In top top news we present selected items which demonstrated superior level of their
insight (and, unfortunately, to judge that is possible only in retrospect). In 2013 for Jan-May
those would be people who understood that bond bubble is about to unwind (can be counted on one hand
:-( ).
20141103 : Bubble Exit Rule: You Only Get Out If You Panic Before Everyone Else Does ( Just a warning against overconfidence and violating 100-your age asset allocation due to greed or clear insufficiency of the size of 401K to the age/time to retirement. Trying to outsmart Wall Street in this casino game is like trying to pick nickels before a steamroller. As financier J. P. Morgan used to say "During crisis assets return to their legitimate owners". This situation repeats before each crisis because the allure of "reaching for yield" is so strong. That does not mean that the next crisis will happen the next year or in 2016. It just means that when it happen suddenly you will see that many people were swimming without pants. )
All the latest development might lead to recession in EU in 2015... Deflation in Eu already started.
Now with loss of Russian market to china and Russian tourists and business travelers they well might
slight into recession. Germany probably already lost considerable part of lucrative Russian auto market.
Decrease of 40 to 50 percent - Many also feel that they are undesirable in the West
The dramatic drop of exchange rate for Russian ruble make the Russians significantly less travel
abroad on holidays . The numbers of travelers this year decreased 40 percent to 50 percent compared
to 2013, said the Director of the Association of tourism in Russia, Maja Lomidse.
The reasons for the decrease were the lack of trust in the economy and the declining purchasing
power, because of the drop of ruble against Western currencies like the Euro and the Dollar . Lomidse
called that "external factors". which might lead to bankruptcies for travel agents
Many Russians also feel that they are now undesirable in the West because of the sanctions against
their. This also increase probability of mass bankruptcies of the travel agents. Turkey and Egypt
became the most popular tourist destinations in the Russians called Lomidse .
In the European Union, Greece and Spain remain the most sought-after countries with a share of
seven percent of the total number of the Russian tourists. The German Embassy in Moscow registered
a decrease of 16 percent to 20 percent in the number of Visa applications in comparison to the previous
year. (APA, 25.12.2014)
Germany hurts itself following the USA foreign policy. You can expect German trade with Russian
to be halved: "Including other companies like BMW, Mercedes and Ford of Europe, which is based in Cologne,
German automakers will lose 15 billion euros, or about $18.3 billion, in Russian sales and €600 million
in profit through 2017, according to estimates by Ferdinand Dudenhöffer, a professor at the University
of Duisburg-Essen. "
Few countries have invested more heavily in
Russia than
Germany has, rushing in to exploit new trade opportunities that opened up after the Cold War
ended. More than 6,000 German companies set up operations there, and Russia became a major customer
for German cars, pharmaceuticals and machinery.
But now the rush is going in reverse. The announcement
last week by the German chemical giant BASF that it had canceled a planned deal with
Gazprom, the Russian energy giant, involving
natural gas extraction and distribution, was the latest example of how German companies are delaying
projects and investment.
... ... ...
Russia's largest trading partners
Total trade, January through August 2014 (billion $)
China 43.4
Netherlands 38.2
Germany 34.3
Italy 25.2
Ukraine 16.1
Belarus 15.7
Turkey 15.5
Japan 15.3
USA 15.0
Poland 12.1
... ... ...
...Russia's problems have helped slow Germany's momentum. Exports to Russia fell 22 percent through
October compared with the same period a year earlier.
... ... ...
Last weekend, the two most prominent Social Democrats in Chancellor Angela Merkel's grand coalition
government of center right and center left - the party leader, Sigmar Gabriel, and the foreign minister,
Frank-Walter Steinmeier - voiced concern that sanctions might hobble the stricken Russian economy,
and they opposed tightening them.
Ms. Merkel, clearly frustrated with the behavior of President Vladimir V. Putin of Russia, has
so far taken a harder line. But the potential for conflict within Ms. Merkel's government complicates
her efforts to use Germany's close ties with Russia as leverage to fashion a solution to the crisis
in Ukraine.
Business groups, normally strong backers of Ms. Merkel's Christian Democrats, have agreed with
the Social Democrats on Russia and warned against using economic means to put pressure on Mr. Putin.
"Sanctions are not the proper means to resolve this political crisis," Eckhard Cordes, a former
Daimler executive who is chairman of the Committee on Eastern European Economic Relations, which
represents companies doing business in the former Soviet bloc, said in an email. "The West cannot
have an interest in destabilizing the Russian economy or Russian politics."
... ... ...
The Russian market has turned sour for German automakers. Opel said in September it would cut
production at its main factory in St. Petersburg, where it makes Opel Astra and Chevrolet Cruze cars,
eliminating a shift and 500 out of 1,600 jobs.
Volkswagen halted production for 15 days at a plant in Kaluga in recent months, in addition to
the usual Christmas and New Year's shutdown. The company said in a statement it remained committed
to Russia but was "watching the market with concern."
Including other companies like BMW, Mercedes and Ford of Europe, which is based in Cologne,
German automakers will lose 15 billion euros, or about $18.3 billion, in Russian sales and €600 million
in profit through 2017, according to estimates by Ferdinand Dudenhöffer, a professor at the University
of Duisburg-Essen.
[Dec 27, 2014] New Year message from Wall Street to 401K investors
We live in a new world, and the Saudis are either the only or the first ones to understand
that. Because they are so early to notice, and adapt, I would expect them to come out relatively
well. But I would fear for many of the others. And that includes a real fear of pretty extreme reactions,
and violence, in quite a few oil-producing nations that have kept a lid on their potential domestic
unrest to date. It would also include a lot of ugliness in the US shale patch, with a great loss
of jobs (something it will have in common with North Sea oil, among others), but perhaps even
more with profound mayhem for many investors in US energy. And then we're right back to your
pension plans.
When "the retirement of the baby boomers is expected to severely cut U.S. stock values
in the near future," is the ominous initial sentence from no lesser maintainer-of-the-status-quo
than the San Francisco Fed's research department, one begins to recognize the Federal Reserve's
overall need to hyper-inflate asset prices at whatever cost for fear of the 'wealth' destruction
looming. As the following study reports, projected declines in stock values - based on the latest
demographic and valuation data - have become even more severe. Our current estimate suggests that
the P/E ratio of the U.S. equity market could be halved by 2025 relative to its 2013 level.
America's Federal Reserve is headed down a familiar - and highly dangerous - path. Steeped in
denial of its past mistakes, the Fed is pursuing the same incremental approach that helped set the
stage for the financial crisis of 2008-2009. The consequences could be similarly catastrophic.
Consider the December meeting of the Federal Open Market Committee, where discussions of raising
the benchmark federal funds rate were couched in adjectives, rather than explicit actions.
In line with prior forward guidance that the policy rate would be kept near zero for a "considerable"
amount of time after the Fed stopped purchasing long-term assets in October,
the
FOMC declared that it can now afford to be "patient" in waiting for the right conditions to raise
the rate. Add to that
Fed Chair Janet Yellen's declaration that at least a couple more FOMC meetings would need to
take place before any such "lift-off" occurs, and the Fed seems to be telegraphing a protracted journey
on the road to policy normalization.
With so much dry kindling, it will not take much to spark the next conflagration.
This bears an eerie resemblance to the script of 2004-2006, when the Fed's incremental approach
led to the near-fatal mistake of condoning mounting excesses in financial markets and the real economy.
After pushing the federal funds rate to a 45-year low of 1% following the collapse of the equity
bubble of the early 2000s, the Fed delayed policy normalization for an inordinately long period.
And when it finally began to raise the benchmark rate, it did so excruciatingly slowly.
In the 24 months from June 2004, the FOMC raised the federal funds rate from 1% to 5.25% in 17
increments of 25 basis points each. Meanwhile, housing and credit bubbles were rapidly expanding,
fueling excessive household consumption, a sharp drop in personal savings, and a record current-account
deficit - imbalances that set the stage for the meltdown that was soon to follow.
The Fed, of course, has absolved itself of any blame in setting up the U.S. and the global economy
for the Great Crisis. It was not monetary policy's fault, argued both former Fed Chairmen Alan Greenspan
and Ben Bernanke; if anything, they insisted, a lack of regulatory oversight was the culprit.
This argument has proved convincing in policy and political circles, leading officials to focus
on a new approach centered on so-called macro-prudential tools, including capital requirements and
leverage ratios, to curb excessive risk-taking by banks. While this approach has some merit, it is
incomplete, as it fails to address the egregious mispricing of risk brought about by an overly accommodative
monetary policy and the historically low interest rates that it generated.
In this sense, the Fed's incrementalism of 2004-2006 was a policy blunder of epic proportions.
Despite the public pledge of President Obama to pull out of Afghanistan, we continue to spend
huge amounts of money in the war and the Obama Administration has fought to keep U.S. troops in the
country. Now an estimate from the
Financial Times and independent researchers put the cost of the war at roughly $1 trillion with
a commitment of hundreds of billions more in the coming years. There continues to be no serious debate
over our ongoing losses both in personnel and money in this war.
"A boom has to be driven by something. Looks, to me, like we are still in a demand-constrained economy,
and the 5% is mostly a spike and not a trend. "
I hate to put a damper on the party, but the some of the reporting on the economy is getting a
bit out of hand. The Washington Post gave us an example, with a piece * on the revised fourth quarter
GDP numbers headlined, "Robust Economic Growth in the third quarter raises hopes that a boom is on
horizon." That's not what Mr. Arithmetic says.
First, just to be clear, the third quarter numbers were definitely good news. Five percent GDP
growth is a solid economic performance by any measure, so there is no doubt that it is a big step
forward by any measure. The economy is clearly growing, and likely at a reasonably respectable rate.
The issue is whether the term "boom" is appropriate.
As this article and other reporting notes, the third quarter follows a strong second quarter of
4.6 percent growth, which in turn followed a first quarter where GDP shrank by 2.1 percent. The piece
dismisses the drop in first quarter GDP as the result of bad weather. This is surely true, but the
strong growth in the subsequent two quarters is clearly related to the drop in the first quarter.
The growth in these quarters was a reversal of the decline in the first quarter.
If we take the average growth over the last three quarters, we get a 2.5 percent annual growth
rate. This isn't bad, but it's hardly anything to write home about. If we assume the economy has
a potential growth rate (the rate of growth of the labor force plus productivity) in the range of
2.2-2.4 percent, then with the 2014 growth rate we are filling the gap in output at the rate of between
0.1-0.3 percentage points a year. CBO estimates that the gap between potential GDP and actual GDP
is still close to 4 percentage points. This means that at the 2014 growth rate we can look to fill
that gap in somewhere between 13 and 40 years. Perhaps we should put a hold on that champagne.
Looking at specifics of the third quarter numbers, there are several items that are virtually
certain to be reversed in whole or in part in the fourth quarter. Top on this list was the jump in
military spending that added 0.66 percentage points to growth in the quarter. Military spending is
highly erratic and sharp jumps are almost always followed by sharp falloffs in subsequent quarters.
This means that instead of adding 0.66 percentage points to growth, we are likely to see military
spending subtracting something like 0.66 percentage points from growth in the fourth quarter.
A smaller trade deficit also added 0.78 percentage points to growth. We will almost certainly
see a larger trade deficit in the fourth quarter (October's deficit was considerably larger than
the third quarter average), which means that the trade deficit will be subtracting from growth in
the fourth quarter. Equipment investment, which added 0.63 percentage points to growth in the quarter
is also likely to go the other way in the fourth quarter. The data for October and November show
that shipments are running below the third quarter average, before adjusting for inflation.
The takeaway is that we should see decent growth in the fourth quarter (consumption spending was
very strong in November), but it is likely to be much closer to 2.0 percent than 5.0 percent, so
folks may want to put that boom talk on the shelf for the moment. One final point, we continue to
hear celebrations of the 0.4 percent growth in the average hourly wage reported for November. As
noted previously, these data are highly erratic. The November number was primarily a bounce back
from weak growth the prior two months. The annual growth rate for the three months (September, October,
and November) compared with the prior three months was just 1.8 percent.
Folks can believe that wage growth was really weak in September and October and then bosses suddenly
coughed up big pay increases in November, or that the monthly data was mostly driven by measurement
error and that there has been little change in the actual rate of wage growth over the last three
months. Mr. Arithmetic and I believe the latter.
No technology breakthroughs I am aware of. That's what drove the boom in the '90s.
Wages aren't going anywhere.
Government still isn't investing like it should be. The deficit isn't anywhere near big
enough to drive spending. In fact, it's shrinking.
A boom has to be driven by something. Looks, to me, like we are still in a demand-constrained
economy, and the 5% is mostly a spike and not a trend.
pgl said in reply to anne...
Nice piece from Dean. I'll just add that the GDP gap is still $570 billion (2009$) or 3.4%
of potential GDP.
Peter K. said in reply to pgl...
Look at what Bernstein says about historical levels of "discretionary" government funding below:
Reagan 10.2 percent of GDP
Bush I 8.5 percent
Clinton 6.4
Bush II 7.3
Obama 6.1
and we have a 3.4 percent gap
JohnH said in reply to Peter K....
"Discretionary" government spending at 6.1% under Obama, the lowest in 35 years. What does it
take for people to realize that Obama is an austerity-driven conservative? Did Obama, Reid, and Pelosi,
despite majorities in the Senate and/or House, ever do anything but appease conservatives? Even when
they had overwhelming majorities in both houses, they could only manage to pass a perfunctory stimulus?
(Budget resolutions are not subject to filibuster.)
And people wonder why ordinary Americans are pissed at Obama, Reid and Pelosi, who have barely
acknowledged their economic situation? And they done virtually nothing to help, dutifully appeasing
Republicans at every opportunity. Heck, they couldn't even craft an economic message for the 2014
elections, which they lost big time.
To make matters worse, Democrats have largely shrugged as the 0.1% take an ever increasing share
of income, reducing ordinary Americans' share.
We've just watched the Senate and the House - aided and abetted by President Obama - pay off financial
interests with provisions in the new spending bill that expand the amount of campaign cash wealthy
donors can give, and let banks off the hook for gambling with customer (and taxpayer) money.
What happened in Washington over the past several days sounds strikingly familiar to the First
Gilded Age more than a century ago, when senators and representatives were owned by Wall Street and
big business. Then, as now, those who footed the bill for political campaigns were richly rewarded
with favorable laws.
Bill's guest this week, historian Steve Fraser, says what was different about the First Gilded
Age was that people rose in rebellion against the powers that be. Today we do not see "that enormous
resistance," but he concludes, "people are increasingly fed up… their voices are not being heard.
And I think that can only go on for so long without there being more and more outbreaks of what used
to be called class struggle, class warfare."
Steve Fraser is a writer, editor and scholar of American history. Among his books are Every Man
a Speculator, Wall Street: America's Dream Palace and Labor Will Rule. His latest, The Age of Acquiescence:
The Life and Death of American Resistance to Organized Wealth and Power, will be published early
next year.
Hard for me to see the fed sounding hawkish in the middle of an emerging currency crisis.
The financial sector can never be "insulated" from mass unemployment. No matter how many banks
there are (big or small) mass unemployment will cause mass defaults. If they are (intentionally
or not) behind the curve as unemployment rises, concerned about inflation, defaults will be higher
than they would be otherwise.
Banks are largely exposed to domestic credit. The energy sector, though growing rapidly, is
not nearly as large as housing, and there is not nearly as much collateral tied to the value of
energy projects (housing backs a lot of financial market collateral).
This time though we are leaning the opposite way. With disinflation(as opposed to inflation
in 2008), the Fed is more than likely to stay dovish for a while.
Credit is priced based on *expected* unemployment, wage growth, and default rates. If unemployment
unexpectedly drops (or rises) then defaults will unexpectedly drop (rise) and banks will have
unexpected gains (losses) - because credit reserves and capital are released (or needed).
Unfortunately, regulators will draw the wrong conclusions. They will draw the conclusion they
are doing a good job regulating. No, they are just not causing unexpected mass unemployment by
tightening too soon.
The real problem as stated in other articles is that since 2007, ALL and I mean ALL of the
decent paying jobs and enough of them to create positive jobs unemployment numbers and the like
came from the 6 shale states...even with oil not going lower, that growth was probably slower
to flat going forward.
With oil at $50, this will move in reverse and the next 6 months of employment numbers
will be horrendous, which will have to engender more QE discussions IMO.
What we see happening in the currency market should be taken as a big red flashing signal of
instability. A weakening in the yen, euro, and pound, is giving the illusion of a strong dollar.
These four currencies are the big players in the world currency market.
Coupled with weak oil prices the strengthening dollar may be sending a signal that the whole
system is unstable. Other currencies are under assault because both economies are weak and countries
are buried in debt they can never repay at real market interest rates. The change in currency
values may be dramatic and using history as a guide m often show no mercy when this shift occurs.
For months the major world currencies had traded in a narrow range as if held in limbo by some
great force. This has allowed people to think we were on sound footing as central banks across
the world continued to print and pump out money chasing the "ever elusive growth" that always
appears to be just around the corner. Recently the major currencies have made multi-year highs
or lows depending on the match-up.
John Maynard Keynes said By a continuing process of inflation, government can confiscate, secretly
and unobserved, an important part of the wealth of their citizens. While there are not many Bond
Vigilantes there are a slew of Currency Vigilantes and they are ready to make their presence known.
Weakness in the value of the Yen, Pound, and Euro must not go unnoticed. The article below looks
at why this trend may accelerate and cause the stock market to drop like a stone.
the most dangerous thing in finance is the "thing" that never moves.
This stability creates an illusion of control around which many positions are built, the greater
the perceived stability the greater the positions, and the more other assumptions and forecasts are
made.
If we assume that "time-to-live" for an shale well is two years, the it would be logical to assume
that at those prices the destruction of US shale will take 2-3 years.
As we have noted in the last two days, on the heels of Janet Yellen's mutterings, US equity m
have exploded higher even as the highly correlated and causative oil prices have done anything but
rise. This 'fact' has not escaped BofA's Hans Mikkelsen's attention as he warns, "While stocks
currently are getting a break from oil, it appears most likely that they reconnect when the decline
in oil prices accelerates – especially if we see associated weakness in credit and EM."
And sure enough, modestly at first, the two are starting to converge this morning...
ben_bernanke
Or maybe oil decoupled from stocks? Why does ZH ALWAYS take the view that is bearish
on stocks?
How about this? If stocks discount the future, then why did they not respond to oil like in
2008? Maybe because the fundamentals don't jive with the drop in crude.
Yes, there is an oversupply, but does anyone honestly believe that can account for 50%
DROP IN JUST A FEW MONTHS? That is not reasonable. Something else was going on.
For all I know, the US was intervening directly in the futures m . What happens when they close
their "position"?
yogibear
All the banks are giddy because they know DC signed the derivative bailout.
No matter how bad the bets are they'll steal from the taxpayer.
Dr. Engali
If BofA says it, then we know the opposite will happen.
rccalhoun
what b of a says has no correlation to what will happen. dont give them any credit for anything
except sub-prime and their complicity in their own bail out and riding on golden chariot lead
by GS's ms. dimon. in a revolution...all b of a executives are 'fair game'. stupid, no conscience,
holier-than-thou whores.
Fed-up with being Sick and Tired
Calling them whores is a compliment.
divingengineer
You have to admire the sheer dipshit arrogance of people who truly believe in their heart of
hearts that they can, by fiat, counteract the forces of nature, economics, human tendencies, etc.
There are a number of them out there, and they shurely must be cut from the same cloth.
Fed-up with being Sick and Tired
This focus upon stocks or correlations is laughable. It would not surprise readers here who
likely know this, but I will post if nonetheless: stocks are a distraction from where the real
money is and will not be: CREDIT M . Bond moves move m , all of them and secondarily, we have
our FX market. BUT, the real fortunes are made in bonds and buying and selling derivatives against
them. Remember that it was the derivatives on Mortgage Bonds, and the CDS window that closed that
caused world-wide misery and we are still stuck in that rut.
Bottom of oil prices is not seen yet. Last time in 1986 oil fall $35 to $10. Most of the damage
in oil price decline behind us. But not oil speculators were washed out.
Marginal producers will go out of business. They are highly leveled and they will have problems
in refinancing their debt. There will some ripple affects on financial market. Increased volatility
is probably coming in 2015. Fed intend to raise rate.
Behind closed doors, the billionaire also opposed the firm's expansion into stocks and real estate,
areas seen by others as crucial to position the firm as the bond rally on which Pimco's growth had
been built showed signs of waning. In pushing for a return to a simpler business model, he questioned
why the firm needed some of the executives it had hired.
By September, as Gross revived plans to fire Balls, 41, Pimco's new senior managers turned against
him. Several of the firm's key executives offered to resign. When Gross proposed again to take a
smaller role, give up management responsibilities and hand over his main fund to a successor by the
end of 2015, Pimco executives were considering his ouster.
Rather than suffer the humiliation of being fired, Gross decided to walk away from the firm that
he had started in 1971. A few hours later on that Friday morning, he was on a plane bound for Denver
to join Janus Capital Group Inc. (JNS), the money manager run by his former general counsel and operating
chief Richard Weil, 51.
... ... ...
Gross built Pimco with some of the best long-term investing track records, and was the face of
the bond market with television appearances almost every day. Assets at the firm doubled between
2010 and 2013, making Gross one of the best-compensated money managers, with a bonus of about $290
million in 2013, a fortune even by Wall Street standards.
An Ohio native who graduated from Duke University with a psychology degree in 1966, Gross built
a reputation unparalleled among mutual fund managers, with his main fund, the $162.8 billion Pimco
Total Return (PTTRX), beating 96 percent of peers over 15 years, according to research firm Morningstar
Inc. The fund has become a staple in the 401(k) retirement accounts of millions of Americans.
Vietnam Vet
His departure triggered a combined $60.5 billion in withdrawals in the past three months from
Pimco Total Return, which at its peak in April 2013 was the world's largest mutual fund, with $293
billion. Assets in the fund have since shrunk by 44 percent.
Gross, who spent three years in the Navy and served in Vietnam, was obsessed with performance.
When his flagship fund trailed 77 percent of peers in 2011, he apologized to clients, calling it
a "stinker" of a year and reassuring them he hadn't lost his touch. After a rebound the next year,
he examined his legacy in an investment outlook that said the careers of great investors were fueled
by a credit expansion that may be ending, and that the real test of his investing prowess was
yet to come.
"Am I a great investor?" he wrote in an April 2013 investment outlook. "No, not yet."
... ... ...
Four years after a Bloomberg M article in which Gross said that stock-market returns would beat
bonds, the firm's equity business wasn't meeting expectations, having gathered less than $3 billion
into its four main mutual funds.
Gross argued the push wasn't cost-efficient, that stocks and other assets were too expensive,
that Pimco should retrench and didn't need the staff it had hired to diversify.
... ... ...
"In the case of Pimco, which always seemed like this monolithic really good organization, when
you go behind the screen you can see that it was pretty messy," said Kurt Brouwer, chairman of Tiburon,
California-based advisory firm Brouwer & Janachowski LLC, who has invested in Pimco funds since the
1980s.
"Money, big money, personal egos, differences of opinion, slights and disagreements built up over
10 or 15 years -- that's a pretty explosive combination."
As if on cue, OPEC stepped in just as monetary policy (at least
the Fed's) has dried up. Central bankers have nothing on the oil cartel that did just what everyone
expected, but has still managed to crush oil prices.
Protest away about the 1% getting richer and how prior QE hasn't trickled down to those who
really need it, but an oil cartel is coming to the rescue of America and others in the world right
now.
It's hard to imagine a "more wide-reaching and effective stimulus measure than to lower the
cost of gas at the pump for everyone globally," says Alpari U.K.'s Joshua Mahoney. "For this reason,
we are effectively entering the era of QE4, with motorists able to allocate more of their money
towards luxury items, while firms are now able to lower costs of production thus impacting the
bottom line and raising profits."
The impact of that could be "bigger than anything that has come before," says Mahoney, who
expects that theory to be tested and proved, via sales on Black Friday and the holiday season
overall. In short, a consumer-spending explosion as we race to the malls on a full tank of cheap
gas.
Tossing in his own two cents in the wake of that OPEC decision, legendary investor Jim Rogers
says it's a "fundamental positive for anybody who uses oil, who uses energy." Just not great if
you're from Canada, Russia or Australia, he says. Or if you're the ECB, fretting about price deflation.
Or until it starts crushing shale producers.
Neil G
The problem with market volatility is a failure of traders to acknowledge cause and effect.
The United States has implemented some form of QE since 2008 which has very little to do with
sustaining the economy other than flooding the banking system with reserves that haven't been
lent while providing liquidity to institutional investors for repositioning to equities.
Regardless, equity valuations are no further out of line than they have been historically,
and with nearly twice the growth rate among emerging m , those valuations are at a more favorable
discount. That being said, the only thing that matters is valuation, not speculation.
Problem is, when your living as a trader is based on mostly speculation and inching out returns
over competing institutions, one looks for reasons to invite volatility, partly from over reactive
insight, also because volatility triggers opportunity. Meanwhile the vast majority of investors
innocently bite their nails and assume improper references by mistaking the forest for the trees.
Media exacerbation doesn't help either, especially while all the drama and accompanying attention
deficit disorder feeds their paychecks too.
At the end of the day, the performance of XYZ company usually has very little to do with the
price of rice in China. All investors large and small with have the most consistent chance of
success by maintaining their investing focus based on prevailing economic fundamentals while remaining
patient with those underlying assumptions. Divergences aside, these events are simply modest opportunities
to re-allocate strategically and have little lasting impact that can't be overcome by long term
discipline; so have a Xanax and stop obsessing already!
Jay
Most people recognize that the m are being supported in some way but most don't understand
the mechanics. I have not worked in finance but I have a lot of experience with industrial process
control systems and I understand their capability. Modern trading networked platforms are nearly
identical. Among many other characteristics of the m , these platforms easily allow prices to
be precisely controlled if there is an unlimited pool of digital money. These systems can precisely
control the price, the rate of the price rise, and the priority of asset price control. All of
the m are networked together to allow the needed liquidity to flow to the m that demand it. The
constant rise in the m since 2009 could not have occurred without these systems even with QE.
As far as the algorithms are concerned all QE looks the same, regardless of the central bank that
support it. QE is the fuel but the trading platforms are the engine. Legitimate buyers, sellers,
bid, and offers no longer dictate prices.
The algorithms ensure that the additional bids and offers are created with thin air digital
money if the legitimate bids will not achieve the desired price. As a result there is nothing
that will keep stocks from going higher except the will of the central banks. But remember that
this is all a debt backed digital creation. Its not even cash until you sell and a clash between
these illusionary values and real values will make it all blow up. That is the risk you are taking
if you participate.
Peter
After 2009 the trading volume in stocks has been cut by 66.6 %. People lost too much. 99% of
the bears disappeared.
Since 2010, People's credit debt is rising 6-7 % yearly. it used to be 2-3%. Now, DEBT to INCOME
ratio is at a very-very high 25%. The only money made in the m are the 401 k s, rigged by the
FED-centrals and the GOV. to keep HOPE alive.
German industrial production dropped 4% from July to August, versus an expected decline of 1.5%.
This is the biggest month-on-month drop in five years. The figure represents a 2.8% drop on the same
month last year.
Similarly ugly numbers on factory orders released on Monday and the worrying business reports
suggest the sector is in decline.
We don't yet have a full quarter's data, but Claus Vistesen at Pantheon Macroeconomics is already
saying the German manufacturing sector "is in a recession."...
This is just a warning for 401K investors to keep power dry... Recession might happen or it might
be postponed again due to lower oil prices (which are huge economic stimulus in itself), but the fact
that we are getting closer to the next economic crash is undisputable. It's already 6 years since the
last. So each year the chances of a new devastating crash only grow. This is the nature of neoliberal
economic order. And during the crash it is 401K investors who are fleeced by Wall Street.
Are you waiting for the next major wave of the global economic collapse to strike? Well, you might
want to start paying attention again. Three of the ten largest economies on the planet have already
fallen into recession, and there are very serious warning signs coming from several other global
economic powerhouses. Things are already so bad that British Prime Minister David Cameron is
comparing the current state of affairs to the horrific financial crisis of 2008. In an article for
the Guardian
that was published on Monday, he delivered the following sobering warning: "Six years on
from the financial crash that brought the world to its knees, red warning lights are once again flashing
on the dashboard of the global economy." For the leader of the nation with the 6th largest economy
in the world to make such a statement is more than a little bit concerning.
So why is Cameron freaking
out?
Well, just consider what is going on in Japan. The economy of Japan is the 3rd largest on the
entire planet, and it is
a total basket case at this point. Many believe that the Japanese will be on the leading
edge of the next great global economic crisis, and that is why it is so alarming that Japan has just
dipped into recession again
for the fourth time in six years…
Japan's economy unexpectedly fell into recession in the third quarter, a painful slump that
called into question efforts by Prime Minister Shinzo Abe to pull the country out of nearly two
decades of deflation.
The second consecutive quarterly decline in gross domestic product could upend Japan's political
landscape. Mr. Abe is considering dissolving Parliament and calling fresh elections, people close
to him say, and Monday's economic report is seen as critical to his decision, which is widely
expected to come this week.
Of course Japan is far from alone.
Brazil has the 7th largest economy on the globe, and it has already been
in recession for quite a few months.
Italian GDP dropped another 0.1% in the third quarter, as expected.
That's following a 0.2% drop in Q2 and another 0.1% decline in Q1, capping nine months of recession
for Europe's third-largest economy.
Like Japan, there is no easy way out for Italy. A rapidly aging population coupled with a debt
to GDP ratio of more than 132 percent is a toxic combination. Italy needs to find a way to be productive
once again, and that does not happen overnight.
Meanwhile, much of the rest of Europe is currently mired in depression-like conditions. The official
unemployment numbers in some of the larger nations on the continent are absolutely eye-popping. The
following list of unemployment figures comes from
one of my previous articles…
France: 10.2%
Poland: 11.5%
Italy: 12.6%
Portugal: 13.1%
Spain: 23.6%
Greece: 26.4%
Are you starting to get the picture? The world is facing some real economic problems. Another
traditionally strong economic power that is suddenly dealing with adversity is Israel. In fact, the
economy of Israel is shrinking
for the first time since 2009…
Israel's economy contracted for the first time in more than five years in the third quarter,
as growth was hit by the effects of a war with Islamist militants in Gaza.
Gross domestic product fell 0.4 percent in the July-September period, the Central Bureau of
Statistics said on Sunday. It was the first quarterly decline since a 0.2 percent drop in the
first three months of 2009, at the outset of the global financial crisis.
And needless to say, U.S. economic sanctions have hit Russia pretty hard. The rouble has been
plummeting like a rock, and
the Russian government is preparing for a
"catastrophic" decline in oil prices…
President Vladimir Putin said Russia's economy, battered by sanctions and a collapsing currency,
faces a potential "catastrophic" slump in oil prices.
Such a scenario is "entirely possible, and we admit it," Putin told the state-run Tass news
service before attending this weekend's Group of 20 summit in Brisbane, Australia, according to
a transcript e-mailed by the Kremlin today. Russia's reserves, at more than $400 billion, would
allow the country to weather such a turn of events, he said.
Crude prices have fallen by almost a third this year, undercutting the economy in Russia, the
world's largest energy exporter.
It is being reported that Russian President Vladimir Putin has been
hoarding gold in anticipation of a full-blown global economic war. I think that will end up being
a very wise decision on his part.
Despite all of this global chaos, things are still pretty stable in the United States for the
moment. The stock market keeps setting new all-time highs and much of the country is preparing for
an orgy of Christmas shopping. Unfortunately, the number of children that won't even have a roof
to sleep under this holiday season just continues to grow. A stunning report that was
just released
by the National Center on Family Homelessness says that the number of homeless children in America
has soared to an astounding 2.5 million. That means that approximately one out of every 30 children
in the United States is homeless.
Let that number sink in for a moment as you read more about this new report
from the Washington Post…
The number of homeless children in the United States has surged in recent years to an all-time
high, amounting to one child in every 30, according to a comprehensive state-by-state report that
blames the nation's high poverty rate, the lack of affordable housing and the effects of pervasive
domestic violence.
Titled "America's Youngest Outcasts," the report being issued Monday by the National Center
on Family Homelessness calculates that nearly 2.5 million American children were homeless at some
point in 2013. The number is based on the Education Department's latest count of 1.3 million homeless
children in public schools, supplemented by estimates of homeless preschool children not counted
by the agency.
The problem is particularly severe in California, which has about one-eighth of the U.S. population
but accounts for more than one-fifth of the homeless children, totaling nearly 527,000.
This is why I get so fired up about
the destruction of the middle class. A healthy economy would mean more wealth for most people.
But instead, most Americans just continue to see a decline in the standard of living.
And remember, the next major wave of the economic collapse has not even hit us yet. When it does,
the suffering of the poor and the middle class is going to get much worse.
Unfortunately, there are already signs that the U.S. economy is starting to slow down too. In
fact, the latest manufacturing numbers
were not good at all…
The Federal Reserve's
new industrial
production data for October show that, on a monthly basis, real U.S. manufacturing output
has fallen on net since July, marking its worst three-month production stretch since March-June,
2011. Largely responsible is the automotive sector's sudden transformation from a manufacturing
growth leader into a serious growth laggard, with combined real vehicles and parts production
enduring its worst three-month stretch since late 2008 to early 2009.
Equities are in a bubble, but the real economy continues to languish. Paper money is
overwhelming, and overflowing. There is some thought that the US can never print too many dollars
for the rest of the world to take. Hubris does not even begin to describe the financial system of
the Anglo-American banking cartel. Who are these people? What are they thinking? Their ability to
bully others blinds them to the balances of the real world.
David Cameron has issued a stark message that "red warning lights are flashing on the dashboard of
the global economy" in the same way as when the financial crash brought the world to its knees six
years ago.
Writing in the Guardian at the close of the G20 summit in Brisbane, Cameron says there is now
"a dangerous backdrop of instability and uncertainty" that presents a real risk to the UK recovery,
adding that the eurozone slowdown is already having an impact on British exports and manufacturing.
His warning comes days after the Bank of England governor, Mark Carney, claimed a spectre of stagnation
was haunting Europe. The International Monetary Fund managing director, Christine Lagarde, expressed
fears in Brisbane that a diet of high debt, low growth and unemployment may yet become "the new normal
in Europe".
Cameron has adopted the more sombre tone in the runup to the chancellor's autumn statement on
3 December, when the Office of Budget Responsibility will produce new growth forecasts and spell
out the impact on public finances.
"The eurozone is teetering on the brink of a possible third recession, with high unemployment,
falling graowth and the real risk of falling prices too," Cameron writes. "Emerging market economies
which were the driver of growth in the early stages of the recovery are now slowing down. Despite
the progress in Bali [trade talks in 2013], global trade talks have stalled while the epidemic of
Ebola, conflict in the Middle East and Russia's illegal actions in Ukraine are all adding a dangerous
backdrop of instability and uncertainty."
The emphasis on potential dangers, balancing some more hubristic ministerial accounts of the state
of the UK economy, reflects Cameron's concern – underlined by conversations at the G20 – about the
extent to which Britain can detach itself from gathering economic storms.
Politically, Conservatives believe an emphasis on the risks still facing the UK will make anxious
voters recoil from handing stewardship of a fragile economy to a relatively untried Labour team.
Some recent polling has seen the economy decline as an issue for voters, partly because there
is a belief that the recovery is secured, leading to issues such as the health service and living
standards, which have been seized upon by Labour, to rise in importance.
But with Germany, Europe's manufacturing powerhouse, growing by just 0.1% in the third quarter,
the eurozone economy appears to be faltering.
A European
Central Bank (ECB) survey showed that inflation would remain at worryingly low levels before
picking up slightly next year. The annual inflation rate in the eurozone was near a five-year low
of 0.4% in October and the ECB expects a rate of 0.5% for 2014 – well below the target of close to
2%.
The EU may also be only one or two new rounds of sanctions away from pushing Russia into a deep
recession as punishment for its interference in Ukraine, a point made in Brisbane by the Russian
president, Vladimir Putin.
Cameron stresses that retreating from the world or imposing extra tax and borrowing may seem easy
solutions but they would instead prove only to be a repeat of the mistakes of the past.
According to data compiled by Goldman Sachs, most American workers earn below $20 per hour. Goldman
Sachs economists David Mericle and Chris Mischaikow crunched Labor Department data that is used to
generate the monthly jobs report that the market closely watches, in particular from the survey of
employers.
The chart, shown above, shows that 19% of workers make less than $12.50 per hour, 32% of workers
make between $12.50 and $20 per hour, 30% make between $20 and $30 an hour, 14% make between $30
and $45 per hour, and 5% make over $45 an hour.
The economists also found that, while wage growth has been soft, the fastest growth in income
has come to the lowest-paid workers.
And they found that the biggest driver to income growth has been rising employment, with help
from rising wages and more hours worked.
Needless to say, this relentless expansion of the bubble eventually kills off the bears, the
skeptics, the prudent and even the militantly incredulous. Undoubtedly, that is where we are
now because the global economic news has been uniformly negative since the October dip, yet the market
has resumed its relentless melt-up.
Under such circumstances, therefore, it is well to remember that we are in the middle of the greatest
central bank fueled inflation in recorded history, and that this insidious inflation
has been channeled into financial assets owing to the arrival of peak debt everywhere around
the world.
But that is the Achilles heel of the game. As the bubble takes on ever greater girth, it becomes
increasingly susceptible to a negative shock to confidence.
I have a lot of respect for Stockman (even though I think he's a bit of an ideologue who could
learn from his contemporary Paul Craig Roberts), but he fails to consider the fact that bubbles
pop when the CB's allow them to pop. Will the Fed decide to pop the stock market bubble in the
next few months or few years? Maybe, maybe not.
He's still focused on fundamentals which mean jack fucking shit for the market. We could have
a Mad Max scenario in the real world, and the market could still be making new highs each week.
ArtOfLife
Stockman, just another old crank ranting about how he missed the biggest bull run in history.
Or is he the type of guy who's screaming for a collapse, but is long stocks anyway?
Newsflash, DJIA is up 11,000 pts in 5 1/2 years, anyone who didn't make some money off that
is an epic loser.
BigJim
Sold, have you? Converted your paper profits into cash?
Yeah, sure you did Isaac, the South Sea Trading Company is still going strong! You'd be a fool
not to get back in now!
Well take a look, University of Missouri Professor of Economics Videos. MMT is the current
Official US Economic Theory... But lo and behold... here is a Professor talking as a Rebel.
http://www.youtube.com/watch?v=_d6D_QvtTmg
(Michael Hudson Video, talks about Predators, what Greece Expected by Joining a United Europe,
How they got hijacked by the Bankers, 2011)
Michael Hudson: Finances vs Economy, Credit vs Money [3/18 ENG] ...Sounds like lots of ZH people
agree with him on Greece & Financialization of Debt & Government in order to steal the assets.
...A recent
Gallup poll found that 59 percent of those surveyed were very or moderately worried they won't
have enough money for retirement – by far their biggest concern.
Many people once counted on a triad of support for retirement – Social Security, personal savings,
and employer-sponsored pensions. Yet in the wake of the Great Recession and a long stretch of
high unemployment and stagnant wages, the once-dependable foundation has been crumbling.
Employers have phased out generous defined benefit pension programs in favor of 401(k)s and other
workplace-based retirement accounts. Personal savings have taken a dive as many people have tapped
retirement savings to pay the rent or help make ends meet. And many young people seriously question
whether the Social Security trust fund will be able to pay them anything by the time they retire.
The latest
National Retirement Risk Index from the Center for Retirement Research (CRR) at Boston College
says that more than half (53 percent) of households risk falling more than 10 percent short of the
retirement income they'll need to maintain their standard of living. More than 40 percent of retirees
are also at risk of running out of money for daily needs, out-of-pocket spending on health care or
long-term care, according to the Employee Benefit
Research Institute (EBRI).
Even more alarming, the National Bureau of Economic
Research recently concluded that nearly one-quarter of Americans could not come up with $2,000
in 30 days if necessary, and another 20 percent would have to pawn or sell possessions to do so.
That would mean nearly half of all Americans are financially stressed.
Since 1998, the number of companies offering any sort of defined benefit plan plummeted from 71
to 30 – and an increasing number of those are hybrid plans, where workers accumulate an account balance
rather than an annuity. When 401(k)s were created in 1978, they were meant to be a supplement to
traditional defined benefit pensions, not a stand-alone retirement account. But over time, they have
evolved to serve that purpose – although they typically provide far less in long-term benefits than
the old plans.
The reasons for the long decline in personal savings are difficult to pinpoint, but they likely
include stagnant real incomes for many workers, rising standards of living and higher consumption,
and a weaker dollar than in the past. The savings rate is the percentage of money that one deducts
from his or her personal disposable income for retirement.
America's savings rate fell steadily from the early 1980s through the mid-2000s, ticking up only
during or after recessions, according to a Washington Post analysis. It topped 11 percent during
President Ronald Reagan's first term. From 2005-2007, the annual rate averaged 3 percent. The savings
rate essentially doubled during the Great Recession, and stayed there, averaging nearly 6 percent
from 2009-2012. By early 2013, the rate had dipped to 2.6 percent, before rising again to 4 percent
by mid-2014.
... ... ...
A Sea Change in Workplace Retirement Plans
Over the past two decades, the workplace retirement landscape has dramatically shifted to defined
contribution plans, in which a worker and in some cases the employer contribute to an account managed
by the employee. These have largely replaced defined benefit plans, which specify a benefit –
often a percentage of the average salary during the last few years of employment – once the worker
retires.
Since 1998, the number of companies offering any sort of defined benefit plan plummeted from 71
to 30 – and an increasing number of those are hybrid plans, where workers accumulate an account balance
rather than an annuity.
When 401(k)s were created in 1978, they were meant to be a supplement to traditional defined benefit
pensions, not a stand-alone retirement account. But over time, they have evolved to serve that
purpose – although they typically provide far less in long-term benefits than the old plans.
Related: The 401(k) Loan: America's Pricey New Piggy Bank
Even as the job market continues to improve, many financial experts recommend that most Americans
keep at least three to six months of expenses stashed away in an emergency savings account.
Yet that message – despite years of shaky economic times – still hasn't gotten through.
Over 40 percent of Americans are living paycheck to paycheck, says a new report from Springleaf
Financial, a consumer finance company. The findings, released today, apply to people across all education
and salary levels.
The study discovered that 24 percent of consumers have less than $250 in their bank accounts
on any given payday – leaving them without reserves to handle unexpected costs.
"We know full well that with rising costs and unexpected expenses, consumers may have a tough
time making ends meet," Dave Hogan, executive vice president of marketing and analytics at Springleaf,
said in a statement.
'Rather Go to the Dentist'
Among those surveyed who make more than $200,000 per year, 20 percent said they save rarely, inconsistently,
or not at all. One in four consumers with a graduate degree actually couldn't miss a single month
of paychecks without having to borrow or sell assets.
The study put some of the blame for Americans' failure to save on a lack of financial skills.
One in five says they learned about money "the hard way" – and one in five says they would rather
go to the dentist than spend half an hour learning money management skills.
The survey was conducted online among 2,010 consumers in October 2014.
In a separate survey done this year by Ameriprise Financial, just a quarter of people said they
were trimming their housing expenses or college savings – the big lifestyle decisions that could
result in serious savings. By comparison, more than half said they were cutting down on everyday
expenses like eating out, entertainment, and clothing.
"Nobody can predict how long governments can get away with fake growth, fake money, fake
financial stability, fake jobs, fake inflation numbers and fake income growth. Our feeling is
that confidence, especially when it is unjustified, is quite a thin veneer. When confidence is
lost, that loss can be severe, sudden and simultaneous across a number of m and sectors."
"The situation is universal, a consequence of incompetent leaders and careless (or ignorant)
citizenry."
Just a warning against overconfidence and violating 100-your age asset allocation due to greed or
clear insufficiency of the size of 401K to the age/time to retirement. Trying to outsmart Wall Street
in this casino game is like trying to pick nickels before a steamroller. As financier
J. P. Morgan used to say "During
crisis assets return to their legitimate owners". This situation repeats before each crisis because
the allure of "reaching for yield" is so strong. That does not mean that the next crisis will happen
the next year or in 2016. It just means that when it happen suddenly you will see that many people were
swimming without pants.
The stock market reached all-time highs last week based upon the machinations of central bankers
and the perceptions of speculators that these bankers will always have their back. Yellen, Kuroda,
and Draghi are growing increasingly desperate as everything they have done in the last five years
has failed to revive their moribund economies. The average person in the U.S., Japan and Europe is
far worse off today than they were in 2009 at the height of the worldwide recession. The .1% have
vastly increased their riches through the ZIRP and QE policies of central bankers. The rise in stock
m is nothing but a confidence game built upon the false belief that there will always be a greater
fool to buy overvalued assets acquired by borrowing from the central bankers at 0%. John Hussman
understands the nature of markets:
We're mindful that the financial m move not based on what is true, but by what is perceived.
At present, the entire global financial system has been turned into a massive speculative
carry trade. A carry trade involves buying some risky asset [typically on margin -- NNB]
– regardless of price or valuation – so long as the current yield on that asset exceeds the short-term
risk-free interest rate. Valuations don't matter to carry-trade speculators, because the
central feature of those trades is the expectation that the securities can be sold to some
greater fool when the "spread" (the difference between the yield on the speculative asset and
the risk-free interest rate) narrows.
He is also understands the move by the BOJ on Friday was made out of panic. It will set in motion
tragic consequences for the Japanese people and world financial systems:
With regard to the recent move by the Bank of Japan, seeking to offset deflation by expanding
the creation of base money, the move has the earmarks of a panic, which is counterproductive.
The likely response of investors to panic is to seek safe, zero-interest money rather than being
revolted by it. The result will be a plunge in monetary velocity and a tendency to strengthen
rather than reduce deflationary pressures in Japan. In our view, the yen has already experienced
a dramatic Dornbusch-type overshoot, and on the basis of joint purchasing power and interest parity
relationships (see Valuing Foreign Currencies), we estimate that rather than the widely-discussed
target of 120 yen/dollar, value is wholly in the other direction, and closer to 85 yen/dollar
(the current exchange rate is just over 112). The Japanese people have demonstrated decades of
tolerance for near-zero interest rates and the accumulation of domestic securities without any
material inclination to spend them based on the form in which those securities are held. Rather
than provoking strength in the Japanese economy, the move by the BOJ threatens to destroy confidence
in the ability of monetary authorities to offset economic weakness – in some sense revealing a
truth that should be largely self-evident already.
The carry trade is like picking up nickles in front of a steam roller. We've seen it all before.
The result will be the same.
The narrative of overvalued carry trades ending in collapse is one that winds through all
of financial history in countries around the globe.Yet the pattern repeats because the
allure of "reaching for yield" is so strong. Again, to reach for yield, regardless of price
or value, is a form of myopia that not only equates yield with total return, but eventually demands
the sudden and magical appearance of a crowd of greater fools in order to exit successfully. The
mortgage bubble was fundamentally one enormous carry trade focused on mortgage backed securities.
Currency crises around the world generally have a similar origin. At present, the high-yield debt
m and equity m around the world are no different.
Hussman can prove that QE and suppressed interest rates below the rate of inflation have completely
failed to benefit the real economy and the real people. It has only benefited Wall Street profits,
insiders, and rich speculators. They have set the stage for a financial collapse that will make
2008 seem like child's play.
High real interest rates generally reflect strong demand for borrowing, driven by investment
opportunities that are seen as productive enough to justify borrowing at those rates. They also
encourage savings that can be directed to those productive investments. As a result, higher real
rates are generally associated with more efficient investment and faster economic growth.
In contrast, depressed real interest rates are symptomatic of a dearth of productive investment
opportunities. When central banks respond by attempting to drive those real interest rates even
lower to "stimulate" interest-sensitive spending such as housing or debt-financed real investment,
they really only lower the bar to invite unproductive investment and speculative carry trades.
We wouldn't suggest that the Fed target above-equilibrium interest rates, but we are also
entirely convinced that below-equilibrium interest rates are harmful to long-term economic and
financial stability. Despite the ability of these policies to create short-term bursts of
demand – enough to hold the global economy at growth rates that remain just at the border that
has historically delineated expansions from recessions – the ultimate and rather predictable
result of these policies will be another round of financial chaos.
Bernanke and Yellen created $3.5 trillion out of thin air since 2008 and have done absolutely
nothing for Main Street USA. None of that $3.5 trillion has ever reached average people in the real
world. It has been funneled to the .1% and used to speculate in the m , creating simultaneous stock,
bond and real estate bubbles. Now central bankers around the world desperately attempt to keep the
bubbles from bursting simultaneously. They will fail once again.
As the central bank creates more money and interest rates move lower, people don't suddenly
go out and consume goods and services, they simply reach for yield in more and more speculative
assets such as mortgage debt, and junk debt, and equities. Consumers don't consume just because
their assets have taken a different form. Businesses don't invest just because their assets have
taken a different form.The only activities that are stimulated by zero interest rates
are those where interest rates are the primary cost of doing business: financial transactions.
What central banks around the world seem to overlook is that by changing the mix of government
liabilities that the public is forced to hold, away from bonds and toward currency and bank reserves,
the only material outcome of QE is the distortion of financial m , turning the global economy
into one massive speculative carry trade. The monetary base, interest rates, and velocity are
jointly determined, and absent some exogenous shock to velocity or interest rates, creating more
base money simply results in that base money being turned over at a slower rate.
Those expecting hyperinflation from these money printing measures will have to wait awhile.
It will happen after deflation engulfs the world and those in power panic. But, confidence in fiat
currency and those controlling its issuance is waning rapidly.
Hyperinflation results when there is a complete loss in the confidence of currency to hold
its value, leading to frantic attempts to spend it before that value is wiped out. I expect we'll
observe significant inflationary pressures late in this decade, but present conditions aren't
conducive to rapid inflation without some shock to global supply.
The fact is that all financial m are extremely overvalued and will crash. The speculators have
already forgotten the tremors of the coming earthquake which occurred two weeks ago. Treasury rates
plunged, along with stock m , as there were no buyers to be found. Confidence dissipated in an instant.
Fear was palpable. Everyone has a choice. You can look like an idiot before the crash or after it.
Overvalued bull market peaks may still be drawn-out and frustrating. They can seem endless
(see The Journeys of Sisyphus)
and then suddenly unravel far more rapidly than it seems they should (see
Chumps, Champs, and Bamboo)
at which point the "lagging" features of a defensive stance are often reversed with striking speed.
As the late MIT economist Rudiger Dornbusch once observed, "The crisis takes a much longer time
coming than you think, and then it happens much faster than you would have thought." Recall that
the 2000-2002 decline wiped out the entire total return of the S&P 500 – in excess of Treasury
bill returns – all the way back to May 1996. The 2007-2009 decline wiped out the entire total
return of the S&P 500 – in excess of Treasury bill returns – all the way back to June 1995.
As we've noted before, the problem with what we call the Exit Rule for Bubbles – "you only
get out if you panic before everyone else does" – is that you also have to decide whether to look
like an idiot before the crash or an idiot after it.
Lehmann: I think it proves that Milton Friedman wasn't exactly right in terms of saying
that the printing of money is a major cause of inflation, that there are other mitigating factors.
And the velocity of money isn't there because the economy isn't moving. So, the multiplier effect
of all this pumping of money hasn't happened. But that doesn't mean it isn't sitting there on the
periphery, waiting for the economy to pick up.
Forbes: The gunpowder is still there, waiting for a match?
Lehmann: That's it. The fuse is still burning.
Forbes: And has that created a bubble in the stock market?
Lehmann: Yes. The Fed policy has basically punished anybody that wants to invest into
fixed income. And therefore, especially things like pension funds, which have 7% and 8% earnings
assumptions, have had to go into the stock market to try to boost up their earnings. Because otherwise,
the companies would have to dramatically increase their funding requirements. And that would be a
real downer to the economy.
Forbes: You've made note, and maybe you can share it with us, that with the easy money,
large companies find it easy to borrow at a very low rate. And this has led to stock buybacks. How
much stock buybacks have there been since the middle of the last decade?
Lehmann: It seems to be a major activity. And it makes sense, in a certain context, that
if companies aren't growing or are even shrinking in their sales, then they're throwing off cash
and buying back their stock. It makes sense. But if you look back in history, it almost seems
like they're buying at the peaks or near it, rather than when things are really cheap.
QE has finally come to an end, but public comprehension of the immense fraud it embodied has
not even started. In stopping QE after a massive spree of monetization, the Fed is actually
taking a tiny step toward liberating the interest rate and re-establishing honest finance. But
don't bother to inform our monetary politburo.
As soon as the current massive financial bubble begins to burst, it will doubtless invent some
new excuse to resume central bank balance sheet expansion and therefore fraudulent finance.
But this time may be different. Perhaps even the central banks have reached the limits of credibility
- that is, their own equivalent of peak debt.
Remember my son's comment about the drivers of expensive cars? You probably know at least a couple
of people who put on a fantastic display of wealth even though they don't have much. They are so
concerned about appearing successful that they make buying decisions that get in the way of long-term
financial success.
It may never happen, but our relationship with money would change considerably if our financial
decisions were transparent to the world. For instance, what would change if the car we drive or the
home in which we live could no longer hide that we've saved nothing for retirement? Would it be easier
to focus on the financial choices that help us instead of hurt us?
Maybe this idea is too radical, but for the next week, I'd love for you to test this theory. Try
living as if everything you did financially was public information. How does it affect your decisions?
Do you find yourself still doing things that just look good, or are you doing things that actually
are good for you? Do you find it easier to be your authentic self? And, perhaps most important of
all, do you now understand the difference between buying the trappings of success and actual success?
It's six years since the last bubble burst. So it's time for a new bubble ;-). In this sense Zerohedge
is important antidote to Wall Street propaganda machine. And might help to avoid stupid moves, which
people usually do after a long rise of stock market.
The U.S. economy continues to lose momentum despite the Federal Reserve's use of conventional
techniques and numerous experimental measures to spur growth. As Kindleberger clearly stated,
the process of excess liquidity fueling higher prices in the face of faltering fundamentals can run
for a long time, a phase Kindleberger called "overtrading". But eventually, this gives way to "discredit",
when the discerning few see the discrepancy between prices and fundamentals. Eventually, discredit
yields to "revulsion", when the crowd understands the imbalance, and m correct.
It's remarkable that this Goldman report, and its writeup on Business Insider, is being treated
with a straight face. The short version is current stock price levels are dependent on continuedstock buybacks.
Key sections of the story...
From exuberant escape velocity 'expansion' hopes and dreams in June, to 'slowing' in September,
and 'drastic downward revisions' in early October, the Goldman Sachs Global Leading Indicator has
had a very troubled recent past (as QE is just 4 POMOs away from coming to an end). But nothing could
prepare the avid reader for what happened to the infamous Goldman "swirlogram" this month - an epic,
total collapse. As Goldman 'politely' notes, "the October Advanced reading places the global cycle
deeper in the 'Slowdown' phase, with momentum (barely) positive and declining."
And just as amazing: the world has gone from Expansion and Recovery, to Slowdown and borderline
Contraction in the span of just 3 months.
Manthong
Oh, and Rickards noted on a chart that the velocity of money now is almost identical in slope
and duration to the months immediately preceding the 1929 crash.
Bell's 2 hearted
Channel stuffed. Wholesale inventories rising more than expected. NRF (national retail federation)
reports record amount of imports for the holidays ... we just had a negative retail sales month.
Blowing out of HY credit and more important OCC and FDIC have warned on subprime auto loans going
sour.
Rising inventories + slowing demand = inventory correction (recession if bad enough ... it
will be bad enough)
Renfield
Bells, I learn a lot from your comments, but I had to downtick you here for appearing to believe
that the 'recession' ever ended.
Bell's 2 hearted
haha. I agree with you 100%. "official" recession ended june 2009
Glasnost
Probably deflation in some areas, hyperinflation in others. I think U.S. might be crazy
enough to hyperniflate. Europe, China will probably deflate. Again. Russia could go either
way, but with the current action in its currency, may inflate significantly. Unless Putin reveals
some gold-backing...doubtful that he will, but it's a possibility as a 'stabilization measure'
or something similar.
Pool Shark
Once a banker creates money out of thin air by lending it into existence, there are only 3
possible outcomes:
1) The borrower goes even deeper into debt while continuing to service the original
debt (what's been happening over the last 30 years). This is necessary to the continuation of
our existing Ponzi financial system, and is where inflation comes from. The Ponzi must always
increase: money and credit must constantly be created, or the system implodes. Unfortunately,
no Ponzi scheme can go on forever (See # 2 & 3 below:)
2) The debt is payed off. This destroys the money that was in existence and is deflationary.
3) The debt is defaulted. This destroys the value of the loan 'asset' on the bank's
books and is also deflationary. This is what happened in 2008 resulting in a rapid downdraft of
deflation, which was reversed only by the massive credit creation of the central banks. Note that
the debts and bad assets never went away, they were merely 'papered-over.'
Because the US dollar is still the world's reserve currency, a hyper-inflation cannot happen.
Hyper-inflation is a political, not an economic event.
The most likely outcome of the current mess is a replay of 2008 on steroids (i.e., initial
defaults, followed by a 'hunt for liquidity' liquidation of assests to meet obligations, followed
by an immediate slowdown in economic activity, resulting in a vicious-cycle feedback loop of debt
destruction, asset price collapse and eventually depression). That will all be highly deflationary...
[We are all Japan. Cash, Bonds, Gold...]
JustObserving
Another few more cases of Ebola in the US and many people will stop flying, going to sporting
events and restaurants, and heaven forbid, going to malls. With thousands of people being monitored
for Ebola, we may be just a week or two away from this reality. Yellen better be ready to buy
airlines and hotels and restaurants with a trillion or so in freshly-minted fiat.
Have not heard anything about Nina Pham's boyfriend who worked at Alcon and was allegedly admitted
to a hospital for monitoring.
Ebola fears blamed for poor turnout at mainland's largest trade fair
Lack of buyers at the mainland's largest trade exhibition amid fears over disease and economy
The number of buyers attending the mainland's largest trade fair was down significantly
yesterday, the first day of its autumn session, with the downturn attributed to fear of the
Ebola virus and global economic gloom.
The opening of the fair coincided with reports the number of Ebola cases in West Africa
could reach between 5,000 and 10,000 a week by December and that a second nurse who contracted
the virus while treating a patient in Texas boarded a plane the day before she fell ill, sparking
fears the disease could spread elsewhere in the US.
Exhibitors at the Canton Fair, held twice a year in eastern Guangzhou, said they had seen
far fewer buyers yesterday than at the spring session in April.
"In the past the hall was full of people. There are fewer people this session, around half
of that in the spring session this year," said Joyce Lin, a sales representative for Guangdong
Kito Ceramics, which sells ceramics used for building materials. She said her company's exports
had declined.
<<But given that it's all just bullshit anyway, they probably just do this to mix things
up a bit>>
heh...how far does the the market have to fall before 'folks' start believing it's really down?
I think the machines and printers may have a wee credibility problem with their market numbers,
going up AND going down, these days. Nobody I've heard from thinks this fall is real...so far.
Bet it'll take a lot bigger than 2008 to get a good panic going this time.
Trouble with believing the printers will always come to the rescue, is that this same belief
leads to their inability to do so. It's just logic. You need some real, true believers in there
to take the losses, in order to convince anyone that this is a real market.
But the jig is up. Every BTFATH moment of the last six years, has proven that this is nothing
but printing. Delete risk, delete market. There are no market moves anymore, no charts to follow,
no production to judge. There is only what the central planners do and don't do next. I think
we're done here, at least with this economic iteration.
Most of those funds use lower credit rating bonds.
Good alternatives to Bill Gross and Pimco
Fund
Ticker
Yield
1-Year Return
3-Year Return
5-Year Return
Expense Ratio
DoubleLine Total Return Bond
DLTNX
4.85%
6.24%
5.08%
NA
0.73%
Fidelity Strategic Income
FSICX
3.71%
9.09%
5.78%
7.73%
0.69%
Loomis Sayles Bond
LSBRX
3.99%
12.87%
8.54%
10.62%
0.92%
Pimco Income
PONDX
4.98%
11.11%
11.47%
13.20%
0.77%
Source: Yahoo Finance
DoubleLine Total Return Bond. Manager Jeff Gundlach may become the Bill Gross of his
generation. (He's 55.) After having a terrific decade at TCW Total Return bond fund, he started DoubleLine
in 2010. DoubleLine Total Return has good, if not quite stellar, returns over nearly five years,
though it has attracted
more than $2.47 billion this year. Its yield is just below 5%. Turnover is only 14%
Fidelity
Strategic Income. Joanna Bewick is the most low-profile manager in a group of heavyweights, but
she has posted very good returns since taking over in 2008. Fidelity Strategic Income is small, giving
her more leeway, and is invested heavily in U.S. and foreign government bonds. Turnover is a relatively
high 135%. This is a good choice for people who have Fidelity accounts, though I might not go out
of my way to buy it.
Loomis Sayles Bond. Another investing legend, Dan Fuss, co-manages this fund with Elaine
Stokes and Matt Eagan. Fuss is 80, 10 years older than Gross, so I wouldn't invest just because of
him. But I've
interviewed Eagan and found him very bright, and the fund's performance is excellent. Turnover,
at 28%, is also low.
Pimco Income. Co-managed by new CIO Ivascyn and Alfred Murata, who both won Morningstar's
Fixed-Income Manager of the Year in 2013, Pimco Income's performance has smoked many other unconstrained
bond funds over the last five years. Ivascyn probably won't be as hands on as he used to be, so Murata
will likely do more heavy lifting.
One reservation: The fund's turnover rate was a blistering 251% - way too high! I'd wait
a bit to see if the managers reduce that over the coming months. But if you're in Pimco Total Return
and want an alternative, look no further than this stellar next-door neighbor rather than following
the once-great Bill Gross down his long, lonesome road.
Howard R. Gold is a MarketWatch columnist and founder and editor of
GoldenEgg Investing, which offers simple,
low-cost, low-risk retirement investing plans. Follow him on Twitter @howardrgold.
robert laden
Probably shouldn't blame Gross too much. It's tough to make money in the bond market when
credit-worthy bonds are yielding zero after taxes and inflation.
"Unconstrained" bond funds sounds like it could be the new face of "mortgage backed securities",
except that the "mortgage" part has probably been replaced by "sub-prime car loans".
Don Bowmore
@robert laden
and "student loan backed securities" ?
[Oct 18, 2014] A quote from previous crisis
After a spectacular year-long rally in the stock market, investors are exuberant. Stock market
bears have become an endangered species, but reports of their extinction are greatly exaggerated.
Indeed, there are many reasons to believe that a return to bear market conditions may be imminent.
If the m turn down again, it won't be pretty but bearish investors may be able to harvest impressive
profits by betting on lower prices.
Regardless of market conditions, most investors are overwhelmingly bullish. They have been trained
to hold stocks through thick and thin. The bear market of 2000-2003 proved that the average investor
will hold stocks through devastating declines, much like a deer in the headlights. Few investors
are even aware of techniques such as short selling, put options, or inverse funds that allow profiting
within bear m . For savvy traders, a fast moving bear market can provide stellar profits using these
techniques. But a bear market implies that most investors are losing. Severe losses can lead to extreme
resentment against those traders who profit from these environments. If you are a profitable bear
trader, you should be sensitive to those who are losing while you are winning. In a very real sense,
the money that you are making is the money they are losing.
Cocktail conversations about stocks are typically brag sessions about being long a stock that
went to the moon. When was the last time you heard someone brag about a spectacular short sale? The
next time you are at a party, try telling your best short-sale story and see what kind of reaction
you get. Hopefully, your friends will be polite.
The most popular form of bear market investing is short selling, a practice where the investor
sells borrowed stock from a broker with the obligation to purchase it back later, presumably at lower
price, with the profit being the difference between the sale price and the repurchase price. Even
though there is nothing illegal or unethical about short selling, it is still regarded in popular
culture as a rogue practice. Many people consider it unpatriotic to sell short the country's finest
firms and profit from their troubles. Short sellers have always created resentment, particularly
during bear m when the majority of investors have lost large sums of money.
Stock investing is fundamentally an optimistic pursuit. Most people (particularly Americans) have
a natural tendency to be optimistic. Short selling goes contrary to that natural tendency. This may
be why short sellers are mistrusted. Short sellers are not necessarily pessimistic, they are just
identifying a trend and profiting from it.
One of the most famous short sellers on Wall Street was Jesse Livermore who emerged from the 1929
crash with almost $100 million. Jesse certainly caused a lot of resentment among all of the ordinary
people who had lost fortunes in the crash. Some even blamed Jesse and other short sellers for the
crash. In response to investor outrage, the stock exchanges enacted rules to limit short selling
that remain to this day. After the crash, Livermore often received personal threats and was forced
to hire bodyguards. Sadly, Jesse lost his entire fortune in a mistimed investment strategy a few
years later and eventually committed suicide. The tragic story of Jesse Livermore has become a parable
for the "evils" of short selling.
Other well-known bears have been teased and ridiculed during bull m , then shunned and reviled
when their bearish predictions came true. Bearish analyst Jim Grant endured years of ribbing by Louis
Ruckeyser on the Wall $treet Week television show during the long bull market. The same Mr. Ruckeyser
fired "permabear" analyst Gail Dudack just months before the stock market peak in April 2000. The
unfortunate Ms. Dudack disappeared into obscurity just as her bearish forecasts proved correct. Professional
stock analysts know that a bearish outlook may permanently ruin a promising career. This may be why
bullish analysts vastly outnumber bearish ones. There is little room on Wall Street for a bear.
Stock market bears are always in a battle with a perpetually bullish "Wall Street Industrial Complex".
These institutions are designed to sell securities to the public so they are always promoting stocks
as safe and sound places to invest capital. Trading commissions by short sellers generate little
revenue for the brokerage industry. In fact trading commissions in general are only a small part
of investment industry profits. Management fees, investment banking, research, media, and a plethora
of related activities make up the big money the investment industry. These institutions need a constant
inflow of new capital to survive. Only a continuously bullish marketing message can lure investors
to buy these products and services.
This bullish message is reinforced by the financial media who receive the bulk of their advertising
revenue from the same industry that is after your investment dollars. They have created 24-hour "news"
channels that are really nothing more than non-stop infomercials for stock investing. Most people
get their financial information exclusively from these tainted sources. Financial media influence
is powerful and pervasive. Most common investors simply reflect the bullish perspective of the information
they receive from the media.
It is not the purpose of this article to discourage purchasing stocks. Quite the contrary. Stock
investing is an essential part of a healthy economy. But there is a time to buy and a time to sell.
The media will tell you that anytime is the right time to buy but will never tell you when to sell.
Successful investors listen to the message of the m , not the talking heads on the cable news network.
The financial media will give no comfort or assistance to short sellers or any other species of the
bear family. Short sellers must think independently and not be influenced by the media-controlled
stock market pop culture.
It is important to remember that other investors may deeply resent all of the money you have made
selling their favorite stocks short. You are on the other side of most investor's trades and making
all of the money that they are losing. Be careful how you describe your investment success. Be sensitive
and generous to those who are losing. Don't brag about your short-selling triumphs.
A bear market usually implies economic distress. Those who profit from this distress have an obligation
to give back to society and help those who have been hurt by deteriorating economic conditions. Bear
investors in particular should give generously to charity and work for the public good. This is not
only for good karma, but to diffuse any resentment that would be generated by profiting from a bear
market.
Collapse without triggering CDS as that would end the Eurozone's amusing monetary experiment and
collapse the Deutsche Bank $100 trillion house of derivative cards
Remember Greece: the country that in 2010 launched Europe's sovereign solvency crisis and the ECB's
own helpless attempts at intervention, which later was "saved", only to default shortly thereafter
(but without triggering CDS as that would end the Eurozone's amusing monetary experiment and collapse
the Deutsche Bank $100 trillion house of derivative cards), which later was again "saved" when every
single global central bank made sure Greek bonds became the only yield-generating securities in the
world? Well, the country which at last count was doing ok, is about to not be ok. Because according
to none other than S&P, at some point over the next 15 months, Greek debt is about to be in default
when the country is no longer able to cover its financing needs. In other words, back to square
one.
As Bloomberg reports, citing Real News, S&P analyst Marie-France Raynaud said Greece can't cover
its own financing needs.
How is that possible? Isn't Europe so fixed, it no longer has anything to worry about except deflation,
pardon,
inflation?
Guesst not. According to Bloomberg, S&P estimates Greek financing needs for the next 15 months
to be at EU43 billion.
This is a problem because even if Greece sells bonds this year and next, sales won't be enough
to cover net financing needs. So maybe Greece will sell more bonds? Well, the problem with that
is that the second the LIFO paradigm of bond investing no longer works, and the last guy in may be
stuck holding the bag, nobody will want to buy 1 penny in debt issued by Greece.
The specifics: S&P estimates Greece will draw EU5 billion from intl bond sales, EU20 billion from
internal mkt, EU12 billion from official lenders inluding the IMF in next 15 mos. S&P also forecasts
Greece will repay EU3 billion in bonds held by investors who refused to participate in 2012 debt
writedown, and if it doesn't then Greece will following Argentina in being held in "contempt to court"
for cramming down foreign law covenants. Just kidding: that would mean the global legal system actually
works instead of serves merely to make the rich richer.
It's the latter. Here's the gist of what happened:
Let's say that you're making $90k a year, and you run three companies: tourism, ship construction
and warehousing, You want to expand, so you take out a loan. Each one of those, (for simplicity's
sake,) makes $100k and costs $70k. So to expand, you take out a loan, say $300k apiece. You're
making a profit, everything's going great, and you're looking to expand again. Even better news,
someone offers you unlimited credit to expand. What do you do if you're optimistic and have unlimited
credit? You overexpand. Instead of taking $300k on $30k profit, you take $3 mil. And then the
crisis hits. So now you have a lot of debt, a lot of workers, and no one wants to buy your original
product, nevermind your expanded products.
On top of that, you have to subject your company to austerity. The problem is that if you're
running tourism and subject your workers to austerity, tourism fails. That's what happened to
Greece in a nutshell; by adopting the Euro, the Greek government went on an uncontrolled spending
spree. When you have your national currency, you'd either have to buy Euro reserves, (or Dollar
reserves,) with your currency. If your currency is fucked, you cannot borrow more currency. If
the Dollar's at 100 of YCU (your currency units), you cannot get it for 50. Unless you're a member
of the Euro Zone. Since the Euro is backed by Germany, and thanks to loose restrictions and creative
financing,
http://www.bloomberg.com/news/2012-03-06/goldman-secret-greece-loan-shows-two-sinners-as-client-unravels.html,
the Greek government breached their currency safety wall. This means that Greece has a debt that
they cannot pay back.
The financial machinations continued, but the point is that Greece still cannot pay back their
debt. If I make $30k and I'm $3 mil in debt, can I pay that back? On top of that, Greece was hit
hard with austerity, which further destroyed their ability to pay back the debt that they couldn't
pay in the first place. It's going to be a fall into the abyss for Greece, so the EU is, allegedly,
applying pressure to credit agencies to be nicer to Greece, meaning that those projections are
the most optimistic that S&P could manage to run on their simulators.
What's going on in Greece is certainly interesting from an analytical perspective, i.e. "what
happens when a country breaches its currency safety wall", but for the average Greeks they really
suck. Greece can default now or Greece can default later. Add Russian sanctions in response to
EU sanctions on top of that, and, well, poor Greece. In more ways than one.
Cult of GDP existed in the USSR and served the same purpose: to hide real problems and stagnation
of the economy... Without new technological breakthrough, it doubtful the this period of stagnation
will end by itself. Money printing since 2008 allowed to make the shock milder (and conceal the death
of neoliberal doctrine), but at one time chickens might come to roost.
It is amazing how the government manages to continue selling Brooklyn Bridges to a gullible public.
Americans buy wars they don't need and economic recoveries that do not exist.
The best investment in America is a highly leveraged fund that invests only in large cap companies
that are buying back their own stocks. Many of the firms repurchasing their stocks are borrowing
in order to push up their stock prices, executive "performance bonuses," and shareholders' capital
gains. The debt incurred will have to be serviced by future earnings. This is not a picture of capitalism
that is driving the economy by investment.
Neither is consumer spending driving the economy. The US Census Bureau's 2013
Income and Poverty Report concludes that in 2013 real median household income was 8 percent
below the amount in 2007, the year prior to the 2008 recession and has declined to the level in 1994,
two decades ago! Even though real household income has not regained the pre-recession level
and has declined to the level 20 years ago, the government and financial press claim that the economy
has been in recovery since June 2009.
Neither is an increase in consumer debt driving the economy. The only growth in personal debt
is in student loans.
Real retail sales (corrected with a non-rigged measure of inflation) remain at the level
of the bottom of the recession in 2009. Macy's , J.C. Penny's, and Sears store closings are further
evidence of the lack of retail sales growth, as is the fact that two of the three dollar store chains
are in trouble. Walmart's sales are declining.
The basis of auto sales hype is subprime loans and leases taken by those who cannot qualify for
a loan to purchase.
Housing starts remain far below the pre-recession level, which is not surprising when available
jobs are part-time with no benefits. Such jobs cannot support the formation of households and purchase
of homes.
Where does the government's second quarter 2014 real GDP growth rate of 4.6 percent come from?
It comes from an understated inflation measure and jiggled numbers. It is not a correct
figure. Nothing has occurred in the economy to turn it from a first quarter decline of more than
2 percent into a second quarter growth of 4.6 percent.
The 4.6% number is pulled out of a hat to set the stage for the November election.
It is extraordinary that economists and the financial media permit the government to get
away with its false economic reporting. Of course Wall Street likes good news . . . but fake news
that misleads investors and covers up economic policy mistakes?
Clearly, something is wrong with the government's economic reporting. It is not possible to have
real GDP growth when real median family incomes are declining and business investment consists
of corporations buying back their own shares. Either the government's GDP estimate is incorrect
or the Census Bureau's Income and Poverty report is incorrect. Apparently Washington doesn't understand
that if it is going to rig the numbers, it must rig all the numbers.
The rigged inflation measures create illusionary real GDP growth. They also block cost-of-living
adjustments to Social Security pensions. Indeed, the main purpose of the rigged inflation measures
is to get rid of "socialistic" Social Security by allowing inflation to gradually erode away the
real values of "entitlements." Republicans always want to cut "entitlements" that people have paid
for over their working lifetime with the payroll tax. But Republicans never want to cut the payroll
tax. They need the revenues in order to bail out the big banks and to pay for never-ending wars.
Washington has been conducting needless wars abroad for 93 percent of the 21st century at
a cost of trillions of dollars. More trillions have been wasted bailing out banks that deregulation
permitted to become "too big to fail." During the past seven years, millions of Americans have lost
their jobs and their homes, and food stamp rolls have reached record numbers. These hurting Americans
have been ignored by policy-makers in Washington.
Clearly, government in America is focused on something different from a healthy economy and the
well being of citizens. We call it democracy, but it's not.
Paul Craig Roberts is a former Assistant Secretary of the US Treasury and Associate
Editor of the Wall Street Journal. Roberts'
How
the Economy Was Lost is now available from CounterPunch in electronic format. His latest
book is
How
America Was Lost.
It might well an end to the created by FED money printing period of irrational exuberance" where
all those "mad money" instead of going to infrastructure went to speculation and propelled S&P500 to
2000.
Wall Street slumped on Thursday as anxieties about global economic growth smothered a short-lived,
Federal Reserve-sparked rally in equity m around the world.
The dollar gave up some gains from a remarkable three-month run-up and U.S. benchmark bond yields
touched one-year lows as investors shrugged off encouraging U.S. jobless data.
Oil prices, deeply affected by the dollar's value, tumbled to near a two-year low.
Energy stocks were big losers on Wall Street, where leading indices were off sharply at mid session.
The MSCI index of world stocks was off 0.9 percent at 407.53.
The Dow Jones industrial average (.DJI) fell 311.82 points, or 1.83 percent, to 16,682.4, the
S&P 500 (.SPX) lost 36.73 points, or 1.87 percent, to 1,932.16 and the Nasdaq Composite (.IXIC) dropped
83.10 points, or 1.86 percent, to 4,385.49.
The S&P Energy Index (.SPNY) was down 3.5 percent on Thursday, a day after investors gave the
U.S. stock market its best day of the year as Fed meeting minutes suggested the central bank would
not rush interest-rate hikes.
European shares hit a fresh two-month low as German exports fell 5.8 percent in August, the worst
decline since January 2009. The data from Europe's biggest economy fed anxieties about recession
in the euro zone.
Brent oil fell below $90 a barrel. Prices have been hurt by a supply glut and concerns about global
economic growth and are now down 20 percent from June.
Yesterday, gold climbed back above $1,200 an ounce. US stocks went nowhere.
Meanwhile, a chill went down our spine. A sense of dread filled our frontal cortex.
We read a report that was designed to give investors courage and hope. Instead, it felt to us
like a guilty verdict in a murder trial. Even with good behavior, our sentence would probably last
longer than we would.
A chart told the story. It showed three bull m over the last 20 years. In the 1990s, the S&P 500
total return was 227%. Then from 2002 to 2007, another bull market. The total return this time: 108%.
And from 2009 to 2014, the S&P 500 returned another 195%.
The lesson is unmistakable. It tells you to get in stocks… and stay in. If the market has a fainting
spell, don't get dizzy. Stick with stocks!
Don't let the occasional 50-60% crashes disturb your peace of mind! You will always win in the
long run! Long term bear m don't exist…well, maybe except in Japan. And much of the 18th
century. But other than that, nothing can go wrong – click to enlarge.
Buy the Dips?
"Yes, we've seen some weak periods," say the wealth managers, investment counselors and stockbrokers.
"But they've always been followed by even greater strength. Each high has led to an even higher high."
This is the message taken on board by a generation of investors. And if you go back further, you
will find the same lesson learned by their fathers… even their grandfathers.
Since the end of World War II, there have been up m , down m and sideways m . But if you had just
gotten in and stayed in over any substantial length of time, you would have done well.
That is true for almost all financial assets – at least over the last 35 years – and true for
stocks, especially, over the last 70 years. In 1960, the S&P 500 was 59. Yesterday, it was 1,964.
The lesson is now imbedded in our race memory… in our collective unconscious… and in our brains,
our culture and our muscles. Even after a stroke or Alzheimer's… after senile dementia and adult
diapers… we will recite it on our deathbeds: "Buy the dips."
We don't have to think about it. We may fear the next recession… or the next sell-off on Wall
Street… but we are confident the darkest night will always be followed by a bright dawn – always
has!
And always will. At least, until it doesn't.
A picture of the "impossible" – a stock market that remains 60% below its peak value almost a
full 25 years later. It frequently paid to buy the dips, but there was never a full retracement of
the lost ground – click to enlarge.
Mr. Market's Biggest Coup
But what if Mr. Market is about to pull his biggest coup? What if the next dark night lasts 10…
20… 30 years? What if the experience of the last 70 years was sui generis? What if it was
the result of particular conditions, which have now changed… and can't be repeated? What if we are
now looking at highs that we will never again see in our lifetimes?
Of course, what we don't know about the future is encyclopedic. But wouldn't it be a nice trick
on Mr. Market's part?
After World War II the US had the world's largest economy – by far – and unlike its rivals in
Europe, it was still intact. The GIs came home. They got married… they had the famous baby boom children…
they started businesses and careers. Credit expanded – up 50 times since then.
And now, with interest rates lower than ever before, the credit expansion must be nearing
its end. World War II vets are dying at the rate of about 1,000 a day. And their children are retiring…
at a rate of 10,000 every day. The boomers are no longer adding to wealth; they're subtracting from
it.
They're no longer expanding credit by borrowing to buy new houses and new cars; now, they're living
off their investments and Social Security, counting on their own savings or the kindness of strangers
to see them through the rest of their lives.
You heard about the great jobs report on Friday. Some 248,000 new jobs were created. But wait…
The real story is that of the 14 million people added to the adult population of the US since 2008,
only 1 million have found real jobs.
That's the important story: Growth is slowing. We have more people… but fewer of them paying the
bills. Reagan's former budget adviser David Stockman comments:
"Going back to September 2000, for example, there were only 76 million adults not in the labor
force or unemployed, and that represented just 35.8% of the adult population of 213 million.
This means there has been a 26 million gain in the number of adults not working – even part-time
– during that 14-year period. About 10 million of that gain is accounted for by retired workers
on Social Security – a figure which has risen from 28.5 million to 38.5 million during the interim.
But where are the other 16 million? The answer is on disability (+4.5 million), food stamps
(+25 million), survivors and dependents benefits, other forms of public aid, living in parents'
basements on student loans or not, or on the streets.
The employment ratio has plunged; full-time breadwinner jobs have actually shrunk; total labor
hours employed have been stagnant; real GDP has grown at only 1.8% annually for 14 years – compared
to 4% annually between 1956 and 1970; and real net capital investment is 20% below its turn-of-the-century
level.
This isn't at all like the postwar period. It is a whole different ballgame. We may never again
in our lifetimes see stocks so high."
Labor force participation is in a steep downtrend since the peak of the 1990s stock market mania
– click to enlarge.
Charts by: BigCharts, St. Louis Federal Reserve Research
A prolonged period of ultra-low interest rates poses the threat of a fresh financial crisis by
encouraging excessive risk taking on global m , the International Monetary Fund has said.
The Washington-based IMF said that more than half a decade in which official borrowing costs have
been close to zero had encouraged speculation rather than the hoped-for pick up in investment.
In its half-yearly global financial stability report, it said the risks to stability no longer
came from the traditional banks but from the so-called shadow banking system – institutions such
as hedge funds, money market funds and investment banks that do not take deposits from the public.
José Viñals, the IMF's financial counsellor, said:
"Policymakers are facing a new global imbalance: not enough economic risk-taking in support
of growth, but increasing excesses in financial risk-taking posing stability challenges."
He added that traditional banks were safer after the injection of additional capital but not strong
enough to support economic recovery.
Viñals said the IMF had analysed 300 large banks in advanced economies, making up the bulk of
their banking system. It found that institutions representing almost 40% of total assets lacked the
financial muscle to supply adequate credit in support of the recovery. In the eurozone, this proportion
rose to about 70%.
"And risks are shifting to the shadow banking system in the form of rising market and liquidity
risks," Viñals said. "If left unaddressed, these risks could compromise global financial stability."
The stability report said low interest rates were "critical" in supporting the economy because
they encouraged consumers to spend, and businesses to hire and invest. But it noted that loose
monetary policies also prompted investment in high-yield but risky assets and for investors to take
bigger bets. One concern is that much of the high-risk investment has taken place in emerging
m , leaving them vulnerable to rising US interest rates.
"Accommodative policies aimed at supporting the recovery and promoting economic risk taking have
facilitated greater financial risk taking," the IMF said. As evidence it pointed to rising asset
prices, smaller premiums on riskier investments and the lack of volatility in financial m . In
many cases, the IMF said the behaviour of investors was at odds with the state of the global economy.
"What is unusual about these developments is their synchronicity: they have occurred simultaneously
across broad asset classes and across countries in a way that is unprecedented."
The IMF said there was a trade-off between the upside economic benefits of low interest rates
and the money creation process known as quantitative easing and the downside financial stability
risks. While its report found that in some countries, including the UK and the US, economic benefits
were becoming more evident, it warned that
"market and liquidity risks have increased to levels that could compromise financial stability
if left unaddressed".
It said developments in high-yielding corporate bonds were "worrisome", that share prices
in some western countries were high by historical norms, and that there were pockets of real estate
over-valuation.
"The best way to safeguard financial stability and improve the balance between economic and
financial risk taking is to put in place policies that enhance the transmission of monetary policy
to the real economy – thus promoting economic risk taking – and address financial excesses through
well-designed macroprudential measures."
These include tougher supervision of banks, requirements on them to hold more capital, and curbs
on lending to specific sectors such as housing.
Viñals said it was time for traditional banks to overhaul their business models. This would involve
not only changing the focus of their lending, but also consolidation and retrenchment. "In Europe,
the comprehensive assessment of balance sheets by the European central bank provides a strong starting
point for these much-needed changes in bank business models," he said.
elektrafortyseven, 08 October 2014 2:12pm
time for traditional banks to overhaul their business models.
In other news ... turkeys vote for Christmas.
phildigbybayliss -> elektrafortyseven, 08 October 2014 5:25pm
This has got bog all to do with turkeys or christmas (i.e self regulation).
Bring back the Glass-Steagal Act which split commercial banking (read 'real world economy')
from financial banking (read speculation) and made casino bets with customers funds illegal. Simple
bit of regulation. But regulation is off the agenda.
Even the IMF who have stated the problem do not advocate a 'simple' political act to remedy
the situation. Speculation is leading (has led) to risk taking (and high returns) in fracking,
privatization of health, transport, energy........
Is there a political party in May 2015 who is willing to regulate the financial system? Vince
Cable has threatened it (but has been very quite since); nothing from Labour and the Cons would
cut their own throats before rejecting the Thatcher-Reagan mantra of the 'free market'.
As Piketty has so eloquently argued, inequality is a political issue, not an economic one.
Elbowpatch, 08 October 2014 2:28pm
These include tougher supervision of banks
There's a major downside to increasing regulation, often the very best model small regional
banks and building societies are taken over by the big boys able to absorb the cost of regulation.
Instead, Govt should create incentives for small regional lenders to once more flourish because
old fashioned building societies tend to be naturally responsible 'old fashioned' guardians of
finance. Bet no one in the lofty corridors of Westminster has ever thought of this.
Germany is full of small regional lenders.
warmachineuk, 08 October 2014 2:29pm
Wow! When the IMF realises something is wrong, it's really obvious.
foolisholdman warmachineuk, 08 October 2014 3:15pm
Wow! When the IMF realises something is wrong, it's really obvious.
It is another case of "You saw it first on Max Keiser!" Really, it is the case, that he has
been saying exactly these same things, in almost the same words, for about 4-5 years.
He also said, long before it was admitted, that LIBOR was being rigged.
Tiresius warmachineuk, 08 October 2014 10:39pm
What is obvious , but not yet on the radar of the IMF , is that grotesque income inequality
also produces unproductive consumption and asset price inflation.
When household income is , say £25,000, any increment in earnings is usually spent in the
economy on goods and services and hence has a multiplier effect.
If household income is £1m or more , incremental income is usually spent on buying further
non consumption assets, houses , stocks and shares etc , with no multiplier.
When wealth is so concentrated and real wages for most people so depressed this becomes further
exacerbated. But as yet the IMF still believe in the idiocy of trickle down economics ..
tomsixty1, 08 October 2014 2:30pm
So why do they now recognise that the policies they supported are making what remains of the
global economy unstable and unsustainable?
They are preparing us for more bail outs and austerity.
"The primary beneficiaries of these central bank money creation policies have been global
very high net worth investors, their financial institutions, and global corporations in general.
According to a study in 2013 by Capgemini, a global business consultancy, Very High
Net Worth Investors increased their invest-able wealth by $4 trillion in 2012 alone, with projected
further asset growth of $4 trillion a year in the coming decade. The primary financial institutions
which invest on their behalf, what are called 'shadow banks' (i.e. hedge funds, private equity
firms, asset management companies, and dozens of other globally unregulated financial institutions)
more than doubled their total assets from 2008 to 2013, and now hold more than $71 trillion
in invest-able assets globally.
This massive accrual of wealth by global finance capitalists and their institutions occurred
in speculating and investing in offshore financial and emerging market opportunities - made
possible in the final analysis by the trillions of dollars, pounds, Euros, and Yen provided
at little or no cost by central banks' policies since 2008. That is, until 2014.
That massive tens of trillions of dollars, diverted from the US, Europe and Japan to the
so-called 'Emerging M ' and China is now beginning to flow back from the emerging m to the
'west'.
Consequently in turn, the locus of the global crisis that first erupted in 2008 in the
U.S., then shifted to Europe between 2010-early 2013, is now shifting again, a third time.
Financial and economic instability is now emerging and deepening in offshore m and economies-and
growing increasingly likely in China as well."
Jack Rasmus February 2014.
Terpitude, 08 October 2014 2:55pm
How is it a "new global imbalance"? The shadow banking system has been in full flow for almost
a decade and its activities make the majority of government attempts to stabilise the global economy
almost pointless.
Johnny Kent, 08 October 2014 2:59pm
The UK and US, who seem to share identical ideals, unfortunately, stick with near zero
rates for the benefit of stockmarket speculators, not the wider hard working public. High time
this changed.
The US/UK ruined by the Neo Cons lets hope Germany can take centre stage and save
us from the authoritarian Chinese regime and the religious fascists in the Middle East. Mutti
we need you and your engineers we got rid of ours for City sharks.
The pinnacle of British engineering skills and training was Rolls-Royce. If you had worked
for RR you could get an engineering job almost anywhere. So what did our brilliant government
do? They sold it to the heirs of Joseph Goebels! If that wasn't treason, it bloody well should
be!
ruskiny, 08 October 2014 3:19pm
You cannot create wealth from a Ponzi scheme. Over 1 million people using money given to them
by the UK Gov. who have borrowed said money in the name of the rest of the UK , go to work in
the City of London and prove this truth every day.
marcelprout, 08 October 2014 3:23pm
Private Eye on Tesco
"While earnings per share (EPS) – "the Number" that drives all things, especially management
pay, had marched on upwards in the Leahy years, return on capital employed "ROCE" had declined.
Tesco was generating insufficient free cash to invest and pay its dividend- the gap being filled
by debt. And its definition of ROCE had changed eight times"
Cheap debt is ruining companies as their greedy CEOs do anything to boost EPS so they can
get big bonuses.
The system is in serious trouble. EPS and low interest rates are right at the heart of it.
kimdriver Notbig Mick, 08 October 2014 4:45pm
Buying a share on the secondary market isn't the sort of investment the IMF is describing.
They want investment in productive assets.
Sadly, with so much existing productive capacity and little growth in demand, nobody wants
to invest.
Ron Jacobs, 08 October 2014 3:35pm
The capitalist system is now in the hands of the financiers. They will not make decisions that
do not provide them with a means to make as much money as possible via their speculative practices.
The rest of the world be damned.
richbandit, 08 October 2014 3:37pm
IMF ......almost 40% of total assets lacked the financial muscle to supply adequate credit
in support of the recovery. In the Eurozone, this proportion rose to about 70%.
................
So that must leave the Basel III LCR stress test close to tatters which was supposed to strengthen
bank capital requirements by increasing bank liquidity and decreasing bank leverage. Fluidity
in the system is obviously failing.
My take:-Western lander EU banks have a problem when compared to those in the FE and Asian
pacific rim which are doing fine. The UK has a lender of last resort, i.e BoE; but for the rest
of Eurozone only the EZB.
marcelprout -> richbandit, 08 October 2014 4:46pm
Basel 3 is a joke. It's stupid to think individual CFOs in finance companies understand the
risk on their books. They do not understand the risk posed by the system itself.
Stripping out all the margins that the boring previous generation left behind was the worst
thing that ever happened to banking. Most if it was lost in speculation.
Following the Lehman collapse (Greenspan 'shocked' that free m are flawed, November 23, 2008)
Alan Greenspan told the New York Times "I made a mistake in presuming that the self-interest
of organisations, specifically banks and others, was such that they were best capable of protecting
their own shareholders."
o572, 08 October 2014 3:54pm
Mind boggling.
The idiocy of the people that 'run' our economic 'systems' is beyond belief.
A layman can instantly see the insanity of printing infinite money, charging nothing for it
and never expecting it to be paid back but those who operate it take 5 years to get an inkling
it might not work.
Am I even living in the same reality as these sort of people, although I suppose when you
are taking 10% of £infinite and pass it on your ability to suspend belief must be affected.
Notbig Mick -> Halo572, 08 October 2014 4:01pm
Not sure you grasp this, tightening would be suicidal a la 1929. Central banks have modestly
increased their balance sheets and the recession has not been bad. The exception being EZ, a reduction
in balance sheet and chaos.
I'm sorry if people don't grasp this but back in 2008 I'd take the UK today in an instant,
few understand how grim things could have been. EZ meanwhile.......................
Notbig Mick, 08 October 2014 3:58pm
Why not wind the IMF up by 2020.
Totally pointless and discredited if not self-serving organisation.
Governments may not ride so rough with their hairbrain schemes, act more conservatively with
a view to long term sustainable progress. Their central bank is the correct backstop.
Was waiting for that... "we want interest rates to rise"
The "rich" don't care if inflation
rises too.
Think about it, interest rates usually hover a % or two above inflation. (financial crash period
excluded). The more money they have, the more money they make relatively, just by storing it.
The inflation hit is less relevant to them as a corporation doesn't rely on CPI and isn't
really affected by the cost of milk.
IMF (september 30th)
"one of the few remaining policy levers available to support growth" – especially in the
euro zone where despite accommodative monetary policy "there is still substantial economic
slack, and inflation remains too low."
B-BU-BUT OUR GROWTH
The German government provisionally posted a 16.1 billion euros ($20.3 billion) surplus
in the first half of 2014, despite faltering growth.
The Puritans said the same hundreds of years ago. People always say Armageddon is just around
the bend, yet we muddle through.
If this was 1973 you would be posting that OPEC is kicking
off together with Iran Iraq war and third world war inevitable.
In 1977 Carters state of the nation address informed a sombre public that peak oil was upon
them, to prepare for the worst. Then followed 20 years of boom.
The whole Keynesian ponzi scheme will come crashing down.
The sooner it does and we get a system of sound money, the better off we will all be.
Keynesianism was actually premised on 1.5% monetary growth per year, as it tied in with annual
increases in the physical amount of gold produced each year, thus tying in perfectly with the
gold standard and tight state regulation over endogenous money creation.
The present system is premised far more firmly around monetarist policies - that is, providing
liquidity to banks and financial institutions to increase the growth of money creation in the
economy like we did over 2008-10. It is the idea that won Friedman his Noble Prize in 1974. QE
is a Friedmanite idea first used in the mid 1970s and then in Japan from 1990.
Of course, this is completely useless in an economy where the cash leaks out to tax havens,
or simply goes into speculation - particularly when a slump is entirely demand driven and hampered
by vast inequalities.
Keynesianism would recommend public works programs and encourage 'the euthanasia of the
rentier' and growth in infrastructure, not their empowerment to speculate away with QE and hold
entire countries at ransom.
Also, your system of 'sound money' (which I presume is full reserve banking) would send the
global economy into a twenty year slump - the key is to take full state control over the creation
of credit/fiat and put it to more productive, rather than speculative, use.
Speaking as somebody who actually owns a small manufacturing business I can't say I blame you
for not investing in a manufacturing start-up. It's not a safe investment. I was pretty lucky
in that i've been building guitar amplifiers and effect pedals since about 14 as a hobby and I
kind of grew that hobby into a business. The only investment i've ever taken was a startup loan
in 2002 and I paid that back in 2010.
I think there are a couple of problems with British Business
from my observation. Firstly a lot of senior management lack technical experience in the business
sector their business is involved in. When I was at university I worked freelance as a web developer
and I noticed that a lot of the MDs of these web development firms had no background in web design
or development. Whilst i'd concede that it's not necessary to be an expert web developer to own
web development firm i'd say it is necessary to have some technical competency otherwise how do
you make appropriate decisions, you end up reliant on other people and usually those people have
their own interests at heart not the interest of the business.
The other problem is again senior management not being able to accept responsibility or criticism.
They pretend they're open to constructive criticism but as soon as somebody sticks their neck
out the axe swings even if the criticism is valid. This is part of the reason I struck out on
my own and tried to run my business differently, I got pissed off with not being able to challenge
stupid decisions. Being a CEO or MD doesn't mean one is better than anyone else, nor are they
infallible and the sooner people realise this the better.
DaylitTunnel, 08 October 2014 4:25pm
Shadow banking system = organised crime. Or it would if the governments of the world legislated
to outlaw antisocial banking activities. I don't hear ANY British political party standing for
election in 2015 offering ANY redress, ANY shift in the balance of power to protect 'ordinary
people'. So what is the point of voting?
The British political system needs urgent reform because as it stands it is undermining democracy
and allowing a run-away corruption in 'shadow economies' to ruin our world.
Voltaire21, 08 October 2014 4:25pm
Thinking we could trust the people who f@#ked us over the first time is arguably the dumbest
mistake our central governments could make. The low lending rates have been given to the banks
with zero caveats to use it responsibly.
So they have done what they usually do...which is instead of working hard and doing the work
they were asked to do, they have gone out and found the quickest way to make hay. The bankers
are still playing on the stockmarket where they can easily make more than 0% interest.
The stockm have been performing remarkably well despite a moribund economy in most countries.
The stockmarket and the real economy have limited relevance yet the former is continually used
as an indicator for the latter. This lie needs to stop, the reason the m are performing well is
the glut of cheap money parked into it by the banks. Half the world is in freefall but the world
of high finance has nicely hijacked the funds to recover from it. Government should have by passed
the funds and directly injected the money into the economy.
jayant, 08 October 2014 4:30pm
With near zero interest rates, it was clear that cheap money was there for asking. It is more
profitable to engage in speculation than to invest in bricks-and-mortar businesses with human
workers. It's too much trouble.
No wonder the stock exchanges are booming, take-overs are increasing and people are struggling
because the real wages are stagnant.
dolly63, 08 October 2014 4:40pm
The cracks are showing and the full is beginning to happen! There is no golden egg, never have
been, never will be. Just poverty to look forward to.
kykcrzy, 08 October 2014 4:44pm
Perhaps the fate of the modern economy is always going to be that of Japan, eventual stagnation
and malaise.
mikedow, 08 October 2014 4:44pm
The IMF has lots to say.
The International Monetary Fund slightly lowered its outlook for global economic growth this
year, but is optimistic about the next two years in the U.S. and Canada.
The IMF said Tuesday the global economy will grow 3.3 per cent this year, a drop from the 3.4
per cent it forecast in July, because of weakness in Japan, Latin America and Europe. In 2015,
world growth could be 3.8 per cent, a reduction of two percentage points.
But it sees "firming momentum" in Canada and the U.S., led by buoyant domestic demand in the
U.S. and export growth in both countries.
zelazny, 08 October 2014 4:48pm
The IMF, another cancer cell in the overall malignancy of financial capitalism, sees perpetual
growth as the only solution to life.
Instead, the world needs a massive austerity program directed at the rich. Ban private jets.
Ban cars, the cause of most wars for oil. Impose draconian taxes on wealth. Make the richest families
pay reparations to those they have enslaved and abused. Hold war crime tribunals for all of the
western leaders.
Many historians like to use the image of a human body to represent the body politic. In that
image, the rich would appear as pustulant boils on the body's posterior, providing no benefit,
but a lot of pain.
zelazny, 08 October 2014 4:51pm
Only perpetual war and authoritarianism holds financial capitalism together. Since 2008, the
central banks have printed money to try to revive the decrepit body of capitalism, without success.
The cancer of perpetual growth must stop and the people should rise up and demand that the
rich stop their predations. Rich people in their yachts and private jets provide nothing of value
to society.
Michael York, 08 October 2014 5:14pm
<Almost zero borrowing costs has encouraged speculation rather than hoped-for pick up in
investment, says Fund>
Well what a surprise! Who could have predicted that?
That's the problem with blackmail; after you pay them off, the blackmailer always wants more.
PeasantsRevolt, 08 October 2014 5:16pm
The Washington-based IMF said that more than half a decade in which official borrowing
costs have been close to zero had encouraged speculation rather than the hoped-for pick up
in investment.
No shit, Sherlock.
With governments of all hues singularly failing to rein in the pre-crash destructive habits
of the banks, and prosecute those who took the global economy to the brink of annihilation, is
it any wonder that said bankers feel free to return to their gambling ways, and shun the notion
of lending to business and industry as a viable business model.
In the UK, this problem is being exacerbated by a government incapable of formulating anything
close to an industrial policy, let alone facilitating a re-balancing of the economy away
from financial services. GO's solution is to actively encourage a housing price bubble, and mass
debt fuelled consumption as a means of boosting GDP - hence why most people don't feel any better
off.
Those who ignore history are doomed to repeat it - and once again it will be the little people
who pay the price.
jakedog, 08 October 2014 5:19pm
So the casino banking in the City by hedge funds and others is back in full flow - what a surprise!
After the financial crash of 2008, there was short period when greater regulation of the world's
financial m looked possible - but not for long. Only 6 months into 2009 and the Financial Times
was calling for the blaming of bankers to stop, for business as usual to be reinstated, and unfortunately
that is exactly what has happened.
For the IMF, the temple of free market, neo-liberal economic thinking, to be calling these
warnings shows just how serious the situation is.
How much longer are we going to accept that unregulated financial m are somehow of benefit
to us all; how much longer before some contribution by rapacious hedge funds and the rest through
a Tobin tax is imposed?
blueba, 08 October 2014 5:22pm
The IMF was founded to support the US Neoliberal Empire and its agenda is to promote its
interests. Raising interest rates before there is employment recovery would be a disaster
for the "real" economy where the bulk of people live and operate. It is just another Neoliberal
concession to the oligarchs who have been screaming as loud as they can to raise interest rates
as its in their best interest to own US Treasure paper with a good return and almost -0- risk.
Clearly, as we have watched the disaster of the "real" economy continue long past the recovery
of the 1930s and policy makers making decisions only in the interests of the oligarchs and the
banks and corporations they own we see IMF has supported the process throughout.
The US Neoliberal Empire and its globalization has done serious damage to civil and human rights
as well as "corportized" the global economy.
No one should trust the solutions offered by this corrupt institution.
ID3839388, 08 October 2014 5:26pm
"IMF warns period of ultra-low interest rates poses fresh financial crisis threat" cries the
headline... then we read down and find it's not actually low interest rates, but the choice
of shadow banking institutions to go for excesses in financial risk taking in light of those ultra-low
interest rates.
So in summary, greedy, high-risk investment by bankers chasing bonuses tanked the economy
and interest rates had to drop to ensure the whole system don't come crashing down completely
taking everything with it...
Then, 5 years or so later, the greedy, high-risk investments by bankers chasing bonuses threatens
to destabilize the economy and cause a fresh financial crisis (even before we've recovered from
the consequences of their last cluster-cuss).
Is anyone else spotting the common denominator here?
Low-interest rates are, thanks to the cost of housing relative to wages in most developed countries,
about the only thing ensuring swathes of ordinary folks don't lose their homes at present and
others aren't locked in to a largely unregulated, and mostly p*ss-poor value for money private
rental sector.
Maybe, if low rates are being taken advantage of and abused by the financiers, the abuse and
risk-taking should be looked at, instead of blaming low interest rates in themselves?
CrazyGuy, 08 October 2014 5:41pm
Greenspan is at fault for all of this nonsense - presiding over year after year of very low
interest rates at the Fed so that Banks and Corporates took it for granted that money would always
be cheap. As a result they developed long-term Business Models which required very cheap capital
and very high margins - or, worse still, they chased after non-viable business such as Sub Prime
Mortgages - and the rest is history.
This is all very well and it made a few people and enormous amount of money but the question
remains as to what happens when the party is over? Adjusting your business model to make more
normal profits - and foregoing huge bonuses is the right way but who in the City is going to do
that? The mantra there is 'if I can take the money I will' - but amazingly with the Governments
generous Quantitative Easing programmes they didn't have to come back to earth - and we are well
on the way to Financial Meltdown 2 - the sequel - which will be much more dramatic - real 'end
of the world as we know it stuff' - unless governments all around the world act to put in structural
measures - with teeth - to change the way the M do business.
Which brings us to the punchline - why do governments not raise base rates to discourage this
behaviour? Well. apart from the current government allowing their mates to stay on the Gravy Train
a little/lot longer the real bombshell is that the Government is also in hock and working to a
dodgy business model - there is a huge pile of Sovereign debt which was sold at very low rates
of interest. If the Interest Rates on refinancing that debt were to rise even a couple of percentage
points UK PLC would be properly invsolvent - in a way that even the IMF couldn't help us!
So we are stuffed and set on a long, hard road of reflation - hopefully led by economic growth
to inflate away the debt - something the USA realised and accelerated 3 years ago - but don't
hold your breath!
ChenaBaldEagle toadwarrior, 08 October 2014 8:35pm
Screwing up the economy?
What is wrong with pushing wages down to benefit the plutocrats and oligarchs? What is wrong
with hollowing out the middle classes? Or transferring assets to the plutocrats and oligarchs,
from the middle classes and also the poor? Or having the taxpayers indirectly subsidize the plutocrats
and oligarchs, by providing the poor with safety nets?
Or ignoring the advice of Adam Smith, in his work, "The Wealth of Nations", that workers should
receive good wages (well above living wages, which only create wage slaves), and that owners will
or may be dissuaded from underpaying workers by patriotism and ethics. Many plutocrats and oligarchs
today have no patriotism, being World Citizens, and justify paying low or minimum wages, because
greater resulting profits benefit shareholders, which is their ethical duty, (and are not paid
to their workers, who give them loyalty and create the profits),
Adam Smith realized that building the wealth of a nation required workers to have good wages
(so that they may buy products of their labor and accumulate wealth). Today, that advice is ignored,
and the wealth of many nations is being dissipated, for the benefit of the plutocrats and oligarchs.
This process, which is a war on the middle classes and the poor, is not new. As Marie Antoinette
advised, we should buy cakes. To date, the handmaidens of the plutocrats and oligarchs divert
the attention of the rest of us with "infotainment", for the same purpose as the circuses of the
Romans.
While there are patriotic and ethical millionaires and billionaires, to date they have not
been able to enlighten the others. And the rest of us, even globally, do not know or understand
what is, and has been occurring. The war on the rest of us, the middle classes, the poor and even
the mere millionaires, will continue until reform or revolution.
Janet Yellen, the Fed Chair, at her confirmation hearing, stated she had not decided whether
we are a capitalist democracy or had morphed into an oligarchy. She now might concur with my analysis,
that we are now an oligarchy.
Cavirac, 08 October 2014 6:21pm
Its all the fault of the greedy American banks and insurance companies. Now they are trying
and claw back the money they lost. The IMF is just their mouthpiece. Three five years ago the
IMF said the Euro was finished, possibly within six weeks of making that statement. Guess which
is the second most traded currency in the world, guess what is the second biggest currency in
the world?
Lets not forget that these are the same 'experts' (if ever a word was used so badly out of
context) that got us in all this crap in the first place.. They should be confined to the bin
along with the credit rating companies.
nikkkkko, 08 October 2014 6:24pm
This is the expected result of trying to use monetary stimulus without a Keynesian fiscal stimulus.
Keynes showed back in the 30's that demand drives supply, and not the other way around.
Beginner20,08 October 2014 6:39pm
According to the report the IMF's World Economic Outlook, released on Tuesday, the world has
got a new Group of Seven (G7)
The new G7 includes BRIC countries (Brazil, Russia, India and China) and the three countries
of the so-called group of MINT (Mexico, Indonesia, Nigeria, Turkey), with the exception of Nigeria.
The total size of the GDP of the new G7 calculated by PPP, is 37.8 trillion dollars, while
the total GDP of the "old" G7 (Canada, France, Germany, Italy, Japan, United Kingdom and United
States) reaches only 34.5 trillion dollars.
At the same time, according to the report, the United States ceased to be the world economy
№1 losing this place China.
MountainMan23, 08 October 2014 6:50pm
A prolonged period of ultra-low interest rates poses the threat of a fresh financial crisis
by encouraging excessive risk taking on global m , the International Monetary Fund has said.
The Washington-based IMF said that more than half a decade in which official borrowing costs
have been close to zero had encouraged speculation rather than the hoped-for pick up in investment.
Who believed the "hoped-for pick up in investment" line? It was obvious from the outset, and
even more obvious as the years wore on, that giving the big institutions "free money" to play
with was only going to make matters worse. Of course they don't invest in the real economy. Why
should they when they can "earn" much more money in derivatives, buy backs, corporate mergers,
etc, ie ALL the bad "investments" that brought the economy down in the first place.
Beginner20 MountainMan23, 08 October 2014 7:04pm
If the stock market had not absorbed all the US dollars, today a loaf of bread would have cost
thousands of dollars. Look how many shares of online companies that do not have any sort of assets
and whose profits will never cover even their costs ... But it is a convenient mechanism of society
control and the Government shifted this burden on private investors..
norecovery, 08 October 2014 7:02pm
For years, we have been screaming at the people holding the purse strings to put money into
the real economy where it will boost real productivity and benefit all of society, instead of
propping up the addictive financial gambling to benefit the infinitesimally few and imposing austerity
on everyone else, but they will not listen nor will they learn from the errors of their ways.
As with climate change vis-a-vis the fossil fuel and military monopolies, only further disaster
might bring about needed change in the financial system. Or maybe it will take mass revolt...
take your pick, guys.
Beginner20 norecovery,08 October 2014 7:09pm
Well, as it was so convenient to cut the property of the former Soviet Union and other
development countries - crazy money and no work - that is all - shop is closed.
Blader, 08 October 2014 7:28pm
The US has a problem it has been ducking for years. One the one hand, real wages have been
stagnant or dropping for many years (except for those at the top), yet the US economy depends
heavily on consumer spending (69% of GDP according to the World Bank). Therein lies the problem:
how do you keep consumer spending high while also reducing wages? First, offshore as much manufacturing
as possible. This lowers product prices and eliminates the better-paying factory jobs at the same
time, thus lowering wages. That's not enough though, to drive constant consumer spending. Here's
the solution: sell everyone a house, thereby driving the housing market up. The paper value increases
then serve a dual function: they form the basis for taking "equity" out by refinancing and higher
real estate values result in higher property taxes, thus bringing in more revenue for towns and
cities. Equity-out refinancing provides cash for consumer spending: everything from cars, appliances,
clothes, to college tuition or vacations. Or even in speculative investing in the m -- As long
as the housing market was going up, up, up this seemed to work just fine. I watched Jamie Dimon,
head of JP Morgan, tell a Congressional committee that he "just never imagined the housing market
would ever go down." But it did. The whole thing was a house of cards, a sort of Ponzi scheme
that required ever larger numbers of homebuyers in order to stay afloat, and that in turn
led to the more creative mortgage products: variable rate, interest only, liar loans, etc. And
all of these were made possible because the secondary mortgage market (created conceptually by
the big investment banks) led to very few banks holding mortgages. The notes and their accompanying
mortgages were sold at a discount to bigger banks that then securitized them. This made it very
easy for the institutions financing the actual real estate purchases to look the other way when
it came to lending to unqualified borrowers, or taking advantage of inexperienced borrowers to
sell them a mortgage product for which they qualified but which had a strong potential to fail.
And of course in the end, the big banks learned nothing, because they were "too big to be allowed
to fail" and likely because they have a practice of hiring their former regulators at peachy salaries
(so how tough will those regulators be?)
The key to the whole thing was the idea that the US housing market had been "a sure bet" historically.
Now there is another "sure bet" for banks: student loans. Here's the deal: US law prevents
student loans from being discharged in bankruptcy! Those loans may go into default, but they can't
be escaped from. If they do go into default, the borrower's ability to get a car loan or a house
loan goes to nil. Although talking heads in the media keep talking about the housing market comeback,
student loan debt is going to hurt those prospects, for a couple of reasons.
First, if recent grads (who would ordinarily be expected to begin focusing on buying a house)
have large student loan debt to service, they will not have the cash to make mortgage payments.
Second, mortgage lenders always want to have the "senior" debt. That way, if the bank has to foreclose
on the borrower, the bank gets paid first. But if there's student loan debt, it could end up being
"senior" to the mortgage bank's loan and if the borrower defaults on both then the student loan
bank (for want of a better term) will get paid first from the proceeds of the foreclosure sale,
meaning the mortgage lender may not recoup enough to cover what it's owed.
In the US college tuition costs have been skyrocketing - all out of proportion to other
increasing costs. This suggests that there is a very large supply of "easy" money being made available
for student loans, which in turn allows universities to increase their prices. We are now
beginning to see cases where "for profit" colleges are springing up, and colleges in general are
becoming more like processing plants rather than educational institutions. Along with this there
is the longstanding belief that everyone should go to college. This sound familiar? Everyone should
own a house - everyone should go to college. Same song, different key. And if you want to go to
college, you most likely will have to take out loans. The ability to pay back those loans is predicated
on an expectation that the graduate will be able to find employment with wages sufficient to service
the loan. But that in turn is dependent on the labor market, and there are no guarantees (despite
what education lenders say) that a graduate will in fact secure employment that pays enough to
both service the loan and live independently.
It is getting dark. The chickens are headed home to roost. Maybe not today. But soon.
Last week's US inflation figures showed that the Federal Reserve's over-expansionary monetary
policy wasn't revealing itself in inflation. But that doesn't mean it's doing no damage. Instead
of in inflation numbers, the multiple years of ultra-low Fed interest rates are manifest in savings
figures for both individuals and companies. Individual savings are at half the long-term average
and corporate stock buybacks, together with dividends, are absorbing 91% of the Standard and
Poor's 500's net income, according to the Financial Times.
Traditionally, fiat-money central banks were supposed to run the system with a view to keeping
inflation as low as possible. In 1978, the Humphrey-Hawkins Act extended the Fed's remit to the "dual
mandate", supposedly managing unemployment and inflation simultaneously.
Hard-money types have criticized this as sloppiness incarnate, allowing the Fed to pursue soft
money policies even when inflation is rising, as in 2005-06. However, the Fed's period of extraordinary
stimulus since 2009 has not been accompanied by an inflation upsurge. Far from it.
There appear to be a number of reasons for this. The link between money supply growth and inflation
is nothing like as tight as Milton Friedman claimed, and his parallel assertion that inflation
is "always and everywhere" a monetary phenomenon is nonsense.
Actually, we could tell that Friedman himself was losing confidence in his own theory during his
last years when he gave encouragement to Alan Greenspan's sloppy monetary policy. With M3 money supply
rising at close to 10% per annum, Friedman should, as a true monetarist, have condemned it. Friedman
should, as a true monetarist, have condemned it.
Since 2008, money supply growth has risen at 6-7% per annum, but that's still a lot faster than
nominal GDP growth, which has rarely touched 5%. Saying that monetary "velocity" has declined is
in a sense tautological; if money supply consistently rises faster than GDP then monetary velocity
must, as an arithmetic necessity, decline. But that says nothing about events in the real world,
nor does it suggest that any real factor is causing monetary velocity to decline and GDP to increase
more slowly than money supply.
Prices have become detached from money supply growth owing to a number of factors. The most prominent
of these is modern telecoms: the communications revolution that has made it much easier and cheaper
to construct global sourcing networks for goods and services. By these technologies, emerging m labor
has been put more directly in competition with Western labor, causing an arbitrage closing the differential
between the two wage rates. That's why median incomes in the U.S. have declined a further 5% in real
terms since 2010, even as economic growth has continued at a moderate pace.
The downward pressure on prices-both directly through competition from goods and services produced
in emerging m and indirectly through lower domestic wages-has suppressed costs in the West in the
2010s just as an equivalent process of market opening to the world suppressed costs in Japan in the
1990s. Also, demographics haven't helped. As Western economies have aged, the downward wage pressure
from semi-retired workers finding they need to continue working has been accompanied by downward
price pressure as they and other disadvantaged consumers attempt to shop more cheaply.
If the Fed has no effect on inflation, then it is left simply with its unemployment mandate. That
is completely unsatisfactory, because it causes the Fed to run policies of negative real interest
rates long after there is any justification for them from the economic cycle. Normally, a burst of
inflation would cut off this nonsense (as it did to some extent in 2004-06) but in this case, the
inflation isn't happening, and the Fed's self-indulgence is thus uncontrolled.
Even though negative real interest rates aren't producing a surge in inflation (at present) they
are having a number of other adverse effects on the economy. The most serious of these is that they
are discouraging saving, to the extent that the U.S. savings rate (savings as a percentage of disposable
income) has declined from an average of over 10% in 1929-94 to an average of just 5% since 1995.
Even if everyone worked till they dropped without retiring, if savings are inadequate the economy
is de-capitalized and living standards erode to poor-country levels.
The savings rate, measured by the Bureau of Economic Analysis since 1929, fluctuates considerably
from year to year. Over the 84 years for which we have data, it has been at times very low, as in
the early 1930s when incomes fell more than consumers were anticipating, and very high, as during
World War II when the opposite process occurred and production shortages restricted purchases of
many goods. However, if you divide the 1929-94 period into three roughly equal segments, 1929-45,
1946-71 and 1972-94 (the separator between the second and third being the breakdown of the Bretton
Woods monetary system), you see an average savings rate that would round to 10% in each of the sub-periods.
In other words, at least in the twentieth century, 10% has been the natural savings rate. Only extreme
economic events have caused it to vary, and it quickly reverted to its long-term average after those
ended.
The savings rate's descent to the 5% range after 1995 is thus highly significant. This is not
solely a function of negative real interest rates. Real interest rates during the Greenspan bubble
of the late 1990s were generally positive, yet the money supply was expanding much faster than the
economy, and the savings rate correspondingly fell (with the impetus for the decline being the extraordinary
rise in asset prices rather than ultra-low rates themselves). Then after 2002 the savings rate fell
further, bottoming out at below 3% in the housing bubble in 2005-07. Its rebound in 2008-09, prompted
by the collapse of housing and portfolio values in 2007-08, proved short-lived. Since 2010, it has
once again languished around 5%.
The same dynamic has played out in the corporate sector. Here, profits in recent years have been
running close to record levels in terms of GDP, but companies have not been using the extra money
for long-term investment. Instead, they have been conducting stock buybacks, running at a record
level of $338 billion in the first six months of 2014. Needless to say, since the U.S. stock market
is at record levels, this is unlikely to be an efficient use of shareholder capital. Indeed, given
that buybacks dropped off sharply in the bear market of 2008-09 and in several cases were replaced
with emergency rights issues at low prices, shareholders have generally been penalized by management
buying stock at high prices and selling at low prices (or at the very least, ceasing purchases when
prices were low) thus producing almost perfect destruction of shareholder value.
Some of the largest companies have spent far more on buybacks and dividends (the preponderance
on buybacks), with Hewlett-Packard spending almost double its profits in 2003-12 and Microsoft, Cisco
and Intel all spending more than 100% of profits, according to the FT. Because all four companies
are trading below their 2000 peaks-even though the S&P's 500 index is about 30% above its 2000 peak-the
buybacks can be regarded as singularly inept investments. H-P, Cisco and Intel are almost certainly
carrying a negative return even in nominal terms. It must be remembered that normal investors typically
get no benefit whatever from buybacks, because they are not the ones tendering stock to the company.
Management, which gooses the value of its stock options, is the only true beneficiary.
With the major tech companies of 2000 investing all their profits in share repurchases, it's not
surprising that economic growth since 2000 has been anemic at best. The Fed, by encouraging cheap
leverage and narrowing the capital cost differential between the U.S. and emerging m , is largely
responsible for this failure. It has left the behemoths of U.S. industry with huge domestic leverage,
while they sit on pools of overseas cash that cannot for tax reasons be deployed in investment within
the U.S.
When you look at corporate behavior, individual savings behavior and monetary policy, it becomes
clear that the economy-wide dearth of savings is very largely the Fed's fault. Far from providing
"stimulus" to U.S. economic growth, its over-expansionary policies have driven growth offshore while
stunting the creation of the domestic capital essential to providing adequate living standards for
the American people. The Fed's artificial stimulus has been anything but stimulating, except in the
shortest term.
The solution is simple. Rather than targeting inflation or unemployment directly, the Fed should
target the savings rate, which it has a much better chance of affecting through its interest-rate
policies. By running the financial system with a high risk-free real rate of interest, it will quickly
pull the savings rate back to 10%, while ensuring that corporations cease taking on unnecessary borrowing
and instead focus on reducing their leverage and repatriating foreign cash pools. Initially this
might cause deflation, as a 3% federal funds rate was accompanied by minus 2% inflation. But high
real rates would soon create more capital in the economy, tending to increase genuine capital investment
and pushing inflation back to positive territory.
Rather than praying for Keynes' "euthanasia of the rentier," the Fed should instead run its interest
rate policy in the interest of rentiers until savings have recovered to their long-term average level.
Not only will it be good for the economy's heath, it will be good for its moral probity. Speculation
and leverage games will disappear, and long-term, steady wealth accumulation will return to fashion.
Who knows, we may even get the bankers back into wing collars!
Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005)
- details can be found on the website www.greatconservatives.com - and co-author with Professor Kevin
Dowd of Alchemists of Loss (Wiley, 2010). Both are now available on Amazon.com, Great
Conservatives only in a Kindle edition, Alchemists of Loss in both Kindle and print editions.
(Republished with permission from PrudentBear.com.
Copyright 2005-14 David W Tice & Associates.)
I've been a bond bull since February, frequently predicting that the 30 year would fall below
3% by the end of the year. Last week, I said it would fall below 3% by Thanksgiving; a call I still
standby. For the reasons that I mentioned on a morning call, I will give the shortened version
of a case why the long bond may even be headed toward 2.5% in 2015.
As the country managing the world's reserve currency, the US needs to run a chronic current
account deficit to supply the world with dollars. Yet, in running a chronic perpetual deficit it
undermines confidence in it. This is what is known as the Triffin Dilemma.
Many believe QE3's printing of $1 trillion per year (of a fiat currency) would be the tipping
point that would debase the dollar. Bitcoin become popular and Gold soared. The world was flush in
dollars. EM corporates issued in dollars, expanding the outstanding float of such securities 7X,
versus 2006 levels. The debasement never happened and now that the QE is ending, the world will have
fewer dollars. In turn, the dollar soaring, while Gold is under pressure and the Bitcoin has collapsed
(75%).
Most importantly, the shale revolution is structurally shrinking the size of the US current
account and fiscal deficits. The US is producing an extra million barrels of oil per year. Throw
in a looming interest rate hike and the dollar is rising (more demand than supply). Since the US
is exporting less capital, liquidity in being tightened abroad, particularly for countries whose
currencies are tied to the dollar (China) or who depend on commodity production (EM).
Reasons to like long Treasuries:
To obtain more dollars, these countries can try to export more or they can deflate their currencies.
Either result is deflationary for the US.
Bank regulation means that new bank deposits are going into Treasuries and away from loans
and credit securities.
Rule changes from the PBGC will increase demand over time for long dated Treasuries (asset
allocation shift away from equities) as penalties for under-funding become more punitive.
Bad demographics and higher debt levels will act as economic growth headwinds.
The falling fiscal deficit will result in less Treasury issuance going forward.
The Fed owns over 40% of all secondary Treasury securities 10-years and longer, so there is
a shortage of high quality longer dated securities.
Geo-political tensions are the highest in decades.
China is reeling in its credit and real estate bubbles further hurting commodity exporters.
(etc)
Equities and credit instruments will be hard pressed to justify valuations. With little
pricing power and economic growth that is likely to be modest at best, revenue growth and profits
are unlikely to be adequate enough to justify lofty valuations.
I maintain my bullish view on long Treasuries and implore investors not to underestimate the
upside potential (in price). Almost everyone is expecting much higher yields in the near term,
but a 30-year drop in yield toward 2.5% should be considered as a possibility
German factory orders had their sharpest drop since 2009, Berlin's Economy Ministry said Monday,
erasing recent gains and adding to fears of a slowdown in Europe's largest economy.
A big drop in international demand caused factory orders to fall by 5.7 percent in August from
July and 1.3 percent from a year ago, Berlin said. Economists had expected a 2.5 percent monthly
decrease, according to a Bloomberg survey. By contrast, orders from abroad drove a 4.6 percent increase
in factory orders in July, the most in more than a year.
Orders from outside the euro zone fell 9.9 percent in August from July, orders from other countries
in the euro zone fell by 5.7 percent, and domestic orders fell by 2 percent.
The "hesitant economic development" of the 18-nation euro zone and uncertainty introduced by "geopolitical
events" weakened demand, the ministry said. The bloc of European countries is struggling to maintain
economic momentum in a recovery while political tensions with Russia continue to escalate. International
sanctions against Russia and a faltering Chinese economy have deteriorated business and investor
sentiment in the euro area. Inflation in the region is at a five-year low, at 0.3 percent last month
compared with the European Central Bank's 2 percent target for price stability.
The European Union and the U.S. have imposed several economic sanctions against Russia over its
involvement in the Ukraine crisis, and Moscow has retaliated by banning most food imports from the
Western trade partners. Moscow is reportedly considering a ban on car imports and clothes from the
West, which would hurt Germany's Volkswagen and Mercedes-Benz manufacturers among others leading
the country's industrial output. If the dispute with Russia over the Ukraine crisis hits Germany's
economy harder in the third quarter than the second, the German economy could fall into recession.
Quote: "I would argue that falling commodity prices are bad news. It likely means that the debt
bubble which has been holding up the world economy for a very long time–since World War II, at least–is
failing to expand sufficiently. If the debt bubble collapses, we will be in huge difficulty."
I would argue that falling commodity prices are bad news. It likely means that the debt bubble
which has been holding up the world economy for a very long time–since World War II, at least–is
failing to expand sufficiently. If the debt bubble collapses, we will be in huge difficulty.
Many people have the impression that falling oil prices mean that the cost of production is falling,
and thus that the feared "peak oil" is far in the distance. This is not the correct interpretation,
especially when many types of commodities are decreasing in price at the same time. When prices are
set in a world market, the big issue is affordability. Even if food, oil and coal are close to necessities,
consumers can't pay more than they can afford.
"Prices of many commodities crashed in 2008, and it was only with massive intervention that
prices were propped up to 2011 levels."
That's one of the hamsters we need to keep running on the wheel.
Looking at prices at the moment are the central banks losing control - or are they playing
a game - do not intervene when the prices increase with the purpose being to encourage investment
- but this of course destroys growth - so do they phase it down purposely - to prevent a collapse
of the economy …. then phase it back up again before oil producers shut down….
Hopefully it is the latter - because if prices keep dropping and stay low - we have a problem.
I think the latter is more likely because otherwise we surely would see some sort of reaction
out of the central banks to offset this drop - the reaction may find it is pushing on a string
- but none the less - I can't imagine that they would sit idly by and let oil tumble out of control…
Of course all of these measures are stop gap – there is no solution … at some point it all
unravels and that is the end of oil and most other resources - they will simply remain in the
ground
My position remains we end up with an 'economy' somewhere between a cave man and Mad Max.
Food will surely be the issue – not trying to tape together the detritus of a collapsed civilization
and trying to keep vehicles on the road…
Stilgar Wilcox,
If Gail's article is correct, we will be separated from non-conventional oil sources first
as they become unaffordable, on down the line until we are mostly reliant on conventional oil
which is already being taken out of the ground via horizontal super straws at an alarming rate
of depletion.
At this point I'm very interested to see if oil price does go back up and how much, and for
how long. There seem to be two peak oil camps; those that think oil price can go up to $130-200
a barrel and those that think the price is currently residing at the affordability ceiling, which
is the camp I am in. Recently there was an article about the Saudi's plan to cut back on oil production
to get price back up, which should prove interesting to see if that works or not.
Stilgar – I think it was posted on this site something to the effect that oil over $50 is not
really affordable… that the economy can only tolerate that for so long…
I think this all ties back to this:
HIGH PRICED OIL DESTROYS GROWTH According to the OECD Economics Department and the International
Monetary Fund Research Department, a sustained $10 per barrel increase in oil prices from $25
to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of
higher prices. http://www.iea.org/textbase/npsum/high_oil04sum.pdf
If that is the case then even $50 oil would be putting a significant drag on the economy …
I think to even stay afloat with 90 oil massive offsets must remain in place (stimulus, QE,
ZIRP …) - of course these offsets cannot hold back the tsunami forever…
I really don't think any of the numbers we are seeing are doable - and of course we can't go
back to 20 or even 50… because that the cost to pull much of the oil of the ground is well beyond
that number…
Really a very bad situation… I remain amazed that they are able to hold this together
BBC this morning: "Rockefellers to switch investments to 'clean energy'"
"Heirs to the Rockefeller family, which made its vast fortune from oil, are to sell investments
in fossil fuels and reinvest in clean energy, reports say.
The Rockefeller Brothers Fund is joining a coalition of philanthropists pledging to rid themselves
of more than $50 bn (£31 bn) in fossil fuel assets….."
One wonders if this level of dis-investment will start a cascade of dis-investment resulting
in an oil price spike-cum-crash, ala 2008. I speculated over at peakoil.com that this, on the
surface, looks like a good thing for the growth of 'green energy' and the climate, but there may
well be another side to this; disaster capitalism at its best. If the Rockefellers can spur an
exit from fossil fuel investment on much of a scale, all hell could break lose in the oil m as
investors follow the 'smart money' out. As we've seen, major oil players are already selling assets
to keep up profits and dividends. Of course, if you're the Rockefellers and can risk a few $billion
loading up on credit default swaps, etc., and position yourselves to buy back the peices, all-the-while
investing heavily in alternatives, just the movie rights could be worth billions.
Nothing wrong with having a little fun with this stuff, eh?
I suppose that there may be some clean energy investment that sort of works–for example, geothermal
in the right location. But there is an awfully lot that has no chance of being cost effective,
and makes the electric grid less resilient. Such investment takes money away from where investment
does (sort of) still work. It makes people feel like they are doing something useful, but it just
makes the crash come sooner, as far as I can see.
I think this is a smart mover on the Rockefellers' part. I was reading where in one of GM's
Labs they are getting their gray matter wrapped around the Lithium Sulphur battery technology
and it appears that they have a battery in the lab that can store 1,000 wh/kg. This is about 10
times the energy density of Lithium Iron Phosphate batteries of the same weight. They showed a
graph where there was very little capacity loss after 600 cycles. In other words, an EV pack with
a 100 mile range is likely to be replaced with a pack of a 1,000 mile range. This, if there are
no "side effects" (e.g., it's not volatile, has a wide operating temperature range, long shelf
life, long cycle life, etc.), is a real game changer.
The other game changer would be if there were economical photovoltaics with an efficiency of
greater than say 45%. I wonder if they have gotten wind of something?
We sometimes look at something like this and say how wonderful life will be if this comes to
pass. For some it will be. It always is. This will at least cut our fossil fuel usage out the
tail pipe and maybe out the smoke stack.
I wonder if this is what some of the people who fought carbon capture were seeing: No one giving
up their cars and hot showers but having them fueled by solar with excess solar energy stored
in batteries.
I wonder what life would look like under a solar/battery epoch? What would we really need coal,
oil, and natural gas for? What could not be done by energy stored in high energy batteries?
We need oil. Easy to extract oil. Unless someone comes up with something that is cheap and
can do what oil does - then the discussion is not worth having
I read through your referenced list under Automotive. Gasoline was listed and EVs do not use
gasoline.
If the fleet turnover is once every 16 years, then at the end of 16 years, there will be very
little gasoline used. Also EVs do not use antifreeze, coolant ( not sure if this is redundant
with antifreeze), motor oil, oil filters, fan belts, etc.). The amount of petroleum used in battery
cases, bearing grease, traffic cones, brake fluid, windshield wipers, visors, etc. might be supplied
from Colonel Drake's original well either because the material does not wear out such as battery
cases or the amount used is so minimal such as less than a teaspoon of grease every100+K miles,
to the point we could be supplied with grease for an extremely long time.
After 16 years, the body of cars that used to use gasoline would be using electricity that
could be supplied solar, wind, and hydro with excess stored in those batteries. Is that not a
game changer? If the USA uses 180 million gallons of gasoline per day, that's 10 million barrels
of oil per day that are not used. Is that not a game changer??? We decrease oil usage to the point
of becoming "energy independent". Is that not a game changer???
The only ones I saw that might be a problem are asphalt and tires. The question back to you
is how much asphalt do we use a year in barrels of oil? What substitutes could we use instead?
How many barrels of oil are used per day to make tires? What can be used as a substitute? When
I posed this situation to my son, he said there are alternatives and he is in the tire business.
I see EVs in the form of cars and trucks as buying us a lot of time to find substitutes to
make the adjustments we need. This is **not** BAU but an evolution into the next era. There may
be less cars and more bicycles but then that is part of the evolution.
The discussion we need to have is what do we do with the remaining oil given our current infrastructure,
resources, and our attitudes? We don't need to be blinded by list of things that might disappear
but to find substitute(s) or alternatives for those things. There are a lot of smart people out
there who have solved problems and there are those that have said that man will never fly so why
try. There have been a lot of people who have seen this coming and are finding and suggesting
ways forward.
It isn't direct use of fossil sunlight that counts, it's the pyramid-effect.
A modern, computer-controlled, high-tech EV essentially requires all of current human civilization
in order to exist.
I think older EV technology could last for some time, but next to fossil sunlight, I think
our biggest addiction is to "human exceptionalism," the thought that our brains and our technology
can get us past the basic laws of physics.
I would absolutely love it if some brave, daring individual would produce EVs using no technology
that didn't exist in 1950. That's going to be the only way EVs can continue past the decline of
fossil sunlight.
I'm currently working on a Vanagon re-powering, using flooded-cell NiCd batteries and a series-wound
DC motor. That may have a chance of surviving a couple decades, but the sealed Curtis controller
can't be repaired if the semiconductor industry falters.
What will be present in the future is hard to say. I can see the military trying to keep some
facilities open to produce electronics. The spill over would be to produce controllers for various
vehicles. Greer mentioned a stair step down scenario and I think I would agree. We may even go
back to a Henney Kilowatt controller.
However, we are still producing and have access to FF of various types. We recycle CPUs and
other electronic parts. Not sure of all that we can retrieve.
"I can see the military trying to keep some facilities open to produce electronics."
Factories are not closed systems … they require inputs from BAU in order to produce electronics…
So to keep a factory operating you would also need to keep the mines open that supply the copper
… the smelters open that smelt that refine the copper … you need mining equipment, spare parts
etc… so you have to keep the factories that produce all of that open … you also need to transport
stuff from one place to another etc…. etc…. etc… etc….
Basically if you want to keep even one electronics factory producing – you need a fully functioning
global economy.
They are called contracts and the Gov't will increase debt to pay for them. During the great
depression, FDR created a number of civic projects and paid people to work them. It was not BAU
but it was a way to prime the pump
If energy is represented by money and energy dwindles, then money dwindles. It is one of the
reasons that the Gov't has tax incentives on home owner solar energy projects. In the summer,
I am basically energy neutral and can recharge an EV while others burn gasoline.
We need to keep the whole system operating. This means that we have to keep demand
for oil high enough that the price stays (or rather, rises) high enough that we can actually get
it out of the ground. Getting rid of all automotive uses is not necessarily helpful.
'Even if this worked out it is not a game changer' I disagree. If the kind of battery advances
he is talking about come to fruition then electrical vehicles become feasible. PV home systems
become feasible. An army of segways. Sure the copper for the motors still has to be mined with
fossil fuels. Sure the tractors and farm equipment will not be converted or replaced with electric.
Batteries like he is talking about could extend BAU for a long time however. Thats a game changer
in my book.
Even if these could be invented tomorrow, we are talking a minimum 20 year change-over time
period, because current cars need to wear out before they are replaced. (We cannot afford the
loss of value on existing cars.) We need to keep oil demand and oil prices high during that period,
so that oil is available for other uses where it is still needed. We have to find ways to continue
to produce electricity as coal is phased out and nuclear wears out. We need to maintain electrical
transmission lines, or we won't have electricity for recharging all of these vehicles.
We would need coal, oil and natural gas as before. In fact, we would need rising prices for
these products, to make it worthwhile for producers to continue to extract them. Without fossil
fuels, we could not make the cars or the new batteries or the new PVs.
There are many calculations of the electric grid investment required to make that transition.
One of them (link below) says about $500 billion a year till 2050 across the globe. Other say
even about $900 billion.
How any one could expect that humanity is able to raise all these investment projects in such
long period of time? Stable economy is needed for once. And I do not even mention the money. There
are resources (steel, copper, oil, coal and full Mendeleev's periodic table considering current
material/technological needs) behind all of these works. Where are we going to find and peacefully
extract them? On Venus, Mars, Jupiter or Saturn? And the energy for that task comes from which
natural resource? And please add the results of demographic bomb we are sitting on.
Oil is gone. Liebig's LotM. The humanity will follow. Sorry.
"we are talking a minimum 20 year change-over time period, because current cars need to
wear out before they are replaced."
Older vehicles with sound body, brakes, steering, etc. could be retrofitted to electric
drive fairly simply.
I haven't gone through a full emergy analysis, but I suspect that an electric drive retrofit
would have less embedded energy than the original internal combustion engine. Plus, electric drive
is simpler, and easier to maintain.
The rub is batteries. There are rumblings about "peak lithium," should electric cars really
take off. Lithium batteries require a lot of technology, too, and long supply lines.
I'm using NiCd, but they are horribly expensive, even though they have a very long life, compared
to the lowest common denominator, lead-acid batteries, which are heavy and need to be replaced
every few years - but they can be rebuilt using simple technology at the disposal of a large village
or small town.
This situation isn't going to change much. There are rumblings of better battery technology
available Any Day Now™, but any highly advanced technology will require much of today's civilization
to maintain it. My vote is that lead-acid will be around for the long term.
That battery thing is interesting. I do know that it takes about half the energy that a lead
acid will ever store, just to make, that is energy stored on investment, ESOI, and that
certain li-ions can achieve an ESOI of up to 10. However, I'm not sure if that includes the average
of whatever gains gathered with recycling. So, imagine a solar panel with an EROEI of about 7
coupled with the lead acid. We need to store about 4/5ths of the energy for "later" (and for making
more batteries and solar panels). Just not happening, because the battery eats fully half the
energy (in this extreme case). Also not happening because we humans are just a little too impatient
for all that, as we are used to extracting and consuming "instantly".
O the other hand, imagine a (somewhat) clean source that doesn't require 4/5ths storage, and
a form of storage that has an ESOI of over 100. Also imagine the source itself having an EROEI
of that of windpower or higher (>20). That would be nuclear, because the power of fission by far
offsets the energy intensive process of mining and enrichment. Efficiency in energy gathering
and storage (and usage) is key to surviving peak oil. What we need to do is make nuclear
itself far more efficient. We do that by chemically reprocessing spent fuel. This voids the negative
inputs to EROEI caused by both mining and enrichment. It also voids the need to mine for any
extra uranium (or thorium) for many centuries!
Given a civilization powered almost completely by fission (and then fusion), there would be
plenty of hydrocarbons for tires and roads, etc
Humans now number 7.1 billion on the planet and that number is on track to rise to 8 or 9 billion
by 2050. Already 'energy per capita' is stagnant across the world and has been for a few decades.
If the human population indeed grows by 15-25% over the next three and a half decades, then net energy
production will have to grow by the same amount simply to remain constant on a per capita
basis.
But can it? Specifically, can the net energy we derive from oil grow by another 15% to 25% from
here?
Consider that, according to the EIA, the US shale oil miracle will be thirty years in the
rear-view mirror by 2050 (currently projected to peak in 2020). And beyond just shale, all of
the currently-operating conventional oil reservoirs will be far past peak and well into their decline.
That means that the energy-rich oil from the giant fields of yesteryear will have to be replaced
by an even larger volume of new oil from the energetically weaker unconventional plays just to hold
things steady.
To advance oil net energy on a per capita basis between now and 2050, we'll have to fight all
of the forces of depletion with one hand, and somehow generate even more energy output from energetically
parsimonious unconventional sources such as shale and tar sands with the other hand.
These new finds...they just aren't the same as the old ones. They are deeper, require more
effort per well to get oil out, and return far less per well than those of yesteryear. Those are
just the facts as we now know them to be.
In 2013, total worldwide oil discoveries were just 20 billion barrels. That's against a backdrop
of 32 billion barrels of oil production and consumption. Since 1984, consuming more oil than we're
discovering has been a yearly ritual. To use an analogy: it's as if we're spending from a trust fund
at a faster rate than the interest and dividends are accruing. Eventually, you eat through the principal
balance and then it's game over.
Meanwhile, even as the total net energy we receive from oil slips and our consumption wildly surpasses
discoveries, the collective debt of the developed economies has surpassed the $100 trillion mark
-- which is a colossal bet that the future economy will not only be larger than it is currently,
but exponentially larger.
These debts are showing no signs of slowing down. Indeed, the world's central banks are
doing everything in their considerable monetary power to goose them higher, even if this means printing
money out of thin air and buying the debt themselves.
Along with this, the demographics of most developed economies will be drawing upon badly-underfunded
pension and entitlement accounts -- most of which are literally nothing more substantial than empty
political promises made many years ago.
These trends in oil, debt and demographics are stark facts all on their own. But when we tie these
to the obvious ecological strains of meeting the needs of just the world's current 7.1 billion, any
adherence to the status quo seems worse than merely delusional.
Here's just one example from the ecological sphere. All over the globe we see regions in which
ancient groundwater, in the form of underground aquifers, is being tapped to meet the local demand.
Many of these reservoirs have natural recharge rates that are measured in thousands, or even tens
of thousands, of years.
Virtually all of them are being over-pumped. The ground water is being removed at a far faster
rate than it naturally replenishes.
This math is simple. Each time an aquifer is over-pumped, the length of time left for that
aquifer to serve human needs diminishes. Easy, simple math. Very direct.
And yet, we see cultures all over the globe continuing to build populations and living centers
- very expensive investments, both economically and energetically – that are dependent for their
food and water on these same over-pumped aquifers.
In most cases, you can calculate with excellent precision when those aquifers will be entirely
gone and how many millions of people will be drastically impacted.
And yet, in virtually every case, the local 'plan' (if that's the correct word to use here) is
to use the underground water to foster additional economic/population growth today without
any clear idea of what to do later on.
The 'plan' such as it is, seems to be to let the people of the future deal with the consequences
of today's decisions.
So if human organizations all over the globe seem unable to grasp the urgent significance of drawing
down their water supplies to the point that they someday run out, what are the odds we'll successfully
address the more complex and less direct impacts like slowly falling net energy from oil, or steadily
rising levels of debt? Pretty low, in my estimation.
Conclusion
Look, it's really this simple: Anything that can't go on forever, won't.We know,
financially speaking, that a great number of nations are utterly insolvent no matter how much the
accounting is distorted. Said another way: there's really no point in worrying about the combined
$100 trillion shortfall in Social Security and Medicare, because it simply won't be paid.
Why? It can't, so it won't. The promised entitlements dwarf our ability to fund them
many times over. There's really not much more to say there.
But the biggest predicament we face is that steadily-eroding net energy from oil, which will
someday be married to steadily-falling output as well, can't support billions more people and our
steadily growing pile of debt.
Just as there's no plan at all for what to do when the groundwater runs out besides 'Let the folks
in the future figure that one out,' there's no plan at all for reconciling the forced continuation
of borrowing at a faster rate than the economy can (or likely will be able to) grow.
The phrase that comes to mind is 'winging it.'
The wonder of it all is that people still turn to the same trusted sources for guidance and as
a place to put their trust. For myself, I have absolutely no faith that the mix of DC career politicians
and academic wonks in the Fed have any clue at all about such things as energy or ecological realities.
Their lens only concerns itself with money, and the only tradeoff concessions they make are between
various forms of economic vs. political power.
If the captains supposed to be guiding this ship are using charts that ignore what lies beneath
the waterline, then you can be sure that sooner or later the ship is going to strike something hard
and founder.
I'm pretty sure the Fed's (and ECB's and BoJ's and BoE's) charts resemble those of medieval times,
with "Here be dragons" scrawled in the margins next to a series of charts of falling stock prices
and unwinding consumer debt.
So there we are. The globe is heading from 7.1 billion to 8 or 9 billion souls, during a period
of time when literally every known oil find will be well past its peak. Perhaps additional shale
finds will come along on other continents to smooth things out for a bit (which is not looking likely),
but it's well past time to square up to the notion that cheap oil is gone. And with it,
our prospects for the robust and widespread prosperity of times past.
Because all of this inevitably leads to some sort of time of reckoning, natural questions
emerge: What might happen and when? What would that feel like? How would I know it's started?
Given the knowns and unknowns, are there any dominant strategies for mitigating the risks that I
should undertake? What are the challenges and what are the opportunities?
WayBehind
Ebola (and other viruses), wars and mother nature will take care of this overpopulation problem
X.inf.capt
you mean the 1% will fix over-population. after they extracted all the wealth from the 99%..
if they wont work, send them to the showers... god, these people are evil...
markmotive
Of course not. But don't pretend to know what's coming next. Because most don't even know how
things work today.
Ray Dalio has a 'template' for understanding the world as it works and how he has avoided catastrophes
in the past.
"The sudden explosion of European sovereign debt is the direct and indisputable result of all
our political parties deciding they would safeguard their mates' and their own personal wealth (it
is the top 10% who hold the bulk of their wealth in the financial products which would be destroyed
in a bank collapse. NOT the rest of us!) by bailing out the private banks and piling their unpaid
debts on to the public purse.
So whatever the trigger of the next crisis may be, they know any solution which saves the wealth
and power of the over-class will have to involve piling new, private-bank bad-debts on to already
indebted sovereigns and that, our leaders must be keenly aware, will not be easy to force on an already
angry public. They know a whole range of the assurances they might like to give us about what must
be done when the next crisis hits and how those things will undoubtedly save us, will not be so easy
to shove down people's throats...
I think one of the cleverest things the 1% have done over the last few years is the way they have
created a relentless public discourse, via their paid political front-men and women and their media
empires, to insist on the need to 'fix' and protect the system, and the extreme danger to us all
should the system not be 'saved'. This has served as a perfect cover for making sure that not enough
people have noticed that the system is, in fact, being gutted and replaced by something that better
serves the interests of the 1%. We have not been fixing the banks, we have been feeding them."
"Money is pouring in" from investors even though shale gas is "inherently unprofitable,"
an analyst from PNC Wealth Management, an investment company,
wrote to a contractor in a February e-mail. "Reminds you of dot-coms."
"The word
in the world of independents is that the shale plays are just giant Ponzi schemes and the
economics just do not work," an analyst from IHS Drilling Data, an energy research company,
wrote in an e-mail on Aug. 28, 2009.
"And now these corporate giants are having an Enron moment," a retired geologist from
a major oil and gas company
wrote in a February e-mail about other companies invested in shale gas.
Deborah Rogers, a member of the advisory committee of the Federal Reserve Bank of Dallas, [and
a] former stockbroker with Merrill Lynch ... showed that wells were petering out faster than expected.
"These wells are depleting so quickly that the operators are in an expensive game of 'catch-up,'
" Ms. Rogers wrote in an e-mail on Nov. 17, 2009, to a petroleum geologist in Houston, who wrote
back that he agreed.
A review of more than 9,000 wells, using data from 2003 to 2009, shows that - based on widely
used industry assumptions about the market price of gas and the cost of drilling and operating
a well - less than 10 percent of the wells had recouped their estimated costs by the time they
were seven years old.
"Looks like crap," the Schlumberger official wrote about the well's performance, according
to the regulator, "but operator will flip it based on 'potential' and make some money on it."
The gas rush has ... been a money loser so far for many of the gas exploration companies
and their tens of thousands of investors.
Although the bankers made a lot of money from the deal making and a handful of energy
companies made fortunes by exiting at the market's peak, most of the industry has been bloodied
- forced to sell assets, take huge write-offs and shift as many drill rigs as possible from gas
exploration to oil, whose price has held up much better.
Now the gas companies are committed to spending far more to produce gas than they can earn
selling it. Their stock prices and debt ratings have been hammered.
Fracking, it turns out, is about producing cheap energy the same way the mortgage crisis was
about helping realize the dreams of middle-class homeowners. For Chesapeake, the primary profit
in fracking comes not from selling the gas itself, but from buying and flipping the land that
contains the gas. The company is now the largest leaseholder in the United States, owning
the drilling rights to some 15 million acres – an area more than twice the size of Maryland. McClendon
[the CEO of fracking giant Chesapeake] has financed this land grab with junk bonds and complex
partnerships and future production deals, creating a highly leveraged, deeply indebted company
that has more in common with Enron than ExxonMobil. As McClendon put it in a conference
call with Wall Street analysts a few years ago, "I can assure you that buying leases for x
and selling them for 5x or 10x is a lot more profitable than trying to produce gas at $5 or
$6 per million cubic feet."
According to Arthur Berman, a respected energy consultant in Texas who has spent years studying
the industry, Chesapeake and its lesser competitors resemble a Ponzi scheme, overhyping the
promise of shale gas in an effort to recoup their huge investments in leases and drilling.
When the wells don't pay off, the firms wind up scrambling to mask their financial troubles with
convoluted off-book accounting methods. "This is an industry that is caught in the grip of
magical thinking," Berman says. "In fact, when you look at the level of debt some of these
companies are carrying, and the questionable value of their gas reserves, there is a lot in
common with the subprime mortgage market just before it melted down."
In February, Chesapeake announced that, because of low gas prices, its revenues will fall $3.5
billion short of its expenses this year
delivered
I'm by no means an expert but do understanding accounting and finance and would like to point
out two key issues. First, the availability of cheap/easy capital as noted in numerous posts (driven
by the Fed and other CBs) has certainly contributed to the perceived economic value of fracking.
Hell, with free flowing money, just about any business can stay afloat for quite some time as
rates, terms, struture, etc. are all extremely favorable during the "salad days". But once a business
actually realizes that debt has to be, dare I mention, repaid, the combination of very highly
capital expenditure requirements and debt service payments basically consume all cash/liquid resources.
Second, I've studied/analyzed a number of fracking company financial statements and have noticed
that the annual capital expenditures (i.e., the cost of acquiring and drilling) compared to revenue
growth and cash flow (both EBITDA and free) supports a number of the comments made in GW's article.
That is, there is a constant need to drill more and more to maintain a base line production level
so what I'm guessing is that the capitalized well devlopment costs are being "managed" by the
accountants to keep an inflated asset on the books (which probably should be written down based
on high production decline rates after 12 months). What would be interesting to evaluate is the
actual oil production in units (or barrels) compared to production development costs over time.
This might be the canary in the coal mine that really helps quantify the economics of the fracking
industry.
So let's combine the end of easy/cheap money, with accountants "managing" fracking company
assets, and a declining price of oil and most likely what you are setting up is a major shakeout
in the industry. No doubt the weak are going to get creamed in this environment and the strong,
just waiting to acquire resources but only at the right price, will get even stronger.
You can say that it's from a .edu and question the source, but then you can go through his
talk and presentation (there is a link to his slides) to see what the actual sources were, because
the .edu was just a forum for presentation.
The economy is a surplus energy equation, not a monetary one, and growth in output (and in
the global population) since the Industrial Revolution has resulted from the harnessing of ever-greater
quantities of energy.
But the critical relationship between energy production and the energy cost of extraction
is now deteriorating so rapidly that the economy as we have known it for more than two centuries
is beginning to unravel.
See: the Killer Equation starting on p.59.... rather fascinating reading....
El Vaquero
The economy stops dead without energy, but the monetary side allows us to distort things. When
those distortions become realigned with reality, it is going to be a violent process, because
we're not looking to what the future actually has in store for us, but rather what we want the
future to be. There's nothing wrong with trying to mould your own future, but we must be realistic
about it.
zuuma
As soon as I saw: "New York Times wrote:"...
I lost faith in any objectivity. That rag is just a PR dump for obamunism.
Even if they occasionaly print something that's true, it's hard to accept - given their solid
track record as lefty shills.
numapepi
Even a stopped clock is right twice a day.
AdvancingTime
Thanks for a very interesting look into this industry that has become another myth of hope.
As to the subject of the Ponzi Scheme I often forget that what may seem familiar to me and
many Americans is not always common knowledge, the story behind the term is very interesting.
To those who are unfamiliar with the term Ponzi Scheme or just would like to know more on where
it originated and such see the article below that is titled Ponzi Scheme 101.
Big difference is the Dot-Com bubble left empty office space. Fracking leaves a scarred and
polluted landscape that was mostly pure before the wells were built. Disgrace!
Felix da Kat
True B7. Take a look on Bing maps (satellite view) at the northern one-third (60 miles x 300m.)
of Pennsylvania. What was once a nearly unbroken, deep and thick forest from New Jersey to Ohio,
is now pock-marked with many hundreds of disgraceful fracking operations where large 25-50 acre
areas are clear-cut along with crude access roads. This might as well be a war zone with bomb
craters throughout. Enviromental concerns were the least of Dick Cheney's/Halliburton's heinous
fracking invention. Pennsylvania was the pushover state selected to be the guinea pig. Fracking
is a colossal failure, period.
givenoquarter
If a tree falls in the forest and no one is there to hear it, does it make a sound?
If a tree is cut down in the forest, and no one is there to see it, who gives a fuck if it
is cut down to extract a needed commodity?
We have tons of trees. More oil please. All of my vehicles need a regular diet of delicious
dinosaurs.
AdvancingTime
Sustainability means planning our future in a way that we do not set ourselves up to crash
and burn at some future date. Long-term planning has not been something politicians excel at or
are even good at. Our system is geared at getting politicians reelected and fulfilling the most
pressing needs of today.
Things like profit, greed, and quenching our unrelinquishing desire for growth are placed in
front of longer term issues and needs. Mapping out a logical and sustainable long-term plan requires
delving into some rather hefty philosophical questions like what brings real happiness. More on
this important topic in the article below.
FOMC voting-member Richard Fisher is among the sanest voices in the Eccles Building asylum and
he is once again sounding alarms that all is not well in US financial m :
*FISHER SAYS FED HAS 'LEVITATED' M , SEES SIGNS OF EXCESS IN FINANCIAL M
Furthermore, Fisher notes The Fed can't force companies to hire, and would like to see rate
hikes as early as Spring 2015.
Manthong
Nothing irrational about this exuberance..
Unlike the dot com bubble, the Fed and its evil owner banks deliberately engineered this one.
Soon it will be time to deflate the bubble and steal the assets from the institutions (pension,
mutual funds/401Ks etc.) at bargain basement prices.
clooney_art
He is the token Banker who plays the bad cop. It's all stage managed for the sheep.
FL_Conservative
Signs of excess? That's a sad fucking statement coming from a supposed Fed "hawk". Just another
manipulator who wants to avoid fault when TSHTF. It's very sad that so many sell their principles
and integrity for 15 minutes of power and a few extra sheckles.
Wait What
it's not a conspiracy until the sheeple find out. then everyone runs around screaming 'it
was a conspiracy all along' long after all the pillaging has been accomplished.
speaking of conspiracies, it strikes me that ZH has been peppered with a lot of bias-confirming
articles lately.
by that i mean a lot of 'the sky is blue, water is wet' type of articles... makes me wonder
if that is for all of te newbs (to the eye-rolls of those who've been around a little longer,
i imagine), or if Tylers have just said 'fuck it' like everyone else and started phoning it in.
LawsofPhysics
and there it is. I am telling you, the real inflationary forces of people on SNAP or medicare
for simple survival is huge ;-). This real liability alone cannot be masked/hidden much longer
in the west. Government paper must be bought because exponential equations (which are driving
those real inflationary pressures) are a bitch.
That is my (what now appears to be a contrarian) hypothesis..
The recent increase in yields is nothing but a CB/government shakedown to get the weak
hands out, it's about, and always has been about, maintaining power and control, period.
People still have faith in fiat, and so long as this is the case, this can continue, period.
The decline in the price of oil - in the face of surging geopolitical pandemonium - has been lauded
as indicative of both US' awesomeness in energy independence and a tax cut for Americans... but,
as the following chart suggests, there may be another - much more realistic - explanation for why
oil is plunging... demand!
World GDP expectations for 2014 just tumbled to their lowest since estimates started...
Maybe - just maybe - that explains the price of oil...
Submitted by Tyler Durden
on 09/03/2014 17:03 -0400
"The stock market is at an all-time, but economic activity is not at an all-time," explains billionaire
investor Sam Zell to CNBC this morning, adding that, "every company that's missed has missed on the
revenue side, which is a reflection that there's a demand issue; and when you got a demand issue
it's hard to imagine the stock market at an all-time high." Zell said he is being very cautious
adding to stocks and cutting some positions because "I don't remember any time in my career where
there have been as many wildcards floating out there that have the potential to be very significant
and alter people's thinking." Zell also discussed his view on Obama's Fed encouraging disparity
and on tax inversions, but concludes, rather ominously, "this is the first time I ever remember
where having cash isn't such a terrible thing." Zell's calls should not be shocking following
George Soros. Stan Druckenmiller, and Carl Icahn's warnings that there is trouble ahead.
Billionaire 1: Sam Zell
On Stocks and reality...
"People have no place else to put their money, and the stock market is getting more than
its share. It's very likely that something has to give here."
"I don't remember any time in my career where there have been as many wildcards floating
out there that have the potential to be very significant and alter people's thinking," he
said. "If there's a change in confidence or some international event that changes the dynamics,
people could in effect take a different position with reference to the market."
"It's almost every company that's missed has missed on the revenue side, which is a reflection
that there's a demand issue," he said. "When you got a demand issue it's hard to imagine the
stock market at an all-time high."
He also lamented about how difficult it is to call a market top. "If you're wrong on when,
that's a problem." His answer: "You got to tiptoe ... and find the right balance."
"This is the first time I ever remember where having cash isn't such a terrible thing,
despite the fact that interest rates are as low as they are," he added.
On Obama and inequality...
"Part of the impact of these very, very low interest rates is that we've creating this disparity.
The wealthy are benefiting from government policy and the nonwealthy aren't," he continued. "So
we have a president who says we've got to fight this disparity and we have a Fed who's encouraging
it everyday."
On Tax Inversion...
"This is both legal and accepted. If the government doesn't like the result, change the
law," he said. "You have to have a rational tax policy." He said the top tax rate should be
changed and the U.S. should not tax worldwide income.
Zell also said it's unfortunate that "this inversion thing has been captured as a political,
electioneering item."
Soros has once again increased his total SPY Put to a new record high of $2.2 billion, or nearly
double the previous all time high, and a whopping 17% of his total AUM.
Ironically, Carl Icahn - poster-child of the leveraged financial engineering that has overtaken
US equity m on the back of Central Bank largesse - told CNBC that he was "very nervous" about
US equity m . Reflecting on Yellen's apparent cluelessness of the consequences of her actions,
and fearful of the build of derivative positions, Icahn says he's "worried" because if
Yellen does not understand the end-game then "there's no argument - you have to worry about the excesssive
printing of money!"
Simply put, Druckenmiller concludes, rather ominously, "I am fearful that today our obsession
with what will happen to m and the economy in the near term is causing us to misjudge the accumulation
of much greater long term risks to our economy."
Financial m have been exuberant over the past year, [...] dancing mainly to the tune of
central bank decisions. Volatility in equity, fixed income and foreign exchange m has sagged
to historical lows. Obviously, market participants are pricing in hardly any risks.
Growth has picked up, but long-term prospects are not that bright. Financial m are euphoric,
but progress in strengthening banks' balance sheets has been uneven and private debt keeps growing.
Macroeconomic policy has little room for manoeuvre to deal with any untoward surprises that might
be sprung, including a normal recession.
* * *
So now we have a quorum of billionaires and the BIS all flashing warning signals which can only
mean one thing: stocks are undervalued so buy, buy, buy...
Lambert here: If the policymakers have turned the US into Japan, we're looking at 20 years of a flatlined
economy, punctuated (this being the US) by explosions. Could that be the why 5- and 10-year yields
have diverged?
By Jérémie Cohen-Setton, PhD candidate in Economics at U.C. Berkeley and
a summer associate intern at Goldman Sachs Global Economic Research.
Originally published at Bruegel.
What's at stake: Fed tapering was widely expected to push up US yields. Instead, US yields
have fallen since the beginning of the year, raising the question of whether we're seeing a new
version of the Greenspan 2005 conundrum. Interestingly, a successful explanation of this new conundrum
cannot just rely on a flight to safety explanation as it also needs to rationalize why 5-year
yield and 10-year yield have diverged over the same period.
"Another possibility is that more people are starting to take seriously the suggestion that
we're on a path now of secular stagnation with weak economic growth and poor investment opportunities
over the next decade. But that's hard to reconcile with the stock market, which climbed impressively
this year."
I think there is no need to reconcile that suggestion with the behaviour of the Great Casino.
Instead, as the following graph shows, although the economy is growing at roughly the same
rate as before the crisis, the growth is from a much lower level of output:
Is this the
"new normal" we hear so much about? Do Americans have no choice but to accept the lower level
of output, and the lower level of employment and living standards that comes with it, or is there
something we can do to push the economy back to the pre-Great Recession trend?
One solution is to increase government spending on America's roads, bridges and other infrastructure.
But does infrastructure spending raise the level of GDP and employment while at the same time enhancing
the prospects for future growth? Or does it simply crowd out other types of private sector spending
so that, all told, there is little or no net stimulus?
Recent research from economists at the Federal Reserve Bank of San Francisco suggests that infrastructure
spending on highways enacted with the stimulus package just after President Obama took office in
2009 might be just what the doctors ordered.
The researchers conclude that such spending "had a significantly positive effect on economic activity."
Examining the broader economic impact of highway spending connected to the stimulus package, the
researchers found that:
... states increased their highway spending more than dollar-for-dollar in answer to the federal
stimulus authorized by the American Recovery and Reinvestment Act. Without these extra funds,
we estimate that national spending on highways would have declined roughly 20 percent between
2008 and 2011, on par with the decline in state tax revenues. Given the large multiplier effect
from infrastructure spending that past studies have documented, the additional spending on highways
likely had a significantly positive effect on economic activity.
With interest rates still at rock bottom so that borrowing to pay for infrastructure is as cheap
as it gets, and with so many idle resources -- the large number of unemployed in particular -- and
with output running so far below the previous trend, it is an opportune time to undertake infrastructure
projects. Even if the spending on infrastructure doesn't fully resolve the problem shown in the graph
above and return us to a higher trend rate of growth, it will at least begin to overcome our large
infrastructure deficit and provide employment for households still struggling to recover from the
Great Recession.
A credit-based financial economy (as opposed to pure cash) depends on an ever-expanding outstanding
level of credit for its survival. Without additional credit, interest on previously issued liabilities
cannot be paid absent the sale of existing assets, which in turn would lead to a vicious cycle of
debt deflation, recession and ultimately depression. It is this expansion of private and public market
credit which the Fed and the BOE have successfully engineered over the past five years, while their
contemporaries (the ECB and BOJ) have until now failed, at least in terms of stimulating economic
growth.
The unmodeled (for lack of historical example) experiment that all major central banks are now
engaged in is to ask and then answer: What growth rate of credit is enough to pay prior bills, and
what policy rate/amount of Quantitative Easing (QE) is necessary to generate that growth rate? Assuming
that the interest rate on outstanding debt in the U.S. is approximately 4.5% (admittedly a slight
stab in the dark because of shadow debt obligations), a Fed governor using this template would want
credit to expand by at least 4.5% per year in order to prevent the necessary sale of existing assets
(debt and equity) to cover annual interest costs. That is close to saying they would want nominal
GDP to expand at 4.5%, but that's another story/ Investment Outlook.
How are they doing? Chart 1 shows outstanding credit growth for recent quarters and all quarters
since January 2004. The chart's definition of credit includes the standard Fed definition of private
non-financial credit (corporations, households, mortgages), public liabilities (government debt),
as well as financial credit. The current outstanding total approximates $58 trillion and has been
expanding at an average annual rate of 2% for the past five years, and 3.5% for the most recent 12
months.
Put simply, if credit needs to expand at 4.5% per year, then the private and public sectors in
combination must create approximately $2.5 trillion of additional debt per year to pay for outstanding
interest. They are underachieving that target in the U.S., which is the reason why GDP growth struggles
at 2% real or lower and nominal GDP growth seems capped at 4.5% or lower. Credit creation is essential
for economic growth in a finance-based economy such as ours. Without it, growth stagnates or withers.
Its velocity/turnover
is critical as well.
The velocity/turnover of credit mentioned above, in turn, is a function of price or the yield
of credit. No central banker knows what that appropriate yield/price is and so Yellen/ Carney/Draghi/Kuroda
walk up forward interest rates carefully so as not to cause a credit collapse. As a general rule,
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. We are dangerously close to the crossing of the lines between long-term
asset returns and forward levels of cash yields, which currently rest at 2.5%+ in 2017 and beyond.
If the forward levels are not validated, however, the danger is lessened.
Today's levels of interest rates and stock prices offer a historically unacceptable level of risk
relative to return unless the policy rate is kept low – now and in the future. That is the basis
for The New Neutral, PIMCO's
assumption that the fed funds rate peaks at 2% or less in 2017 versus others' assumptions (Taylor,
Fisher, Lacker, the market) that it goes much higher. BOE's
Carney, by the way, believes
his country's New Neutral is 2.5%, a level consistent with PIMCO's 2% in the U.S. If so, existing
asset prices in the U.S., while artificially high and bond yields artificially low, may continue
to be so unless the Fed oversteps its interest rate line.
This global monetary experiment may in the short/intermediate term calm m , support asset prices
and promote economic growth, although at lower than historical levels. Over the long term, however,
economic growth depends on investment and a rejuvenation of capitalisticanimal spirits
– a condition which currently does not exist. Central bankers are hopeful that fiscal policy
(which includes deficit spending and/or tax reform) may ultimately lead to higher investment, but
to date there has been little progress, as seen in Chart 2. The U.S. and global economy ultimately
cannot be safely delevered with artificially low interest rates, unless they lead to higher levels
of productive investment.
"For Wonks Only" Speed Read
1. Cross your fingers, credit growth is a necessary but not sufficient condition for economic
growth. Economic growth depends on the productive use of credit growth, something that is not occurring.
Quote: "Although they rarely mention it in the history books, it is ironic that around this
time the moneyed interests and neo-cons of Roosevelt's day were
fomenting a domestic revolution, and investing
heavily in European fascists whom they hoped would be obedient gangsters for crony capitalism."
"A man must always live by his work, and his wages must at least be sufficient to maintain him."
Adam Smith
"The issue isn't just jobs. Even slaves had jobs. The issue is wages."
Jim Hightower
Some analysts are confusing higher wages with monetary stimulus. Nothing could be further from
the truth, at least in the real world of today.
Monetary stimulus is what the Federal Reserve does, that is, increasing the money supply by expanding
the monetary base. It is a non-organic growth of money.
I think it is a well-noted and oft-remarked upon feature that the monetary stimulus that the Fed
is providing is being given directly and almost exclusive to the Banks, in order to shore up their
damaged balance sheets and provide them an artificial stream of profits.
And of that stimulus, the bulk of it seems to be finding its way into financial speculation and
a new bubble in paper assets, and the acquisition of more companies to build even greater monopolies.
Wage increases, that are not merely a secondary effect of a general monetary inflation, are indeed
not useful, except that the workers at least keep pace with the rate of price inflation. But I don't
think that this is what anyone is recommending who talks about higher wages. The Fed is not an actor
on that stage.
The currently imbalanced and distorted financial system is taking the lion's share of all new
growth, and continues to do so as it has been doing for the past twenty years. This cannot last.
When consumers purchase things, they must either use cash or credit. And to obtain the cash they
can work more hours, or have more family members working. To obtain more credit, they can mortgage
their house, and increase their debts.
We have seen the explosion of a consumer credit bubble in housing debt, facilitated and engineered
by historic levels of financial fraud by the very Banks who are now taking their subsidies of monetary
stimulus from the Fed. It happened almost six years ago, but the economy remains in 'the new noe-feudal
normal.'
At some point the long abused consumer says 'enough' and cuts back their purchasing to the barest
of essentials. And the economy grows stagnant at home, which gives the moneyed interests a strong
incentive to seek captive m overseas. And so a new round of neo-colonialism is born. Which in turn
creates its own sets of problems, lies, and economic distortions.
The data indicates that we are now, at long last, finally at that point.
And the one percent has never been richer, or had more influence with the political class.
How much is enough for them? When will they be content? With them it is with wealth as it is with
power.
'Wir haben keine Hemmungen, und einen großen Magen.'
I think that the solution is rather obvious. We have been here before.
"After many requests on my part the Congress passed a Fair Labor Standards Act, what we call the
Wages and Hours Bill. That Act --applying to products in interstate commerce -- ends
child labor, sets a floor below wages, and a ceiling over hours of labor.
Except perhaps for the Social Security Act, it is the most far-reaching, the most far-sighted
program for the benefit of workers ever adopted here or in any other country. Without question
it starts us toward a better standard of living and increases purchasing power to buy the products
of farm and factory.
Do not let any calamity-howling executive with an income of $1,000.00 a day, who has been turning
his employees over to the Government relief rolls in order to preserve his company's undistributed
reserves, tell you -- using his stockholders' money to pay the postage for his personal opinions
-- tell you that a wage of $11.00 a week is going to have a disastrous effect on all American
industry.
Fortunately for business as a whole, and therefore for the Nation, that type of executive is
a rarity with whom most business executives most heartily disagree...
Some of my opponents and some of my associates have considered that I have a mistakenly sentimental
judgment as to the tenacity of purpose and the general level of intelligence of the American people.
I am still convinced that the American people, since 1932, continue to insist on two requisites
of private enterprise, and the relationship of Government to it. The first is a complete honesty,
a complete honesty at the top in looking after the use of other people's money, and in apportioning
and paying individual and corporate taxes (according to) in accordance with ability to pay. And
the second is sincere respect for the need of all people who are at the bottom, all people at
the bottom who need to get work -- and through work to get a (really) fair share of the good things
of life, and a chance to save and a chance to rise.
After the election of 1936 I was told, and the Congress was told, by an increasing number of
politically -- and worldly-- wise people that I should coast along, enjoy an easy Presidency for
four years, and not take the Democratic platform too seriously. They told me that people were
getting weary of reform through political effort and would no longer oppose that small minority
which, in spite of its own disastrous leadership in 1929, is always eager to resume its control
over the Government of the United States.
Never in our lifetime has such a concerted campaign of defeatism been thrown at the heads of
the President and the Senators and Congressmen as in the case of this Seventy-Fifth Congress.
Never before have we had so many Copperheads among us -- and you will remember that it was the
Copperheads who, in the days of the Civil War, the War between the States, tried their best to
make President Lincoln and his Congress give up the fight in the middle of the fight, to let the
Nation remain split in two and return to peace -- yes, peace at any price.
This Congress has ended on the side of the people. My faith in the American people -- and their
faith in themselves -- have been justified. I congratulate the Congress and the leadership thereof
and I congratulate the American people on their own staying power...
You will remember that from March 4, 1933 down to date, not a single week has passed without
a cry from the opposition, a small opposition, a cry 'to do something, to say something, to restore
confidence.' There is a very articulate group of people in this country, with plenty of ability
to procure publicity for their views, who have consistently refused to cooperate with the mass
of the people, whether things were going well or going badly, on the ground that they required
more concessions to their point of view before they would admit having what they called "confidence."
These people demanded 'restoration of confidence' when the banks were closed -- and demanded
it again when the banks were reopened.
They demanded 'restoration of confidence' when hungry people were thronging (the) our streets
-- and demanded it again now when the hungry people were fed and put to work.
They demanded 'restoration of confidence' when droughts hit the country -- and demanded it
again now when our fields are laden with bounteous yields and excessive crops.
They demanded 'restoration of confidence' last year when the automobile industry was running
three shifts day and night, turning out more cars than the country could buy -- and they are demanding
it again this year when the industry is trying to get rid of an automobile surplus and has shut
down its factories as a result.
But, my friends, it is my belief that many of these people who have been crying aloud for 'confidence'
are beginning today to realize that that hand has been overplayed..."
Although they rarely mention it in the history books, it is ironic that around this time the
moneyed interests and neo-cons of Roosevelt's day were
fomenting a domestic revolution, and investing
heavily in European fascists whom they hoped would be obedient gangsters for crony capitalism.
Despite caution from Bob Shiller that stocks are "hovering at worrisome levels," the FOMC
Minutes yesterday (and various Fed speakers and talking heads this morning) have reassured the investing
public that stocks are "cheap" and it's credit and bonds that are rich and bubbly. However, as the
following simple table from Bloomberg Briefs shows, concerns over "frothy" valuations is warranted
-
especially in light of P/Es above previous bubble peak levels.
After crisis of
neoliberalism in 2008
global trade is under pressure. Countries are more protective about their m in Great Recessions than
before. And that speaks troubles for Germany and other countries that try to export their way out of
recession
Why are most economists more in favor of free trade than the general public?
One reason may be that the models economists use to evaluate the impact of global trade often
overlook some significant ways it affects jobs, income and social services.
STR Save_the_Rustbelt:
Tenured economists do not lose their jobs to free trade.
And they get lots more opportunities to fill journals, which is the primary metric of their
promotions and pay raises.
Besides, the "average worker" always seems to be better off.
Michael:
I'm not sure it's valid to use "free trade" and "China" in the same sentence...
I think free trade works well when all participating countries have a comparable level of environmental
and worker protection laws and exchange rates are allowed to float freely without any government
intervention. But what we have now is a disgrace. Corporations and the 1% are making out like
robber barons while the middle class gets decimated.
I guess that's what happens when unions go away and Democrats buy into supply-side economics.
pgl:
"Democrats buy into supply-side economics". You must be watching Governor Cuomo's
recent political ads. Tax free zones is his way of promoting growth for the state. I guess that's
why a lot of Republicans voted for him. Alas.
William Meyer:
Unfortunately, it seems clear that the gains of trade will never be redistributed from
the current winners. The tendency of economists to always argue for a more open economy --
that is, one where international trade makes up a larger percentage of total economic activity
-- thus turns out to be just one more justification for the status quo.
If economists don't want to be viewed as providing nothing but complex, mathematical excuses
for the current distribution of money and power--which is largely how, I, at least, view them
-- they need to stop discussing laughably counterfactual situations like "redistribution
of the benefits of trade" and being more honest about the class war being waged by the wealthy
and powerful on the rest of society in the USA.
At the moment, "technocratic expertise" just translates to "toadying to the rich." It would
be refreshing to see mainstream people admitting this publicly, and quite possibly socially useful
as well.
Lafayette:
{Why are most economists more in favor of free trade than the general public?}
My answer would be that economists are less likely to lose their jobs to foreign competition
than the ordinary worker.
(Of course, I could be wrong ... ;^)
Catatonic:
"It's worth emphasizing this isn't the same thing as saying that expanding international trade
is harmful. Specialization and trade produces overall gains for the U.S. economy according to
both theoretical and empirical work."
It isn't harmful to Mark Thoma. It is harmful to a lot of people.
Nobody cares about the US economy. They care about their own job and wages.
And not everything shows up in the numbers. Trade updates the employer/employee power balance
in favor of the employer.
And the view of people is not colored. It is the view of economists that is colored. Our view
is crystal clear!
It's six yeas since
the last market crash. Which
started at autumn of 2008 with approximately the same level of prices for junk bonds. In
august 2008 few people worried. We can probably
run another two years, or three years, or five years... But who knows when the music stops and retail
and 401K investors wiped out...
"When the music stops, in terms of liquidity, things will be complicated.
But as long as the music is playing, you've ot to get up and dance. We're still dancing,"
Chuck Prince, CEO Citigroup, 9 July 2007
In this record inequality and atmosphere of serial policy errors by the privileged ruling class,
the m no longer need the broad, direct participation of the public.
The Fed is taking care of the moneyed interests, and the sycophants in government will do anything
to smooth their way.
With Russia's 300-truck-long "humanitarian" convoy parked near the Ukrainian border,
British journalists reportedly witnessed a convoy of Russian military vehicles -- including 23
armored personnel carriers -- cross into
Ukraine. This morning, Ukraine
claimed to have destroyed part of this convoy, but Russia denies sending anything over, while Europe
is furiously warning that any unilateral Russian military action would violate international law.
The renewed escalation of tensions has stocks on the slide again, putting an end to the two-week
long rebound the market had been enjoying. After starting strong, the Dow Jones industrial average
fell nearly 100 points in the afternoon before recovering some of its earlier gains. The blue-chip
index closed at 16,656, down 58 points, 0r 0.3 percent. The S&P 500 and Nasdaq composite index were
largely flat on the day.
The mixed trading reflects the confusion over exactly what is happening in Ukraine, with Ukrainian
border guards apparently inspecting Russia's aid convoy in preparation of the move across the border.
For Russian President Putin, the stakes couldn't be higher. Serious economic sanctions have limited
the ability of the Russian financial system to borrow money in Western currencies. But "surrender"
would risk undermining his power and would abandon scores of ethnic Russians in the eastern and southern
regions of Ukraine -- a matter that's close to his heart according to an interview with Time magazine,
which named him
Person of the
Year in 2007.
So, further escalation looks likely before this is all done, which comes at a time of vulnerability
for the economy and m .
The hammer finally hit for Europe when overnight both Germany and France reported Q2 GDP prints
that missed expectations, the first actually contracting at a 0.2% rate with consensus looking for
-0.1%, while France remained flat vs expectations for a tiny 0.1% rise.
As a reminder, this GDP is the revised one, which already includes the estimated contribution
of drugs and prostitution, suggesting the actual underlying economic growth is far worse than even
reported.
Then again, this is hardly surprising considering all the abysmal data out of Europe and the rest
of the world in recent weeks, and with the Russian trade war sure to trim even more growth, look
for all of Europe to join Italy in its first upcoming triple-dip recession in history.
"The apparent stability of the world financial system is superficial – financial asset prices are
not real, the equilibrium is temporary, the lack of volatility is a trap, and when the whole thing goes
haywire, there will truly be hell to pay."
"By all measures, the U.S. stock market is currently frothy," warns Paul Singer, founder
of $24.8 billion hedge fund firm Elliott Management, ominously concluding, "The apparent stability
of the world financial system is superficial – financial asset prices are not real, the equilibrium
is temporary, the lack of volatility is a trap, and when the whole thing goes haywire, there will
truly be hell to pay."
The attached Barron's article appeared in December 2007 as an outlook for the year ahead, and
Wall Street strategists were waxing bullish. Notwithstanding the advanced state of disarray in
the housing and mortgage m , soaring global oil prices and a domestic economic expansion cycle that
was faltering and getting long in the tooth, Wall Street strategists were still hitting the "buy"
key.
In fact, the Great Recession had already started but they didn't have a clue: "Against
this troubling backdrop, it's no wonder investors are worried that the bull market might end in 2008.
But Wall Street's top equity strategists are quick to dismiss such fears."
Will investing based on fundamentals eventually find favor once again with investors? The
problem is that market participants no longer view the financial m as a place to invest savings over
the "long term" to ensure future purchasing power parity. Today, they view the m as a place to "create"
wealth to offset the lack of savings. This mentality has changed the market dynamic from investing
to gambling. As Seth Klarman warned, "There is a growing gap between the financial m and
the real economy. Not surprisingly, lessons learned in 2008 were only learned temporarily.
These are the inevitable cycles of greed and fear, of peaks and troughs." Simply put, fundamentals
will matter, but only after the fact.
...Here to help us understand the legislative framework that holds America together, and the foreign
policy which results from the choices left to Americans, is the commenter I know only as UCG. University
of California Graduate? Uruguayan Cowboy Groupie? No way to know, although he is clearly from California.
I recommend you check out the other fine and perceptive discussions on hisblog
– meanwhile, read on.
Surviving in the US
According to Indeed.com, the
average salary in the US
is $62,000. Since that's on the high end of the spectrum, let's go with that, even though
the Sacramento Bee
places the average salary at $51,190. And let's take your average family, two parents,
(both working,) and two kids. That's $124,000. This seems like a lot of money, but it's not.
... ... ...
But I don't expect you to take my word for it, so let's start with the family that I introduced
earlier, 2 adults, 2 kids and $124,000 in income.
First there's the
federal income tax of
25 percent, over a third of which goes to the military, perhaps to bomb a country you never heard
of. That's $31,000.
Of course that number doesn't include property taxes, sales taxes, other taxes, car insurance,
home insurance, other insurances, etc, and that's already $72,840. But hey, I said half, maybe they'll
get a tax rebate, so despite the tax and insurance burden clearly being more than half, let's go
with half. Now the family of four has a net income of $62,000.
The next two big items on the expenditure list are housing and food. People need a place to stay
and a place to eat. However we're talking about the middle class here, and they shouldn't be living
in Ghettoville, also known as Detroit. The
median home price is $425,000.
Presuming that they can get a decent rate, let's say four percent, that their housing value does
not decrease, (which usually isn't the case in California, or at least wasn't prior to economic crash,
but hey, at least comedians got a good laugh out of Gore's "locked box" speech, politician wants
to do something good for the economy – hilarious!) and that they take out a 30 year housing mortgage,
we're looking at $24,000 in home payments. Of course there needs to be a fund for fixing the
house, paying for utilities, etc. That can
cost about $300 a month on average,
so another $3,600.
After taxes, insurance and housing we're left with $34,400 for the hardworking family of four,
who probably need to eat. Presuming that they don't end up eating junk food all of the time,
the food would average out to be $60 a day for the family of four, one of the reasons being that
the mom is working and thus cannot cook Monday through Friday. That's $21,900. We're left with
$12,500. And I'm being generous, since I'm
basing that sum on collegiate
data.
I'm also guessing that the parents might need a way to get to work, probably a car. In California
you can get two decent cars for $25,000, and pay it off with $250 a month or $3,000 a year. But you
also need to pay for gas and car repairs. I don't drive as much as I used to and I still spend about
$100 a month on gas, and half of that on other repairs. Thus the car bill, for the parents, assuming
that they work fairly close to home and that they are safe drivers, is $6,600. We're left with $5,900.
-- [he forgot car insurance --NNB]
The charges still left include emergency situations, school supplies, clothes, toiletries, stuff
that families can do on the weekends, etc, etc, etc. That's Middle America. This is why people in
the US are having one kid instead of two: they cannot afford two. That's why the mom has to work,
instead of staying at home and raising her kids. What's that mean? The kid's raised by school, TV,
the Internet, and video games. Speaking of schools, most schools are not doing too well and quite
a few are failing miserably.
Please note what I did: I took the highest Middle America salary I could find, I've applied the
expenses generously and I still ended up with a loss. That's why
close to half of Americans are in debt. Speaking of Americans being in debt, here's what's
owed:
(OT) (Reuters) - U.S. construction spending rose less than expected in May, which could
prompt a further downgrading of second-quarter economic growth estimates.
Construction spending edged up 0.1 percent to an annual rate of $956.1 billion, the Commerce
Department said on Tuesday. However, April's construction spending was revised up to show a 0.8
percent rise, taking some of the sting out of the report.
Economists polled by Reuters had expected construction spending to advance 0.5 percent
after a previously reported 0.2 percent gain.
Inventories still rising, backlog of orders switched to declining. Lots of long tailed cats
remain who still remember that room full of rocking chairs last time.
Bubbles ride the surface, but ugly cuts to the bone.
And this market may look good, but deep down it is almost ugly as the characters that live
off of it.
That does not mean that it cannot continue on, with some pancake makeup and lipstick, for quite
some time. There is some thought that nothing bad, barring the exogenous and unexpected, will happen
before the midterm elections in November.
Highlights
Durables orders were much weaker than expected for May. Durables orders fell 1.0 percent in May
after rising 0.8 percent in April. Analysts forecast 0.4 percent. Excluding transportation, orders
slipped 0.1 percent, following a 0.4 percent gain in April. Market expectations were for 0.3 percent.
...No durable goods report this am, I expect....so here is the lead from Bloomie, who (I think)
isn't jaundiced politically...
...Lunch is packed, and now I am off to the mountains..
"American families experienced significant losses in wealth during the Great Recession, and
these losses were distributed very unequally," said Fabian Pfeffer, assistant research professor
at the U-M Institute for Social Research.
In 2003, households at the top 5th percentile of wealth had 13 times more wealth than the median
household, according to the analysis. By 2013, this gap nearly doubled to 24 times as much wealth.
While households at the top lost large amounts of wealth during the recession, those at the
bottom of the wealth distribution lost the largest share of their total wealth.
In 2003, households at the top 5th percentile of wealth had 13 times more wealth than
the median household, according to the analysis. By 2013, this gap nearly doubled to 24 times
as much wealth.
Winning the future!
lawyerliz, 6/25/2014
Well, I was right, alas.
Like the dope dealers, some of the very rich can neither effectively spend nor invest their
wealth. Farr as I see, it exists to enforce their alphaness.
The Commerce Department said on Wednesday durable goods orders declined 1.0 percent as demand
for transportation, machinery, computers and electronic products, electrical equipment, appliances
and components, and defense capital goods fell.
Orders for durable goods, items ranging from toasters to aircraft that are meant to last
three years or more, increased by a revised 0.8 percent in April, when they were boosted by
defense equipment.
Remember when in January 2014, Q1 GDP was expected to rise 2.6%? Well, here comes the final Q1
GDP revision and it's a doozy: at -2.9%, far below the -1.8% expected and well below the -1.0%
second revision, it is an absolute disaster, and is the worst print since Q1 2009.
And while a bad GDP print was largely expected, the driver wasn't: personal consumption expenditures
somehow crashed from 3.1% to just 1.0%, far below the 2.4% expected, meaning that all hope of a consumer
recovery is dead. Finally, as a reminder, US GDP has never fallen more than 1.5% except during or
just before an NBER-defined recession since quarterly GDP records began in 1947. Good luck department
of truth propaganda machine, because even assuming 3% growth every other quarter in 2014 means
2014 GDP will be 1.5% at best!
Major stock averages remain in earshot of all-time highs and this bull market has been nothing
if not resilient, repeatedly defying predictions of its demise for five-plus years.
Still, Robert Shiller, Yale professor and Nobel prize winner, is "definitely concerned" about
the outlook for stocks based on the cyclically adjusted price-to-earnings ratio (CAPE) he created.
At 26, the so-called Shiller PE is currently well above its long-term average of 17 and approaching
levels that previously presaged doom for equities.
Shiller has plotted CAPE going back to 1881 and notes (with some alarm) it has only been higher
than current levels three times: In 1929, 2000 and 2007.
"It looks to me like a peak," he says in the accompanying video. "I would think there are people
thinking 'it's gone way up since 2009, it's likely to turn down again.' That's what people might
plausibly think."
Anecdotal evidence does indeed suggest people are thinking "the end" of this bull run is nigh.
But if the market "climbs a wall of worry," that's arguably a bullish sign as my colleague Michael
Santoli
describes here.
And Shiller is quick to note the CAPE is not a market-timing tool and he remains in the market
in his personal account. "We don't know what it's going to do," he says. "Realistically, stocks should
be in one's portfolio but maybe lighten up."
Stocks should be in one's portfolio in part because interest rates are so low and "the fixed income
market just doesn't look very attractive," Shiller says.
As for the idea,
proffered here by Citigroup's Tobias Levkovich, that CAPE is flawed because it doesn't "normalize"
for interest rates (as it does for earnings), Shiller says the following: "He's right the very low
interest rates are a sign maybe you want to keep more invested in the [stock] market now rather than
getting nothing [from bonds]. That ought to help explain the high CAPE but that doesn't mean the
high CAPE isn't a forecast of bad performance."
So what does Shiller, whose books include Animal Spirits and Irrational Exuberance,
make of the recent steep declines in trading volume and volatility? Watch the accompanying video
to find out.
Aaron Task is the host of The Daily Ticker and Editor-in-Chief of Yahoo Finance. You can follow
him on Twitter at @aarontask or email
him at [email protected].
Roman
In addition to severe lagging and other shortfalls, I folks completely mis-use Shiller P/E.
Robert Shiller linked the 10-year AVERAGE real P/E to subsequent 20y AVERAGE return (check his
book, or Wikipedia for 'shiller p/e').
Therefore, we will know 20y average return staring this year ONLY in 20 YEARS. Instead, folks
tend to incorrectly use it as predictor of mid-term or short-term stock market return. Shiller
P/E is really only good as an ex-post metric, to make sense of history, not as a forward-looking
measure of equity market valuation. For forward-looking measures, take a look at our approach
modelcapitalmgmt.com
Wall Street and Washington want you to believe the stock market isn't rigged. Guess what? It
still is
Michael Lewis woke up Average Joe investors, but the fat cats are still trying to lull you
into financial submission with their intellectual dishonesty
Most Americans don't think much about the stock market, and that's just fine with Wall Street.
Because once you wake up to how screwed up the stock market really is, the financial industry knows
you're likely to get very nervous and take your money out.
Many are catching on: between 2007 and 2014, investors pulled $345bn from the stock market. E-Trades
are down and worries are up, with 73% of Americans still not inclined to buy stocks, five years after
the financial crisis.
No wonder "investor confidence" – the mass delusion that the stock market is trustworthy – has
been in short supply this year. Nothing has done more to decimate it than Michael Lewis's new book,
Flash Boys, which focuses on the predatory behavior of high-frequency trading. Nobody – including
Congress – cared much about the "high-tech predator stalking the equity m " before Flash Boys hit
the bestseller list, reaching beyond the walled garden of the financial industry into American dining
rooms and Washington hearing chambers. It didn't leave all spring.
So last week, Washington featured a lot of handwringing, in two separate Congressional panels,
about how to convince Average Joe investors that the stock market is their friend – even when it
obviously isn't. And it's great that elected officials and Wall Street millionaires are talking about
investor confidence. But they're not talking about what really matters: investor protection. Guaranteeing
that everyone gets a fair shake. Un-rigging the stock market.
Yet in Congress, the worry is all about appearances.
"We've heard a consistent message, and that's that there is a lack of confidence in the [stock]
m ," Senator Carl Levin said on Tuesday to open his Senate investigations subcommittee panel inspired
by Flash Boys. New York Stock Exchange president Tom Farley echoed that sentiment, testifying that
participation of US citizens in the stock market is at a 16-year low – and blaming regular investors
for simply not believing enough: "We think the reason for that is [lack of] confidence in the m ."
Let's get one thing straight: Investor confidence is not the problem. The screwed-up stock market
is the problem. It's time to break down the polite fiction that investing in the stock market is
something that sane, rational, sensible people do. It is a high-risk contact sport for your money.
If you know that, you're ahead of the game.
And the more you read about the new game in town, the more nervous you should get about high-frequency
trading (HFT).
Rich, elite traders are making millions of dollars in bonuses by using super-fast computers to
swoop into the stock market and conduct trades in milliseconds, faster than even most professionals
and certainly faster than any Average Joe. The HFT industry – a collection of stock exchanges, hedge
funds, banks and others that has actually been around for six years – collects billions of dollars
in profits: the kind of money you just can't earn unless you elbow someone else out of the way. Numerous
studies show that Flash Boys-style trades affect stock prices and increase fees for long-term investors.
The New York state attorney general even has a nickname for it – "Insider Trading 2.0" – and now
would-be investors are starting to realize, once again, just how much the decks are stacked against
them.
As Senator Elizabeth Warren noted at her Senate panel on Wednesday, one high-frequency trading
firm, Virtu, made a profit on 1,237 out of 1,238 trading days. "You know, this isn't trading," Warren
said. "Traders have good days and bad days... but high-frequency traders have only good days."
Nice work if you can get it.
murhill, 22 June 2014 1:11pm
There is a fundamental difference between the stock market, and the corn market or the oil
market.
If the price of oil or corn goes up a bit, producers will produce more, and consumers will
consume less. And conversely, if the price goes down. This tends to maintain the supply and demand
in equilibrium.
If parties which are neither producers nor consumers try to manipulate the market, for example
by forcing prices down, then the supply of product to the market will dry up. If the price of
corn goes too far down, farmers will plant soybeans or wheat or canola or cotton instead. If the
price of oil goes too far down, owners of old or expensive wells will abandon them. Supply will
contract.
But in the stock market, if you can succeed in forcing the price down far enough - then bonanza,
there is a huge burst in new supply at bargain prices. Companies are pursuaded, often against
their best interests, and almost certainly against their existing shareholders' interests, to
issue vast amounts of new shares, at low prices, to privileged parties. The supply vs price curve
does not have the continuous and monotonic behaviour that the economists say that it should have.
This does not happen, in the oil or corn market.
BruceMullinger, 22 June 2014 1:35pm
A stock market is but a glorified casino and there are those who would rather see a plane crash
than a stock market crash.
That Wall St. is the centre of our economic universe is testament to just how warped and decadent
"the economy" has become.
Unfortunately, most of the love in the world is the love of money and if money is indeed the root
of all evil then the society is in a hell of a lot of trouble.
remarks, 22 June 2014 1:37pm
You seem to be effectively mixing up day trading/.short term trading of shares with long term
buy and hold (investing). The former will wipe most people out, the latter has taken a knock but
over the long term is not a bad way to save money.
Unlike the rigged pyramid house price taxpayer subsidised scheme, investing in shares is generally
not taking away homes, as BTL and homeowner speculators do. And investing in shares of productive
companies that employ people and who pay taxes why not, people should be encouraged to invest
in such business and the tax system should be used to discourage speculation in the rigged housing
market.
Bar some major external political or economic turmoil wouldn't be surprised if the FTSE hits
7500 this year.
After this year's Secular Forum, PIMCO adopted its New Neutral view: We expect global economies
to converge to modest trend growth rates over the next few years. What does The New Neutral mean
for inflation risk around the world?
Deputy Chief Investment Officer Mihir Worah, head of PIMCO's real return and multi-asset portfolio
management teams, discusses PIMCO's expectation of low but rising inflation over the next three
to five years, and what it means for investors.
While retirees can generally leave their savings in 401(k) plans, financial firms entice them with
cold calls, Internet ads, storefront signs and cash incentives to switch to IRAs. They tout the advantage
of the IRA's wide variety of investment choices over the typical 401(k) plan's limited menu.
Yet that appeal can also be a pitfall for retirees offered expensive and high-risk investments.
IRAs often charge higher fees than those associated with 401(k) plans, giving brokers an incentive
to promote rollovers.
"You're going into the wild, wild west when you take your money out of a 401(k) and put it into
an IRA," said Karen Friedman, executive vice president and policy director of the
Pension Rights Center, a Washington-based
group representing retirees.
Tarr's clients paid higher fees in their brokerage accounts than they would have in their AT&T
plan. There's no way of knowing exactly how they would have fared if they had left their savings
behind. Employees in 401(k) plans, including AT&T's, also faced losses during the 2008 financial
crisis, though the market has since rebounded to reach new highs.
Tarr, who left Royal Alliance in 2010,
stands by her advice, saying the investments held up well in a difficult market. She said she didn't
even know about the commissions each investment paid and wanted to do what was best for her clients.
'Forever Besmirched'
In a more than two-hour interview, Tarr said she often tried to talk customers out of rolling
over their pensions, but that many were eager to have the lump sum to generate higher returns and
leave money to their children. She always made clear that she worked for Royal Alliance, not AT&T,
she said.
"I am forever besmirched, and that is really hard for me," said Tarr, fighting back tears. "I
am a minister's daughter and granddaughter. If anyone thinks I would do anything illegal, immoral
or unethical, that hurts me where I live."
Tarr's strategy of focusing on one big company isn't unusual. A broker for another AIG unit, FSC
Securities Corp., cold-called employees of
UPS (UPS), the world's largest
package-delivery company, in the area around its headquarters in Atlanta, according to a June 2013
complaint. Nine customers, including six UPS employees, lost more than $1 million when broker Brian
G. Brown rolled over their retirement money into high-risk investments, including oil and gas private
placements, they said.
Experienced Customers
AIG, based in New York, declined to comment on the complaint against FSC. In a filing responding
to the allegations, FSC said most of the customers were multi-millionaires "with decades of investing
experience" who understood the risks.
Brown left FSC in 2010 and works for another brokerage company in Atlanta.
The complaint "hasn't been arbitrated, and all of it is not true," he said in a telephone interview.
Federal regulators are targeting rollover abuse. Last year, the U.S
Government Accountability Office,
Congress's investigative arm, found that a conflict of interest was fueling IRA growth. Financial
companies that administer 401(k) plans misled GAO investigators posing as departing employees, telling
them they would almost always be better off if they shifted to IRAs that the companies also managed.
Fiduciary Standard
The U.S. Labor Department has said it will propose rules in January that brokers and other advisers
act in clients' best interests during rollovers, a so-called fiduciary standard. The agency had announced
a similar plan in 2010. Brokers are generally held to the lower standard of selling products that
are suitable for their customers, meaning that they don't have to put their clients' interests first
as long as they select appropriate investments. In January, Finra, the Wall Street self-policing
group, warned members that it would heighten its scrutiny of IRA rollovers.
The Securities Industry and Financial M Association,
which represents brokers, banks and money managers, opposes stricter regulation. It would hurt commission-based
brokers, limiting consumer choice, according to the group. Disclosure rules are already sufficient
to protect customers, said Ira
Hammerman, the association's executive vice president and general counsel.
"If someone offers you $600 to roll over your IRA, you can be sure you are going to be paying
a lot more additional expenses later," said Mercer Bullard, an associate professor at the University
of Mississippi Law School who heads Fund Democracy, an advocacy group for mutual-fund shareholders.
Incentives 'Commonplace'
Kristen Georgian, a Bank of America
spokeswoman, said such incentives are "commonplace for many leading brokerage firms." The company
informs clients about their options, "including keeping their assets in place," she said.
"We believe strongly in rollovers," said Mike Loewengart, E*Trade's director of investment strategy.
Clients benefit from more transparent fees and broader investment options in an IRA with E*Trade,
he said.
In a 401(k), an employee sets aside money -- often with a company match -- in a menu of mutual
funds, which aren't taxed until withdrawal and, in some cases, at all.
Cheaper 401(k)s
Once workers exit a company, they generally can leave the money behind, roll it over into an IRA,
transfer it to another 401(k) or cash out and suffer a huge tax hit. In a rollover, customers set
up IRAs with financial companies, preserving their tax deferral.
Though 401(k)s offer fewer choices than IRAs, large companies such as AT&T negotiate for institutional
discounts on the funds they select. As a result, 401(k) participants paid less than half the average
1.4 percent annual expenses charged to all U.S. stock mutual-fund investors, according to a 2013
study from the
Investment Company
Institute, a Washington-based mutual-fund industry trade group.
Still, almost 18 million U.S. households hold IRAs that include rollover money, estimated a
recent report from the Investment
Company Institute.
After he lost his job in 2009, Manuel Gonzalez Martinez, a mechanical engineer for Hewlett-Packard
in Puerto Rico, rolled over $150,000 from a 401(k) and a lump-sum pension payment to an IRA with
UBS AG (UBS), the Swiss financial-services
company.
'Stuck' With Bonds
His broker, Luis Roberto Fernandez Diaz, recommended Puerto Rico municipal bond funds with a 3
percent upfront sales fee and 1 percent annual expenses, according to his arbitration complaint with
Finra, which lists 17 customer disputes against Fernandez from 2009 through 2014. Six of them have
been settled.
Financial advisers generally frown on investing an IRA in municipal bonds because their main advantage
is tax avoidance, something that is already a feature of an IRA. Worse, the bonds plunged in value
because of the deteriorating finances of Puerto Rico and are now worth only $90,000, Gonzalez said.
"I am stuck with the bonds," said Gonzalez, 51. "They are a just a number on paper."
UBS doesn't comment on individual arbitration cases, said spokesman Gregg Rosenberg. In a filing
responding to the allegations, UBS said Gonzalez "invested very profitably in the funds" for years
before the municipal bond market
deteriorated.
Fernandez now works as a broker for Popular Securities. Teruca Rullan, a spokeswoman for Popular
Inc., the parent company, said he would not be available for comment.
Vulnerable Workers
At the time of leaving a longtime employer, workers are often confused and vulnerable to unsound
financial advice. In 2010, Albert Grathwol stopped by a hotel to attend a seminar organized by Raymond
J. Lucia Sr., a radio personality who also ran an investment firm. Grathwol was about to retire as
a structural engineer for
Marc Fagel, an attorney
for Lucia, declined to comment because Grathwol's complaint is still in arbitration.
Joseph Kuo, a First Allied spokesman, also said the company doesn't comment on pending arbitration
cases, while noting Lucia is no longer affiliated with the brokerage. In a filing responding to the
allegations, First Allied said they were "baseless," because the REITs were "only one part of a layered
investment strategy" and the Grathwols were fully informed of the risks.
Employees at AT&T faced similar quandaries about where to entrust their savings.
AT&T Ranking
Based in Dallas, the telecommunications company, with 246,000 workers, is one of the largest private
employers in the U.S. AT&T's 401(k) ranks among
the best 15 percent of U.S. plans in terms of fees, according to BrightScope, a financial information
company that rates retirement offerings. AT&T funds, which are available only to employees, charge
expenses as low as .01 percent.
Typically, when employees retire or lose their jobs, they have the option of rolling over their
401(k)s or, in most cases, leaving them behind in the same low-cost investments. At AT&T, they often
have another big decision. Along with their 401(k), they can take a pension -- a monthly fixed payment
for life -- or an equivalent payment that could amount to hundreds of thousands of dollars.
Business Opportunity
Sensing a business opportunity, broker Richard McCollam, a West Point graduate and former U.S.
Army captain who had worked for insurer
MetLife (MET) Inc., began
marketing to AT&T employees with 401(k) rollovers and lump-sum pension payments.
Starting in 1994, McCollam worked for Royal Alliance, part of AIG's Advisor Group, one of the
largest networks of independent brokers in the U.S., with about 6,000 representatives. While McCollam
handled the back office, Kathleen Tarr, who joined him as a broker in 2002, prospected for clients.
"If you are like most AT&T retirees, you probably feel that you are drowning in information that
may be confusing and frustrating," according to marketing material saved by a former customer.
Tarr had an unusual background for a financial adviser. She has a Ph.D. from the
University of California at Berkeley,
where she studied invertebrate physiology. She taught briefly at UC-Irvine before quitting to raise
three boys. She then went back to work as a private-school teacher and then in finance after her
husband lost his job as a biochemist.
Chaplain's Daughter
Like many at Royal Alliance, Tarr and McCollam worked out of their homes, in Contra Costa County,
near San Francisco. Tarr, who had just turned 50 when she teamed up with McCollam, had an easy manner
with soon-to-be retirees. The daughter of an Army chaplain and granddaughter of a Congregational
minister and missionary, she would invite clients to hear her sing at a local Episcopal church, where
she led the soprano section.
Tarr won referrals by word-of-mouth, meeting clients both at their homes and, by appointment,
at AT&T offices across the San Francisco area.
Mark Siegel, an AT&T spokesman,
said the company provides information about benefits, but doesn't endorse specific financial advisers,
which aren't affiliated with the company.
Siegel said the company periodically sends alerts to employees, such as an e-mail from last October,
which warned: "You should research the individuals contacting you and their organizations before
doing business with them."
Non-Traded REITs
McCollam said they recommended that clients put 60 percent to 70 percent of their money in variable
annuities. The balance would end up in non-traded REITs, including Oak Brook, Illinois-based
Inland American Real Estate (IARE)
Inc. The REITs generated dividends of 6 percent to 8 percent a year, providing an alternative to
the vagaries of the stock market, Tarr said.
In variable annuities, customers invest in mutual funds within an insurance wrapper, which offers
a death benefit, typically providing heirs a minimum payout. Earnings are tax-deferred.
Investing in a variable annuity within an IRA "may not be a good idea" because it provides no
additional tax savings over an already tax-advantaged IRA, according to a
Finra alert originally posted on its website in 2003 and updated in 2009. The annuities will
increase costs, "generating fees and commissions for the broker or salesperson," Finra says.
Variable Annuities
Customers often choose variable annuities because they offer a guaranteed minimum lifetime income,
which is assured no matter how their investments perform, said Andrew Simonelli, a spokesman for
the Washington-based Insured Retirement Institute,
which represents companies that offer annuities.
"While tax deferral is certainly part of the value proposition of annuities, it's not the only
reason," Simonelli said.
McCollam said he, Tarr and Royal Alliance would generally receive a total commission of as much
as 6 percent or 7 percent of the money that clients invested in variable annuities. The mutual funds
they selected would charge customers 2 percent to 3 percent a year in fees. Those fees were no higher
than those of many mutual funds sold by brokers, Tarr said.
Broker Commissions
The brokers and Royal Alliance also received commissions totaling 6 percent to 7 percent for selling
non-traded REITs, McCollam said. Typically, Tarr and McCollum kept 90 percent of their commissions,
giving 10 percent to Royal Alliance, McCollam said.
Over time, the pair signed up as many as 500 customers, most from AT&T, McCollam said. Overseeing
about $90 million in investments, their business generated about $600,000 to $700,000 in annual commissions
-- and $1 million in its best year, he said. As the founder of the operation, he would keep 90 percent
and Tarr, 10 percent, McCollum said. He said they won sales awards, with Royal Alliance sending one
or both to resorts in the Bahamas; Boca Raton and Orlando, Florida;
Arizona and Texas.
Doug Beal, a $32-an-hour mechanic specializing in air-conditioning and fire detection, heard about
Tarr from his union steward. Tarr visited Beal in his shop, where he worked outside
San Francisco.
"I wanted something where I wouldn't lose a whole bunch if the market went crazy," said Beal,
a disabled Vietnam veteran.
When he retired in 2009, Beal invested $320,000 in variable annuities and REITs, rolled over from
his pension and 401(k). He has since lost $60,000 because of a decline in the REITs' value, said
Frank Sommers of Sommers & Schwartz LLP in San Francisco, who represents 17 of Tarr's former clients.
Paying Bills
Beal is deferring his dream of moving up to Spokane, Washington, where he hopes to set up a shop
to tinker with motorcycles and old cars, including a 1926 Model T Ford in his garage.
"It's making it a little harder to pay bills," said Beal, 67, who also receives disability payments
related to military service. "Thank God for my VA pension."
Tarr cultivated some employees for years, such as Mae Holloway, who started her 40-year career
at AT&T as a telephone operator and ended up overseeing maintenance in Oakland. Tarr would stop by
Holloway's desk, encouraging her to come up with a budget for her retirement.
In 2008, Holloway, then making $69,000 a year, decided it was time to leave. She was 62 and figured
she needed her investments to generate $3,000 a month. So, hoping she could have money left for her
children after she died, she turned down the guaranteed $2,500 a month pension and took a $600,000
lump sum payment from her pension and 401(k). She rolled it over into an IRA, invested in variable
annuities and REITs.
'No High Risk'
"If I do this, can you guarantee I won't go broke before I leave this world?" Holloway remembered
asking Tarr. "And she said yes. I told her no high risk. I didn't want to be aggressive."
Tarr said she would have never made that kind of statement.
"I used to call it the G-word," she said. "I could never guarantee anything. That is the first
rule of investing."
Holloway lost about $90,000 because of the reduced value of her REITs, according to Sommers, her
attorney.
"I'm losing sleep over it," Holloway said. "I should have just left it. I wanted to leave money
for my kids."
Lew's Mortgage
Lew, the former administrative assistant with the hole in her kitchen ceiling, has a more immediate
worry: paying her mortgage. An immigrant from Central America, she retired from AT&T in 2003 with
an IRA set up by Tarr. Afterward, they often discussed investments over coffee at Lew's kitchen table,
as her prized green parrot squawked in a cage with a sweeping view of the parched hills surrounding
San Francisco.
Lew started her withdrawals at $2,000 a month, then bumped them to $2,500. Lew said Tarr blessed
the move -- something Tarr disputes, saying she had warned against it.
By 2010, Lew noticed losses in her account. Her REITs have plunged $145,000, according to Sommers.
To make ends meet, she is caring for neighbors' children. She will run out of money in three
or four years, which could force her to sell her house.
"I was old-fashioned like my mom about planning for the future," said Lew, 61. "I never thought
I'd end my years worrying about money."
'Good Advice'
McCollam said that Lew, Beal and Holloway showed modest gain in their account, when the dividends
from REITs are taken into account.
"We feel like we gave as good advice as we could have given," McCollam said.
In 2010, Royal Alliance dismissed
Tarr and McCollam, citing a failure to follow a policy for pre-approval of variable annuities, according
to a Finra filing.
"No client was adversely impacted by any omission by either Mr. McCollam or Ms. Tarr -- all transactions
were ultimately reviewed and determined appropriate," Linda Malamut, a Royal Alliance spokeswoman,
said in a statement. "Further, the terminations were unrelated to any transaction by a client who
filed a complaint with Royal Alliance." Malamut declined to answer more detailed questions.
Tarr Dismissed
Before Tarr was fired, she said she had already left Royal Alliance to join a competitor because
of frustration with the backlog in approving the annuities. Royal Alliance put a black mark on their
record because the company was upset about losing their business, Tarr and McCollam said. Royal Alliance
then contacted clients, sparking the flurry of arbitration complaints, which came after their dismissal,
according to Tarr and McCollam.
As investments soured, 37 customers complained about Tarr to Finra, which logs disputes with brokers
in public records. Fifteen of these complaints are pending, four were settled, and 18 were closed
without action. The agency lists 11 complaints against McCollam. Eighty-eight percent of brokers
do not have any complaints, disciplinary proceedings or other adverse actions listed with Finra.
Brokerage customers typically sign a contract giving up their right to sue in court and requiring
them to submit to Finra arbitration. These proceedings are generally confidential. Sommers said ten
of his clients have filed arbitration claims against Royal Alliance, Tarr and McCollam, and he expects
at least two more will too.
Lawsuit Filed
Last week, seven of Sommers' clients, including Lew, filed suit against Royal Alliance in state
court in Alameda County, California. The complaint alleges breach of fiduciary duty, fraud and failure
to supervise its brokers, leading to more than $1 million in damages. The former employees were placed
"in totally unsuitable investments" that were "designed to maximize the commissions and fees" paid
to the company and the brokers, according to the lawsuit.
In 2012, arbitrators awarded three former AT&T employees a total of $1.4 million in damages
and interest from Royal Alliance, according to a filing with a California court, where the company
unsuccessfully appealed. Darlene Peterson, Karen LaBuda and Sherry Leach-Warth each worked at AT&T
for more than 30 years.
McCollam and Tarr said they did not appear at the arbitration to defend themselves and that losses
suffered by the three customers were modest.
Tarr, 61, is now working as president of AeroComputers
Inc., an Oxnard, California aviation company catering to
law enforcement. She took
over from her brother-in-law, who died in January.
Tarr said she believed in the products she sold at Royal Alliance, but would have changed course
if the brokerage had objected.
"Royal Alliance could have said to me five years ago, we've been looking through your book of
business, we think you're a little heavy on variable annuities, let me suggest alternatives," Tarr
said. "They never said anything. Nothing."
(An earlier version of this story was corrected to show that a payment is one-time, not annual)
IMF Warns Of Housing Crashes - World Bank Says 'Now Is The Time To Prepare For Next Crisis'
Yesterday, the IMF and World Bank issued warnings about the global economy.
The International Monetary Fund (IMF) warned that the world must act to contain the risk of another
devastating housing crash. The World Bank warned that the anticipated rise in interest rates will
hit global growth this year - and presumably house prices too.
"We are not totally out of the woods yet," Kaushik Basu, the World Bank's Senior Vice President
and chief economist and he warned that "now is the time to prepare for the next crisis."
The warning from the IMF came as it published new data showing house prices are well above their
historical average in many countries as covered in the
Financial Times today. The data shows how an acceleration in house prices in many countries from
already high levels has emerged as one of the major threats to global economic stability.
Financial Times
House prices "remain well above the historical averages for a majority of countries" in relation
to incomes and rents, Mr Zhu said in a speech to the Bundesbank last week, which was only released
on Wednesday because it clashed with a European Central Bank announcement. "This is true for instance
for Australia, Belgium, Canada, Norway and Sweden," he said.
Financial Times
In the wake of the global recession central bankers have cut interest rates to record lows, pushing
house prices to a level that the IMF regards as a significant risk to many economies.
There was no mention of the housing bubbles in important financial centres such as New York or
of the
London property bubble. The clear warnings by the two institutions were not covered by much of
the non specialist financial media and the majority of the public will not be aware of them - nor
will at risk house buyers in many countries.
The World Bank's chief economist is offering important advice to investors and savers when he
said that "now is the time to prepare for the next crisis."
One important way to do that is to own gold in the safest way possible: 7 Key Allocated Gold Storage
Must Haves
honestann
The world economy cannot survive WITHOUT a housing crash. Think about it.
A house is the number one expense for most families. Every extra dollar spent on a house is
one less dollar for every other expense. And every other expense is a synonym for... the economy.
The only scumbags who benefit from higher home prices are banksters. Why? Because the more
people cannot afford basic expenses, the more they borrow. Which means more money for banks, more
people become debt serfs, and more generations of debt serfs into the indefinite future.
LOW PRICES ARE GOOD FOR THE ECONOMY.
And low prices on the biggest expenses are especially beneficial.
Agreed! 100% correct! We need a massive housing BUST, and the sooner the better!
I live in the further Greater Toronto Area and it's fuking mad how many new developents are
going up - tearing up farmland to build brand new cookie-cutter "homes" for God-knows who. Blackberry
is defunct and they are still building like MAD in my city. It's fucking lunatic!
Here's Carney after todays "hawkish" BOE statement;
"Mark Carney told households, companies and financial m that the tightening cycle "could
happen sooner than m currently expect". Mr Carney also outlined that measures to cool down the
housing market in the UK will act as a substitute for gradual rate rises.
...AND TO ADD ASININE TO THE ALREADY MORONIC....
Carney added, in an attempt to justify future rate hikes, that "growth has been much
stronger and unemployment has fallen much faster than either we or anyone else expected."
This, after the GBP went full retard at 4pm....bizarre that they would affect their own shit-currency
after their m are closed.
Look for some pissed off "Russell Crowes" AND HIS LAB RATS tomorrow morning in London
moneybots
"We are not totally out of the woods yet," Kaushik Basu, the World Bank's Senior Vice President
and chief economist and he warned that "now is the time to prepare for the next crisis."
We are in the deep dark middle of the forest, not even close to getting out of the woods. Adding
30 trillion dollars to global debt digs a deeper hole in the middle of the dark forest.
There are millions of Americans who hoped 2014 would be the year their financial lives would improve.
After the struggle of a stagnant country since 2009, economic forecasts predicted that a real recovery
was coming - that this this would be the year for a well-paying new job, a house, the year those
Americans would pay off student loans or reduce their credit-card debt.
But nothing can really improve for us individually until everything improves for all of us economically.
And, increasingly, that utopia looks distant. According to the numbers – and to an increasingly frustrated
group of experts – the first few months of 2014 are turning out to be a bust, and there's no reason
to believe the rest of the year will be any better, for the haves or the have-nots.
First, there are the basics. This year has started with bad news for consumers: a
weaker housing market, anemic employment
with 10m people out of work and millions of others not even looking any more, plus
economic growth that's lower than it's been in three years.
Guy LeBas, a managing director at Janney Capital M who called the GDP figures "an absolute tape
bomb," pointed out: "2014, what was supposed to be the 'break-out' year according to many optimistic
forecasts, would be starting off with the weakest performance of any quarter since 2011."
There are other, wonkier measures that fill out the picture: productivity, a measure of the robustness
of the American workforce, dropped to 3.2% in April - the sharpest tumble since 2008. Personal spending
is falling, into negative territory, because healthcare and high gas bills were the main things Americans
were buying this winter, and they aren't now.
To millions of Americans, this downward trend is no surprise, even if the numbers are new. The
relentless cheerleading about the improving economy never really made sense for a large swath
of Americans: those who were forced to take lower-paying jobs, had their houses foreclosed by banks,
or were drummed out of the workforce into long-term unemployment.
What's different this time is that the misery is starting to spread higher up.
The paradox of the "recovery" for the past five years has been that consumers suffered while corporations
and Wall Street raked in profits unseen in their history. At the end of 2013, corporate profits
hit an all-time high of $1.9tn. Those profits were largely achieved not by growing, but by cutting
- cutting jobs, investment in research, and new projects. Banks benefitted, too, with their
profits of the six largest US banks reaching $76bn last year - not so far from the record of
$82bn in 2006. That was also based on cutting - mainly, on cutting out consumers from mortgages and
other lending.
The corporate balloon is popping: trade deficits jumped to a two-year high, and once-bulletproof
companies and banks are suffering as corporate profit margins fell 14% in the first three months
of the year – at the expense of American workers, of course, with
Goldman Sachs dispassionately declaring that "wage growth has shown little evidence of a pick-up".
The negative economic data recently has been waved off by any number of economists, who dismissed
the GDP drop into negative territory, for instance, as an anomaly. It's the same way many economists
have waved off America's persistent unemployment crisis. The promise was that the economy was storing
up all its energy, that consumers were temporarily holding back until they would be released - by
weather, by credit, by sheer impulse - to go on economy-boosting spending sprees throughout the country.
For anyone paying attention, hearing these chipper decisions to ignore the data was like falling
through the looking glass.
Lindsey Piegza, chief economist of Sterne Agee, was paying attention. Her prediction for GDP growth
in the second half of the year is about 1.7% – less than half of what many others are predicting.
"The momentum that I found most economists pointing to, I wasn't seeing that," she told me. "A
lot of economists were expecting this rebound in demand in the consumer sector, but it's not as if
consumers were at home twiddling their thumbs waiting to spend money."
In her discussions with businesses, too, she gets the impression that "they're trying to keep
their heads above water. … I'm not seeing where the momentum is coming from."
That will trickle down to workers and consumers. Guy Lebas, a managing director with Janney Capital
M , says as long as companies are "finding it more productive to buy back shares than build new factories,
productivity will remain at best stagnant."
No wonder consumers – those engines of economic growth – don't have much money. Income growth
is at its lowest point since 2007. When people are shopping, they're using borrowed money - "some
of it credit, 401ks, investment portfolios", Piegza says.
A good example: the boom in auto sales. GM, Ford and Chrysler have been selling cars at a rapid
clip,
despite the recall scandals. The reason? Auto loans are cheap and readily available, and
the lenders aren't too picky. The average auto loan is now about $28,000 a car, and one-quarter of
new loans are being paid out over as much as seven to nine years. Lenders are also giving auto loans
to people with bad credit - subprime consumers. Auto sales are booming purely on the back of the
American willingness to go into unimaginable levels of debt with very little collateral.
For things that aren't cars - houses, and clothes, and gadgets - Piegza says, "we have nowhere
to go but waning consumption levels."
Translation: expect people to squeeze their wallets shut, and hard.
To find out why, look to employment and housing, those two stalwarts of financial security for
most people.
The job market is not yet secure. The real unemployment rate - not the one in headlines (6.3%
in May, the US Department of Labor announced Friday morning), but the one that counts a fuller number
of the unemployed as well - is around 12%. Companies are hiring, but it's "temporary flexible labor,"
and even though the economy is adding jobs, many of them are low-quality and low-paying.
Housing is also becoming weak, after false claims last year that a recovery was on the way.
The problem is simple: housing is too expensive for most people to afford, especially because
mortgages are scarce. To paraphrase
a New York political candidate, the mortgage is too damn high. Or, as Ian Shepherdson of Pantheon
Macroeconomics puts it:
The end of the severe winter weather will not bring with it a sustained revival in the housing
market. The real problem is last year's massive deterioration in affordability, the worst for
32 years. Housing is not going to drive the economy forward for the foreseeable future, and could
easily be a net drag for some time yet.
This is not a permanent situation. The economy changes - monthly, weekly, and daily. It is volatile.
It can turn around, but it would require something to create a giant shot of economic growth - a
massive investment in infrastructure, for instance, or a sudden demand for US products. If US consumers
aren't buying, maybe Chinese consumers will get excited about spending again.
There's no evidence that anything like that is in the works - and with an election coming in November,
vast swaths of Washington lawmakers are happier to believe magical thinking that says the recovery
is already here. Talk won't fix the problem.
For the rest of us, there's not much to do but be more careful with our money, work a little harder
to keep our jobs, and not make any plans for big spending. It won't improve the economy. But it will
mean we won't be surprised or particularly vulnerable if the bad times keep going just a little bit
longer.
Celtiberico, 06 June 2014 1:50pm
The paradox of the "recovery" for the past five years has been that consumers suffered
while corporations and Wall Street raked in profits unseen in their history. At the end of
2013, corporate profits hit an all-time high of $1.9tn. Those profits were largely achieved
not by growing, but by cutting - cutting jobs, investment in research, and new projects.
Future historians will have a belly-laugh about those figures...
mcgill16 -> Celtiberico, 06 June 2014 2:02pm
It's incredible.
We hear daily on all the media, the elite speaking with great gravitas about economic reality,
the way to success, the free market etc etc, and actually they are just a bunch of self interested,
pretty thick wankers, who are completely winging it while they endeavour to fill their pockets,
without a care for their fellow human beings.
Consumers are not the engines of economic growth. That's the hangover of flawed Keynesianism
speaking.
Producers are the engine of economic growth. Or more particularly, it is the entrepreneurs
who find ways of configuring the capital structure more efficiently and better matched to what
people want to consume, who drive innovation and thus growth.
Zakida succulentpork, 06 June 2014 1:56pm
Indeed, consumers are the result of economic growth.
succulentpork succulentpork, 06 June 2014 1:56pm
I Want to be a Consumer
"And what do you mean to be?"
The kind old Bishop said
As he took the boy on his ample knee
And patted his curly head.
"We should all of us choose a calling
To help Society's plan;
Then what to you mean to be, my boy,
When you grow to be a man?"
"I want to be a Consumer,"
The bright-haired lad replied
As he gazed into the Bishop's face
In innocence open-eyed.
"I've never had aims of a selfish sort,
For that, as I know, is wrong.
I want to be a Consumer, Sir,
And help the world along."
"I want to be a Consumer
And work both night and day,
For that is the thing that's needed most,
I've heard Economists say,
I won't just be a Producer,
Like Bobby and James and John;
I want to be a Consumer, Sir,
And help the nation on."
"But what do you want to be?"
The Bishop said again,
"For we all of us have to work," said he,
"As must, I think, be plain.
Are you thinking of studying medicine
Or taking a Bar exam?"
"Why, no!" the bright-haired lad replied
As he helped himself to jam.
"I want to be a Consumer
And live in a useful way;
For that is the thing that is needed most,
I've heard Economists say.
There are too many people working
And too many things are made.
I want to be a Consumer, Sir,
And help to further trade."
"I want to be a Consumer
And do my duty well;
For that is the thing that is needed most,
I've heard Economists tell.
I've made up my mind," the lad was heard,
As he lit a cigar, to say;
"I want to be a Consumer, Sir,
And I want to begin today."
Boghaunter, 06 June 2014 2:16pm
I think of conversations about Piketty's book (confession: I haven't read it yet) and that
"profits" are being made by manipulating money rather than producing anything. Producers depend
on consumers to buy their product and so production is a better gauge of reality than simply "profits".
The current high stock market levels and profit claims are tied to the manipulation of money -
not actual economic growth. Thanks, Heidi, for this column.
psygone, 06 June 2014 2:23pm
[.. the truth about the economy ..]
Obama's economic policies have failed the very people who voted for him at a rate of 90+ percent:
Minorities, university students and the millions of 30 somethings who live in the basement
of their parents.
-- of course, after six years in office, our incompetent community organizer still has no clue
on how a job is created, and has yet to take full ownership of the presidency because he likes
to blame Congress and the previous administration for everything.
Hopie! Changie!
AnEmptyHourglass Heidi N. Moore, 07 June 2014 4:01pm
It's a good article, and a necessary article given all the government propaganda trying to
trick people into thinking things will be/are improving.
Underneath all this lies a fundamental truth - the supply of energy is not now cheap enough
for any recovery at all to the possible. This can be expected to worsen relatively rapidly year
on year for the foreseeable future, making the question more one of when and how bad the next
lurch down will be, rather than any speculation of recovery.
Anyone thinking we can power our way out with renewable energy might want to consider the EROI
of the various options.
TerribleLyricist -> AnEmptyHourglass, 07 June 2014 8:02pm
a fundamental truth - the supply of energy is not now cheap enough for any recovery at
all to the possible. This can be expected to worsen relatively rapidly year on year for the foreseeable
future
Spot on. The kinds of technological shift we need take a long time to come about - like the
proverbial supertanker. Cheap energy is in rapid decline, as are some minerals, such as phosphorus.
To be clear, there is plenty of energy (and phosphorus, and all the rest), but they are in forms
we do not have cheap access to right now. The incentive to develop the new technologies required
are not yet strong enough, or, more often, are stifled by vested interests.
BenTrovata, 06 June 2014 3:35pm
...if you'll allow me to lend a hand... getting the $1 billion plan to support and train the
armed forces of Nato states on Russian borders [...dailymail.co.uk/news...] ...plus the nearly
$3 billion in grants annually to Israel [ ...wikipedia.com...], is nearly $4bn.back into the hands
of U.S. consumers...See,that wasn't so hard to do...( But,of course,you have to * want to *...)
Felipe1st BenTrovata , 06 June 2014 4:29pm
Don't forget the $5bn coup in the Ukraine plus all the other little escapades around the world.
Adds up to a tidy sum not being spent on the people that gave it in the first place.
Daveinireland BenTrovata, 07 June 2014 10:37am
The US government will spend $3.7 trillion this year, those sums are less that the money it
looses down between the couch cushions.
The Continuing Lie of Falling Unemployment - The government announced this week that unemployment
has dropped to a new post-recession low, allowing them to spout off yet again about the alleged
(but for most people, non-existent) recovery. And so I update my usual post with the latest figures
to show why this is just an enormous lie.
The official unemployment rate keeps dropping – 6.3% as of May 2014 – which gives people the
illusion of an economy undergoing a jobs recovery:
From the US Bureau of Labor Statistics:
Nov 2007 - 4.7% (the month before the recession began)
Feb 2008 - 4.9%
Feb 2009 - 8.3%
Oct 2009 - 10.0% (the supposed bottom of the recession)
Feb 2010 - 9.8%
Feb 2011 - 9.0%
Feb 2012 - 8.3%
Feb 2013 - 7.7%
Feb 2014 - 6.7%
Jun 2014 - 6.3%
If you look only at the official unemployment number for that period, what you see is 10.0%
for Oct 2009 and 6.3% for May 2014, which would lead people to think that we've supposedly seen
a 37% drop in the unemployment rate over the last four-plus years.
But, as I frequently point out to people, you have to look beyond the unemployment number alone,
which by itself is more than a little misleading. For one thing, any increase in the number of
people considered to be "no longer looking for work" results in a decrease in the unemployment
rate because of the way in which it's calculated. Thus the unemployment rate can actually drop
even when the number of employed people is declining. And then there's the lesser-followed category
of underemployed people, i.e. people who need full-time jobs but can only find part-time work
but who are nonetheless counted as being employed.
The reality job-wise is that real employment hasn't budged. Let's look at the actual employed
numbers as a percentage of the population, a much more accurate measure of who's actually working:
From the US Bureau of Labor Statistics:
Nov 2007 - 62.9% (the month before the recession began)
Feb 2008 - 62.8%
Feb 2009 - 60.3%
Oct 2009 - 58.5% (the supposed bottom of the recession)
Feb 2010 - 58.5%
Feb 2011 - 58.4%
Feb 2012 - 58.6%
Feb 2013 - 58.6%
Feb 2014 - 58.8%
Jun 2014 - 58.9%
This is what's really going on. In terms of real employment, the economy has been essentially
dead in the water for the last four-plus years. After dropping for almost two years, it leveled
off around Oct 2009 but has been stuck there ever since, with a tiny improvement only occurring
in the last six months or so.
What this tells us is that:
(1) The jobs growth is more than a little anemic, just barely enough to keep up with the overall
population increase so that the ratio of employed to total population remains static.
(2) The number of people deemed "no longer looking for work" is growing and growing steadily.
In point of fact, the increase in this number is the _only_ reason that the official unemployment
rate appears to be dropping as these people are no longer considered part of the labor pool and
hence are not counted as unemployed. If they were included, the real unemployment rate would be
around 10%, which would put us back where we were at the supposed bottom of the recession. It
would also more closely fit what is reflected in the actual employment numbers.
(3) At this rate, we're not talking about years before the economy recovers in a way that will
mean anything to most people - we're talking _decades_. Consider that in the last 4 years and
7 months (i.e. the period since the alleged bottom of the recession), the employment rate has
only managed to rise by 0.4 points. At that rate, it will take some 45.8 years before we manage
to get back to where we were in Nov 2007, just before the recession began.
Making the picture worse is the fact that the median wage for the US - which actually peaked
back in 1999 - has continued to decline during that period, to the point that we're now where
we were back in 1995. So what you have in the end is a lot of unemployed people who still cannot
get work and even more working people being hit with stagnant and declining wages.
This makes the government's assertion that we've gained back most of the jobs lost in the recession
even more egregiously deceptive. Most of the jobs that have been created in the last four years
pay less than the ones that were lost. Which means that most people in truth have less than what
they had before. Consider in plainer terms if you'd lost $10K back in 2008, had managed to recover
$7K since then, but the government claims that all money that had been lost has been fully recovered
by simply saying that part of a dollar amounts to a whole dollar. It's the same thing as saying
that a job that pays $40K/year amounts to a job that paid $60K/year.
This is the reality that most people in the US are having to deal with.
Recovery, my ass!
WithoutMalice , 07 June 2014 3:28pm
You're right Heidi, the economy sucks, and it's been sucking for 14 years now. Bush's first term
was the first full presidential term since Hoover that added no new jobs to the economy - actually
we lost a quarter million. We needed to add six million during that time (Clinton added about
11.5 million in each of his terms) just to keep up with population growth; so that left us with
a six million jobs shortfall. In Bush's second term, when all was said and done in Jan. of 09,
we had added a grand total of about a million jobs. That's a shortfall of 5 million jobs. And
since we've only managed to return to the job numbers we had in 08 that means we have shortfall
of another 6 million jobs, for a total shortfall of 17 million jobs. Everyone bitches about the
economy under Carter, but the truth is the man created 10.25 million jobs in his four years and
he never had even one year where we lost jobs, while Reagan created about 1/3 of that in his first
four years and only a quarter million more than Carter in his second term. I really don't know
what to say when the greatest capitalist nation in the history of the world has not been able
to add one new net job in over 14 years; about all you can say is yes, the economy sucks.
Harvestclubfounder , 07 June 2014 4:45pm
The main problem we have to creating solutions is that we are not measuring the right data. Forget
"job" numbers. Focus on payroll dollars. These figures factor in market forces and combined with
local and regional costs of living, provide a good idea of the amount of discretionary dollars
(or any currency) available to drive the economy. If one follows this methodology, it becomes
clear what is happening. The US economy is approximately 70% driven by consumer spending, hence
less disposable income begats a weaker economic outcome.
And then there is this absolute gem from the NYT article:
"The Fed is making an important contribution to middle class and lower income folks' welfare,"
Mr. Bernanke said.
Right. Artificially suppressing interest to ridiculously low levels has the following effects:
1. Makes it impossible for millions of retired people to live off their life savings, forcing
them to consume their principal and/or speculate in the stock market.
2. Makes saving money a fools game, since interest rates are lower than the (government caused)
rate of inflation (which is also
much higher
than reported), turning everyone with extra money into speculators.
3. Incentivizes people to incur debt, and thus interest payments.
So it is that "monetary policy" creates a nation of insolvent debtors, most of whom are a paycheck
away from penury and the dole.
Now, who actually benefits from such policies?
1. Government, which can borrow much more money that would otherwise be possible, thereby enriching
themselves and their cronies at the expense of savers, and buying support from the gullible electorate
with one boondoggle or another.
2. Banks, which can obtain newly created money for next to nothing and then lend it out via
loans and credit facilities for much higher rates, thus making large profits for doing essentially
nothing.
We the people are being fleeced six ways till Sunday so the Feds can make twice the average
salary of the rest of us and the bankers can ride an endless debt-service gravy train.
And that's assuming America's shale reserves are as massive and bountiful as they would have you
believe. Are they? Not according to the Energy Policy Forum, which reports – and I quote – "The
recent natural gas market glut was largely effected through overproduction of natural gas in order
to meet financial analyst's production targets and to provide cash flow to support operators' imprudent
leverage positions…Wall Street promoted the shale gas drilling frenzy, which resulted in prices lower
than the cost of production and thereby profited [enormously] from mergers & acquisitions and other
transactional fees…U.S. shale gas and shale oil reserves have been overestimated by a minimum of
100% and by as much as 400-500% by operators according to actual well production data filed in various
states…Shale oil wells are following the same steep decline rates and poor recovery efficiency observed
in shale gas wells."
A very low figure: "25 percent believe the recent financial crisis was caused by the small cabal
of Wall Street bankers". And this is not a conspiracy theory, this is a fact. Is this brainwashing or
what ?
According to Vedantam, the research suggests that not everyone harbors the same doubts, either.
"So 19 percent of Americans believe the U.S. government was behind the 9/11 attacks; 25 percent
believe the recent financial crisis was caused by the small cabal of Wall Street bankers;
They had to restate the PMI number a couple of times this morning before they got it right.
I had not realized that they seasonally adjust these surveys. Do they seasonally adjust opinion
polls too?
These m are already acting like the dog days of summer, with an upward bias on sleepy volume.
There is a yawning divergence between Bonds and Stocks. I suspect this might be due to Fed interference
on the Bond side, which we know about, as well as some free range tinkering with values on the Stock
side.
Either way, this is going to end badly. I have an open mind to a summer slump, but unless something
happens to provoke more selling at higher volumes we may just muddle along until something more traditional
in the autumn, and event inspired. This is a midterm election coming up after all.
If you look at the metals calendar below, tomorrow is first notice day for June.
It is hard to
tell, but I think the worst of the sell off for June option expiration is about done. But let's see
what happens.
I must have heard ten times on the financial news, as they discussed the awful GDP revision, that
there is no inflation because gold is down. Ron Insana said that since gold is down $35 the last
couple of days, that shows that there is no inflation.
Well, this is all perception management. They took most of the damage in the GDP number now. Why
didn't they take it in the upfront number? Because it was too close to the fact. In this second revision
they took it down dramatically to the negative. But now it is further a long, and the story about
the odd winter weather effect has had time to gain traction.
The net result is that the next number is now important, and we are not looking at what just happened
because it is so two months ago. And the comparison is set rather low for the next quarterly number,
which I predict will come in much higher. All hail The Recovery™, fait accompli, just in time
to influence the midterm elections.
I think I have made my own analysis of the theory fairly explicit. It has been tried many times.
The key phrase is 'a currency issuer can never run out of money.' This is true. They can print all
that they want. The critical variable is the 'value.' And as for value, 'the Jobs Guarantee Wage
determines the value of the dollar.' And the Jobs Guarantee Wage is a function of the government.
It is a self-referential fiat standard, in the manner of the Alice in Dollarland in which
we are beginning to find ourselves today. It will stand only so far as the force of law can reach.
Generally that ends at the borders, but one can always hope for a one world government that is able
to dictate the value of everything to everyone at their own discretion.
It is not that we need better financial engineers, or more virtuous custodians of society, a kind
of a priesthood of economic virtue, worthy of the burden of being benevolent tyrants. There is NO
class that is capable of wielding such raw power, without falling into a destructive cycle of self-destruction.
As an elite impoverishes their homeland, they find it necessary to engage in various types of
colonialism, to create new m for their excess supply, since paying living wages to their people creates
a blur in class distinctions.
How can I know I am sufficiently rich, unless many are exceptionally poor? This impulse to economic
expansion and marriage of force and economics was the story of the British Empire. And it explains
much of the otherwise odd behavior of this New American Century, and its many wars and adventures.
They make a desert and they call it peace.
I hate to pick on MMT like this, because so many otherwise nice, sensible people seem to be drawn
to it. But I can see such a revolutionary move is already in the cards from other corners. Nothing
attracts the unworthy like the power to dictate and distribute wealth. And the more arbitrary it
is, the greater the allure. As Abraham Lincoln said, it is the crux of human society.
"They are the two principles that have stood face to face from the beginning of time, and will
ever continue to struggle. The one is the common right of humanity and the other the divine right
of kings...No matter in what shape it comes, whether from the mouth of a king who seeks to bestride
the people of his own nation and live by the fruit of their labor, or from one race of men as
an apology for enslaving another race, it is the same tyrannical principle."
Abraham Lincoln, 1858
And like most utopian exercises, some of the well-intentioned may promote it, but the worst end up
controlling it for their own ends and personal enrichment. We have seen this tendency so far, at
the dawning of the sixth year of The Recovery™ from the Great Recession, which formally ended in
June, 2009. And isn't life grand.
To read the headlines, it seems that the USA has emerged out of the blue to the point of becoming
the world's oil and gas production giant. All thanks to the Shale Revolution. Recently President
Obama made various noises that the US could solve the Ukraine gas dependency on Russian gas because
of the spectacular growth of extracting natural gas, and more recently, oil, from shale rock formations
across the US. There's only one thing wrong with this picture-"It ain't gonna happen…"
The surface numbers are indeed impressive to a layman or politician. According to US Government
Energy Information Administration data, between 2005 and 2010 the contribution from shale gas to
total US marketed gas production rose from less than 2% to more than 20%. And 2011 set an all-time
record for US production as the result of shale gas growth.
However the shale gas comes from a small number of areas with significant and viable shale rock
formations that have trapped gas and oil in the interstices of the sedimentary shale rocks. The main
shale gas areas are the Barnett shale in Texas'
Fort Worth basin; the Fayetteville and Woodford shales of the Arkoma basin in Arkansas and Oklahoma;
the Haynesville shale on the Texas Louisiana boarder; the Marcellus shale in the Appalachian basin,
and the most recently exploited, the Eagle Ford shale in southwest
Two metrics widely used in describing shale well performance are the initial production (IP) rate
and the production decline rate which together determine the ultimate recovery (UR) from a well,
an essential number in determining economic viability. A group at MIT university in Massachusetts
carried out an analysis of production data from the major US shale regions. What they found is sobering.
While initial production from most shale gas plays was unusually high, an essential component of
the Wall Street shale gas bubble hype, the same gas regions declined dramatically within a year.
They found "in general, shale well output tends to drop by 60% or more from the Initial Production
rate level over the first 12 months. The second is that the available longer-term production data
suggests that levels of production decline in later years are moderate, often less than 20% per year."
Translated, that means on average after only four years, you have only 20% of your initial gas
volume available from a given horizontal drilling investment with fracking. After seven years, only
10%. The real volume shale gas boom appeared in 2009. That means in the fields where significant
drilling was present by 2009 are already dramatically depleted by 80% and soon by 90%. The only way
oil or gas drillers have managed to maintain production volume has been to drill ever more wells,
spending ever more money, taking on ever more debt in hopes of a sharp rise in the depressed US domestic
gas price. As a whole shale energy companies spend more than they are making in net profit, creating
a bubble of "junk" bond debt to keep the Ponzi game going. That bubble will pop the second the Fed
hints interest rates will rise, or even sooner.
The industry tries hard to pump the prospects of the shale revolution. One of the most outspoken
recently was the CEO of Conoco/Philips, Ryan Lance. Taking a baseball analogy, he recently told an
energy conference in Houston that the shale gas "revolution" in the country is only just beginning
and there should be several decades left of successful energy production: "We're in the first inning
of a nine-inning game on the shale revolution in the
United States." He did not make clear what the scientific connection between baseball and shale
gas was.
The reality of the shale gas boom is increasingly being shown to be quite different. According
to Arthur Berman, a petroleum geologist of 34 years' experience who has studied production and other
aspects of the shale gas and oil boom, "forecasts show production in shale plays from North Dakota's
Bakken to Texas's Eagle Ford will peak around 2020. Those investing with the expectation that the
boom will last for decades are "way
out of line."
To be concrete, the major shale formations in the US, and there are not that many geologically-speaking,
will begin an absolute production decline in less than six or seven years. Unlike conventional gas
or oil fields, shale is an unconventional and difficult way to extract energy by the highly controversial
and toxic practice of "fracking" or hydraulic fracturing of the shale formations. As the shale runs
horizontally, perfection of new horizontal drilling techniques in the 1990's opened commercial prospects
for shale gas for the first time.
Fracking the Bakken Formation in North Dakota
The hydraulic fracture is formed by pumping a fracturing fluid-typically highly toxic and exempt,
thanks to then-Vice President Cheney's Congressional influence, from EPA Clean Water Act regulations-into
to the wellbore at a rate sufficient to increase pressure down-hole at the target zone. The rock
cracks and the fracture fluid continues further into the rock, extending the crack still further,
and so on. Often up to 70% of the toxic fracking fluids leak and in many cases in Pennsylvania and
elsewhere seep into the ground water.
Even the US Government's EIA projects that US oil output will peak at 9.61 million barrels a day
in 2019. They see tight-oil or shale oil topping at 4.8 million barrels in 2021. That's only seven
years out. And if the US Government is trying to fast-track approval of LNG gas export terminals
on coastal ports to allow US gas companies to export their gas, completion of such complex terminals
including environmental impact approvals typically takes seven years. Hmmmm.
Wall Street easy money
No one expects the President of the US to have the time or the scientific background to delve
into the geophysical complexities of shale energy. He naturally relies on competent advisers. What
if the advisers, instead of being competent, like in so many government agencies today, are in the
sway (and sometimes perhaps pay) of the shale energy companies and their Wall Street investment bankers
who have hundreds of billions of dollars riding on promoting the shale hype?
The current US Shale boom is being sustained on steroids, otherwise known as the Fed's never-ending
Quantitative Easing zero-interest-rate policy, a stance that shows no sign of reverting to normal
interest rate levels as the economy continues to be depressed since the collapse of the 2007 real
estate mortgage securitization bubble. In effect, shale drillers are able to keep in business only
because Wall Street and other investors continue to throw money at them like it was falling from
trees. Tim Gramatovich, chief investment manager for Peritus Asset Management LLC, an $800 million
fund, notes, "There's a lot of Kool-Aid that's being drunk now by investors. People lose their discipline.
They stop doing the math. They stop doing the accounting. They're just dreaming the dream, and that's
what's happening with the shale
boom."
Given the endless zero interest rate regime of the Fed, investment funds are desperate to find
investments that yield higher interest. They are so desperate they are pouring money into shale gas
and shale or tight oil companies like never before. The companies are operating at losses, loaded
with debt and the credit rating agencies rate their debt as "junk", i.e. in a market downturn, likely
to default. One such company, Rice Energy, sold its bonds in April with a rating of CCC+ by Standard
& Poor's, seven steps below investment grade. That is below the minimum risk/quality level that major
investors, such as pension funds and insurance companies, are allowed to buy. S&P says debt rated
in the CCC range is "currently vulnerable to nonpayment." Despite that, Rice Energy was able to borrow
at an astonishingly low 6.25 percent.
"This is a melting ice cube business," said Mike Kelly, at Global Hunter Securities in Houston.
"If you're not growing production, you're dying." Of the 97 energy exploration and production companies
rated by S&P, 75 are "junk" or below investment grade. The shale "revolution" is but a Ponzi Scheme
disguised as an energy revolution.
F. William Engdahl is strategic risk consultant and lecturer, he holds a degree in politics
from Princeton University and is a best-selling author on oil and geopolitics , exclusively for the
online magazine "New Eastern Outlook"
The US economy shifted into reverse in the first three months of 2014 shrinking by an annualised
rate of 1%, official estimates have shown.
It is the worst economic performance since the first quarter of 2011.
It is also a big fall on the 2.6% rise in economic output in the final quarter of last year.
The US Commerce Department's first reading
of gross domestic product (GDP) showed the economy grew at an annualised rate of just 0.1%.
The fall in output was blamed on an unusually cold and disruptive winter - one of the coldest
in the US for 20 years - and a plunge in business investment.
Nobody thinks the US economy is slipping back into recession. Still it's a nasty reminder that
instead of robust growth America's recovery is just ticking along.
Given the slow return to health, the recovery in American corporate profits since the financial
crisis has been all the more remarkable. But has it finally peaked?
This release shows corporate profits fell 9.8% (non annualized) in the first three months
of the year. There are plenty of reasons why they were squeezed, including the weather but it
still bears watching.
... ... ...
The fall was also twice as big as economists expected. Most Wall Street analysts had
forecast the economy to contract by around 0.5%.
...American preeminence is triggering a balancing coalition.
The de geopolitical constellation--one in which the U.S. figures as the target of joint Russian
and Chinese [responding to] Washington[s ill gotten belief it] could do whatever it wanted wherever
it chose. No longer. What realists predicted would occur is indeed occurring. American preeminence
is triggering a balancing coalition."
Obama was simply wrong, when he asserted that Russia is merely a regional power and that the U.S.
is truly the [only] world power. The two are out maneuvering this country, despite our leaders denials
of that fact.
Arti Fact • 3 days ago
It is good that this deal masquerades all other deals signed. Let you think we are gas station,
let you:) But as for the text, IMHO it states obvious things, what was the purpose of writing it?
Btw try to read newspapers and blogs and forums in China: the words used towards Russia is "neighbour",
"friend", "ally". Words used towards US are in best case: "trade partner". Just to give some material
for thinking.
With the stroke of a pen, Russia significantly shifted its economic relations with its neighbors,
creating a major new export market to the east and reducing its reliance on European customers at
a time when its relations with the West are at their lowest point since the Cold War.
... ... ...
U.S. Treasury Secretary Jack Lew appealed to China in a visit last week to avoid actions that
might limit the impact of recent Western sanctions against Russia. But a U.S. official, who was not
authorized to speak by name, said the United States would distinguish between deals that have long
been in the works - such as this one - and new agreements that seek to fill space left by U.S. and
European Union sanctions.
... ... ...
Russian officials on Wednesday also hinted at a possible "prepayment" totaling $25 billion.
Mr. Putin told reporters after the signing ceremony that the price of the gas for China was based
on the market price of oil, just as it was for European countries.
"The gas price formula as in our other contracts is pegged to the market price of oil and oil
products," Itar-Tass quoted Mr. Putin as saying.
The deal is the largest ever for the Russian natural gas industry, he said.
Russia will invest $55 billion in infrastructure for transporting the gas to China, said Alexei
B. Miller, the chief executive officer of Gazprom.
AK, US
This gas deal shows that the US attempts to isolate Russia economically are destined to fail.
These attempts are getting little traction even in Europe. Nobody wants to take economic pain
to help people in the State Department advance their agenda. And countries like China and India
will absolutely refuse to treat Russia like a pariah state. These countries have their own economic
and geopolitical interests. Working with Russia helps them further their interests. The relative
economic power of these countries will continue to grow.
The US-centered world order established after the fall of the Soviet Union was never going
to last. Instead of trying to maintain it, US policymakers should think about how to act in a
multipolar world. Considering other countries' interests – now, that would be a change!
Nick Wright, Halifax, Nova Scotia 4 hours ago
The geostrategic and environmental implications of this deal are huge.
The West, in a hamfisted continuation of the Cold War, has been trying to isolate and contain
a resurgent Russia. However, it found itself strategically and tactically outplayed by Vladimir
Putin as it blundered around in his neighbourhood--Ukraine, Syria and Iran--and its Cold War bluster
and saber-rattling over military interference in sovereign nations just look hypocritical to educated
people worldwide.
On the environmental front, China looks good for succeeding in lowering its reliance on energy
from coal, while Europe--especially Germany--is building more coal-fired generating capacity,
and Canada is offending the world with its determination to develop its massive, polluting oil
sands. Western claims of superiority on the environmental front sound hollow by comparison.
Socially--from Ukraine, to Europe, to Canada, to the U.S.A.--the world is watching the rise
of aggressive, intolerant, divisive parties of the extreme right in the West, raising the legitimate
question of which of the world's regions are improving and which are in decline. Throw in Western
levels of indebtedness, and the question becomes even more pointed.
And finally, Western chauvinism is pushing Asian countries into closer economic alliances--and
who knows, perhaps eventually military ones as well. But it didn't have to turn out this way;
we can change direction before things get worse; it's just a matter of political will.
Stephen Miller, Oakland
This deal is just the tip of the iceberg. Russia has astonishingly huge reserves of gas, and
all those oil and coal burning plants are going to need to switch over in the coming years to
reduce pollution and greenhouse gas emissions. Russia will become the undisputed energy superpower
and likely overtake the US eventually.
As the easy oil disappears and energy demands continue to rise globally, prices will rise very
dramatically. More gas and oil from fracking and tar sands and shale will slow the rise, but eventually
the prices will go up.
The US and Europe can whine about Russian gas all they want, but in the end, everybody pays.
Quandry, is a trusted commenter LI,NY
Although this is very important to the US's and the world's survival from an environmental
perspective, this is another faux pas upon Obama's and the EU's statecraft. The big winners in
all of this are Russia who now can thumb its nose at the US, and even more China which who will
pay less than the EU for its gas. Unfortunately, China has continued to prevail in its economic
policy over the US from Iraq to Africa, while the US has paid in lives and unrequited financial
aid. Our statecraft can use some changes and improvement.
Judyw, cumberland,
Congratulaton to our State Department who have made this deal possible. Oh yes our Congress
helped out too. By our reckless of expansion of NATO we have driven the Russian into the army
of China. I hope we are proud of ourselves for doing that.
I have never seen the US government make such a mess of Foreign Policy as this government has
made. And I don;t mean to leave out the government from Bill Clinton forward - they have contributed
to this mess with the the whole Kosovo creation.
It is important that we now recognize that we are driving countries away from the US who are
sick of our efforts of trying to "run the world", be "the indispenable power" and all that malarky.
Our pivot to Asia seems more like it was Russia's pivot to Asia while we sat and watched. Perhaps
it would be better if we did more watching and less acting. It seems that whenever we interfere,
we create more hatred of the US and increase our separation from the world.
I hope this lesson on "the pivot to Asia" has taught us a lesson. We thought we could punish
and sanctions Russia to behave as we dictated. We just found out we can't bully Russia. In the
world today Sanctions have little meaning as they are easily broken by countries who have no interest
in "toeing the US line".
We had wanted Russia as friend, but our actions have driven into the arms of China. Congratulations
USA -- you just had another foreign policy failure.
Efren, Texas 6 hours ago
All of this is the result of not understanding that the world is headed to a multipolar world,
and that the US must learn to deal with it (see conference of Bill Clinton in Davos). Why does
US insist on destabilization of governments claiming democracy interests? Don't you remember all
dictatorial regimes supported by the US in Latin America? Now, US is so engaged in bringing back
the cold war. It's not only Russia-China being together now, most of main Latin American countries
have leftist governments. Don't be surprised if they start achieving important deals with Russia
and China.
Let's take it easy. No empire last forever. It would be better for US to respect others and
try to build a leadership based on ethical and real reasons, not on bullying everybody else who
thinks differently.
Smartlegov Oleg, Moscow 7 hours ago
This is an epic deal and just on time. Putin compromised the price, but showed how quickly
he can respond in a big wave to US/EU symbolic sanctions.
Cato, California 5 hours ago
Another positive step by Russia and China in brokering a deal that doesn't involve the West.
Please note that the almighty USD wasn't invited to this party. The deal, coupled with massive
historic accumulations of gold by both countries, spells doom for the world's reserve currency.
This will be over the next 10 years the nightmare of all nightmares for Americans when we lose
world currency status. A word to America: Hope is not a strategy.
Edwin, NY 4 hours ago
China is learning how to do its things. I'm actually glad for them and for Russia also. I'm
a citizen of the United States but I'm tired of foreign policies. Its time to realize that we
are not the only kid in the block. Let them join in and play the game of capitalism. Focus our
money and our strength our Nation in serving our people, in educating them, and helping them become
more competitive in this global marketplace instead of throwing money and effort to keep others
down while we stand at the top. Those days are over. Lets work together, accept our differences,
and be the best we can be. Invest in healthcare, social programs, education, research, technology
and we will remain at the top no matter what without the need to isolate or bomb everyone that
stands on our way
Babeouf, Ireland 7 hours ago
The US desperately needs joined up thinking in it foreign policy. The US 'Pivot to Asia' to
contain China may make sense. The US funding of the coup in Ukraine may make sense. Doing both
at the same time doesn't make sense. It is US foreign policy which has provided the incentive
for Russia and China to draw closer together. Of course for imperial powers foreign policy appears
just another part of domestic policy.
With the result that, due to political competition in the US, a rational US foreign policy
seems out of reach.
PuppetMaster11 -> FighTheBrainwashing
Even better. NYT, yesterday, already ran with the story of the failure of the gas deal.
China and Russia Fail to Reach Agreement on Gas Plan
I'd like to see them eat their hats.
PuppetMaster11, 21 May 2014 6:14pm
The US attempt to sever the economic tie between Europe and Russia forced Russian into an alliance
with China.
Now, a lot depends on whether this rearrangement will congeal into a permanent line of confrontation,
or the new Russia-China alliance will work as a leverage to entice Europe away from the confrontational
US.
raindancer68, 21 May 2014 6:15pm
Energy makes the world go around, not money. The Russians are in a strong position, as the
western world tries to make up for the falling energy dynamic in their economies by scrabbling
around for fracked oil and gas.
The price that Russia was formerly selling gas to Ukraine at was $268.50 per thousand cubic
metres. Now, thanks to the so-called international community's destabilisation, Russia is selling
its gas to China instead, and getting a 30 per cent higher price.
So, as less Russian gas is available to Europe, the Ukrainians and people in the rest of Europe
can look forward to paying more. Well done, our leaders! But no doubt their masters in Saudi Arabia
and Qatar will be able to provide supplies, at rather higher prices.
MyDown titipap, 21 May 2014 6:32pm
Not that simple. Urengoy from which gas goes to Europe is 5 thousand kms away from Yakutiya
and 6 thousands kms away from Sakhalin from which gas will go to China.
Mr1Cynical, 21 May 2014 6:23pm
This has gone under the radar but Rouhani is also in China perhaps its to do with this ?
U.S. Issues Threats Over Pending Russia-Iran Oil Deal
FTMDaily.com – Russia and Iran are forging ahead with a controversial oil-for-goods deal that
is being criticized by Washington as a violation of Iran's interim nuclear agreement. .
Under an interim agreement reached with world powers last year, Iran is permitted to continue
exporting no more than 1 million barrels a day of oil to six countries: China, India, Japan, South
Korea, Taiwan and Turkey.
Now, Russia is offering to buy 500,000 barrels of Iranian oil per day, which Washington says
will violate the terms of the interim agreement.
U.S. Secretary of State John Kerry has already begun threatening more 'sanctions.
Iran's response: The country refuses to 'wait for America's permission' to increase its oil exports.
On the surface, Washington is pointing to Iran's "violation" of the interim agreement. But, when
you follow the money, you find something much different. Not only will a Russian-Iranian oil deal
inject a massive amount of fresh revenue into Tehran while emboldening Russia, but the proposed
oil deal will completely sidestep the U.S. dollar. rest of article
Will May 20th Go Down In History As the Day the U.S. "Petrodollar" Monopoly Was Finally Shattered?
May 21, 2014
…The struggle over Ukraine has caused Russia to completely re-evaluate the financial relationship
that it has russia-dollarwith the United States. If it starts trading a lot of oil and natural
gas for currencies other than the U.S. dollar, that will be a massive blow for the petrodollar,
and it could end up dramatically – and negatively – impacting the average American's current standard
of living. Let me explain.rest of article
…The struggle over Ukraine has caused Russia to completely re-evaluate the financial relationship
that it has russia-dollarwith the United States.
Nonsense! The West's reaction regarding Ukraine has been entirely immaterial. Putin has been
committed to the geopolitical policy of Eurasianism for a decade, as have those in positions of
power and influence around him.
Mr1Cynical ID5677229
Yes but i think you'll find Iran and Syria are a part of that plan Iran the wildcard I think
they wanted the west to lift sanctions but realize now that the G5+ 1 are demanding that Iran
gives up their ICBMS as part of the Nuclear deal it won't happen so Iran has joined the triparte
and will now ignore sanctions. Iv'e heard they now have the S300 So Israel becomes less of a threat
I think the US fck fest in the Ukraine has forced Russia China Iran to man up, and put the crazies
from the shite house back in their boxes
John Mack, 21 May 2014 6:28pm
Truly ironic. Mich of the US long term strategy has been to prevent China from becoming dependent
on Russia for energy. That was the point of the Iraqi war. The US feared a Russian-French plan
to assassinate Saddam Hussein and replace him immediately with a stable military government that
would agree to respect certain human rights an Shiite rights and Kurdish rights. That would have
made Russia in control of the largest store of energy resources. The US feared that would mean
that Russia gained a position where it vastly increase the costs of energy to China, Japan, and
India, or even starve them at least partially of their energy needs, this crippling their economies
or making them ally with Russia. So here we are, over Ukraine ...
elti97
Europe's long-term energy policy seems clear: reduce energy dependence on Russia. Fortunately
there are good alternatives: oil and gas imports from the Middle East, Africa and North America,
fracking, nuclear, renewables and increased efficiency.
With a little smart planning, in 5-10 years time, Russian threats to cut off the gas will be
a mild annoyance. More importantly, a variety of competing suppliers will give European countries
greater bargaining power.
AlexRussia elti97
If you decline dependence from Russia then you increase dependence from someone and it is not
fact that the second is good for you
elti97 AlexRussia
Wrong. If you increase the number of potential suppliers, you gain bargaining power.
For example, if Estonia has the option to buy gas from Russia, Norway or the US, it is obviously
in a better position than if it could only buy from Russia. That is exactly why a massive gas
terminal is currently in construction in Estonia.
Estonia will probably still buy some gas from Russia, but at a better price.
Robert Sandlin elti97
Dream on.Estonia is one country Russia wouldn't mind seeing fall off into the Baltic Sea.
Robert Sandlin elti97, 21 May 2014 7:41pm
On yes,who would ever doubt that gas from North Africa and the Middle East wasn't a reliable
source,cough,cough,Libya,Al Queda,cough. And were you talking about the DOA Nabucco pipeline.
But seriously, I have no doubt giving up Russian gas could be done. But the question is WHY
in the first place give up a cheap easy supply. To pay out the a$$ for uncertain other supplies
of gas.
kenlinuk, 21 May 2014 6:39pm
Russia tells the EU to go frack itself. China and Russia stand united against the
US-EU sponsored fascist coup in Ukraine! UKIP landslide is a certainty. Good times for democratic
freedom. Fuck the EU!
Kingston Elenwo kenlinuk, 21 May 2014 8:05pm
It's Frack the EU... If ur gonna say it, say it right:)
ID7776906, 21 May 2014 6:40pm
West always treated Russia like a dog anyways. They`re better off going East.
burnageblue11 ID7776906, 21 May 2014 7:09pm
I find it all very sad. I would much rather closer ties with Russia and see a declining US
influence in Europe.
What we have done, is push an economic neighbor East. We are now fully dependent on US gas
imports(with transit costs).We are now more dependent on the United States than ever.
Talk about cutting off your nose to spite your face.
Huge hike in Gas bills this winter.
indietinker
21 May 2014 6:41pm
this is all in the US plan for Russia and China am afraid to say.
"Instead of containment, the US should block Russia's ambitions in Europe while encouraging
them in Asia".
Last month, The New York Times reported that in the wake of the Ukraine Crisis, U.S. President
Barack Obama had decided to abandon the reset with Russia in favor of a policy of containment
2.0. According to the report
Given Russia's intransigence, it's completely understandable that Obama would be tempted to
pursue this approach. It's also a mistake. Instead of containing Russia completely, the U.S. should
block its ambitions in Europe while encouraging it to turn eastward towards Asia.
Despite the hopes of many in the post-Cold War era, the U.S. and Russia are not going to have
compatible interests in Eastern Europe anytime soon. Russia will always see this as its natural
domain, which is a status that the U.S. is unwilling to grant Moscow, especially since NATO's
expansion over the past two decades. On the other hand, as John Allen Gay recently noted, American
and Russian interests are almost perfectly compatible throughout Asia. It is in this region that
the strategic rationale of the reset was always on the firmest ground.
The challenge is forcing Russia to turn eastward. Europe's dynamism throughout the modern era
has forced the Russian state to adopt a westward orientation. This is reflected in the country's
geography - with most of the major cities being located in western Russia - and deeply ingrained
in Moscow's strategic culture.
Over the long-term, it's nearly inevitable that the Asian Century will force Russia to reorient
itself towards the east. Indeed, as I have noted before, this is already taking place to a growing
degree. Still, the question for U.S. policymakers is what actions can be taken to accelerate this
natural progression?
The first step is blocking Russia's ability to expand westward. This doesn't mean that the
U.S. and its NATO allies have to deploy troops to Ukraine. All that is required is to introduce
greater uncertainty into Putin's calculus about Russia's ability to successfully expand westward.
Most importantly, the U.S. must disabuse Putin of the notion that Russia could easily take and
hold territory in Ukraine and Eastern Europe.
The more Putin fears that an invasion would expose the weaknesses of the Russian armed forces,
and either fail completely or turn into a prolonged debacle in the mold of Afghanistan during
the 1980s, the less likely he is to order Russian troops across the border. The good news is that
Putin appears to already have these fears, as evidenced by his restraint in an overt invasion
of eastern Ukraine.
In addition, the U.S. should continue underscoring its commitment to the securiSP 500 and NDX
Futures Daily Charts They had to restate the PMI number a couple of times this morning before
they got it right. I had not realized that they seasonally adjust these surveys. Do they seasonally
adjust opinion polls too? These m are already acting like the dog days of summer, with an upward
bias on sleepy volume. There is a yawning divergence between Bonds and Stocks. I suspect this
might be due to Fed interference on the Bond side, which we know about, as well as some free range
tinkering with values on the Stock side. Either way, this is going to end badly. I have an open
mind to a summer slump, but unless something happens to provoke more selling at higher volumes
we may just muddle along until something more traditional in the autumn, and event inspired. This
is a midterm election coming up after all. I found these words from Daniel Ellsberg below about
Snowden and some other things to be worth hearing. Have a pleasant evening. member states, and
intentionally create ambiguity as to how it might react to Russian expansion in non-NATO countries
in Eastern Europe. This will increase Putin's apprehension about becoming too adventurous in Europe.
After all, he has already squandered Russia's influence in most of Ukraine and can hardly endure
another embarrassing international setback.
At the same time, the U.S. should encourage Russia to expand its influence in Asia, and thus
give Putin an outlet in which to act upon his grand ambitions for Russia. The most immediate area
of focus should be in Central Asia, where the U.S. is currently withdrawing from Afghanistan.
Given Russia's largely congruent interests with the U.S. in Central Asia, Moscow should be encouraged
to play a leading role in helping to fill the vacuum the U.S. withdrawal is bound to create, as
it is already starting to do with India in the region. Moscow and Delhi can help ensure a modicum
of stability in Central Asia even as they cooperate in opposing radical Islamist terrorist groups.
This would be entirely to America's benefit.
Furthermore, as Russia has been focused elsewhere in recent years, China has quickly filled
the role Moscow historically has played in Central Asia. Already, many analysts see China as the
most important external actor in Central Asia, a position that Russia has held since the 19th
Century. Beijing is in the process of trying to further entrench its new position further through
organizations like the Shanghai Cooperation Organization (SCO) and its new Silk Road Economic
Belt.
As Russia reengages in Central Asia, it will increasingly find itself clashing with China for
influence in the region. This would inevitably create tensions in the increasingly close relationship
between Beijing and Moscow. These tensions would force Russia to concentrate more on the long-term
threat a rising China poses to its national security. In grappling with this challenge, Russia
will naturally seek to assert itself more forcefully in Eastern Asia to hedge against China.
Mr1Cynical -> indietinker
To try and spin this as an American plan is wishful thinking I think you'll find the NYT is
hailing defeat as victory. The Dollar as the worlds reserve currency has been in decline for many
years this deal between Russia and China will hasten it The EU won't save the US, it will only
ever be it's prostitute with little economic clout outside of Germany.
loveminuso -> indietinker, 21 May 2014 6:56pm
Yeah right...The only problem here is this shit might work in Africa and the ME, with one big
difference...Russia and China have Nukes with the capability of strategic delivery...
"We have powerful enemies but we don't have powerful friends, that's why we need the
support of such a giant as China," said Ruslan Pukhov, director of the Centre for the
Analysis of Strategies and Technologies in Moscow.
Even the threat of use by this new alliance will set the American working class against it's
'leadership'; and the Americans know how to deal with criminals - even those in leadership positions...I
think Obama, and those NeoCons who own him have huge problems right at Home suddenly. The Revolution
is coming...
docrhw -> Mr1Cynical, 21 May 2014 7:01pm
I agree about the reserve currency thing. One day we Americans will wake up and discover
that the dollar is now part of a basket of currencies needed to buy raw materials. It will
happen gradually, but I think is inevitable. The sad thing is that Congress, the Fed, and of course
the American public are completely oblivious to this issue. (At least the first two don't talk
about it.) When that day comes it will be mighty ugly here.
Robert Sandlin indietinker, 21 May 2014 7:17pm
So basically what your saying is that since Russia is to feel nothing for Europe. Then in a
crisis they'll have no remorse about destroying it in a nuclear holocaust. OK,maybe they'll get
the point.Now me, if I was a European leader, I'd want to have Russia as friendly and connected
to me as possible.
Because countries friendly and interconnected don't want to destroy each other. And with thousands
of nukes, and a rightful paranoia about being attacked by the west, I'd want as much friendship
as I could get with Russia.
But maybe I'm wrong, maybe the right thing is to slap Russia around like the EU is doing now.
Spit in their face and all. After all just how mad would a country once ruled by Stalin get anyway.
But then maybe dusting off the old bomb shelters might be prudent. Just encase following the US's
advise isn't the best idea. It was Britain that followed the US into Iraq right. I forget,how
did that work out anyway.
Mr1Cynical docrhw, 21 May 2014 7:20pm
A lot of American Patriots want the Dollar to collapse, to get rid of the Fed. introduce a
new Currency, kick the thieves and jackals out ,rebuild the constitution,.and start afresh, these
people who've run the US into the ground are neocon globalists inhuman completely without reason,barking
mad Narcissists For all our sakes i hope you get rid of them.
ID075732, 21 May 2014 6:45pm
So the EU$A have blundered into the Ukrainian kitchen.
Vicky Nuland's half-baked attempt with the cookies was a failed recipe. Even Chaz
has now brought his flaky biscuit to the table. The only question now remaining is who could believe
any of them could make anything?
So it's not surprising Putin's gone to the Chinese!
kenlinuk, 21 May 2014 6:46pm
US loan repayments to China are going to end up in Russia. Sweet justice!
tfernando, 21 May 2014 6:54pm
I ask all Americans to read this article without burying head in sand.
The US really shot itself on the foot. This self-inflicted wound of interfering to destabilize
other countries for its own interest, the US will only accelerate its decline that should/could
have been avoided with sensible thinking.
I live in the US and, as it is, times are far from being good compared to what it was just
ten years ago. And despite the fact there is not much indications the country's economy is
improving, the US wants to act as if no economic or financial crisis took place and wants to live
on just 'confidence'.
Well, I think it is very sandy ending for the people of this nation who, to begin with, has
a tough me making ends meet.
lesnouveauxpauvre tfernando
There still is enough people with good jobs to keep the illusion afloat. I live in San Francisco
and it's a bubble here in Silicon Valley. There are a lot of young people like myself and younger
with good jobs making really good money. They have no concern about what you are talking about;
and you could never convince them their bubble they are living in is not real.
They think this country is wonderful and so do all people here who still support Obama; including
gays who don't care Obama has a 'kill list', and can imprison any American without cause; as long
as he supports gay marriage they and a lot of people will support war crimes!?
It seems unbelievable but it is true. I have gotten into arguments with people about this;
and I am gay.
burnageblue11, 21 May 2014 6:58pm
The USA can now fill that big void that is left in the gas market. It can supply Gas at vastly
inflated prices knowing the EU,UK are now fully dependent on all they gas they can get
EU leaders want sacking for this.They are not looking after Europeans interests only those
off the corporate USA.We will pay the price.
evolution2now burnageblue11, 21 May 2014 7:07pm
Europe getting American Natural Gas is fantasy. This is a fact for at least the next 10 years.
richiep40 burnageblue11, 21 May 2014 7:25pm
Despite the US pretends to be into free trade it is a lie, even though it basically runs WTO.
LNG exports from the US are not in a free market, they are restricted to only about 20
countries which the US classifies as FTA agreement countries. These FTA trade deals are almost
as catastrophic for the client nations as the proposed TTIP deal with the EU.
I am a member of 38 degrees, I was surveyed yesterday by them about my views on TTIP. Although
38 degrees have many priorities, my vote was to put TTIP close to the top of their priority list
( I am only a member, nothing to do with those that run 38 degrees, so don't blame 38 degrees
for my opinions).
JVC120, 21 May 2014 7:00pm
America should reevaluate the direction of ots foreign policies. It is antagonizing a few important
countries and the remaking are sitting on the fences or are looking from the sidelines.
Can US afford the vives of militaristic arrogant and unreasonable messages it is sending to the
Asian ,African,and Latin American?
Its foreignolicy has been hijacked by the warmongers who have never seen a war from frontline
and have never wavered on supporting a war from close distance.
Blenheim, 21 May 2014 7:02pm
"Russia's new pipeline to China will increase competition for natural gas from 2018 and
will most likely increase the cost we pay for natural gas here in the European Union. It will
certainly increase the pressure on European countries to find alternative gas supplies," he
said.
Yup, you just have to love the way the west handled the Ukraine situation. Brilliant!
Reducing China's massive dependence on coal based energy is a great win for the world. This
deal does more for the environment than any western climate regulations could possibly do.
Let's not forget India, which also relies heavily on coal. I would guess they are next to make
a deal with Russia.
Babeouf, 21 May 2014 7:05pm
Yes this is the first mega deal which breaks the ice it won't be the last though will it. The
US regime will still continue attacking both Russian and China. It will still bore the world rigid
with its ' Pivot to Asia' and its 'Isolation of Russia' . The really really funny part is the
sudden suggestion that the EU's Russia policy is actually going to raise gas prices for European
customers. Must be part of the EU's new competition strategy built on raising production costs
for the various European based industries that consume large amounts of energy. Still you must
admit that the EU's Russian policy has worked a treat for the Chinese government. So among the
nations of Europe there is at least one ' Manchurian Candidate'. The servile spirit of Europe's
political leaders is only matched by the bone headed stupidity of their imperial US masters.
Peabody94
Nice deal, take a loss for a few years, smacks of desperation by Russia. It's nowhere near
being a deal big enough to bother European supplies, Europe takes about 170 bn cubic meters a
year, this is only for 38bn and from an undeveloped field. Desperate dealing at a low price.
So as Europe weans itself off Russian gas Gazprom takes a mighty big hit over time. That's
what happens when you have a one trick pony economy and you need western technology to extract
the minerals, one trick pony technology as well, decades behind the west.
AlexRussia Peabody94
Generally less and in Europe are important only a few countries - everything else is not so
important
Great job that EU is doing with antagonising Putin with the Ukrahinian saga. Now we have to
bail out a broke country and pay more for the gas. Great news.
vr13vr Shiku101, 21 May 2014 7:28pm
This deal will definitely make it more difficult for Ukraine to claim any discount. Ukraine
will have to eat at least this price and guess who will have to pay it? That's right, the "Western
partners," a.k.a EU.
ID5677229, 21 May 2014 7:15pm
The contract [is for Russia ]to provide 38bn cubic metres of gas each year [to China at] ....
about $350 (£207) per thousand cubic metres.
This deal has some symbolic value I suppose but otherwise it is a rather desperate and only
partially successful move on Russia's part to shore up its export market for gas.
Reacting to Russia's aggression in Ukraine, a month ago the EU announced plans to effect a
25% cut in its gas imports from Russia by 2020. Since the EU has been importing 180bn cubic metres
of gas a year Russia's deal with China barely makes up the shortfall. In fact, from Russia's viewpoint
the situation is even worse: China will pay $30 per thousand cubic metres less than the EU has
been paying; moreover, Ukraine's imports of Russian gas are going to be greatly reduced too.
vr13vr ID5677229
This deal is bigger than the current European deal, and it is muuuuuuch bigger than whatever
reduction EU will be able to make in the future. China got some 9% of volume discount compared
to EU prices, but that's reasonable given the volume. At the end of the day both countries will
end up with newly developed infrustructure. And both will be better diversified to deal with "pressure"
from the West. Not a bad deal at all.
mustspeak, 21 May 2014 7:17pm
@article:
"But one British energy expert warned last night that the move could drive up prices for European
gas consumers who are becoming increasingly dependent on Russia and now face a competition for
supplies"
Serves Britain and EU right, only pity and concern is that I happen to be British, so also
EU citizen. The West's gerrymandering around the world is going to spectacularly bite their asses
harder and harder as time goes by.
daylight101 mustspeak, 21 May 2014 7:22pm
It's unlikely. Russia already sells gas to Europe at premium price and setting it higher now
might be self defeating in longer terms. I am sure that Russia will attempt to undermine the US
gas proposal to EU by offering more competitive bargains.
SteveK9, 21 May 2014 7:21pm
The comment about 'finding financing' betrays the faulty economic thinking that pervades the
West right now. If Russia does not import anything to build the pipeline, then 'financing' is
irrelevant. The Russian state cannot run out of Rubles. The only question is whether this is a
worthwhile investment of workers and materials. Since this is becoming a strategic question for
Russia ... you can bet your ... they will 'find the financing'.
I don't know how much help China will be providing to this project but if there is one thing
that China seems to be very capable of these days it is large construction projects.
Just incredible: infrastructure investment from both sides will be more than $70
billion and will be the world's largest construction project, with Russia providing $55 billion
up front and China $22 billion. Fuck my boots...
All this is fallout over the Crimea because off US hegemonic foreign policy. It was a Russian
base to start with, its not like they were invading. We had to make a big song and dance over
it, because the United States really wanted it as a warm water base for the US 6th fleet in Sevastopol.
It was never going to happen, we knew it, they knew it.
Sanctions, provocative rhetoric, more sanctions.
End result. New Cold war. Redirected gas supplies to China that Europe badly needed. The irony
is, the United States will be totally unaffected. Europe will become dependent on US gas imports.
How could European leaders allow this to happen. How could they pursue a US foreign policy that
will have a detrimental affect on Europe European industry, and consumers.
Our leaders are nothing more than traitors.
It wont be the citizens off the United States freezing this winter. They wont be paying though
the nose for gas, it will be us in the EU,UK.
Not sure how traitorous EU leaders who have screwed their own people, economies over will survive
long term. Germany will be the biggest loser. Merkel pursuing US hegemonic foreign policy despite
the fact German industry is very dependent on Russian imported supplies. German Business leaders
were totally against Merkel position to start with.
Russia has said it will turn off supplies to Ukraine on June 3rd if their debt is not paid
in full. And unless they pay in advance.
European supplies come through the Ukraine. This could get much worse.
I hope this winter is not a cold one.
mikebraksa Fednad
Europe will fall apart into three parts soon - that's all
Already has. Eastern EU states. Western EU states. And France.
Slo27, 21 May 2014 8:04pm
So, they are getting $350 from China and $380 from Europe and what will they do? Sell more
to Russia and less to Europe .... Eeeh, not exactly.
BrissieSteve Slo27, 21 May 2014 9:19pm
The gas comes from totally different gas fields thousands of km apart and with different extraction
costs. Geography wasn't one of your school subjects was it?
GAHenty, 21 May 2014 8:06pm
The significance is in the continued rise of China. Putin may believe himself clever but in
any Chinese-Russia alliance Russia will quickly become the junior member. The provider of raw
materials for the Chinese machine.
Russia and China have to guard against America's sanctions-happy foreign policy, so the more
business they can do together, it will be the more 'sanction-proof' their economies become.
We already see America gunning for China, in her attempt to delay China's ascendancy to top-dog
status.
Eaglesson, 21 May 2014 8:27pm
What the article forget to mention is both countries with this deal are bypassing the (petro)dollar,
so it will be in their domestic currencies.
Another bold move from both sides..After a similar bold move between Russians and Iranians
short time ago
Russia and China took a small step toward undercutting the domination of the U.S. dollar
as the international reserve currency on Tuesday when Russia's second biggest financial institution,
VTB, signed a deal with the Bank of China to bypass the dollar and pay each other in domestic
currencies.
Japan got the news and is running fast to get a piece of the deal, quoting that is paying a
hefty price for US LNG...why should't they? And Russians have thought about that, the plan of
a gas pipeline through North Korea are targeted for m of South Korea and Japan.
In a period of one year neocons have done so much damage to US and Europe that it cannot be revoked
any more. The biggest loosers are EU in this deal and right away after the deal Barroso send a
pledge letter to Putin, pleading him to keep his gas running for Europe and (they were prepared
to pay the price dictated by russians for Ukraine's gas supply)
wimberlin AlexRussia
In spite of all the space that the 'Prince's' stupid comments are receiving from the Guardian
- in fact the US today is much more similar to Nazi Germany than any other country. Ask Edward
Snowden, he has all the dirty details that the US does not want you do know. He is presently in
Russia, so therefore all the anti-Russia hysteria.
Oh but not by Luke Harding - he is really good and never lies about Russia - no I certainly
do not include him!
Ciarán Here
When you compare this deal to the "DEAL" Russia had with Ukraine since 1991- Russia lost -
subsidised Ukraine to the tune of up to 300 billion it now seems that Russia has Ukraine and EU
over a barrel. Russia won't be subsidising Ukraine a saving of 300 billion over the next 30 years
and a gain of over 400 billion from China . I guess Russia with not be to concerned about others
taking on the burden of Ukraine.....
daylight101 Ciarán Here
There will be some attempts to rebuild Ukraine but it will be not subsidising, I am sure.
finnja, 21 May 2014 8:42pm
Notably, also
the plans for South Stream, which does not go through Ukraine, are on track
, at least when it comes to the directly involved EU countries (like Bulgaria, Hungary, Austria)
and Russia.
The question now is: will the EU force its Southeastern member states (the ones that depend
on Russian gas) to fall on their swords in order to make a point and to prop up fracking and TTIP?
GAHenty natalifoley, 21 May 2014 9:26pm
Oh look. Articles from a Russian news corporation. No bias there then.
windies GAHenty, 21 May 2014 9:56pm
ABC, NBC or CNN, they do objectivity, they do equal points of view, don't they!!
American news is as bias as Russian news..
What is your point.
Mark Chaloner, 21 May 2014 8:47pm
Sounds like a good deal but it won't make the Russian economy grow. Russia needed this just
to stand still. In the long term Russia can't do without the EU. Russia needs the EU as much as
the EU needs Russia.
daylight101 Mark Chaloner
My understanding is that Russia can actually substitute many of its high-tech EU imports
by chinese ones.
ploughmanlunch Mark Chaloner, 21 May 2014 9:04pm
Standing still might be more desirable than back tracking, as this still fragile Euro economy
may yet do.
It's true that the EU and Russia would mutually benefit from unimpeded trade and commerce, but
the EU, following the lead of the US appears to be willing to sacrifice it's own prosperity at
the behest of US geo-political interests.
daylight101 Mark Chaloner, 21 May 2014 9:19pm
Russians will not quit EU market, I am sure. They will keep selling gas to EU and, probably,
will even offer bargain to undermine the US gas proposal. They will compete, not leave.
bulldoggy, 21 May 2014 9:11pm
Reporter needs to get the story straight. One paragraph describes a deal, "ten years in the
making". Another paragraph quotes a Russian spokesman who attributes the deal to western hostility.
What it really looks like is Russia and China not letting a PR opportunity slip by without exploitation.
A deal ten years in the making wasn't spawned on western hostility. It was spawned by economic
reality. An eastern Siberian gas field is conveniently close to China and half a planet away from
Europe. I'd guess the low price China wrung out of Russia had a lot to do with Chinese perception
that Russia has no other buyers for this gas.
knuckles66, 21 May 2014 9:18pm
Businessweek and Bloomberg both think the deal is more fumes....that the Chinese and Russians
agreed on the volume to be shipped, but still have not agreed on the price. The Chinese will kick
in 25 billion in pre-payment to fund the cost of building the pipeline, but the final pice will
still be in negotiations.
Since the pipeline will take several years to build, they have plenty of time to fight over
the price.
windies knuckles66, 21 May 2014 9:31pm
They will make it work, the "west" pisses them off..
American financial reporting are so boned faced one-sided, objective reporting is beyond
them. Course they want it to fail.
The US/EU point of view is now redundant in their eyes.
richiep40 windies
The 'm ' and the western press have been predicting the collapse of the Chinese economy for
more than a decade. It will not happen.
MyDown, 21 May 2014 9:22pm
Almost 700 comments, yet there is none about the agreement is somehow affecting gay rights.
Strange, but it shows that Guardian readers are confused. )))
zchabj5, 21 May 2014 9:27pm
Much more important than the deal itself is the agreement to open up Russia to Chinese investment
for infrastructure.
The UK has agreed to become a clearing house for the renminbi. Osborne is not stupid, we can
see which way the wind is blowing, and it is blowing east. Israel has also made significant moves
to encourage trade with China, to mitigate the fallout of US decline.
For last 20 centuries, China has had the largest GDP for 15 to 18 of them. The two centuries
right after the industrial revolution saw European hegemony, brief lived, but the world will return
to it's Asia dominated status quo.
MyDown, 21 May 2014 9:46pm
Economical and infrastructural aspects are significant, but political one is just huge. Talking
to my Chinese friends - they are as excited on green light the deal brought as Russians are. The
whole story is kind of step up in friendly relations between Russia and China and money is not
the main issue.
followthemonkey PoiticalWatchDog, 21 May 2014 9:59pm
Saddam Hussein paid a high price but Russia and China are not defenceless like Iraq or Afghanistan.
They're completely capable of defending their countries interest.
geoprobe, 21 May 2014 9:49pm
I think we need to thank the neo-cons in the Obama administration to apply the pressure to
make this deal happen. Without them, the Russians might have held firm on their price and the
Chinese might have held out for a lower price.
Due to the Americans' imperial might it brought these players to the table. It might be a bad
move for American might, but it just might save the planet, as it will provide the Chinese a more
climate friendly fuel than their current coal.
"We have powerful enemies but we don't have powerful friends, that's why we need the support
of such a giant as China," said Ruslan Pukhov, director of the Centre for the Analysis of Strategies
and Technologies in Moscow.
Telling statement.
Robert Sandlin Wagram, 21 May 2014 10:53pm
And it works both ways.Only a fool couldn't see that if Russia was destroyed,China would face
the West alone.A strong Russia in support is China's greatest aid.So in many ways the Russo-Chinese
relationship is a marriage made in Heaven.And they can both thank the US for being the Matchmaker.The
US trying to humble Russia,and threatening China,did the trick
Our dependence on their gas is their dependence on our money. Both sides are well advised to
diversify. However, i would be careful if i had to decide for Russia: China and Russia have animosities
and while the Europeans are a bunch of hysteric merchants, the Chinese will know how to get what
they want once Russia is dependent on THEIR money.
followthemonkey -> Bismarx, 21 May 2014 8:59pm
the Chinese will know how to get what they want
I'd rather be a Chinese than an American.
"Americans more afraid of being tortured by their government than Chinese are of theirs"
Putin said that gas price of the agreement is linked to petrol price, so it will not effect
USD.
FrankPoster -> MyDown, 21 May 2014 7:44pm
FFS you know nothing. The price might have a formula that involved the USD somewhere, but the
transactions will be in Rubles and Yuan, thereby fully bypassing the petrodollar. There are huge
implication to the US for this, and therefore you will see them ramp up efforts in Ukraine and
elsewhere to engage Russia in a proxy war with a view to eventually destabilize Russia in 5-10
years time to grab their oil and gas and process it in dollars to support their massively bankrupt
financial system...but this time they will fails since china will side with the Russians and will
drop their US treasury bills if necessary.
HongKongBlue
preemptive move to invade Ukraine?
Gudwin -> HongKongBlue
Nobody gives a rat's ass about Ukraine anymore.
whyohwhy1 Gudwin
Nobody gives a rat's ass about Ukraine anymore.
At the moment Ukrainian soldiers are killing civilians in the eastern part of that country,
that is why the Western media seem to have lost all interest after 24/7 coverage for a couple
of months.
AndyOC, 21 May 2014 5:39pm
You can't blame them for forging ever closer ties, uncertain as both countries must be with
regards both recent Ukraine and industrial espionage problems.
Is it worth being worried about? Probably.
PaulThtanley AndyOC, 21 May 2014 7:49pm
No it isn't.
Russia and China don't trust each other at all, despite this grandstanding. Both countries
look to the West and define themselves relative to it. Their oligarchs send their kids to school
here and maintain holiday homes. Many retire (or flee) here. Let the Chinese bubble accumulate
more investment debt and let the Russians have a go at extracting gas that is harder to reach
than the gas they currently extract and sell it for less than they are currently selling their
gas that has existing infrastructure. Who knows? It may even work out.
griffinalabama, 21 May 2014 5:39pm
Nice to see Russia outsmarting the nefarious yanks especially after all the bullshit the US
has instigated in Ukraine. A good article in Counterpunch goes into the media coverup of the Odessa
massacre and US involvement. The truth is coming out. Link here:
http://www.counterpunch.org/2014/05/08/false-flag-in-odessa/
ahbowledhim
Geo-political realignment is evident. A Sino-Russian alliance is huge and puts Washington on
the back foot.
Can Washington play off the back foot like the incomparable Viv Richards could is the question?
IgAIgEIgG ahbowledhim, 21 May 2014 5:45pm
Geo-political realignment is evident. A Sino-Russian alliance is huge and puts Washington on
the back foot.
Dude! What are the contingencies?!
Carl Jones IgAIgEIgG
Only one...world war 3. The fact is, Amerika and Britain are bankrupt. So they need some very
big wars.
iamnotwise vr13vr, 21 May 2014 7:49pm
But this will become a new Cold War only if the US decides to stir trouble.
Continue to stir trouble, I think you mean. This whole Ukrainian situation is another US instigated
clusterfuck. Once again the failing empire (with the UK clinging to it like a tumour) tries to
drag everyone else down with it.
steavey, 21 May 2014 5:42pm
Russia maybe unpopular with the west, but their assets are always popular everywhere. It's
nice to come home in winter time heated by gas central heating, and does not matter where the
gas comes from, Alex Salmond's Scotland or Putin's Russia.
OneWorldGovernment, 21 May 2014 5:50pm
Love the 15 minute context. The negotiations for this deal was a decade in the making and the
Chinese strong armed the Russians into taking a lower price. It shows how desperate the Russians
have become and their weak bargaining power.
Carl Jones
I like that US dollar sign in front of the 400 billion?lol This deal is a massive nail in the
coffin of the US dollar!!lol Funny, but true, Western sanctions are actually hastening the end
of US dollar hegemony. You should watch a Dr Paul Craig Roberts youtube vid called "Fed launders
treasury bonds in Belgium"...then you`ll know just how precarious the US economy is.lol
PaperEater Carl Jones
Lol. The level of discourse is amazing. Lol
Pazuzu Carl Jones, 21 May 2014 9:07pm
Nothing like a bunch of LOLs and references to to the Youtube School of Economics to lend that
much needed dose of credibility to an argument. Well played!
Let me put things in perspective for you, if you'll allow me to interrupt your scholarly lulz
for a moment: $400 billion is about the amount Uncle Sam uses to wipe his bum every day.
Still, I admire the resolve of the Putinbots, like obedient toy poodles still firmly clamping
their little jaws on the heels of a giant, convinced they're winning the fight.
Mr1Cynical, 21 May 2014 5:56pm
This is only a terrible deal for the US and it's prostitute EU Milov i wouldn't take to seriously,
as usual the Guardian always go for the lowest denomination when it comes to experts they mean
someone who has an axe to grind.
This comes as CNN are calling Russia a pariah nation, they really mean o shi# this is great
as the Bog roll called the petro dollar struggles along getting closer to the cliff O-Bama helping
it along the way
What next Sanctions on everybody outside of Utah, still cheer up you Barry o supporters, you've
still got your killer drones to play with
whyohwhy1
Russia didn't "fall out with the West": it was threatened with sanctions by the US and their
puppets in Europe after they supported a coup against the elected government of Ukraine.
Maybe Kerry's hot air can provide enough energy for Poland and Germany next winter.
semyorka, 21 May 2014 5:59pm
The Kovykta field is considered to supply natural gas to China and Korea. According to these
agreements signed by Rusia Petroleum with China National Petroleum Corporation and Kogas on
2 November 2000, the annual export of gas to China and Korea will be 20 billion cubic meters
(bcm) and 10 bcm, respectively.[7] The Kovykta field will contribute also to the gasification
of Irkutsk Oblast, implemented by the OAO East Siberia Gas Company, a joint venture of Gazprom
(originally TNK-BP) and the Irkutsk Oblast Administration. http://en.wikipedia.org/wiki/Kovykta_field
You tell people Putin had stomach cramps and CiF would be crawling with people announcing this
latest move had the west in knots by the master strategist.
TransAtlanticist, 21 May 2014 6:00pm
Iraq, Afghanistan .. now Russia. I will say the Chinese are remarkably good at knowing when
to capitalize on others' bad situations.
vr13vr TransAtlanticist, 21 May 2014 6:30pm
It says the US is remarkably good at creating bad situations that only hurt the US.
AlexRussia, 21 May 2014 6:01pm
Putin: gas contract with China signed today has become the largest in the history of the USSR
and Russia
Signed today contract to supply China natural gas from Russia is the biggest gas deal in the
history of the USSR and Russia , said Russian President Vladimir Putin According to him, laying
a gas pipeline " Power of Siberia " will come be the largest construction project in the world
for the next 4 years. Meanwhile, Russia will invest in the construction of the pipeline and development
Kovyktinsky and Chayandin deposits and about $ 55 billion while China is going to to create the
necessary infrastructure for at least $ 20 billion. "This is the largest contract for Gazprom"
- said SEO Gazprom Miller.
Ludwitt, 21 May 2014 6:04pm
The reporter writes
"Gazprom and CNPC (China National Petroleum Corporation) have signed a 30-year, $400bn (£237bn)
deal to deliver Russian gas to China"
a factual statement and adds an editorial comment
"a deal that underscores Russia's shift towards Asia amid strained relations with the west."
It's fine for the reporter and/or editor to have an opinion: it's just that the above statement
does not follow at all from the previous statement about the signing of the deal. Indeed further
down the article that this deal was 10 years in the making. Indeed it is prudent to diversify
one's portfolio for a variety of reasons and especially have China, a voracious consumer and a
key if not THE engine of global growth as one of your primary customers.
In fact the US and the West do roaring business with China itself. So why not Russia? And why
not some analysis as to whether this deal would eventually be good or bad for the Russian economy
and its growth? Or the development of the Russian Far East which has long been declared as a National
Priority within Russia's domestic policy?
In a Western government centric world, any major deals that don't have the West in the picture
are seen to be a threat, to be amplified as such by the Western corporate media.
An interesting gas story thread to chew on meanwhile is Hunter Biden - the US VP's son - being
appointed to the board of Ukraine's largest gas company.
And so it goes.
FighTheBrainwashing
To be honest, right now I can't but feel quite a bit of shadenfreude picturing the "ecstatic"
faces of the newsmakers from the Financial Times, Bloomberg, Washington Post, Wall Street Journal,
etc., etc. that spent the last 24 hours leading to the announcement of this ground-breaking deal
gloating over Putin's "failure to reach a landmark agreement with China".
As they say, he laughs best who laughs last, so, suckers, deal with it! It's our turn to laugh
now!
:)
PS: And I'm absolutely positive it's only the beginning of good news for those who dare defy
the criminally hypocritical, cynical, double faced, devious, mendacous and war-mongering United
States of Lies, Propaganda and Double Standards around the world!
The U.S. drive for energy independence is backed by a surge in junk-rated borrowing that's been as
vital as the technological breakthroughs that enabled the drilling spree. While the high-yield
debt market has doubled in size since the end of 2004, the amount issued by exploration and production
companies has grown nine-fold, according to Barclays Plc. That's what keeps the shale revolution
going even as companies spend money faster than they make it.
"There's a lot of Kool-Aid that's being drunk now by investors," Tim Gramatovich, who helps manage
more than $800 million as chief investment officer of Santa Barbara, California-based Peritus Asset
Management LLC. "People lose their discipline. They stop doing the math. They stop doing the accounting.
They're just dreaming the dream, and that's what's happening with the shale boom."
... ... ...
Spending Treadmill
"Who can, or will want to, fund the drilling of millions of acres and hundreds of thousands of
wells at an ongoing loss?" Ivan Sandrea, a research associate at the Oxford Institute for Energy
Studies in England, wrote in a report last month. "The benevolence of the U.S. capital m cannot last
forever."
The spending never stops, said Virendra Chauhan, an oil analyst with Energy Aspects in London.
Since output from shale wells drops sharply in the first year, producers have to keep drilling more
and more wells to maintain production. That means selling off assets and borrowing more money.
"The whole boom in shale is really a treadmill of capital spending and debt," Chauhan said.
Access to the high-yield bond market has enabled shale drillers to spend more money than they
bring in. Junk-rated exploration and production companies spent $2.11 for every $1 earned last year,
according to a Barclays analysis of 37 firms.
...
"It's a perfect set-up for investors to lose a lot of money," Gramatovich said. "The model
is unsustainable."
"The decadent international but individualistic capitalism in the hands of which we found ourselves
after the war is not a success. It is not intelligent. It is not beautiful. It is not just. It
is not virtuous. And it doesn't deliver the goods."
John Maynard Keynes
"After the collapse of socialism, capitalism remained without a rival. This unusual situation
unleashed its greedy and - above all - its suicidal power. The belief is now that everything,
and everyone, is fair game."
The market is somewhat above its historic levels relative to trend earnings. Pearlstein cites
Shiller who puts the price to earnings ratio at 25 to 1, compared to a historic average of 16.
... I would agree that stock prices are somewhat above trend, but not by quite as large a margin
as Shiller.
... ... ...
However, there are some points worth noting. The social media craze has allowed many companies
with no profits and few prospects for making profits to market valuations in the hundreds of millions
or even billions of dollars. That sure looks like the Internet bubble. Some of these companies
may end up being profitable and worth something like their current share price. The vast majority
probably will not.
The other point is that the higher than trend price to earnings ratio means that we should expect
to see lower than trend real returns going forward. This is an important qualification to Ritholtz's
analysis. While there is no reason that people should fear that stocks in general will take a
tumble, as they did in 2000-2002, they also would be nuts to expect the same real returns going
forward as they saw in the past.
With a price to earnings ratio that is roughly one-third about the long-term trend, they should
expect real returns that are roughly one-third lower than the historic average. This means that
instead of expecting real returns on stock of 7.0 percent, they should expect something closer
to 5.0 percent. That might still make stocks a good investment, especially in the low interest
rate environment we see today, but probably not as good as many people are banking on.
In short, there is not much basis for Pearlstein's bubble story, but we should also expect that
because of higher than trend PE ratios stocks will not provide the same returns in the future
as they did in the past. Anyone who thinks we can better
have their calculator checked.
The only way is to model your future using Excel spreadsheet and using you expected longevity data.
Most of those financial planners advice is counterproductive. This article is more realistic then other
but still take it with a grain of salt...
Retirement is a balancing act. You want to spend enough to enjoy today, while preserving enough
to take care of your needs tomorrow. If you keep things in balance, there is no reason you should
run out of money. So what throws people off balance in retirement? Here are five things people do
that puts them at risk of running out of money.
1. No measuring device. Imagine driving across the country with no fuel tank gauge. How
often do you stop for gas? I suppose you'll have to guess. If you approach retirement income this
way, you can get yourself in trouble. You must have a monitoring system in place.
This type of system measures how much you have left, your income needs, uses a conservative rate
of return based on your
investing style, and takes into account remaining life expectancy. Your retirement income
gas gauge isn't only there to tell you when to slow down -- it can also tell you when there is room
to step on the gas.
2. No spending plan. The No.1 reason people run out of money in retirement is they
spend too much relative to the amount of financial assets they have. Most often excess spending
occurs as parents help adult children, or because an upcoming retiree forgot to
calculate expected taxesand health care expenses in their retirement budget.
When you retire, make a spending plan that lays out your monthly and annual expenditures, including
money for fun. Now, add up your guaranteed sources of income, like Social Security. The amount of
living expenses in excess of your guaranteed income must come from your savings and investments.
Make a projection assuming you take the desired withdrawals, and see how long the money lasts.
Now, make the same projection, but assume you spend $5,000 more or less a year. This type of
scenario modeling can show you how small changes in your spending can make the difference between
having enough or running out.
... ... ...
4. No plan B. Life throws curveballs, and it will continue to do so in retirement. If your
plan requires you to use every asset you have, you're at risk of running out of money. You need
to allocate some of your assets to reserves -- this means the asset is not included in your plan
as available to meet
living expenses in retirement.
Reserves can be an emergency fund account, home equity, cash in the safe, a piece of land you
own, or even a valued collectible. Hopefully you'll never need to tap into your reserves, but it
may be you'll need it for health care expenses later in life, or to help an adult child who gets
in trouble. There's no telling what might come up that throws your original plan off track. That's
why you need assets set aside as plan B.
5. Fall for the scam. There will never be a shortage of people trying to part you from
your money. In our own family, my great aunt had caregivers that embezzled hundreds of thousands
of dollars from her in her last year of life.
... ... ...
Dana Anspach , certified retirement planner, retirement management analyst, Kolbe Certified
Consultant, is the founder of Sensible Money,
LLC , a registered investment advisor with a focus on retirement income planning based in Arizona.
She is the author of "Control Your Retirement Destiny" (Apress), writes for About.com as its Expert
on MoneyOver55 and contributes to MarketWatch as a RetireMentor.
May be not collapse but it's already 6 years from 2008 crash and it is time to start thinking about
"What's next?". And before 2008 there was a crash of 2000. Do we have two more years, four more, six
more years ?
And another one of the big problems that we are facing is something called "normalcy bias". The
following is how Wikipedia
defines it…
The normalcy bias, or normality bias, refers to a
mental state people enter
when facing a disaster. It
causes people to underestimate both the possibility of a disaster occurring and its possible effects.
This often results in situations where people fail to adequately prepare for a disaster, and on
a larger scale, the failure of governments to include the populace in its
disaster preparations.
The assumption that is made in the case of the normalcy bias is that since a disaster never has
occurred then it never will occur. It also results in the inability of people to cope with a disaster
once it occurs. People with a normalcy bias have difficulties reacting to something they have
not experienced before. People also tend to interpret warnings in the most optimistic way possible,
seizing on any ambiguities to infer a less serious situation.
Over the past several years, the U.S. economy has been relatively stable. And that is a good thing.
But it has also lulled millions upon millions of people into a false sense of security and complacency.
At this point, most Americans consider 2008 to be a temporary bump in the road, and most assume that
the U.S. economy will always be strong.
Unfortunately, that is not the truth. As I have written about previously, the long-term trends
that are destroying our economy
have continued to get worse since 2008, and none of the problems that caused the last financial
crisis
have been fixed.
We are steamrolling toward the edge of an economic cliff, and most people in our entertainment-addicted
society are totally oblivious to what is going on. So they are not doing anything to get ready for
the immense economic pain that is coming. The following are 16 signs that most Americans are completely
unprepared for the coming economic collapse…
Forty percent of individuals in the U.S. said they could not or probably could not come up
with $2,000 if an unexpected need arose, according to research by Atif Mian of Princeton University
and Amir Sufi of the University of Chicago Booth School of Business.
#2 In that
same study, Americans were asked the following question…
"Do you have 3 months emergency funds to cover expenses in case of sickness, job loss, economic
downturn?"
An astounding 60 percent of people that responded said that they do not.
#3 Another study found that less than one out of every four Americans has enough money
stored away
to cover six months of expenses.
#4 Some people are actually trying really hard to get ahead, but admittedly that is really
tough to do when we are all being
taxed into oblivion. In fact, it was reported this week that Americans now spend more on taxes
than they spend
on food, clothing and housing combined.
#5 Right now, more Americans are dependent on the government
than ever before. In fact, according to the U.S. Census Bureau,
49 percent of all Americans live in a home that currently gets direct monetary benefits from
the federal government.
#6 It is estimated that
less than 10 percent of the entire U.S. population owns any gold or silver for investment purposes.
That is a stunning number.
#7 It has been estimated that there are
approximately 3 million "preppers" in the United States. But that means that almost everyone
else is not prepping.
#8-16 The following are nine more statistics that come from a survey conducted
by the Adelphi Center for Health Innovation. As you can see, a significant portion of the population
is not even prepared for a basic emergency that would last for just a few days…
44 percent don't have first-aid kits
48 percent lack emergency supplies
53 percent do not have a minimum three-day supply of nonperishable food and water at home
55 percent believe local authorities will come to their rescue if disaster strikes
52 percent have not designated a family meeting place if they are separated during an emergency
42 percent do not know the phone numbers of all of their immediate family members
21 percent don't know if their workplace has an emergency preparedness plan
37 percent do not have a list of the drugs they are taking
52 percent do not have copies of health insurance documents
"Past performance is not an indicator of future results":
Pseudo-mathematics
and financial charlatanism, EurekAlert: Your financial advisor calls you up to suggest a new
investment scheme. Drawing on 20 years of data, he has set his computer to work on this question:
If you had invested according to this scheme in the past, which portfolio would have been the
best? His computer assembled thousands of such simulated portfolios and calculated for each one
an industry-standard measure of return on risk. Out of this gargantuan calculation, your advisor
has chosen the optimal portfolio. After briefly reminding you of the oft-repeated slogan that
"past performance is not an indicator of future results", the advisor enthusiastically recommends
the portfolio, noting that it is based on sound mathematical methods. Should you invest?
The somewhat surprising answer is, probably not. Examining a huge number of sample past portfolios---known
as "backtesting"---might seem like a good way to zero in on the best future portfolio. But if
the number of portfolios in the backtest is so large as to be out of balance with the number of
years of data in the backtest, the portfolios that look best are actually just those that target
extremes in the dataset. When an investment strategy "overfits" a backtest in this way, the strategy
is not capitalizing on any general financial structure but is simply highlighting vagaries in
the data. ...
Unfortunately, the overfitting of backtests is commonplace not only in the offerings of financial
advisors but also in research papers in mathematical finance. One way to lessen the problems of
backtest overfitting is to test how well the investment strategy performs on data outside of the
original dataset on which the strategy is based; this is called "out-of-sample" testing. However,
few investment companies and researchers do out-of-sample testing. ...
{If a stock is currently way overvalued, it is more likely to get picked.}
Yes, that is called the "herd instinct". And when the lemmings all go over the cliff, we
all go with them ...
A balanced portfolio is best. Old fashioned but replete with good sense: One-third high-risk
(such as stocks), one-third medium risk (such as bonds), one-third very low risk (such as the
home you own and live in).
Or some such balanced variety of investments. Seeking interminably high-risk, high-return
investments is for suckers.
And why hedge-funds that pay hundreds of millions of dollars to have the fastest telecom-link
to an exchange (for high-frequency trading) is allowed, thus giving them a great advantage
over the rest of us peons dealing via the Internet, I will never ever understand.
The disparity in the ability to trade between them (a select few) and us is patently obvious.
It's an example of the world gone berserk, as happens all too often in America with its
unfettered "free enterprise" ...
I'd agree with pth above: the industry at the research side is extremely sophisticated (as
is anyone whose business is to do modeling right (i.e. they make money when their model is
good)). This article blurb is conflating the research world with the sales world, and in the
sales world they make money by convincing people to hand over money. This is completely orthogonal
to modeling rectitude.
{... the portfolios that look best are actually just those that target extremes in the dataset.}
Just one more ruse in a profession replete with them.
Huckstering is not new to selling equities, and will probably never ever go away entirely.
Not until there are laws that allow an investor to sue a bank or investment adviser for portfolio-mismanagement,
with sufficient precision describing "mismanagement".
That works in France, btw. But one must be careful to work through an adviser that, in turn,
is working for a entity that can afford to lose the case.
I wonder what percent of the US population even has a financial advisor? I'd think that
would be a luxury good if it were not a luxury bad:<)
My wife and I each have some index funds laying under our 401K pillows and she also is sleeping
on her firms EMPP. I have known some people that traded and made a few bucks and I have known
some people that traded and lost more than a few bucks.
... ... ...
Active portfolio investing is a rich man's game and a working man's obsessive compulsive
disorder. Stashing money in a low fee index fund or a managed fund that has a good manager,
for as long as they stay, is saving and saving for retirement makes good sense. Chasing a higher
risk for a shot at a higher yield ain't exactly saving, but it ain't really investing either.
Even in Vegas, there are a few players that beat the house, but they all cannot. Only a few
winners can take a bigger haul that everyone else.
I've been teaching a course on decision theory to freshman/sophomore honors college students
for a number of years; Because financial decisions are so important, I urge them to think about
all of this early on. They are ~20 years old and have ~45-50 years ahead before they retire.
Early acquisition of good habits is a must if they are to educate their kids and retire in
some degree of comfort.
This is the handout I give them (talking about this on Monday):
No doubt that finance does not want for charlatans, but Bailey et al, the authors of the
paper (http://www.ams.org/notices/201405/rnoti-p458.pdf)
obviously didn't even bother to perform a cursory google search:
"While the literature on regression overfitting is extensive, we believe that this is
the first study to discuss the issue of overfitting on the subject of investment simulations
(backtests) and its negative effect on OOS [out of sample] performance."
Had they done so, they would have discovered any number of papers showing that mean-variance
optimization and its progeny are notoriously unstable and perform poorly out-of-sample (e.g.,
Frankfurter et al 1971; Bloomfield et al 1977; Jobson and Korkie 1980). DeMiguel, Garlappi
et al. (2009) reported the results of an extensive out of sample horse race showing that none
of the portfolio optimization models consistently performed better out of sample than a naïve
equal weighting strategy. (DeMiguel was highlighted in Andrew Haldane's much publicized Dog
and Frisbee paper.)
So Bailey et al. provide a double service. They remind us of the importance of out of sample
testing and the conceit of the mathematical.
A curious story, and one which should be taken with a mine of salt, has surfaced out of the
pro-Russian newspaper Iskra, which reports - so far on an entirely unsubstantiated basis - that
last Friday, in a mysterious operation under the cover of night, Ukraine's gold reserves were promptly
loaded onboard an unmarked plane, which subsequently took the gold to the US.
Tonight, around at 2:00 am, an unregistered transport plane took off took off from Boryspil
airport.
According to Boryspil staff, prior to the plane's appearance, four trucks and two cargo minibuses
arrived at the airport all with their license plates missing. Fifteen people in black uniforms,
masks and body armor stepped out, some armed with machine guns. These people loaded the plane
with more than forty heavy boxes.
After this, several mysterious men arrived and also entered the plane. The loading was carried
out in a hurry. After unloading, the plateless cars immediately left the runway, and the plane
took off on an emergency basis.
Airport officials who saw this mysterious "special operation" immediately notified the administration
of the airport, which however strongly advised them "not to meddle in other people's business."
Later, the editors were called by one of the senior officials of the former Ministry of Income
and Fees, who reported that, according to him, tonight on the orders of one of the "new leaders"
of Ukraine, all the gold reserves of the Ukraine were taken to the United States.
Indicatively, according to the latest IMF figures, Ukraine's official gold holdings are just over
40 tons, having doubled in the past decade:
Even Lord Rothschild, who invests over 2 billion pounds of his own dynasty's and other depositors'
cash through RIT Capital Partners, is ringing alarm bells this week: "With the world recovery
still fragile and reliant to a large extent on policy support [QE/money printing]", he warns,
"it is not hard to envisage m having to deal with shocks in the coming year." Yes, "shocks."
... ... ...
Abandoning a domesticated animal or withdrawing its supply of food can end in criminal convictions
here in the UK, yet the duty of care and animal cruelty legislation does not, it seems, apply to
human beings. This government has taken Britain over the line into barbarism, around 5 million Britons,
if they get their way, are headed for the Tory party knacker's yard.
Cameron seems fixated on trying to stop the unemployed or other victims of his money laundering
fraudster City funders from eating and sleeping. The Britain he wants to see is a sadistic place
where, as US writer Gore Vidal mockingly commented: "It is not enough to succeed, others must fail."
Only the selfish, the ignorant and the rich count as human in Cameron's financial determinism.
The Recovery™ - Bubble Back To the Bar For the Hair of the Dog That Bit You
"Double, double toil and trouble,
Fire burn and cauldron bubble.
Cool it with a baboon's blood,
Then the charm is firm and good...
By the pricking of my thumbs,
Something wicked this way comes."
William Shakespeare, Macbeth, Act 4 Sc. 1
And why would we expect anything different, given the lack of serious reform and the careful targeting
of the monetary expansion into the hands of the same old TBTF financial firms that have been distorting
m and misallocating capital for their own advantage since the repeal of Glass-Steagall?
The best way to cure the damage from a widespread, real economic collapse in the aftermath of
a financial asset bubble is surely a continuation of the failed policies of the past, and yet another
asset bubble targeting the most wealthy in the hope that something will trickle down to the rest.
Doing so means the only reason the Fed would change its monetary policy is if trouble in emerging
m had a direct effect on the US. There are two main channels – exports and financial m – but neither
looks likely to hurt the US unless the EM turmoil gets a lot more severe. Thus while the Fed may
make a greater show of consultation, and soak up some flak at the G20, its actions this year are
unlikely to change.
Exports
If interest rate rises drove big emerging m into recession, then that would hit US exports, but
any plausible effect is very small. A proper estimate needs a big equilibrium model, because you
have to consider currency and feedback effects, but you can get a pretty good idea just by
looking at where most US exports go.
The only member of the 'Fragile Five' to make the Top 15 is Brazil. Brazil buys 2.8 per cent of
US exports. Meanwhile, exports equal only 13 per cent of US output. Thus exports to Brazil amount
to less than 0.4 per cent of the US economy.
It quickly becomes clear that only a very broad emerging market slowdown – one that included China
or Mexico, for example – would have much effect on US exports. It remains the case that a US recession
can plunge the rest of the world into an export crisis; there are not many countries that can have
the same effect on the US.
Financial M
A more plausible way for an emerging market shock to hit the US is via financial m . Corporate
America earns a good share of its profits from emerging m . The Asian financial crisis in 1997 and
the collapse of Long-Term Capital Management in 1998 show how financial shocks from emerging m can
quickly hit Wall Street.
But as Capital Economics point out, both the Asian crisis and LTCM had short-lived effects on
US stocks, and the S&P 500 ended up rising by around 25 per cent in both of 1997 and 1998.
The effects have been similarly modest so far in 2013 and 2014. The S&P 500 is less than 4 per
cent below its all time high. A deeper EM crisis could mean greater losses for US banks and investors
but so far there is hardly an effect on financial conditions that would justify a change of Fed policy.
Flight to Safety?
So far the troubles in emerging m , far from being a drag on the US economy, have if anything
been a net stimulus. That is because ten-year bond yields have fallen. It is hard to know whether
that reflects capital flight to US Treasuries or merely a little less optimism about the US growth
outlook. Either way, it loosens financial conditions in the US.
An emerging market crisis could end up influencing the Fed sometime this year. But it would have
to become much more of a crisis – rather than just the wobbles we have seen so far – to activate
these channels and thus endanger the US economy.
The author quotes Mr. Rchard Fisher, President of the Dallas Fed as haqving said that 'the
US Central Bank must make policy according to what is best for America.' This policy sounds like
unilateralism in economics, closely similar to unilateralism in using arm forces that led to disaster.
Excellent table. A very diversified list. Undoubtedly a lot of good research will come out
of the QE experience.
An interesting hypothetical model would show a US increase in monetary supply and its ripple
effects out across the world economy. If a lot of US-fueled monetary expansion hits a country,
one presumes the domestic monetary authorities can counter it with some form of sterilization
(?) or macro prudential policy. Possibly, the domestic country could sop up incoming liquidity
with public debt and finance public investment. The opposite would be to allow a housing bubble
to take off.
I think US authorities are going to have to pay attention to the impacts of both expansion
and contraction in the wider world. I would say overall stability is a paramount goal of US policy.
An axiom is that countries have no permanent friends, just permanent interests. I think the
US permanent interest is international stability. How to achieve and sustain this goal has to
be reinvented every generation or so. One might say that today Fed Reserve policy is a bigger
policy tool than NATO.
"One might say that today Fed Reserve policy is a bigger policy tool than NATO." Or more likely
to be said is that Fed policy is like a financial thermonuclear ticking time bomb.
In regards to this line, from up above: "The S&P 500 ended up rising by around 25 per cent
in both of 1997 and 1998." Statistically speaking two samples makes no rule. Also, there are a
lot of variables at play in both cases, and also in the current one that make any analysis on
such lines flawed to begin with. You might argue though that there is no proof such events have
any long term effects.
"Unstable stability" is very dangerous for investors. It stimulates making reckless moves in order
to get above average return. While Mark Faber is perma bear watching video might be educational as a
immunization from making stupid moves now. Among other things this bull market is supported by executives
attempts to secure bonuses and related abilities to cut work force. But cutting work force at some point
needs to stop. Then what?
"It's not an opportune time" to buy US stocks but while it might be too early to buy some of the
beaten-down emerging m at these levels, Faber believes investors can make money in the longer-term
- "I think I can make the case that over the next five to 10 years, I will make more money by
buying now in the emerging economies then in the U.S."
According to St. Louis Fed, the Monetary Base has halted it's $100 B/mo growth and as of Jan,
added just over $10 B/mo…bout to go negative??? Big change in trajectory since November…prior
to taper $10B (now $20B/mo taper)??? Somebody draining the pool???
http://research.stlouisfed.org/fred2/series/AMBNS
click on 1yr or 5yr chart to see big change
http://research.stlouisfed.org/fred2/graph/?chart_type=line&s1id=AMBNS&s...
http://research.stlouisfed.org/fred2/graph/?chart_type=line&s1id=AMBNS&s... During periods
since '09 when the monetary base was flat, equities have been down / flat and then lifted by anticipation
of QE / QE execution. If this pattern holds (particularly w/ record leverage) stocks bout to get
clobbered. Also notable is that golds big upside runs happened during the flat periods or QE runoff
periods…
here are the last five months…after growing consistently by about $100B/mo all '13..Novembers
growth was $31B, Dec $13B…and likely going negative in next month???
2014-01: 3,749.462 Billions of Dollars
2013-12: 3,736.789
2013-11: 3,705.077
2013-10: 3,610.306
2013-09: 3,508.808
This slowdown is way in excess of tapering and looks more like reverse repo's kicking in???
Correlation to market downturns since '09 has been 100% when this happens.
mayhem_korner
have you ever heard N.N. Taleb's saying "that's like picking up nickels in front of a steamroller"...?
Or his other gem "it's not the frequency with which you are right that counts, but rather
the aggregate of your losses."
Dr. Engali
I like Marc Faber, but I'm still waiting on that 20% correction call from levels 40% lower
than where we are now.
The market is a policy tool and until that changes the only response is to BTFD. When policy
does change there will be no getting out.
kaiserhoff
Well said, Doc.
Faber has a sense of humor and a sense of style. He plays the game on a global scale, but which
"emerging m " is he talking about? Argentina, Venezuela, Greece, Colombia, Eastern Europe? What
is the last time one of these suckers emerged and stayed up long enough for someone to get their
money back, much less a profit?
mayhem_korner
I saw this clip live (in a moment of weakness, forgive me)...Faber was in part responding to
the shill commentator who in his comatose state declared that whatever the returns might be in
emerging m relative to the U.S., there would certainly be "less risk" in the U.S. So Faber's comments
were very, very crafty in dressing down that assertion.
I feel bad for anyone who actually takes this clowns advice.
mayhem_korner
Good thing there wasn't a global recession in 2013. Oh, wait...
NoDebt
What does the economy have to do with stock prices the last 5 years (or arguably longer)?
mayhem_korner
Everything. The more the sheeple have been sold on the Keynesian myth that monetary stimulus
is needed to jump-start the economy, the more stawks have been inflated. Prolly a 90+ R-squared
on that.
Spitzer
The longer the realists like Marc are wrong, just means the worse it will be when it happens.
zebrasquid
Funny, if you call him out on being wrong on his ongoing bearishness he bristles and says "show
me where I ever said to short stocks!"
really, Marc?
Your predictions of 30% crashes would not lead one to believe that a short position would be
your advice?...
he likes to hedge alright..his words.
deflator
The difference between this long running bull market and the previous ones is there was
some actual substance besides hopium behind them.
For example, the runup to the dot.com bubble crash in 2000 had tremendous investment in internet
technology and, I think more importantly the paradigm shift of U.S. manufacturing to China. (and
the profits U.S. companies were enjoying via the labor arbitrage, lack of regulation, new customers,
etc.)
This bull market is backed purely by confidence in central bank intervention without any
underlying premise other than recovery to the good ole days.
From comments: "That comes from the seasonally-adjusted household data, which did some weird things
and doesn't agree at all with the establishment data, so I'd take this with a grain of salt. Remember
that January data are driven entirely by seasonal adjustments, which can be highly inaccurate when attempted
in real time--in the unadjusted data, employment actually fell by millions in January, like it does
every year after Christmas."
Yes, but unemployment is at 6.6%! Happy times are here again! *snark.
comma1 -> comma1...
Headline from Boston Globe website:
Jobless rate falls to 5-year low of 6.6%
pgl -> comma1...
Yep - it fell and this time because the employment to population ratio increased a wee bit.
But much of that 5 year decline was alas from a fall in the labor force participation rate.
Fred C. Dobbs -> comma1...
US employers add 113K jobs; rate dips to 6.6% - via @bostondotcom
http://bo.st/1kkkkaW
NEW YORK (AP) - The U.S. stock market is moving higher in early trading after the government
reported a decline in the unemployment rate last month.
Earnings gains from several U.S. companies including Expedia also drove the market higher early
Friday. The market had its best day of the year the day before.
The Dow Jones industrial average rose 75 points, or 0.5%, to 15,700 shortly after trading began.
...
im1dc
Did anyone notice that local, State, and Federal jobs lost 33,000 in this report?
If government hiring were increasing to norms in all likely hood this jobs report would have
been a mildly good one.
The takeaway is that Republican/Tea Party forced austerity hurts America and increases unemployment.
Will someone please tell that story so the media will pick it up and run with it and maybe
start asking Republican/Tea Party candidates about what austerity is doing to America?
I know some might object to referring to today's trading as 'technical' but I think that is exactly
what it was.
By technical I mean that those in the know saw the market structure of positions, to which they
have an advantageous view, looked at the buying and selling pressures, saw a short term opportunity
to profit, and then jammed the futures up hard after the Non-Farm Payrolls number came out. They
ran the stops, and handed out some serious pain to traders who were positioned bearishly.
They can do this in the absence of a consensus of more organic selling volume, as opposed to computer
gamesmanship. In a light volume market, dominated by the hot money traders, they can almost write
their names in the snow with the tape. I showed a picture of it at the time, but a while ago when
AG Eliot Spitzer was taking on Wall Street, they made a nice picture of a hand 'giving him the finger'
using the 5 minute SP futures. You can't make this stuff up. If you want to be a short term trader,
you need to understand and respect that. In the intraday trade, fundamentals don't mean squat, unless
they are driving the herd to do something in force.
That is not how it always is, at least not to this degree. But with computers dominating the course
of the intraday trade and regulators held at bay, its taken on a larger footprint than what might
ordinarily might be expected.
The bad news is that in the face of some exogenous bad news, I would think this market is set
up to melt down. That is because it is a snarky, in your face 'professional market,' not based on
value but on bullshit, on short term money muscle and market gamesmanship.
Does this strike you as improbable? Talk to me after the next crash, when the economic sages are
running around waving their hands saying, 'what happened, what happened?'
And by the way, this is not sour grapes from a bear. I have 'no' short position and no stock positions
for that matter. I just think this is one hell of a way to allocate capital and revive the real economy.
It is a disgrace, and a shame.
Corporate cash piles have never been bigger, either in dollar terms or as a share of the economy.
The labor market, meanwhile, is still millions of jobs short of where it was before the global
financial crisis first erupted over six years ago.
Coincidence?
Not in the slightest, according to Jan Hatzius, chief U.S. economist at Goldman Sachs:
"The strength (in profits) is directly related to the weakness in hourly wages, which are still
growing at just a 2% nominal pace. The weakness of wages and the resulting strength of profits
are telling signs that the US labor market is still far from full employment.
Companies have been unable to raise prices much because of the economic recovery has been fragile.
But they've still managed to boost profits beyond anything ever seen before because they've got away
with employing as few workers as possible at as low a rate as possible.
Citi's credit group is bullish; but, as they admit, for all the wrong reasons. Bullish,
because they still believe that the extraordinary liquidity environment which has dominated the last
four years will remain in place this year (despite tapering) and for the wrong reasons because aside
from their doubts about the foundations of much of the economic recovery itself, nearly all the factors
that they would normally base their view on the m on seem to be pulling in the opposite direction.
In their own words, "everything is expensive; and the market is driven purely by a variant of
the Greater Fool's Theory."
Via Citi's Credit group:
...We are bullish...
For the wrong reasons, because aside from our doubts about the foundations of much of the economic
recovery itself, nearly all the factors that we would normally base our view on credit on seem to
be pulling in the opposite direction:
Credit fundamentals are deteriorating. Although the fragile European and global recovery
should support earnings, we expect leverage to rise further as companies push shareholder value.
Valuations are increasingly unattractive. Scored against 20 different fundamental metrics,
credit spreads come in as 'Tight' or 'Very tight' on every single one of them at the moment. The
yield offered by € IG corporate credit is in the 4th percentile looking at the last ten years
– hardly a compelling case for investing if you look at credit from a total-return perspective.
The marginal money is going elsewhere. Judging by our survey, inflows into corporate
credit have been on a falling trend for 18 months and are now close to neutral at a five-year
low. This weakens the technical that has so often left the credit market almost impervious to
negative headlines in recent years.
Market composition is deteriorating. We think the European credit market should see
a record volume (~€90bn) of subordinated debt issuance next year. While some of that (the AT1
issuance) will remain outside the indices for now, the market will still have to absorb a lot
of additional risk.
And to top it off, positioning in the credit market is very different. The rush into
beta may have further to go, but already the rally we have seen since September has created a
vulnerability through higher-beta exposure in the market. We reckon that it is at least comparable
to the one that was exposed by the Fed's change in tone on tapering in May.
We'd argue that m may be driven by a variant of the Greater Fool's Theory, where the underlying
rationale for many would in essence be:
"I don't like credit here, but I don't like other assets very much either (other than, perhaps,
equities). I don't see what turns the market any time soon and I can't afford to sit and wait
for a better entry point, especially while central banks are backstopping everything. I'll have
to take more risk and then sell to someone else when I see a trigger ahead. Worst case, I'll be
in the same boat as everybody else."
We are not arguing that this is irrational – on the contrary, for individual investors whose performance
is tracked on a monthly, weekly or daily basis, this argument seems entirely rational – especially
against the perception that central banks can no more afford to let the prevailing equilibrium slip
today than they could in 2009.
But the sum of that individual rationality is a market with a very obvious vulnerability.
When no one sees an immediate risk of losing, when positions get ever longer and when valuations
are stretched further and further as a result, less and less is needed to eventually topple the consensus.
Longer-term, it is a recipe for breeding black swans.
So the inherent challenge is to predict how long the Greater Fool's game goes on.
However, the more tension that builds up between market valuations and fundamentals and the
more stretched positions get, the more likely a subsequent selloff becomes.
Where's the value? Spreads look tight to fundamentals on every single one of the 20 metrics
CarrierWave
The Market is expensive? - Come back in a month after the SP500 breaks above 1850 and closes
in on 1900, and then read this same article again.
Point is that this sort of articles is useless in determining when the market will really top
before the next Bear market.
And.. No one ever knows beforehand when M Top.
Conclusion? - Stay with the trend. Thanks to the FED, I am grateful to having seen my 401K
going 50-80% higher since Nov-2011.
No matter how many articles of this sort ZH will keep posting, it's the FED who drives
this market higher still.
Since when has labeling anything you disagree with "Socialism" a substitute for poltiical discourse?
We embarrass ourselves as a nation to the rest of the world when we do this.
Yes S&P500 can go to 2000. But it can go to 1000 too... The key question is this a new normal or
Fake Normal. Is this "normality" natural or tenable in the long term or it reflects temporary and potentially
reversible factors.
"I've got plenty of common sense ... I just choose to ignore it."
- Calvin, from Calvin and Hobbes
By the time the Times Square ball landed, U.S. equity m had closed the books on one of the best
years in recent history. Oecember's further rise of 2.5% put the capstone on an amazing year for
the S&P 500 Index, which finished 2013 up 32.4%. New historic highs on this index were reached
routinely throughout the month. Small-cap stocks, as represented by the Russell 2000® Index, added
2% in December to finish the calendar year up a remarkable 38.8%. Yes, you read that correctly: Small-cap
stocks rose almost 40% in a single year.
The "common sense" justifications for these dramatic moves are now well documented. The Federal
Reserve (Fed) model, which compares earnings yields on the S&P 500 Index (the inverse of price/earnings)
with the Treasury yield, clearly signals to load up on stocks. Common sense also tells us that profit
margins are at an all-time high, so clearly it's a good time to be buying stocks. Yellen's dovish
background, common sense tells us, is yet further reason to expect continued loose monetary policy
and accommodation. And, finally, common sense dictates that recent upward gross domestic product
(GOP) revisions, lower unemployment numbers, and a successful holiday retail season, means that of
course it's time to load up on stocks.
Here's the problem: We don't buy the common sense. And so, like the philosopher boy above, we
choose to ignore it. We suggest you do the same, but for good reason.
First, the Fed model, while intuitively appealing, is a relative measure. Yes, bond yields are
ridiculously and artificially low, so of course earnings yields are going to look attractive on a
relative basis. But we're trying to make money in an absolute sense, not a relative one. What if
bonds and stocks are BOTH overpriced? Then what? Oh, and one more inconvenient truth-the Fed Model's
track record of forecasting future returns is actually quite abysmal.
Second, yes, we'll concede that profit margins are at all-time highs-an undeniable fact.
Here's the problem: Profit margins are reliably mean-reverting, which means that hitting an all-time
high is not a cause for celebration but just the opposite-a reason to be afraid.
Third, yes, quantitative easing can continue for some time, maybe even decades. But that isn't
a reason to get excited about stocks. In fact, we believe quite the opposite. What it means is that
if that is true (and we don't believe that it will be), then we've got much bigger problems on our
hands because stock returns going forward are going to be dismally below what they've delivered for
the past 150 years of our modern industrial society.
And finally, ah, yes, GDP growth! Too bad GDP growth has historically had zero to mildly negative
correlation with stock market returns. In other words, even if GDP growth is resuscitated, even if
2014 turns out better than we thought, so what! Economic growth-across developed countries, across
emerging countries, across time-has told us absolutely nothing about future stock market returns.
Sorry to deliver the bad news.
So, we ignore common sense and instead rely upon the unconventional wisdom of, you guessed it,
valuation. Rather than load up on stocks, we remain cautious and nervous because, from a valuation
perspective, U.S. stocks look downright frothy. And, if the global m continue to rally into 2014
and beyond, it is more likely that we'll trim. By the end of November, our official seven-year forecast
for the S&P 500 Index was -1.3 (real) and our forecast for small-cap stocks, at 4.5%, is worse than
it was during most of 2007. Quality, a large position in the fund, has also seen its forecast come
down as it, too, has had quite a nice run. Forecasts for quality are still quite positive, so we're
happy to continue owning these stocks but becoming less happy by day. Outside of the U.S., the only
groups that we are somewhat optimistic about are value stocks, particularly in Europe, and emerging
equities, which we think are priced to deliver 3.4% annually over the next seven years.
It's possible like Chris Hedges suggest to view creation of a National security state as a reaction
of elite to the fact that the current generation in Western countries will be unable to achieve similar
level of prosperity as their parents. That's why the elite feels an urgent need to create military and
total surveillance-based mechanisms of suppressing latent protest which materialized in Occupy Movement.
Putting them on the same page as Soviet rulers who also responded to the inability to fitful promises
of "scientific socialism" (and the major one was to exceed productivity and well-being of capitalist
nations) with the creation of brutal totalitarian state and KGB.
January 11, 2014
"In the same way, those who possess wealth and power in poor nations must accept their own responsibilities.
They must lead the fight for those basic reforms which alone can preserve the fabric of their
societies. Those who make peaceful revolution impossible will make violent revolution inevitable."
The Jobs number sucked out loud this morning, as the economy added a meager 74,000 jobs, compared
to an expected number of 197,000. That's a swing and a miss. Both hourly earnings and average workweek
missed as well. Today's box scores are included below.
The good news was that the unemployment
percentage dropped hard from 7.0% to 6.7%. Huzzah! Stocks rally back, and the VIX plummets.
The fly in that holiday toddy is that they did it by whacking the denominator in the unemployment
ratio, declaring about a half million or so able bodied workers to be the new walking dead. (Hey,
I was just kidding about liquidating people as the next move the other day.)
Capping that bit of cheer off, US retailers reported their worst holiday season since 2009.
Let's talk.
Stimulating the economy is not a bad idea when it is in shock from a financial crisis brought
on as the result of massive systemic fraud and financial asset bubbles perpetrated by the financial
system. And yes, austerity has been proven wrong, again and again, and is the stuff of puritans and
pigmen.
But stimulating the economy by giving more money directly to the same self-serving jokers
that caused the problem in the first place, AND failing to correct the massive distortions in the
economy that have been growing through horrible policy decisions over a period of years, is not exactly
what Lord Keynes might have had in mind, ya think?
The Banks must be restrained, and the financial system reformed, with balance restored to the
economy, before there can be any sustainable recovery.
"Those who fail to exhibit positive attitudes, no matter the external reality, are seen as maladjusted
and in need of assistance. Their attitudes need correction...
Suddenly, abused and battered
wives or children, the unemployed, the depressed and mentally ill, the illiterate, the lonely,
those grieving for lost loved ones, those crushed by poverty, the terminally ill, those fighting
with addictions, those suffering from trauma, those trapped in menial and poorly paid jobs, those
whose homes are in foreclosure or who are filing for bankruptcy because they cannot pay their
medical bills, are to blame for their negativity.
The ideology justifies the cruelty of unfettered capitalism, shifting the blame from the power
elite to those they oppress."
Chris Hedges
Here is a recent conversation I had with a friend about the current state of the US recovery. As
an accountant with a wide range of exposures, I enjoy hearing his perspective since I no longer have
that sort of current insight into the corporate culture in America. I have years of background running
large businesses in corporations, and some forays into large scale M&A work, so I have seen quite
a bit of it. The methods rarely change, merely the guises and degrees.
Here are excerpts from his
side of the conversation with only one parenthetical comment of my own.
"I don't think we're seeing profits in a traditional sense. Instead, it appears to me that we're
watching a long, drawn out LBO'ing of America. It appears that companies are liquidating
capital and returning it as opposed to earnings spreads on revenue.
It seems like we're seeing the final blow-off phase that started with the stock option
becoming the primary form of compensation for corporate talent. By drawing out the LBO, they
re-stock their options each year with a guaranteed return thanks to the Fed and their own Treasury
Departments.
The problem is that you can't have systematic corporate buybacks with employment/economic growth
as they create diametrically opposite outcomes. The more work I do, the more I conclude that
the US economy has not expanded since 2006.
I was looking at mutual fund data the other day and it showed that people moved their fixed
income money into domestic equity - $185 billion in liquidated bond funds to buy $175 billion
in equity funds. This happened after the Fed announced tapering was on the table. Just like the
gold market, I suspect that "someone" forced the liquidation of bond funds and herded the money
into equity funds to keep the rally going. (Ithink it is perfectly reasonable to
flee bond funds at any time that interest rates are turning higher. Bond funds often take it on
the chin in such a deleveraging of a long term interest rate trend. However, I think the whole
taper thing was hyped and used by the wiseguys, as are most things these days by our financial
masters of the universe. - Jesse)
Coincidentally, corporations used half a trillion in cash flow on buybacks. It's a
liquidity game but with limitations. What's the next asset that can be liquidated or levered?They're still working on gold but sometime soon, the price of gold will be set in the East,
where the gold resides. Agricultural commodities are being liquidated but that ensures a
drop in planting next year. Oil is too valuable on the geopolitical front to liquidate.
There are certainly winners in this economy but far more losers. At some point,
the weight of the losers acts against the winners, many of whom are levered up with confidence.
Corporations can liquidate equity capital but we all know how the LBO'd companies operated in
the 1990's. In many ways, they've gotten corporations to behave like consumers did in the
2000's, only this time they're trained to buy back their own stock. Every cycle has natural limits.
We know that corporate cash flow is no longer growing and we know that it's more expensive
to sell debt today than a year ago. We also know that the Fed sees the stock market as their
proof of success. So how does this shakeout? If corporations are a lemon, how much juice can you
squeeze out of the lemon?"
Although I do not wish to be an alarmist, I have to say that this trend of attempting to sustain
the unsustainable has gone on longer than I had previously thought possible.
I am fairly sure that the next crisis will bring these things to a head and some sort of resolution.
But therein also lies great danger. Philosophies that have grown time can have deep roots, and when
faced with what to them is an intolerable change, can react somewhat excessively. They may even welcome
the opportunity to act excessively and decisively, at least in their own minds, as the path to
winning.
When a ruling subculture that has become accustomed to crushing and liquidating things for its
own power and pleasure, whether it is natural resources, the environment, crops, animals, land, or
social organizations, eventually runs out of things, it can become frustrated and angry in its seeming
impotence to continue on, to keep expanding.
Indirectly and somewhat benignly at first, but with a growing efficiency and determination over
time, it will begin with the weak and the defenseless, attacking and objectifying them, even in the
most petty of ways and impositions. It will turn to its critics, and then everyone who is defined
by them as 'the other.'
That is when a predatory social and economic philosophy can turn into pure fascism, and start
liquidating people. And finally it liquidates and consumes itself.
But really, no one wakes up one morning and suddenly decides, 'Today I will become a monster,
and wantonly kill innocent women and children.'
Otherwise ordinary people get to that point slowly, one convenient rationalization for their 'necessary
and expedient' behavior at a time. After all, they are the good people, they are the strong, they
are the most successful and the favored.
They are the entitled, and not these others who would seek to drain them, drag them back
down. They are the champions of progress and achievement and civilisation, the hardest working,
and the epitome of mankind.
What could possibly go wrong?
"He prompts you what to say, and then listens to you, and praises you, and encourages you. He
bids you mount aloft. He shows you how to become as gods. Then he laughs and jokes with you, and
gets intimate with you; he takes your hand, and gets his fingers between yours, and grasps them,
and then you are his."
J. H. Newman, The AntiChrist
If you are one who thinks that the above 'could not possibly happen here,' and I am sure that there
are many, you may wish to read the following vignette from modern US history. Alan Nasser,
FDR's Response to the Plot to Overthrow Him
Speaking of optimism, stock market bullishness is at an extreme, with one bearish sentiment indicator
at the lowest level in its history going back 25 years, and at the lowest level since before the
1987 Crash.
Reported earnings and revenues have been flat for over two years, whereas the S&P 500 is up
60-65%, and the P/E has expanded 50%. The only two times in the 142-year history of the S&P 500
when a similar situation occurred with real reported earnings having contracted yoy along the
way was in 1986-87 and 1928-29.
Shiller's 10-year average P/E is above the levels historically when secular BULL M PEAKED (1881,
1929, and 1966-68) and thereafter experienced secular bear m lasting 15-16 to 20 years. Even a
best case scenario implies a ~0% real total 10-year return (before fees and taxes) and cyclical
drawdowns of 35-50%+ in the meantime.
The speculative leveraged meltup we have seen since summer-fall 2012 (Fed's "all in") is one
for the history books, if not one for which the history books must be rewritten.
Despite Wall St. (that depends upon inflating bubbles), Fed officials (who work for the TBTE
banks and Wall St.), and establishment economists (who serve the TBTE banks, the Fed, and Wall
St.) claiming that there are no bubbles anywhere (or they are incapable of seeing, or are not
permitted to see, bubbles), there are bubbles ABSOLUTELY EVERYWHERE (because the Fed/TBTE banks
intended there to be bubbles):
Stocks
Non-financial corporate debt to GDP
Real estate, including in China, Asian city-states, Canada, Australia, parts of Europe, and the
oil emirates
Wealth and income concentration to the top 0.01-0.1% to 1-10%
Equity market cap to GDP
Q ratio
Trophy properties
Farmland
Teslas
IPOs
NYSE margin debt
Stock buybacks
Derivatives to GDP
Total debt to GDP
Art
Vintage cars
Student loans and college tuition
Subprime auto loans
Bank reserves
Bank assets to GDP
Fed balance sheet to GDP
Professional athlete and CEO compensation
Professional sports franchise prices
Tight oil extraction and exports
There is also a bubble in the number of people claiming that there are no bubbles anywhere.
The bubbles are global and cumulatively far larger than anything experienced in history, even
larger in scale globally than in 1999-2000 and 2006-07.
The bubbles, Fed printing, bank cash hoarding, and the resulting EXTREME wealth and income
concentration to the top 0.1-1% to 10% is contributing to money velocity plunging and the pricing
of Millennials out of the housing market, causing household formation to collapse.
Bears have been in hibernation for so long (as in 1999-2001 and 2007-08) that no one remembers
where their caves are or if they are any still alive. The bulls have only themselves left to trample
in the next stampede out the exits (when, not if, it occurs) when the TBTE bankers finally decide
to pull the plug on (or deflate) the bubble, as they always do.
Reason for optimism or unreasonable optimism by the top 0.01-0.1% to 1%?
Ricardo
A friend sent me the following email.
The inability to see that the current monetary policy does not work in any mechanically
rational way is embedded in the culture of the professional and academic community. There
is an orthodoxy of thought in all the elite institutions of learning and then in all the government
and private applications of that learning. This group think will not change, as Schumpeter
explained, until all the old heads of academic economic departments die and a new generation
can impose a new orthodoxy. Professors and Central Bankers, who have spent their whole lives
writing papers and books from an Aggregate Demand, Quantity Theory of Money point of view,
are not capable of mentally confronting the possibility that everything they learned and taught
for their whole lives might be wrong.
All the cherished beliefs of a generation that low interest rates stimulate economic activity,
that increasing the quantity of money will increase bank loans and inflation, or that the economy's
growth can be judged by the level of government spending and consumption, are exposed as intellectually
bankrupt myths, are not effective in structuring policy, but the current orthodoxy makes it
culturally and professionally impossible to admit that.
Bruce:
Ricardo, brilliant. Thank you and thank your friend for his/her clarity in succinctly stating
the obvious that obviously cannot be admitted by establishment economists.
The focus on public debt by many academics creates a political debate that obscures the structural
drag effects of demographics, "globalization"/"trade" (neo-imperial "trade" regime), PRIVATE debt
to wages and GDP, and the resulting end of the reflationary effects on the growth of economic
activity when the cumulative imputed compounding interest claims of private debt on wages and
GDP are so large as to no longer permit growth of private economic activity.
Neither supply-side nor Keynesian policies can resolve the secular Long Wave debt cycle
we currently face after 32 years of falling nominal interest rates and the reflationary effects
from increasing debt to wages and GDP. More private debt (debt-money lending/deposits) to wages
and GDP to increase supply does not work when there is too much private debt to service.
(Total rentier income [interest, dividends, and capital gains)] received disproportionately
by the top 0.1-1%, and total gov't receipts combine for an equivalent of 51% of GDP, 120% of public
and private wages, and 145% of private wages. The hyper-financialized economy and local, state,
and federal gov't spending at 35% of GDP is resulting in a private sector so burdened by debt
service, i.e., "rentier taxes", and gov't taxation that it cannot grow.)
Nor is more public debt to wages and GDP successful in increasing gov't spending to encourage
private sector growth when the private sector is burdened with unprecedented debt.
By definition, secular highs in debt to GDP coincide with bubbly asset values to GDP, which
in turn is reflected by extreme wealth and income concentration, as the top 1-10% receive 20-50%
of income and hold 40-85% of all financial wealth.
The secular debt constraint to real GDP per capita precludes further supply-side expansion
of debt, whereas extreme wealth and income concentration and runaway central bank reserve expansion
causes asset bubbles, further hoarding at no velocity by the top 1-10%, and plunging money multiplier
and velocity.
Historically, high debt/GDP, asset bubbles, and extreme wealth and income concentration are
unambiguous indications of sub-optimal incentives, gross price distortions, misallocation of flows,
and precursor conditions to decelerating real GDP per capita, financial panics, currency crises,
structurally high labor underutilization, social instability, political reaction, and war.
Then add the structural ("permanent"?) drag effects from peak Boomer demographics AND Peak
Oil (and net energy per capita), and the effects of debt and inequality are exacerbated (reinforced).
The median household income per capita for the bottom 80-90% of US households is equivalent
today to the country GDP per capita in eastern Europe and the wealthier areas of Central and South
America. The bottom 50-60% now have household income per capita of Mexico, poorer South and Central
Americans, and South Africa.
The typical American male under age 35 receives an income of 60% of that of his generational
predecessor in 1970-73 after taxes, inflation, and the effects of higher costs to income for energy,
housing, education, and medical services.
The typical college grad today (the 50% who are employed or not underemployed or unemployable)
receives a salary similarly adjusted at the equivalent purchasing power of the minimum wage in
1970.
We should thus not be surprised why Millennials are staying home, or moving back in, with Mom
and Dad (or Mom or Dad); why household formation is collapsing; why Millennials' headship rate
is at a record low; why Millennials are not marrying; and why the birth rate for Caucasian females
is converging with that of Europeans, Japanese, Singaporeans, and Taiwanese.
In spite of all of this, or because of it, the stock market is melting up and the top 0.1-1%
have virtually disengaged from what remains of the productive sectors of the economy on which
the rest of us depend for paid employment and purchasing power.
Now the owners of most of the financial wealth and the means of production of goods and services
and the managerial caste that facilitates economic activity intend to accelerate automation of
paid employment, expand "trade" via an Asian NAFTA, increase immigration to the US, further increase
surveillance-state capabilities, and impose "austerity" on the 50% "takers".
In the context of such conditions, it's no wonder economists spend most of their time focused
on attempting to determine how many angels can dance on the head of the proverbial pin. No one
gets paid nor receives tenure, a department endowment fund, and a pension by looking out of the
window of the ivy-covered tower at the real world and telling his peers to do the same and write
about it.
We have gotten to a point when even the most tenured economists have finally admitted the truth,
and in the process none other than JPMorgan itself has just issued a chart titled "The era of
central bank-driven equity rallies."
Is the U.S. consumer tapped out? If so, how in the world will the U.S. economy
possibly improve in 2014? Most Americans know that the U.S. economy is heavily dependent on consumer
spending. If average Americans are not out there spending money, the economy tends not to do very
well. Unfortunately, retail sales during the holiday season appear to be quite disappointing and
the middle class
continues to deeply struggle.
And for a whole bunch of reasons things are likely going to be even tougher in 2014. Families
are going to have less money in their pockets to spend thanks to much higher health insurance premiums
under Obamacare, a wide variety of tax increases, higher interest rates on debt, and cuts in government
welfare programs. The short-lived bubble of false prosperity that we have been enjoying for the
last couple of years is rapidly coming to an end, and 2014 certainly promises to be a very "interesting
year".
The Last but not LeastTechnology is dominated by
two types of people: those who understand what they do not manage and those who manage what they do not understand ~Archibald Putt.
Ph.D
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