Sep 18

Today’s News 18th September 2016

  • What Is A Globalist?

    If you've been following this election at all, you have probably heard the words "globalist" and "globalism" thrown around a lot.

    As The Rebel's Lauren Southern explains, some of the people using it are nationalists, or patriots (they see globalism as a threat to the sovereignty of their nation… whichever nation that happens to be). Others argue that the term "globalism" is just a scary catch-all word invented by Trump supporters, or the alt right. A word that means nothing at best, and is a racist code at worst.

    The reality is that globalism means something very specific, and very dangerous, if you value democracy, individualism, or any of the values of Western civilization.

  • IED Explodes In New York City; 29 People Injured, 1 In Serious Condition

    Update 2: Fox News is reporting a second explosion on 27th street.  The NYPD reportedly moved the media to safety before the blast indicating that it may have been a controlled explosion by police.  The device is believed to be a “pressure cooker” device similar to the one used in the Boston Marathon bombing with a cell phone and wires attached.   

     

     

     

    * * *

    Update 1:  The NYPD has potentially located a 2nd device on 27th Street in Manhattan.

    * * *

    An explosion occurred at 8:30PM this evening in New York City at 135 23rd Street (between Sixth and Seventh Avenue).  Early reports suggested the explosion came from an improvised explosive device (IED) stuffed inside a dumpster. 

    Mayor De Blasio confirmed at a press conference earlier that the explosion was believed to be an “intentional act” though noted there are no known links to any terrorist organizations at this time.

    The NYPD has confirmed that 29 people have sustained injuries and 1 is in serious condition.

    The NYPD Counterterrorism Unit has arrived at the scene and is conducting searches for other devices.  At least two buildings were evacuated in the vicinity of the incident.

    Earlier today a pipe bomb exploded in Seaside Park, New Jersey, as about 5,000 people were set to run a 5k Marine charity race (see: “Pipe Bomb Explodes At Marine Charity Run In New Jersey“).  It is unknown at this time if the two events are linked. 

     

     

     

     

     

     

     

     

     

     

  • This 40 Sq. Ft. New York Apartment Could Be Yours For $450 Per Month

    Ever feel like you just don’t have enough space to entertain guests or otherwise enjoy your New York City apartment?  Well don’t complain to this guy.

    Meet Jack Leahy and his 40 square foot apartment in Williamsburg, Brooklyn.  According to the New York Times, Leahy pays $450 per month for his pad, or $11.25 per square foot.  The apartment is 9 feet in length and 4.5 feet wide which is just enough room for a twin-sized futon mattress.  And standing room is not included throughout with the ceiling measuring only about 5 feet high on one end of the apartment. 

    NYC Aparment

     

    While $450 per month may seem like a bargain to most New Yorkers we think Leahy may have been taken for a ride.  We found some “nice” 700 square foot pads just across the bridge in Greenwich Village for $9.25 per square foot and they even come with a bathroom.  Though we suspect Leahy’s not too worried about the math, he’s just “happy to be in New York.”

    “I think I was happy to be in New York and that I actually had a place,” Mr. Leahy said. “It was just kind of comical. It is comical. Whenever I show people where I live, they always laugh.”


    NY Apartment

     

    Leahy also loves hanging out with the 7 other “artists and creative types” in his building which is fantastic news given that he shares 1 kitchen and 1.5 bathrooms with them.

    He awakens many mornings to the sounds of experimental theater: strange clanging, performers speaking in gibberish, chants. The space is ovenlike in the summer, cozy in winter.

     

    And though he doesn’t see much of them, he likes his quasi-roommates: seven other artists and creative types who live in the warren of more traditional rooms at the back of the building. “Though I’m always jealous when I see them sitting on chairs in their rooms,” he admits.

    We’re not contractors, but something tells us that Leahy’s apartment may not meet all of New York’s building codes (e.g. the need for two exits in case of a fire) and he may have just sacrificed his living space for his 15 minutes of fame.

  • On The Process Of Awakening

    Submitted by Charles Hugh-Smith via OfTwoMinds blog,

    We cannot help but feel a hunger for authenticity, honesty, spiritual solace and human connection, but these are precisely what is scarce in our social and economic structure.

    There is a tremendous amount of pain in our society. There are many sources of this pain: the emotional desertification of dysfunctional families, the knowledge that we don't fit in and never will, a widening disconnect between the narratives we're told are true and our experience, and a social and economic structure that tosses many of us on the trash heap.

    The lifestyle we're told we need to be happy is unattainable to many, and disconcertingly unsatisfactory to the top 10% who reach it.

    We cannot help but feel a hunger for authenticity, honesty, spiritual solace and human connection, but these are precisely what is scarce in our social and economic structure.

    The process of awakening has many paths. For some, the path starts with the incoherence of official explanations and narratives. For others, it's the inner search for truth via psychotherapy or spiritual practice.

    For some, it's an investigation into the way our economic and political hierarchy function. For others, art is the starting point: a film, a novel, a comic, a song.

    For many of us, it begins with this simple but devastating realization: I don't fit in. I don't fit in, have never fit in and never will fit in. I play along because it's easier on me and everyone I interact with to do so, and I value my independence which means I have to find a way to support myself. That is difficult, as what I like to do has little to no value in our economy.

    What interests me is how the epidemic of pain and alienation that characterizes our society is the direct result of how our economy and social order is structured. Incoherence, self-destruction, pain and alienation are the only possible outputs of the system we inhabit.

    I have explored this dynamic in my books, starting with Survival+ in 2009 and working forward to my latest book, Why Our Status Quo Failed and Is Beyond Reform. (My other books are: A Radically Beneficial World: Automation, Technology and Creating Jobs for All; Get a Job, Build a Real Career and Defy a Bewildering Economy; The Nearly Free University and the Emerging Economy: The Revolution in Higher Education; Resistance, Revolution, Liberation: A Model for Positive Change; Why Things Are Falling Apart and What We Can Do About It and An Unconventional Guide to Investing in Troubled Times.)

    I recently had an amazing free-form 1:50 hour conversation on these topics with New Zealand talk-show host Vinny Eastwood. Any conversation that stretches from the erosion of community to loneliness to Daniel Ellsberg to Marx to Taoism to alienation to Michelangelo Antonioni and on to the process of awakening is amazing in my view.

    Here's Vinny's page with listening/viewing/downloading options, and the program on Youtube (please ignore my goofy expressions): The magic of bitcoin and cryptocurrencies (1:49:54)

    My conclusion may strike many as radical, but to me it is self-evident: the primary source of the rot, insecurity, inequality and alienation of our society is the way we create and distribute money, which is the conduit for creating and distributing political power.

    I explain why this is so in my books A Radically Beneficial World: Automation, Technology and Creating Jobs for All and Why Our Status Quo Failed and Is Beyond Reform.

    If we don't change the way money is created and distributed, we change nothing. Money = power. If we don't devise a form of money that is beyond the reach of central banks and states, all "reform" is just window-dressing, simulacra of "change" that simply solidifies the system's bogus claim of being reformable.

    Cryptocurrencies are in their infancy. There will be many more iterations of Cryptocurrencies beyond bitcoin and Ethereum; recall that bitcoin went public in 2009.

    There are security challenges with cryptocurrencies, and the potential for central-state meddling via backdoors in computer operating systems. But once we understand that community and the potential for a less toxic society and economy are crippled by the centralized structure of the state and its money, then there is no way forward but to develop structures of money, work, community, purpose and meaning that are outside the direct control of the state and central bank.

    This sort of "crazy talk" is unwelcome. As I noted earlier this week on my chart of the Ministry of Propaganda, in the status quo, skepticism is always a conspiracy or a hoax.

    So instead we consider an exploding opiate epidemic, an epidemic of obesity and metabolic illnesses, a discourse of inchoate rage and a Grand Canyon-sized gap between what we're told is true and what we experience as true "normal." These things are not normal; they are manifestations of a system that can only generate one output: self-destruction.

    * * *
    My new book is #6 on Kindle short reads -> politics and social science: Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle ebook, $8.95 print edition) For more, please visit the book's website.

  • String Of Deadly Arsons Strike Chicago Leaving 1 Dead And Dozens Homeless

    The level of crime in Chicago these days is more on par with certain violent third-world countries than other U.S. cities.  In fact, we recently pointed out that Chicago has recorded more homicides so far in 2016 than Los Angeles and New York, combined, despite having a fraction of the population (see “Chicago Records “Most Violent Month In 20 Years“). 

    With 3 days left in the month of August, the city of Chicago has recorded 84 homicides making it the deadliest month since October 1996 when 85 homicides were committed.  In fact, as the Chicago Tribune points out, YTD through August, Chicago has recorded more homicides than New York City and Los Angeles, combined.  So far Chicago has recorded 487 homicides in 2016 compared to 222 in New York and 176 in Los Angeles.  This staggering data comes despite the fact that Chicago’s total population is roughly 20% the size of New York and Los Angeles.

    The latest wave of violent crime came on Friday when an arsonist set 7 fires in the Lower West Side neighborhood of Chicago.  The fires killed at least one man and has left as many as 40 people homeless according to The Chicago Tribune and ABC.

     

    At least seven separate fires were reported around 3 a.m., apparently set in alley trash cans that spread to garages and homes.  Around 100 firefighters from across the city were required to help extinguish the flames.

    Chicago

    Chicago

    Chicago Arson

     

    According to The Chicago Tribune, residents were slow to respond to the fires after dismissing “noises” from the flames as firecrackers from a nearby celebration of Mexican Independence Day. 

     

    The latest round of arsons come just days after Reginal Hester appeared in court for a blaze he set in the city’s South Chicago neighborhood that killed 4 people and injured two others.  According to ABC, Hester torched an apartment building after one its residents borrowed $10 and refused to repay him with sexual favors.

     

    Alas, we’re sure the Black Lives Matters folks will dismiss these recent arsons as just another unfortunate side effect of Chicago’s “racist” police force.

  • "Why Don't They Trust Her": A Look At One Of Hillary Clinton's Early Scandals

    In recent months the mainstream media has worked itself into a frenzy trying to defend Hillary from the various scandals surrounding her campaign.  There is seemingly no end to the “plumes of smoke” emanating from the Clinton camp including questions over Benghazi, missing emails, pay-for-play at the Clinton Foundation, strange “medical episodes”, etc, etc, etc.  All the while, the press simply can’t bring themselves to understand why voters never quite view her as a trustworthy candidate. 

    The problem, says Peggy Noonan of the Wall Street Journal, is that the Clinton’s have been embroiled in so many scandals dating all the way back to the 1970’s that their name has been branded into the American psyche as being synonymous with the word “scandal” itself.  While millennial voters are most familiar with the recent scandals (and we all know how well that is playing out for her, see: “Hillary’s Growing “Millennial Problem” Forces A Reset“), older voters have been hearing about the Clinton escapades for over a quarter century since they first entered public life on the national level in the early 90’s. 

    As such, the Wall Street Journal took a walk down memory lane by recounting one of Hillary’s early scandals that emerged shortly after she entered the White House and came to be known afterward as “Travelgate.”  It was out of this first scandal that Hillary’s critics said she first “revealed the soul of an East German border guard.”

    Then she—not he—messed it up. It was the first big case in which she showed poor judgment, a cool willingness to mislead, and a level of political aggression that gave even those around her pause. It was after this mess that her critics said she’d revealed the soul of an East German border guard.

    It all started less than four months after the Clinton’s moved to D.C. when 7 men working in the White House travel office were suddenly fired.  The same people had been running the White House travel office for 30 years and had successfully served multiple Presidents of both parties along the way.

    Hillary

     

    Needless to say, the press at the time was very surprised by the move to brutally fire non-political, career White House staff so early into Bill’s term.  Under pressure to answer for the firings, the White House initially offered up multiple stories that seemed to evolve daily.  Per the Wall Street Journal:

    Under criticism the White House changed its story. They said that they were just trying to cut unneeded staff and save money. Then they said they were trying to impose a competitive bidding process. They tried a new explanation—the travel office shake-up was connected to Vice President Al Gore’s National Performance Review. (Almost immediately Mr. Gore said that was not true.) The White House then said it was connected to a campaign pledge to cut the White House staff by 25%. Finally they claimed the workers hadn’t been fired at all but placed on indefinite “administrative leave.”

    Sound familiar?  It’s just a cough…no, it’s just allergies…no, it’s heat and dehydration…no, it’s pneumonia…

    Hillary even alleged that Bill Dale, a 30-year veteran of the travel office, was embezzling funds and called into the FBI to investigate.  While the FBI initially balked at the case due a lack of any evidence, they eventually relented and indicted Dale on embezzlement charges.  The trial lasted two weeks but it only took the jury two hours to acquit Dale of all charges. 

    Then, suddenly new details emerged from the notes of a White House staffer that suggested Hillary’s plan all along was to privatize the White House travel office and put it out for “competitive bid” to private companies.  And, as it turns out, Hillary had already identified the perfect winner of the “competitive” bidding process as none other than Harry Thomason, who just happened to be a long-time friend and fundraiser for the Clintons and had provided travel services for their 1992 campaign. 

    It emerged in contemporaneous notes of a high White House staffer that the travel-office workers were removed because Mrs. Clinton wanted to give their jobs—their “slots,” as she put it, according to the notes of director of administration David Watkins—to political operatives who’d worked for Mr. Clinton’s campaign. And she wanted to give the travel office business itself to loyalists. There was a travel company based in Arkansas with long ties to the Clintons. There was a charter travel company founded by Harry Thomason, a longtime friend and fundraiser, which had provided services in the 1992 campaign. If the travel office were privatized and put to bid, he could get the business.

    As the scandal grew, Hillary repeatedly denied any knowledge of the the firings, claiming under oath that she had “no role in the decision to terminate the employees” and that she did not “direct that any action be taken by anyone.”  Unsurprisingly, Hillary also had a difficult time remembering the specifics of her conversations with various staffers connected to the scandal.  Perhaps she fell and bumped her head back in the early 90’s as well?

    Of course, after 3 years passed an investigation by the GAO found that, in fact, Hillary did play a direct role in the firing of the 7 travel office employees.  Moreover, a memo originally written by White House Chief of Staff, David Watkins, surfaced which directly connected Hillary to the event saying “there would be hell to pay” if staffers did not conform “to the first lady’s wishes.”

    But, of course, by that time, the scandal had passed, the press had moved on and Hillary was able to simply dismiss any new questions as a futile effort of right-wing conspiracy nuts to raise doubts about a scandal that had been put to bed long ago.  A plan that the Wall Street Journal dubbed the “Clinton Scandal Ritual”:

    “Clinton Scandal Ritual: lie, deny, revise, claim not to remember specifics, stall for time. When it passes, call the story “old news” full of questions that have already been answered. ‘As I’ve repeatedly said . . .'”

    Seemingly not much has changed over the past 25 years….

  • DoNaLD TRuMP SLaYING THe MaNY HeaDeD MeDiA MoNSTeR…

    TRUMP SLAYS THE MANY HEADED MONSTER

  • Previewing Next Week's Main Event: What Will The BOJ Do? (Spoiler Alert: Probably Nothing)

    One week after we explained not once but twice that next week’s main central bank event is not the Fed – which won’t do anything – but the Bank of Japan, even CNBC has finally figured it out, observing with about a 7 day delay that “Everyone’s waiting for the Federal Reserve in the week ahead, but the real action may be coming out of Tokyo.” Well, thanks for that.

    But while it’s clear that Yellen won’t dare shock the market (which now trades with a 20% probability of a September rate hike and as we showed a year ago, the Fed has never hiked unless the market is already pricing in at lest 60% odds), the question remains – just what will Kuroda and the BOJ do, especially since as we wrote last week, not even the BOJ knows what it will do, and has instead flooded the market with news report trial balloons covering every possible, even contradictory, possibility. Which also makes the BOJ’s decision that much more important.

    As DB points out, “this week will be the litmus test for whether central banks are in shift mode as regards ongoing accommodative monetary policy. Investor consensus revolves around the notion that monetary policy has run its course and it “needs” to be supplanted by fiscal policy or at least combined with fiscal policy, via helicopter money, to be effective. The potential for a BoJ move on short rates and a shift in QE plus a Fed insistence on hiking despite market expectations (including a “hawkish” hold for September) might be considered to be consistent with a steeper curve.”

    Here is what DB’s Dominik Constam, one of Wall Street’s best credit strategists expects the BOJ will reveal on Wednesday:

    The BoJ is conducting a comprehensive review of monetary policy. It is fair to say that there is substantial uncertainty as to what they may choose to do but recent policy speak has suggested that further cuts in the deposit facility rate are possible as well as a shift in the duration target away from the 7-12 year sector towards the 3-5 year sector. The proposed logic would be to steepen the yield curve, offering extra NIM to banks whilst also alleviating pressure on the entitlement industry. Some Fed officials meanwhile have also chimed in regarding the concern for financial stability that emanates from low long yields that in turn have compressed risk premia across asset classes as part of a “hunt for yield”. The implication is that if long rates stay artificially low, there may be a case for earlier moves higher in short rates to compensate even if the data itself was less compelling for such a move, all else equal. In both cases the potential for a BoJ move on short rates and a shift in QE plus a Fed insistence on hiking despite market expectations (including a “hawkish” hold for September) might be considered to be consistent with a steeper curve. Even the ECB could be added to this mix after the recent “disappointment” around not committing to an extension of its QE program nor adjusting the parameters.

    In other words, in line with what we predicted ten days ago, Japan may engage in a reverse Twist, where it cuts short end rates while slowing down purchases of longer maturities to force the JGB curve steeper. Citigroup’s Brent Donnelly caught up to this idea this over the past week, and added the following notable color:

    there is an interesting and lively debate going on here at Citi and elsewhere about the JPY impact of the recently-touted BoJ actions. If they cut front end rates and reduce 30-year purchases in a Twist-type operation, is that good or bad for USDJPY? I feel it is 100% terrible for USDJPY but there are enough smart people disagreeing that I’m not fully confident. I think it is negative USDJPY because:

    1. It’s not great for Japanese banks (see Chart1, note they gapped lower overnight after the rate cut story came out in NY time).
    2. The last time the BOJ cut (and the last time the ECB cut) the currency ripped. There is no empirical evidence that rate cuts below zero are bad for a currency. There is a small body of evidence that rate cuts below zero are good for a currency.
    3. When the US did Twist, the currency ripped and equities tumbled aggressively as you can see in the next two charts.

    Overall I think what the market wants from the BoJ is pretty simple: Incremental stimulus. The composition of current stimulus, the shape of the yield curve and all that is just noise. If the BoJ buys foreign assets, USDJPY will explode higher and if they do not, it will go down. I really think trading the BoJ meeting is that simple… Note one important point made by Deegs this morning: US Twist flattened the curve and Japanese Twist would steepen the curve so it’s not unreasonable to guess the reaction in the currency would be opposite. That’s not my view but it’s certainly a reasonable view.

    So while DB and Citi agree on what the BOJ may (or may not do) with Japan’s interest rate (cut from -0.1% to -0.2%), and shifts to QE (fewer purchases on the long end, perhaps shifting the focus from 7-12 to  7-10 to 5-10 year bonds), others like CLSA take aim at a different aspect of the BOJ’s monetary lunacy, namely the ongoing nationalizaton of the stock market.

    According to Bloomberg, CLSA’s Nicholas Smith says he’s “absolutely certain” the Bank of Japan will stop buying exchange-traded funds tracking the Nikkei 225 Stock Average amid criticism its use of the measure is distorting the market.

    The central bank will make the change at its meeting next week, shunning ETFs following the price-weighted stock gauge in favor of those linked to more modern indexes, Smith said. He says he’s been talking to BOJ officials within the last three days, while declining to name them. BOJ board members have made no public indication of an impending shift in the ETF program ahead of announcing their monetary policy review on Sept. 21.

     

    The Nikkei 225 gives undue influence to certain stocks because it determines its rankings by the price of one share, rather than market capitalization. Fast Retailing Co., for example, accounts for 8 percent of the gauge, versus just 0.3 percent of the Topix. That means it benefits disproportionately from the central bank’s Nikkei 225 purchases. Since the BOJ almost doubled its annual budget for ETFs on July 29, the issues associated with the Nikkei 225 have become more pronounced, Smith said.

     

    “I am absolutely certain that they will shift their buying to pretty much Topix-based,” Smith, a Tokyo-based strategist at the brokerage, said by phone Friday. “The Nikkei 225 is a Flintstones index from the abacus era,” he said. “It’s been a laughing stock for a long time.”

    Perhaps he is right, although adjusting ETF purchases would be peanuts in the grand scheme of things, where the BOJ needs to inject trillions instead of trifling with billions in stocks here and there.

    * * *

    Finally, the most comprehensive assessment of the BOJ’s “comprehensive assessment” due next week, comes from Goldman’s Naohiko Baba, who has a rather unexpected conclusion: don’t expect much if anything, at all.

    Here is Goldman’s full report:

    Final update on BOJ’s “comprehensive assessment”

    At the next Monetary Policy Meeting (MPM) on September 20-21, the Bank of Japan (BOJ) will conduct a “comprehensive assessment” of trends in economic activity and prices under the current policy framework, as well as the policy impact, with a view to achieving its 2% price stability target at the earliest possible time. We gave our take on this in our August 5 Japan Views and September 7 Japan Views, and our overall view remains essentially unchanged. Below we provide a final update of our view in a Q&A format ahead of next week’s MPM, focusing on the most common queries we have fielded, particularly from overseas investors, since our last report.

    Key points

    • We believe the BOJ’s comprehensive assessment has four main objectives: (1) reiterate the positive aspects of its easing policy (quantitative/qualitative easing with a negative interest rate); (2) switch from quantitative easing to a negative interest rate policy (NIRP) as its primary policy tool; (3) correct the excessive impact of the easing policy on the yield curve; and (4) curve excessive market expectations of additional easing by extending the policy timeframe.
    • We expect the BOJ to retain its 2% target due to the risk of severe yen appreciation if scrapped.
    • The BOJ will highly likely move towards negative interest rates as its primary policy tool, as quantitative and qualitative easing are approaching the limits of their effectiveness. The BOJ also sees negative rates as an effective tool for combating the strong yen.
    • We think possibilities of both helicopter money and foreign bond purchases by the BOJ as extremely unlikely.
    • Although taking interest rates deeper into negative territory is likely to be seriously discussed at the policy meeting next week, we expect the BOJ ultimately to opt to push back the rate cut until a later date.

    Q1: What are the purposes of the BOJ’s comprehensive assessment?

    A1: We believe the BOJ’s review has four main objectives: (1) reiterate the positive aspects of its three-dimensional monetary easing policy (quantitative/qualitative easing a with negative interest rate); (2) switch from quantitative easing to a negative interest rate policy (NIRP) as its primary policy tool; (3) correct the excessive impact of the easing policy on the yield curve; and (4) dampen excessive market expectations of additional easing by extending the policy time-frame.

    Below we touch on each of these points.

    1. We believe the BOJ will attribute its inability to reach the 2% inflation target so far to deflationary pressure from external factors beyond its control, including lower crude oil prices, a slowdown in emerging market economies, and greater-than-expected downward pressure on the economy following the consumption tax hike, and explain how this impact has spread to backward-looking inflation expectations. In other words, we expect the BOJ to stress that its QQE with NIRP policy would have had sufficient clout to achieve its objective if not for the impact of such factors out of its control, and that this policy could still be effective moving forward.
    2. The BOJ faces various issues relating to its “quantitative” easing (QE) policy, such as (1) the likelihood that it will eventually reach a physical limit to its large-scale JGB purchases, (2) excessive flattening of the yield curve due to the combination of large-scale JGB purchases and the NIRP, and the concerns this has generated for financial intermediation, and (3) the drying up of liquidity in the JGB market. As such, we believe the BOJ has a strong desire to shift from QE to the NIRP as its primary policy tool (see Q3 below). At the same time, we think the BOJ seeks to remove uncertainty over the future direction of policy by clearly defining the fulcrum of its policy framework. In a recent speech, BOJ Governor Haruhiko Kuroda said that “in order to ensure the effectiveness of monetary policy…the important thing is…to maintain consistent and predictable policy responses.”[1]
    3. The excessive decline in interest rates, particularly in the super-long zone, has raised concerns over the potential impact on life insurance and pensions, and thus we believe the BOJ could well shorten the maturity of JGBs it purchases. However, we believe it will not shift its annual purchase target from ¥80 tn to a more flexible range of ¥70-¥90 tn, for example, as has been suggested by some observers (Sankei newspaper, August 9), given the risk of further yen appreciation should the market focus only on the lower figure of ¥70 tn.
    4. We expect the BOJ will effectively scrap its two-year time-frame for achieving its 2% inflation target in favor of the less defined and more ambiguous wording, “at the earliest possible timing.” This is not just because 3.5 years have passed already since the launch of the easing program, but because we believe the BOJ also aims to curb excessive market expectations for additional easing by redefining the QQE with NIRP as a long-term strategy, strengthening the bias towards status quo, rather than a quick-fix policy.

    Q2: Will the BOJ stick to its 2% inflation target?

    A2: We expect the BOJ to retain its 2% target due to the risk of severe yen appreciation if scrapped.

    The BOJ originally chose 2% as its inflation target primarily focusing on the impact on the exchange rate. The widely held view is that long-term exchange rate trends are formed based on purchasing power parity (PPP: a comparison of inflation levels between two countries). In many developed economies, such as the US, long-term inflation (or inflation expectations) is viewed as anchored around the 2% level, whereas in Japan, inflation levels were markedly lower. This is perceived to have formed the long-term trend in yen appreciation, from a PPP perspective. For this reason, the BOJ has had to make a strong commitment to achieving 2% inflation, an international norm, in order to reverse the long-term trend of yen appreciation. If it were now to scrap its 2% inflation target, forex market expectations could reverse completely as the BOJ would be viewed as tolerating a severe appreciatory yen trend. Also, we expect the BOJ not to adopt a more flexible band target such as between 1% and 3% at least at this stage.

    Q3: Why is the BOJ likely to choose the NIRP as its primary policy tool?

    A3: Within the current policy framework, QQE is approaching the limits of its effectiveness, so we think the BOJ wants to place the NIRP as its primary policy tool before this occurs. Another important reason is that the BOJ sees negative rates as an effective tool for combating the strong yen.

    We touched on the “quantitative” aspect of easing in Q1 (2) above. The “quality” aspect of the current policy, which centers on the purchase of equity exchange-traded funds (ETFs), has already seen purchases balloon out to ¥6 tn annually, and there is strong recognition now of three potential side-effects (see our August 3, 2016 Japan Economics Analyst).

    First, there is the possibility of across-the-board rises in share prices, including for companies that should be exiting the market or else languishing at low valuations due to poor earnings prospects. Second, stocks that are substantially overvalued by the market may become even more so on the influx of funds. Third, from a corporate governance perspective, we think the market’s surveillance function could be diminished. This last point, in particular, would appear to run contrary to the Abe administration’s corporate governance reform efforts.

    Furthermore, a simple estimate of potential risk from the BOJ’s equity holdings suggests this will likely surpass the BOJ’s capital even for a 1-year holding period. Under the current BOJ Act, the BOJ is prohibited from receiving loss compensation from the government. Because erosion of a central bank’s balance sheet could undermine confidence in the value of the currency, further expanding ETF purchases could be difficult. 

    We believe there is a strong willingness at the BOJ to move the focus on to its NIRP not only because its QQE options are approaching their limits, but also because the BOJ considers the NIRP to be an effective means of countering the strengthening yen.

    In a recent speech, Governor Kuroda stated that “The basic mechanism of monetary policy … is to drive the real interest rate higher or lower than the “natural rate of interest”. In normal times, this can be achieved by adjusting short-term rates; namely, simply lifting or lowering them.” He went on to say, “Any additional monetary easing entails ‘costs’ which negatively affects some sectors. That said, we should not hesitate to go ahead with it as long as it is necessary for Japan’s economy as a whole; namely, if its ‘benefits’ outweigh its ‘costs’”[2]. We think both statements can be seen as very supportive of the NIRP.

    Q4: What is the likelihood of helicopter money and foreign bond purchases by the BOJ?

    A4: We think both possibilities are extremely unlikely.

    Both helicopter money and foreign bond purchases are in a legal gray zone and therefore cannot be ruled out entirely (see our July 15 Japan Views, and August 30 Japan Views). With helicopter money, however, we see a major risk of the BOJ having difficulty exiting such a policy once it has been set in motion. This is because of the high possibility that giving the government a really convenient tool, namely monetary financing, would cause it to lose fiscal discipline. Given Governor Kuroda is a notable proponent of fiscal consolidation, we think the likelihood of him agreeing to such a policy is extremely low.

    With foreign bond purchases, we think they cannot be dismissed if positioned as a means of expanding the monetary base and not for the purpose of influencing foreign exchange rates. However, even if foreign bond purchases were positioned as a means of monetary base expansion by the BOJ, they would almost certainly be seen by the international community as an attempt to influence foreign exchange rates, in our view. We think foreign bond purchases would be very difficult, especially in light of the US Treasury including Japan on its new currency monitoring list in April 2016.

    Q5: What is the likelihood of the BOJ easing further at the September MPM (next week)?

    A5: If the BOJ were to position the NIRP at the center of its easing policy, we think that it would be only a matter of time before it takes interest rates deeper into negative territory, and that there will be serious discussions on the topic at the September MPM next week. However, we expect the BOJ ultimately to opt to push back additional easing until a later date.

    If the comprehensive assessment was to result in negative interest rates becoming the central pillar of the BOJ’s efforts to achieve its 2% inflation target, it may be natural to think the BOJ would then seek to immediately show a strong commitment to the NIRP, and therefore a deeper negative rate at the September meeting is a possibility. At the next meeting, however, we believe the BOJ will ultimately opt to stand pat and is likely to postpone a deeper interest rate cut for the following three reasons.

    First, in its July Outlook Report, the BOJ sharply raised its GDP growth forecast for FY2017 (to +1.3%, from +0.1%), and kept its bullish inflation forecast (+1.7%) for the same period. Behind this are two main measures on the fiscal front, including a postponement of the second consumption tax hike, and the formation of an economic stimulus package. By the time of the September MPM, however, the only additional macro data available to the BOJ since the July-end Outlook Report will be that for July. While the figures are mixed, we think macro data are unlikely to be weak enough to warrant a major downgrading of the overall economic assessment (see our September 5 Japan Economic Flash).

    The BOJ identified overseas economic developments as the largest downside risk to the economy and prices, but we note that the turmoil in the wake of the Brexit decision has eased, and Chinese macro data, among others, have somewhat improved. Based on the BOJ’s most fundamental approach, we believe that it would see no need to urgently implement additional easing measures if there was no basis for downgrading its economic assessment. 

    Second, because the September MPM and the US FOMC meeting will be held on the same day, the BOJ will need to make its monetary policy decision half a day ahead of the FOMC due to the world time differences. This means that, even if the BOJ were to decide to cut interest rates further, there is a risk of the FOMC decision nullifying the impact on the markets (especially the foreign currency market) of any additional BOJ easing. Considering the possible side-effects and the limited number of chances the BOJ has to take negative interest rates deeper, we believe it will need to think very carefully about the optimal timing when making its next move.

    Third, we believe there is considerable risk in the BOJ cutting rates further before ensuring a more stable steepening of the yield curve. While the yield curve has steepened significantly of late on anticipation of more flexibility on the maturity of JGB purchase, we think this mainly reflects expectations running ahead and that the curve may not stabilize based solely on any news of a more flexible purchase maturities. Rather, with market expectations driving wild fluctuations in yields, we think an actual decision could invite more volatility. If the yield curve fails to steepen in a stable manner in spite of the BOJ taking the negative rate deeper, we think this could have consequences for the financial intermediation function. Consequently, we expect the BOJ to adopt a phased approach, and to consider the timing of future rate cuts only after adjusting the maturity of its JGB purchases first.

  • Alabama, Tennessee, & Georgia Declare States Of Emergency As Gas Shortages Loom After Pipeline Leak

    As Native Americans protesters face arrest in North Dakota for blocking the construction of the Dakota Access Pipeline, TheAntiMedia's Carey Wedler reports a gasoline pipeline spill is currently unfolding in the South. The leak has prompted Alabama Gov. Robert Bentley, Tennessee Gov. Bill Haslam, and Georgia Gov. Nathan Deal to declare states of emergency.

    The Colonial Pipeline, which runs from Houston to New York, began leaking on September 9, spilling 250,000 gallons of gasoline, or 6,000 barrels. The pipeline was built in 1962, and the current leak in Helena, Alabama, is the largest one Colonial Pipeline has experienced in 20 years, Reuters noted.

     

     

    AL.com reported that according to the Colonial Pipeline company’s spokesperson, Bill Berry, the pipeline could still be leaking:

     

    “The leaking pipeline was shut down [last] Friday after the leak was discovered, but Berry said there may be additional gas still inside the pipeline. The leaking section of pipeline hasn’t been excavated yet due to safety precautions, so Berry said the condition of the pipeline and cause of the leak is still unknown.”

     

     

    Hundreds of employees and contract workers face health risks from inhaling vapor as they work overtime to clean up the spill, which the company says is contained to a mining retention pond. AL.com reports “the leak was discovered at the inactive mine site by employees of the Alabama Surface Mining Commission.”

    The governors of Georgia, Tennessee, and Alabama have declared states of emergency, not due to environmental concerns, but over the gas shortage that will result from the leak. After Colonial Pipeline announced Thursday there would be a delay in restarting the pipeline because “work activity was intermittent overnight due to unfavorable weather conditions that caused gasoline vapors to settle over the site,” the price of gasoline futures rose six percent… even as crude futures prices tumbled…

     

    As CNN reports, The major pipeline, one pipe of which has been severed, provides gasoline for an estimated 50 million people on the East Coast each day, according to company estimates. The cause of the leak has yet to be determined, according to the company's most recent statement.

    The pipeline's operator has said full service will not be restored until at least next week. The closure has set off an industry-wide scramble as suppliers seek alternative ways to transport gasoline to the East Coast.

     

    According to reports, the leak will likely start affecting drivers in the nearby states of Georgia, Tennessee, North Carolina and South Carolina within a matter of hours and may spread in coming days. Colonial Pipeline Co., which transports some 40% of the gas along the I-95 corridor says at least 250,000 gallons of gasoline have already been lost.

     

    Senior petroleum analyst Patrick DeHaan warned that some stations may run out as primary gasoline transportation shipping routes along the East coast have been temporarily closed.

     

    Not every station will be able to get the gasoline it needs, he said.

     

    “You’re going to see some places without gasoline,” he said. “It’s like a mini-hurricane.”

     

    The pipeline operator said that based on its current projections, parts of Georgia, Alabama, Tennessee, North Carolina and South Carolina will be the first markets to suffer potential supply disruptions.

    And sure enough the price of East Coast gasoline is soaring relative to the slide in West Coast… (4month highs for East Coast vs 1-month lows for West Coast)

    Gas prices typically fall at this time of year. Thursday was the day that stations in most of the country could start using the cheaper winter blend of gasoline rather than the summer blend, which is formulated to combat smog. But East Coast gas prices are spiking already…

     

    As SHTFPlan's Mac Slavo notes, the massive pipeline leak in Alabama is threatening widespread gas shortages and significant price hikes on the East Coast of the United States. Though the leak reportedly poses no danger to the public, officials say it stands to affect drivers all along the I-95 corridor from Florida to Maine.

    If you live in any of the aforementioned states then you may want to head to your local gas station and fill up the tanks. Though any shortages will be temporary, not being able to get gas for several days or a week could prove troublesome to the 50 million residents served by the Colonial pipeline. The shortage may also impact grocery store deliveries, so if you have anyessential items you absolutely must have it may be a good idea to pick those up before trucks stop delivering.

     

    The declared states of emergency highlight the fragility of just-in-time delivery systems that include critical goods like gasoline, food and medicine. As we’ve previously noted, even a small emergency could wreak havoc on a local, state or nationwide basis with immediate and catastrophic consequences for the populace.

    Mansfield Oil, a fuel distributor, has warned its customers to take fuel savings measures and to place their orders early. The company said the supply of gasoline is currently very thin along the closed pipeline, and that it was trucking in supplies from the coast to meet demand. The company said it was treating the situation "with the same importance and urgency as a natural disaster."

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