- Tech Exec "Outraged" At Having To See "Homeless Riff-Raff", Warns Of Revolution
In an open letter to San Francisco's mayor Ed Lee, tech entrepreneur Justin Keller said he is "outraged" that wealthy workers have to see people in pain and despair. As The Guardian reports,
The latest cultural altercation between San Francisco’s tech workers and the city’s impoverished population finds one such 'entitled' citizen declaring the homeless are "riff raff" whose "pain, struggle and despair" shouldn’t have to be endured by "wealthy" people commuting to work.
Full Open Letter (via JustInk)…
I am writing today, to voice my concern and outrage over the increasing homeless and drug problem that the city is faced with. I’ve been living in SF for over three years, and without a doubt it is the worst it has ever been. Every day, on my way to, and from work, I see people sprawled across the sidewalk, tent cities, human feces, and the faces of addiction. The city is becoming a shanty town… Worst of all, it is unsafe.
This holiday weekend, I had my parents in town from Santa Barbara and relatives from Denver and Rochester New York. Unfortunately, there was three separate incidents and countless times that we were approached for money and harassed.
The first incident involved a homeless drunken man in the morning coming up to their car and leaning up against it. Another bystander got frustrated with the drunken man, and they got into a heated pushing and shoving altercation.
The second incident occurred as we were leaving Tadich Grill in the financial district. A distraught, and high person was right in front of the restaurant, yelling, screaming, yelling about cocaine, and even, attempted to pull his pants down and show his genitals.
Finally, last night Valentines, I was at Kabuki Theater inside watching a movie. About two hours into the film, a man stumbled in the front door. He proceeded to walk into the theater, down the aisle to the front, wobbled toward the emergency door, opened it, and then took his shirt off and laid down. He then came back into the theater shielding his eyes from the running projector. My girlfriend was terrified and myself and many people ran out of the theater.
What are you going to do to address this problem? The residents of this amazing city no longer feel safe. I know people are frustrated about gentrification happening in the city, but the reality is, we live in a free market society. The wealthy working people have earned their right to live in the city. They went out, got an education, work hard, and earned it. I shouldn’t have to worry about being accosted. I shouldn’t have to see the pain, struggle, and despair of homeless people to and from my way to work every day. I want my parents when they come visit to have a great experience, and enjoy this special place.
I am telling you, there is going to be a revolution. People on both sides are frustrated, and you can sense the anger. The city needs to tackle this problem head on, it can no longer ignore it and let people do whatever they want in the city. I don’t have a magic solution… It is a very difficult and complex situation, but somehow during Super Bowl, almost all of the homeless and riff raff seem to up and vanish. I’m willing to bet that was not a coincidence. Money and political pressure can make change. So it is time to start making progress, or we as citizens will make a change in leadership and elect new officials who can.
Democracy is not the last stop in politics. In-fact, the order of progression according to Socrates via Plato in the Republic goes: timocracy, oligarchy, democracy, and finally tyranny. Socrates argues that a society will decay and pass through each government in succession, eventually becoming a tyranny.
“The greater my city, the greater the individual.”
Finally, having been throughly abused we suspect, Keller appended the following to his "open letter"…
"I want to apologize for using the term riff raff. It was insensitive and counterproductive."
And in an email to the Guardian, Keller added that he was writing an additional blog post about the issue.
“The thesis of the post was that inaction by the city and officials is not working. We all as citizens of San Francisco need to figure out how we can improve the city and address the homeless and drug addiction problem straight on,” he said.
“I in no way meant to vilify homeless or drug users, my frustration was that we as citizens don’t feel safe. The amount of violent crime is increasing, and it affects everybody. What specific measures is the city taking to proactively help the homeless and drug addicted?
“Instead of crucifying me, we all as citizens should be crucifying the city and elected government officials for ineptness. The status quo is not working.”
Oh well I'm sure you're forgiven then… Let's ask one of the homeless riff raff themselves…
“Being homeless is like being the germ of the city. That’s how they treat you,” said Bercé Perry, a homeless resident of San Francisco. Perry was standing outside his tent in an encampment underneath the Highway 101 overpass. The 42-year-old said he had been homeless for about one year, and he has little patience for the distaste some people have for his presence in the city.
“They don’t care about nobody but themselves,” Perry said about the wealthy tech workers who’ve moved into San Francisco. “If you got money, you just want to grab anything you can get.”
ne wonders just how close to homeless Keller will be when his "Pets.com" collapses?
- Chinese Money-Market Rates Are Spiking As Post-New-Year Liquidity Hangover Hits
It would appear the Chinese central bank currency squeeze is back as money-market rates are exploding higher once again. With the outpuring of liquidity heading into the new-year holiday, the post-celebration hangover was always likely unless PBOC just kept pumping but judging by the 500bps spike in overnight Yuan interbank rates to 9.3%, more than a few banks are desperate for some liquidity. We note that the last six times that Chinese banks have suffered liquidity constraints, US equities have tumbled…
While not at the extremes of mid December or mid-January’s catastrophes, O/N Yuan depo rates are soaring…
As it seems PBOC is not quite as liberal with its liquidty post-new-year…
and that bodes ill for US equities as the global liquidity problems this signals send ripples through every conduit (and their corresponding risk asset)…
Still 9.3% overnight deposit rates are probably nothing, right?
- The "Hillary Vs Bernie" Pitch: Fix 'Cultural Bigots' Or 'Corrupt Billionaires'
Authored by Eric Zuesse,
Whereas Bernie Sanders claims to represent the bottom 99%, Hillary Clinton claims to represent a coalition of groups who are victimized by bigots (racists, sexists, etc.: she aims at women, homosexuals, Blacks, etc.). Whereas Bernie seeks to mobilize the bottom economic 99% against the top 1% who have scooped up almost all of the economic benefits that Americans have gained since 1993, Hillary seeks to mobilize all bigotry-victims against all of the many types of bigots. These pitches are fundamentally different from one-another. In fact, they’re diametrically opposite diagnoses of the biggest ailment threatening the U.S. future: our perilous economy.
At the close of the Wisconsin Democratic debate on February 11th, Hillary Clinton made an appeal to members of labor unions, and then said:
"I think that a lot of what we have to overcome to break down the barriers that are holding people back, whether it's poison in the water of the children of Flint, or whether it's the poor miners who are being left out and left behind in coal country, or whether it is any other American today who feels somehow put down and oppressed by racism, by sexism, by discrimination against the LGBT community, against the kind of efforts that need to be made to root out all of these barriers, that's what I want to take on. … Yes, does Wall Street and big financial interests, along with drug companies, insurance companies, big oil, all of it, have too much influence? You're right. But if we were to stop that tomorrow, we would still have the indifference, the negligence that we saw in Flint. We would still have racism holding people back. We would still have sexism preventing women from getting equal pay. We would still have LGBT people who get married on Saturday and get fired on Monday.”
Bernie Sanders closed instead with:
“This campaign is not only about electing someone who has the most progressive agenda, it is about bringing tens of millions of people together to demand that we have a government that represents all of us and not just the 1 percent, who today have so much economic and political power.”
Hillary Clinton is saying that what’s “holding people back” is bigotry.
Bernie Sanders is saying that what’s holding people back is concentration of too much power in too few people – not meaning a concentration of too much power in a freely and democratically elected government (which Republicans constantly attack as having too much power), but instead meaning a concentration of too much power in the richest 1% who buy the government, and who use it to make American workers compete against the workers in Haiti, Honduras, Vietnam, etc., so as to benefit the global stockholders of international corporations by lowering wages, instead of to benefit American workers by increasing wages. He’s attacking a system that benefits global stockholders by lowering wages everywhere to some lowest common denominator, so as to increase profits and stock-values and executive compensation everywhere. Workers don’t receive the benefits of that; the stockholders and executives in international corporations do. That’s the “1%”, though actually it’s even more concentrated in the top 0.1%.
Hillary Clinton is saying that the main problem in America is America’s bigots — it’s no economic motivation, by billionaires who essentially buy the government, nor by anyone else. This political view, in which there are essentially no economic classes, but only bigots and their victims, is fundamentally different from Sanders’s view. It’s so different that in some other countries they would constitute two different political parties.
Sanders is saying that the main problem in America is actually America’s corruption — a system that he says has been very successfully gamed by “the billionaire class.”
That’s what the Democrats’ Presidential choice comes down to.
This choice is a stark one. Democratic voters are being asked which is the primary issue for government to overcome: countervailing excessive greed by the super-rich, or countervailing all bigotry by anyone? Both greed and bigotry are bad, but which is more the main function of government to countervail? That’s the question.
Hillary Clinton is saying that what American workers are pitted against is, essentially, bigots, individuals who are bigoted — bigoted against gays, against women, against Blacks, against Hispanics, etc.; they’re not pitted against the controlling stockholders who are collectively represented by their corporation’s management and who want higher profits from paying lower wages. Hillary Clinton focuses on the cultural divide, the various types of inter-ethnic conflicts, as being “what we have to overcome to break down the barriers that are holding people back.”
Bernie Sanders is saying that the big problem American workers are up against isn’t bigots — rich and poor — as much as it’s the unlimited greed of the controlling stockholders who are represented by management (even if they’re not bigots). His diagnosis is that not only should workers have the collective-bargaining right against the corporation’s owners, just like those corporate owners themselves already possess the collective-bargaining right via managers they hire, but that workers should also be more the focus of government’s concern and sympathy than stockholders are, because there are far more workers than owners, and because a one-person-one-vote democracy is far better than a one-dollar-one-vote ‘democracy’ (the latter of which is otherwise called an “oligarchy” or an “aristocracy”), the latter of which is what Sanders campaigns to put a stop to.
Hillary Clinton is saying that there is no common and shared enemy that oppressed employees have: instead, the main problem is racist bigots in the case of Blacks; it’s homophobic bigots in the case of homosexuals; it’s misogynist bigots in the case of females, etcetera; and, if a Black happens also to be a homophobe, or a homosexual happens to be also an anti-Black racist, then each one of those victim-groups will be fighting against the bigoted members of the other victim-groups. The chief job of the government, led by the U.S. President, is then somehow to punish all types of bigots equally, regardless of their particular group, so as to minimize the complaints about bigotry from, and by, all Americans. That’s a balancing of groups against groups — a balancing of ethnicities. This is Clinton’s diagnosis and cure for America’s economic problems.
Hillary’s diagnosis isn’t economic or systemic, but instead cultural and individual — it’s actually individual against individual, instead of stockholders against employees. And, just as a particular victim of bigotry can also be a bigot (for example, a Black can be homophobic, sexist, or etc.), a particular employee can also be a stockholder; some individuals stand on both sides at once, there too; but those are all individual matters, not systemic matters, and so they’re not really authentic issues of governmental policy. Hillary Clinton says that they are themain issues of governmental policy — that people’s problems are mainly individual problems, against bigots; not systemic problems, against stealers-of-the-public’s-government — and she says that the government should focus on individuals’ problems, not on systemic problems. That’s her view, which she expresses on almost every occasion, though she doesn’t put it in quite this way — a systematic way.
Bernie Sanders, in contrast to Hillary Clinton, is saying that the oppressed do have a common and shared (a systemic) enemy. Here is how he expressed this in a speech to the Democratic National Committee on 28 August 2015: “We need a political movement which is prepared to take on the billionaire class and create a government which represents all Americans, and not just corporate America and wealthy campaign donors.” He was saying this to individuals — specifically, to the Democratic Party’s chief political agents — most of whose own career success has largely depended upon that “billionaire class,” but Sanders was up-front to them about it. He even calls this “movement” a “revolution.” He’s not trying to hide his opposition to the staus-quo.
The Democratic Party’s Presidential contest isn’t really a contest between ‘idealism’ versus ‘pragmatism,’ such as some propagandists claim. To characterize either candidate as ‘the idealist’ versus ‘the pragmatist’ is false. That characterization of this contest is actually deeply deceptive, because it focuses on vague abstractions, whereas the real issue in the Democratic Party primaries now is totally nitty-gritty, and it concerns two alternative diagnoses of what has been going wrong with America’s economy in recent decades.
In Bernie’s view, American democracy is now in the emergency room; in Hillary’s view, complainers (against anything other than bigots) are like mere hypochondriacs who simply don’t understand the experts who say that things aren’t so bad, and that therefore no “revolution” is needed.
Is America’s basic governmental problem bigotry (i.e., certain cultural and ‘values’ problems), as Hillary says;
or is it instead corruption (i.e., certain economic and governmental problems), as Bernie says?
These are two very different conceptions of what the U.S. Presidency is about.
And that’s the central choice in the Democratic Presidential primaries. More than anything else, that’s what the choice between Clinton and Sanders comes down to.
* * *
Investigative historian Eric Zuesse is the author, most recently, of They’re Not Even Close: The Democratic vs. Republican Economic Records, 1910-2010, and of CHRIST’S VENTRILOQUISTS: The Event that Created Christianity.
- Visualizing The World's Stock Exchanges
There are 60 major stock exchanges throughout the world, and their range of sizes is quite surprising.
As Visual Capitalist's Jeff Desjardin notes, at the high end of the spectrum is the mighty NYSE, representing $18.5 trillion in market capitalization, or about 27% of the total market for global equities.
At the lower end? Stock exchanges on the tiny islands of Malta, Cyprus, and Bermuda all range from just $1 billion to $4 billion in value. Even added together, these three exchanges make up just 0.01% of total market capitalization.
Courtesy of: The Money ProjectThe Trillion Dollar Club
There are 16 exchanges that are a part of the “$1 Trillion Dollar Club” with more than $1 trillion in market capitalization. This elite group, with familiar names such as the NYSE, Nasdaq, LSE, Deutsche Borse, TMX Group, and Japan Exchange Group, comprise 87% of the world’s total value of equities.
Added together, the 44 names outside of this aforementioned group combine for just $9 trillion, or 13%, of the world’s total market capitalization.
Northern Dominance
From a geographical perspective, it is the Northern Hemisphere that is dominant. North America and Europe both hold 40.6% and 19.5% respectively of the world’s markets, and the vast majority of Asia’s 33.3% lies north of the equator in places like Shenzhen, Hong Kong, Tokyo, and Shanghai.
Notable exchanges that are south of the equator include the Australian Securities Exchange, the Indonesia Stock Exchange, the Johannesburg Stock Exchange and the Brazilian BM&F Bovespa.
- A "Baffled" Bank Of Japan Is Shocked By Its "Message Of Despair"
One look at Japan’s bond yields, which moments ago hit a fresh record low for the 20Y maturity as the curve slowly but surely inverts…
…. and one would think Haruhiko Kuroda would be delighted.
After all, when he launched NIRP three weeks ago, a world in which negative rates are now a reality, it should have been clear to everyone even children, that yields would collapse as the scramble for any positive yield was unleashed.
The only problem is that Kuroda did not care about yields – positive or negative: what he wanted was to crush the currency and to send the Nikkei soaring – the only two actual “arrows” of Abenomics. Sadly for the BOJ, this time it failed as precisely the opposite of what was expected happened.
But, as the WSJ wrote earlier today in an article explaining why the BOJ is baffled (at least before a call from the BOJ forced it to change the title to the far more politically correct “Bank of Japan Faces a New Opponent on Negative Rates: Main Street“)…
… Kuroda’s confusion has nothing to do with the market’s reaction; it has everything to do with the reaction by the public.
An appropriately very negative reaction.
Just yesterday, shortly after the BOJ’s shocking announcement, Kuroda found himself dodging a concerted attack in Parliament from lawmakers who charged the policy was “victimizing consumers and sending a message of despair“, the WSJ writes.
Even a ruling-party member, Masahiro Ishida, called the policy hard to grasp. “It could have the opposite effect of confusing the market,” he said.
It already has. But the problem is not that the market is confused; it is that the market’s reaction to the BOJ’s NIRP, which as we explained previously was largely due to central banker “peer pressure” during this year’s Davos meeting, has led to a global revulsion against negative rates in general, thus validating the BOJ’s error.
The criticism has come as a surprise to central-bank officials who thought their efforts to spark lending and faster economic growth would gain more public support. “Those who understand this policy are criticizing us, and those who do not are also criticizing us,” said one official this week.
Here the WSJ adds something that is patenly wrong: “It is a symptom of a global problem. The more central banks move into unconventional policies, the harder it becomes to get their message across. That is a particular problem when the policies are supposed to work in part by inspiring confidence.”
Dead wrong: central bank policies are supposed to work by boosting the market; the narrative follows from there. It goes without sayinng that had Japan’s NIRP somehow sent stocks soaring and the Yen crashing, the avalanche of praise would have been constant and Kuroda would be deemed a hero in parliament. Alas for the BOJ – which failed at the simple task of manipulating the market higher in the initial kneejerk reaction – that did not happen, and now Kuroda is suddenly fighting for his professional life.
And since the BOJ’s market domination had finally cracked, a new narrative emerged: one which demonstrated the BOJ as being a bunch of “clueless losers”, with no understand of what they are doing.
Although negative interest rates have existed for some time in Europe, the idea was unfamiliar to most Japanese when it burst onto the front pages late last month. Initial accounts focused on what could happen to bank deposit rates. That is a sensitive issue in a society where wages have barely risen since the 1990s and where one in three citizens receives pension income.
“Deposit one million yen and earn annual interest of ¥10,” said the headline of an online article Tuesday by Japan’s biggest daily newspaper, the Yomiuri Shimbun, telling savers with nearly $10,000 in the bank that they could expect less than a dime in interest
But nothing demonstrates Kuroda’s bafflement quite as much as the outright hostile reception he got during his speech before parliament on Thursday:
In Parliament on Thursday, opposition lawmaker Shinkun Haku squared off with the Bank of Japan’s Gov. Kuroda on whether commercial banks would effectively introduce negative rates by hitting consumers with fees in excess of the tiny amount of interest paid. “Can you deny that banks will put an additional burden on average depositors?” Mr. Haku said. “If you can’t deny it, don’t. It’s a yes or no.”
Mr. Kuroda said he didn’t want to speculate about fees, but “there’s no chance that deposit interest rates will turn negative.”
Which is a lie – not only will deposit rates ultimately turn negative, the only questions are when and by how much.
He said negative interest rates had helped spur lending in Europe with few harmful effects. “Europe has much larger minus interest than the Bank of Japan, and I haven’t heard of minus interest rates being applied to individual depositors there,” he said.
Someone please inform the Credit Suisse or Deutsche Bank stock about the “few harmful effects”, or the fact that Europe’s economy is once again slowly relapsing into a recession, only this time with some 1.5 million Syrian refugees to partake in the festivities.
It didn’t stop there:
“Mr. Kuroda’s responses merely inspired further attacks from the opposition, which has been looking with little success for an issue with which to dent Prime Minister Shinzo Abe’s popularity…. a Communist Party lawmaker, Akira Koike, said negative interest rates were bad public relations. “You have sent a message to the people that they had better watch out because Japan’s economy is in trouble,” Mr. Koike said.
Which in itself is a stunning of just how stupid communists, or anyone else for that matter, still are and are utterly incapable of grasping the most simple equality of the post-crisis era, namely that any central banks intervening = the economy is in trouble.
And of course Japan’s economy is in trouble: it has had 6 recessions in the past 6 years as it rushes toward a demographic singularity in which there is simply no longer a Japanese population. Japan’s economy is in so much trouble, the only question is when does it disintegrate into a Venezuela-style supernova.
But we can see where the confusion comes from. As the WSJ conveniently notes, central banks “policies are supposed to work in part by inspiring confidence” and instead “lawmakers charged the policy was victimizing consumers and sending a message of despair.“
No: the message is one of reality, because the can kicking for Japan, having gone on for 40 years, is almost over. The good news about a central bank-free future is that it will hurt – a lot – for a while, and then normal growth can resume, but not before trillions in fake paper wealth are wiped out and quadrillions (in Yen terms) in debt is swept away.
As for Kuroda, we will fondly remember him forever as Peter Panic. There was also this pearl in the WSJ piece: “opposition lawmaker Motoyuki Odachi accused Mr. Kuroda of sounding like a World War II propaganda broadcast.“
Dear Motoyuki, all central bankers sound like a World War II propaganda broadcast, one on which the time has long ago come to pull the plug.
- Fed Skeptics Seek Gold Safe-Haven As Bullion Bears Capitulate
Gold is having one of its best starts to a year in history as investors start to lose faith in central bankers’ ability to deal with economic challenges. Fed skeptics as well as capitulating bullion bears are being drawn to the precious metals as Bloomberg reports,
“The safe-haven demand appears to be where people are focused on, and that is on a loss of faith in central banks being able to manage through this period,” said Klein, executive chairman of Australia’s second-biggest producer.
Bullion is “certainly getting more attention from people who have generally been bears over the past few years,” Klein said in a phone interview.
Even with the weakness of the last few days, Gold is still up 15% YTD – the best in at least a decade…
Prices have gained as investors scaled back expectations for tighter policy from the Fed…
“There seems to be general skepticism now, both from the Fed’s language and from market participants, as to whether that’s going to be possible,” said Klein, who’s been a gold-industry executive for about 20 years.
“All the financial markets, and all the asset classes, seem to be highly sensitive to central-bank policy.”
Gold's standout year is also driving some long-term bears to capitulate… (as Bloomberg details)
For years, ABN AMRO Group NV’s Georgette Boele has been a staunch bear on gold as prices tumbled. Now with gold on the brink of a bull market, she’s changed her tune.
Boele changed her year-end forecast to $1,300 an ounce from $900, according to report released Tuesday.
ABN Amro is becoming more pessimistic about the global economy, especially in the U.S., emerging markets and countries with exposure to oil. Boele no longer expects the Federal Reserve to raise interest rates this year.
“Having been long-standing bears we have now turned bullish on precious metal prices,” Boele wrote. “Our new scenario sees a longer period of weaker global growth.”
As Klein concludes, "it does seem like there’s a general review of gold as an investment sector by people who haven’t been interested in it for years." And yet Goldman will still do its best to tell you to sell your gold (to them).
- Why The Chinese Yuan Will Lose 30% Of Its Value
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
The stark truth is nobody wants yuan any more.
The U.S. dollar (USD) has gained over 35% against major currencies since 2011.
China's government has pegged its currency, the yuan (renminbi) to the USD for many years. Until mid-2005, the yuan was pegged at about 8.3 to the dollar. After numerous complaints that the yuan was being kept artificially low to boost Chinese exports to the U.S., the Chinese monetary authorities let the yuan appreciate from 8.3 to about 6.8 to the dollar in 2008.
This peg held steady until mid-2010, at which point the yuan slowly strengthened to 6 in early 2014. From that high point, the yuan has depreciated moderately to around 6.5 to the USD.
Interestingly, this is about the same level the yuan reached in 2011, when the USD struck its multiyear low. Since 2011, the USD has gained (depending on which index or weighting you choose) between 25% and 35%. I think the chart above (trade-weighted USD against major currencies) is more accurate than the conventional DXY index.
Due to the USD peg, the yuan has appreciated in lockstep with the U.S. dollar against other currencies. On the face of it, the yuan would need to devalue by 35% just to return to its pre-USD-strength level in 2011. This would imply an eventual return to the yuan's old peg around 8.3–or perhaps as high as 8.7.
Longtime correspondent Mark G. submitted this article China's Subprime Crisis Is Here:
The dynamic is clear. A splurge of new lending can help to dilute existing bad loans, but only at a cost. This is a game that can't continue forever, particularly if credit is being foisted on to an already over-leveraged and slowing economy. At some point, the music will stop and there will have to be a reckoning. The longer China postpones that, the harder it will be.
Mark also submitted the following commentary:
It seems the best way to assess the likely effects and outcomes is to look at what the Chinese government can control, and at what it can't control. And we should observe at the start that the yuan is not a global reserve currency.
1. Beijing can control the amount of yuan in existence. It can therefore easily pay off all these bad internal debts, at least in a strict book keeping sense. And it can also recapitalize its bankrupt banks to any degree necessary, at least in yuan. The process of doing so involves assigning winners and losers. The latter group will comprise anyone earning a subsistence working wage in yuan and anyone whose assets primarily consist of savings in yuan.
2. Undertaking #1 will lead to a large increase in the amount of yuan in existence. Here Beijing will be acutely sensitive to any increase in food prices since this can swiftly lead to mass food riots and the concomitant rapid and bloody end of the regime. Therefore food prices have to be insulated somehow from this huge internal devaluation.
3. Beijing cannot permanently control the yuan-dollar exchange rate or any other FOREX rate involving yuan. It can do so in the short term but only to the limit of its usable foreign exchange reserves. This total is minus the FOREX working capital China needs to pay for imported raw materials and fuels. And also food: China’s Growing Demand for Agricultural Imports (USDA)
It appears that one certain outcome will be a huge depreciation in the value of yuan. Bailout of the bad bank debt is reason #1 to print yuan. The decline of yuan will lead to lower prices and a temporary relief of U.S.-based automation pressure on export market share. This begins to become a Reason #2.
How this will be received outside China is the immediate question. Probably not too favorably.
One way to paper over impaired loans is to issue a flood of new credit: this dilutes the problem and enables defaulted loans to be "paid down" with new loans that are doomed to default once the ink is dry: China Created A Record Half A Trillion Dollars Of Debt In January (Zero Hedge)
Here's the larger context of China's debt/currency implosion. From roughly 1989 to 2014–25 years–the "sure bet" in the global economy was to invest in China by moving production to China.
This flood of capital into China only gained momentum as the yuan appreciated in value against the USD once Chinese authorities loosened the peg from 8.3 to 6.6 and then all the way down to 6 to the dollar.
Every dollar transferred to China and converted to yuan gained as much as 25% over the years of yuan appreciation. Those hefty returns on cash sitting in yuan sparked a veritable tsunami of capital into China.
Now that the tide of capital has reversed, nobody wants yuan: not foreign firms, not FX punters and not the Chinese holding massive quantities of depreciating yuan.
This is why "housewives" from China are buying homes in Vancouver B.C. for $3 million. That $3 million could fall to $2 million as the yuan devalues to the old peg around 8.3 to the USD.
Who's left who believes the easy money is to be made in China? Nobody. Anyone seeking high quality overseas production is moving factories to the U.S. for its appreciating dollar and cheap energy, or to Vietnam or other locales with low labor costs and depreciated currencies.
For years, China bulls insisted China could crush the U.S. simply by selling a chunk of its $4 trillion foreign exchange reserves hoard of U.S. Treasuries. Now that China has dumped over $700 billion of its reserves in a matter of months, this assertion has been revealed as false: the demand for USD is strong enough to absorb all of China's selling and still push the USD higher.
The stark truth is nobody wants yuan any more. Why buy something that is sure to lose value? the only question is how much value? The basic facts suggest a 30% loss and a return to the old peg of 8.3 is baked in.
But that doesn't mean the devaluation of the yuan has to stop at 8.3: just as the dollar's recent strength is simply Stage One of a multi-stage liftoff, the yuan's devaluation to 8 to the USD is only the first stage of a multi-year devaluation.
- Bilal Erdogan Accused Of Money Laundering In Italy
Regular readers are no doubt familiar with Bilal Erdogan.
Bilal is the son of Turkish dictator President Recep Tayyip Erdogan who is on the verge of kicking off World War III by invading Syria in what is sure to be an ill-fated effort to shore up rebel forces and preserve the Azaz corridor, the last remaining supply line for the opposition which is staging what amounts to a last stand at Aleppo.
Erdogan’s family was put under the microscope by the Russian defense ministry in the wake of Ankara’s decision to shoot down a Russian Su-24 on the Syrian border in late November. “What a brilliant family business!,” Deputy Minister of Defence Anatoly Antonov remarked, at a press briefing documenting Turkey’s connection to Islamic State’s illicit oil trafficking operation.
For those who might have missed the backstory, you’re encouraged to read the following articles in their entirety:
- The Most Important Question About ISIS That Nobody Is Asking
- Meet The Man Who Funds ISIS: Bilal Erdogan, The Son Of Turkey’s President
- How Turkey Exports ISIS Oil To The World: The Scientific Evidence
- ISIS Oil Trade Full Frontal: “Raqqa’s Rockefellers”, Bilal Erdogan, KRG Crude, And The Israel Connection
Put simply, there are any number of reasons to believe that AKP and the Erdogan family are complicit in the sale of illicit crude not only from Massoud Barzani and the Iraqi Kurds, but from Islamic State as well.
ISIS oil and Erbil’s crude are both technically “undocumented” and considering that “the terrorists” are only producing around 45,000 b/d versus the 630,000 b/d the Iraqi Kurds are churning out, it’s easy for Islamic State’s product to get “lost” or to disappear as a rounding error, as it were.
Some say Bilal Erdogan is directly involved in getting ISIS crude to market via the Turkish port of Ceyhan, where tanker rates mysteriously spike around siginificant oil-related events involving Islamic State.
Bilal owns a Maltese shipping company which is almost certainly involved in the transport of stolen (and yes, regardless of whether the Iraqi Kurds’ claims to statehood are legitimate, they are for the time being anyway, stealing oil form Baghdad) Iraqi oil to global markets. The question is whether the same connections and routes used to transport Barzani’s oil are being used to transport Islamic State’s product.
We won’t recount the whole story here as you can read the entire account in the articles linked above, but we were amused to discover that Bilal Erdogan is now being investigated by Italian authorities for money laundering. “Prosecutors in Bologna have opened an investigation into the financial dealings of Bilal Erdogan, 35, who is currently living in the city with his family while he studies for a doctorate at an offshoot of Johns Hopkins University,” The Telegraph reports, adding that “the investigation was opened after Murat Hakan Uzan, a businessman and political opponent of the Erdogan family, made the allegations about money laundering to the Italian authorities.” Here’s more:
Mr Uzan, who is in exile in France and claims to have been persecuted by the Erdogan regime, claimed that Bilal Erdogan was stockpiling money in Italy because he saw the country as a potential bolt-hole should he face problems at home.
Mr Uzan, a wealthy businessman, filed a criminal complaint with prosecutors in Bologna, accusing the president’s son of contravening Italy’s financial laws by bringing in huge amounts of money without declaring it to the authorities.
The claims of money laundering are being investigated by Manuela Cavallo, Bologna’s chief public prosecutor. Calls to her office were not answered.
Wiretapped telephone conversations were leaked in which two people alleged to be President Erdogan and his son were heard discussing how to dispose of large sums of cash.
The conversations allegedly took place in December 2013, on the day that sons of three Cabinet ministers were detained as part of a vast corruption investigation.
The Turkish government insisted they were fabricated. Both the president and his son denied any wrongdoing.
Bilal, who is one of President Erdogan’s four children, has commercial interests in shipping and oil tankers.
In December Russia accused him and his family of profiting from the illegal smuggling of oil from territory held by Islamic State in Iraq and Syria.
Bilal’s attorneys aren’t prepared to comment. “I have nothing to say,” Giovanni Trombini , one of Bilal’s lawyers said. “Trials should be held in court, not in the press.
True.
But this is the court of public opinion and we implore readers to render their judgement below. Just beware the wrath of Bilal’s bow…
- Markets Ignore Fundamentals And Chase Headlines Because They Are Dying
Submitted by Brandon Smith via Alt-Market.com,
Normalcy bias is a rather horrifying thing. It is so frightening because it is so final; much like death, there is simply no coming back. Rather than a physical death, normalcy bias represents the death of reason and simple observation. It is the death of the mind and cognitive thought instead of the death of the body.
Ever since the derivatives collapse of 2008 the public has been regaled with wondrous stories of recovery in the mainstream to the point that such fantasies have become the "new normal". These are grand tales of the daring heroics of central bankers who “saved us all” from impending collapse through gutsy monetary policy and no-holds-barred stimulus measures.
Alternative economists have not been so easy to dazzle. Most of us found that the recovery narrative lacked a certain something; namely hard data that took the wider picture into account. It seemed as though the mainstream media (MSM) as well as the establishment was attempting to cherry-pick certain numbers out of context while demanding we ignore all other factors as “unimportant.”
We just haven’t been buying into the magic show of the so called “professional economists” and the academics, and now that the real and very unstable fiscal reality of the world is bubbling to the surface, the general public will begin to see why we have been right all these years and the MSM has been utterly wrong.
Mainstream economists have done absolutely nothing in the way of investigative journalism and have instead joined a chorus cheerleading for the false narrative, singing a siren’s song of misinterpreted statistics and outright lies drawing the masses ever nearer to the deadly shoals of financial crisis.
Why do they do this? Are they part of some vast conspiracy to mislead the public?
Not necessarily. While central banks and governments have indeed been proven time and again to collude in efforts to cover up financial dangers, most economists in the media are simply greedy and ignorant. You have to remember, they have a considerable stake in this game.
Many mainstream economists tend to have sizable investment portfolios and they base their careers partly on the successes they garner in the annual profits they accumulate playing the equities roulette. They also have invested so much of their public image into their pro-market and recovery arguments that there is no going back. That is to say, they have a personal interest in using their positions in the media to engineer positive market psychology (if they are able) so that their portfolios remain profitable. Not to mention, their professional image is at stake if they ever acknowledge that they were wrong for so long about the underlying health of the real economy.
This atmosphere of deluded self interest also generates a cult-like collectivist attitude. There is a lot of mutual back scratching and mutual ego stroking in the MSM; a kind of inbred conduit of regurgitated arguments and unoriginal talking points, and people in the club rarely step out of line because they not only hurt their own investment future and career, they also hurt everyone in their professional circles. Meaning, no more cocktail party invitations to the Forbes rumpus room…
This is not to say that I am excusing their self interested lies and disinformation. I think that many of these people should be tarred and feathered in a public square for attempting to dissuade the public from preparing in a practical way for severe economic instability. I do not think they see themselves as being responsible to the people who actually take their nonsense seriously and their attitude needs adjustment. I am only explaining how it is possible for an entire profession of supposed “experts” to be so wrong so often. Mainstream financial analysts WANT to believe their own lies as much as many in the public want to believe them.
Like I said, normalcy bias is a rather horrifying thing.
One of the root pieces of disinformation in the mainstream that feeds all other lies is the disinformation surrounding falling global demand. MSM pundits cannot and will never fully admit to the cold hard reality of collapsing demand within the global economy. If they are forced to admit to falling demand, then the facade of a steady or recovering U.S. economy crumbles.
I covered the facts behind falling global demand for raw goods and consumer goods last year in part one of my six-part article series, 'One Last Look At The Real Economy Before It Implodes.' The hard evidence and numbers I presented have only become more important in recent months.
For example, U.S. inventories are building and freight shipments are declining in the U.S. as retailers cite falling demand for goods as the primary culprit. Official retail sales numbers for the holiday season of 2015 have come in flat. When one takes into account real inflation in prices, consumer sales are actually far in the negative. According to the more accurate methods the U.S. government used to use in their calculations of CPI in the 1980’s, we are looking at annual price inflation rate of around 7%. Price inflation does not necessarily equal improved sales.
Energy usage has been crushed since 2008. Despite a growing population and supposedly a growing economic system, oil consumption in 2014 according to the World Economic Forum dropped to levels not seen since 1997.
This is the exact opposite of what should be happening and it is the opposite of mainstream projections for oil consumption made back in 2003. This is why inventories and storage for oil across the globe are reaching capacity in a manner never seen before. American demand for oil is not growing exponentially as expected because Americans cannot afford to support such growth anymore. Falling energy demand at these extreme levels is an undeniable indicator of a failing economic system.
Of course, mainstream economists in their desperation to keep market psychology rolling forward and the equities casino producing profits seek to spin this problem as an “oversupply” issue rather than a demand issue. And this is where the disparity in their arguments begins to bleed through.
Here is the problem presented in the mainstream; what came first, the chicken or the egg? Did falling demand lead to oversupply and thus a fall in prices? Or, is demand remaining steady and is overproduction the cause of falling prices? Yes, let's confuse the issue instead of looking at the obvious.
As already linked above, it was falling demand which came first in 2008, and demand which continues to fall in relation to past trends. Have producers failed to reduce oil production to match falling demand? Yes. But this does not change the fact that oil demand today is well below levels needed to sustain the kind of economic growth markets have come to expect. Mainstream economists attempt to distract by hyper-focusing on supply, or twisting the discussion into an either/or scenario. Either it is a supply problem, or it is a demand problem, and they assert it is only a supply problem. This is not reality.
In fact, both can and often do exist at the same time, though one problem usually feeds the other. Falling demand does tend to result in oversupply in any particular sector of the economy. The bottom line, however, is that in our current crisis demand is the driving force and supply is a secondary issue. Supply is NOT the driving force behind the volatility in oil markets. Period.
This same chicken and egg distraction rears its ugly head in discussions on shipping markets as well.
The mainstream claim that the historic implosion of the Baltic Dry Index is nothing more than a problem of “too many ships” operating in the cargo market has been throttled, dissected and debunked so many times that you would think that it is surely dead. But the lie just will not die.
Mainstream propaganda houses like The Economist and Forbes continue to produce articles on a regular basis which deny the issue of falling demand for raw goods and claim that oversupply of vessels is the root cause of the BDI losing around 98 percent of its value since its highs in 2008.
I haven’t seen any of these articles offer actual stats or evidence to back their claims that oversupply of ships is the culprit and that demand is not a legitimate issue. But beyond that, why does the mainstream seem so hell bent on dismissing the BDI as a reliable economic indicator? Well, because shipping rates fall when demand falls, thus, when the BDI falls, it signals a lack of global demand. This is a fact they refuse to accept. When the BDI falls by 98 percent since the 2008 highs preceding the derivatives crisis, this signals a disaster in the making.
So, let’s stamp out the “too many ships came first” disinformation once and for all, shall we?
Shipping companies like Maersk Lines have already publicly admitted that falling global demand is the core problem behind falling rates and that supply is a secondary driver. They view the current financial crisis to be “worse than 2008”.
The fact that the largest shipping company in the world is warning of falling demand does not seem to be having any effect on the mainstream talking heads, though.
So, what do major shipping companies do when demand is falling and too many ships are operating on the market? Do they field those ships anyway and drive rates down even further? No, that makes no sense.
What companies do is either leave ships idle in port or scrap them. According to BIMCO (Baltic And International Maritime Council), 2015 was the busiest year since 2012 for the scrapping of older ships to make way for new arrivals. This process of scrapping ships or storing them idle destroys the argument that too many ships are driving falling rates in the BDI. In fact, as chief shipping analyst Peter Sand of BIMCO stated last year:
“The increase in Capesize scrapping comes at a much needed time for the market. Looking at the development so far this year the fleet growth has actually been negative, with a reduction of 0.8 %.”
I hope the garbage peddlers at Forbes and The Economist caught that — NEGATIVE growth of ship supply, not massive over-growth of ship supply. The scrapping increase was also across the board for other models of ships, not just the Capsize, and the increase of cargo capacity by new ships has been negligible. Yet, shipping rates continue to plummet to historical lows. Only falling demand, as Maersk Lines admits, explains the crash of the BDI in light of this information.
China in particular has been offering considerable incentives to those companies that do scrap older ships, to the point that some are even scrapping semi-new ships in order to cash in.
Now, this is not to say there is not an “oversupply” of ships. There are indeed many ships within cargo fleets that are not in operation. But again, this is because demand has declined so completely that even with increased scrapping and idling, shipping companies cannot keep up. Falling demand OCCURRED FIRST, and oversupply is nothing more than a symptom of this root problem.
So, mainstream hacks, can we please put the “too many ships” nonsense to rest and get on with a real discussion on obvious issues of demand? Stop focusing on the symptoms and examine the cause for once.
These are just a few of the hundreds of fundamental problems plaguing the global economy today, and they are all problems that the mainstream continues to ignore or dismiss out of hand. Which brings us to the now accelerating volatility in stock markets.
Stock markets are crashing, there is no other way to paint it. They are crashing incrementally, but crashing nonetheless. When you have violent swings in equities and commodities between 5 percent and 10 percent a day, then something is very wrong with your economy and has been wrong for some time. If global consumption and demand were really steady or growing, then you would not see the kind of systemic backlash in the financial system that we are now seeing. If companies listed on the Dow were making legitimate profits due to a healthy consumer base and enjoying solid expansion, stocks would not be increasingly volatile. If investors and mainstream analysts actually looked at the real numbers in demand (among other things), then the strange behavior in markets would be easy for them to understand. They will not look at such numbers until it is too late.
Instead, markets have chosen to chase headlines, and here is where the ugly circle of normalcy bias and cognitive dissonance completes itself. There are no positive indicators within the fundamentals today to energize market faith or market investment. So, investors and algorithmic trading computers track news headlines instead. The MSM hacks now have the power (along with central banks and governments) to create massive stock rallies with one or two carefully placed news tags, such as “Russia To Discuss Oil Production Cuts With OPEC.”
Market speculators and trading computers jump on these headlines without verifying if they are true. In most cases, they end up being false or just hearsay from an “unnamed source.” And so, the markets then crash further down into the abyss, waiting for the next headline to bolster activity even for a day.
The sad truth is, if any of these headlines turned out to be legitimate, their effect would still be meaningless in the long run as the overwhelming weight of the fundamentals continues to topple poorly placed optimism. Now that the investment world no longer has the certainty of central bank intervention as a useful tool, they don’t know if bad news is good news or if good news is bad news. The fact that the system is moving into a death spiral without the psychological crutch of central bank stimulus measures should tell you all you need to know about the supposed recovery since 2008.
No society wants to admit economic failure or economic sabotage, and this is why the con-game is able to continue in the face of so much concrete truth. Ultimately, the market trends and economic trends will flow into the negative. In the meantime, expect massive market rallies, rallies which will then disintegrate in a matter of days. And, whatever happens, never take what mainstream economists say very seriously. They have failed the public for long enough.
- BofA Asks: Is This The Chinese Shadow Bank Failure That Will This Trigger The Chain Reaction
While various Chinese bubbles have already burst in recent years, including those in the real estate, stock market and fixed investment sectors, so far the credit and shadow banking bubbles linger on with bond yields recently touching on record lows as the money invested in the various other bubbles has migrated into various forms of fixed income, including investment companies which promise exorbitant returns.
The reason why this particular bubble has proven so resilient is because up to this point the government has been willing to directly or indirectly bail out the participants. However, as Bank of America’s David Cui writes today, that may not be the case for much longer.
Take the case of Shanxi-based shadow bank Xinsheng. As CBN writes today, this is the latest shadow bank to collapse, a bank whose Shanghai subsidiary alone sold RMB1.9 billion in wealth management products to over 5,000 investors and is now unable to return the funds. As Chiecon writes, the company marketed “asset securitisation” wealth management products promising annual returns between 13%-24%. In reality, client funds were diverted into real estate projects, mainly office buildings, in lower tier cities, where chronic oversupply has depressed local property prices. Some investors are now protesting outside the company’s Shanghai branch office.
As Bank of America adds, as large as Xinsheng’s sounds, it pales against some of the other recent defaults in the lightly regulated P2P and private wealth management product markets. For example, in July 2015, a commodity exchange, Fanya, defaulted on Rmb43bn, involving some 220k investors nationwide (Yunnan News, Feb 5); in Nov, a P2P platform, Caifu Milestone, defaulted on Rmb5bn from some 75k individuals (China Business News, Jan 11); in Dec, a P2P platform, eZubao, defaulted on Rmb50bn from some 900k investors (New Beijing News, Feb 1); in Jan, a P2P platform, Rongzicheng, defaulted on Rmb1.5bn (Economic Information, Jan 26); another P2P player, Shengshi Caifu, defaulted on Rmb2bn from some 7k investors (Rong360, Jan 21).
The charts below show BofA’s estimates related to the default cases in the shadow banking sector, based on media reports of high profile actual default cases. What is notable is that while the number of reported cases has remained relatively low, the size of the blow ups has soared in recent months.
So far, none of the six cases mentioned above in the P2P and private wealth management product markets have been resolved, and there has been no clarification from the companies or local governments on potential solutions. Unless the government decides to bail investors out, large losses could ensue, Cui warns.
Previously, defaults mainly occurred in more stringently regulated areas e.g. trust and bond, and involved financial institutions with large balance sheets. The cases were often resolved in investors’ favor.
In a scenario in which investors are not bailed out and thus become more cautious, eg, rolling over some of the debt instruments in the shadow banking sector, some borrowers may struggle to obtain credit, for example, developers and coal miners.
Whether this scenario would trigger a chain reaction is a key risk that needs to be monitored.
Moreover, given the default pressure in the trust and bond market markets as detailed in the list of defaults at the end of this article, cases may emerge there eventually.
The paradox, as Cui concludes, is that if shadow banking investors continue to be bailed out, this would imply a further strengthening of the implicit guarantee, and potentially, put pressure on growth, increase the debt burden and hurt RMB stability.
BofA’s conclusion: “financial system risk is arguably the most important risk facing market this year. Until the debt issue is addressed, we believe it is unlikely we will see the bottom of the market.“
We don’t know, but we find it disturbing that suddenly a whole lot of banks around the globe – from Germany to China – are being watched very closely as a potential catalyst that will spark the next crisis. Wasn’t the entire point of the 2008/9 bailout and subsequent injection of trillions in central bank liquidity to ensure that precisely this scenario does not occur?
And speaking of defaults of either plain vanilla companies, or shadow bank trusts, here is a brief list of all recent Chinese defaults: how long until the the losses from any one of these – or some upcoming default – are simply too large for the government to pocket, and the inevitable “chain reaction” is finally triggered.
- When Paper Money Becomes Trash
Submitted by Nick Giambruno via InternationalMan.com,
This definitive sign of a currency collapse is easy to see…
When paper money literally becomes trash.
Maybe you’ve seen images depicting hyperinflation in Germany after World War I. The German government had printed so much money that it became worthless. Technically, German merchants still accepted the currency, but it was impractical to use. It would have required wheelbarrows full of paper money just to buy a loaf of bread.
At the time, no one would bother to pick up money off the ground. It wasn’t worth any more than the other crumpled pieces of paper on the street.
Today, there’s a similar situation in the U.S. When was the last time you saw someone make the effort to pick up a penny off the street? A nickel? A dime?
Walking around New York City recently, I saw pennies, nickels, and dimes just sitting there on busy sidewalks. This happened at least five times in one day. Even homeless people wouldn’t bother to bend over and pick up anything less than a quarter.
The U.S. dollar has become so debased that these coins are essentially pieces of rubbish. They have little to no practical value.
Refusing to Acknowledge the Truth
It costs 1.7 cents to make a penny and 8 cents to make a nickel, according to the U.S. Government Accountability Office. The U.S. government loses tens of millions of dollars every year putting these coins into circulation.
Why is it wasting money and time making coins almost no one uses? Because phasing out the penny and nickel would mean acknowledging currency debasement. And governments never like to do that. It would reveal their incompetence and theft from savers.
This isn’t new or unique to the U.S. For decades, governments around the world have refused to phase out worthless currency denominations. This helps them deny the problem even exists. They refuse to issue currency in higher denominations for the same reason.
Take Argentina, for example. The country has some of the highest inflation in the world. In the last 12 months, the peso has lost over half its value.
I was just in Argentina, and the largest bill there is the 100-peso note, which is worth around $7. It’s not uncommon for Argentinians to pay with large wads of cash at restaurants and stores. The sight would unnerve many Americans, who’ve been trained by the government through the War on Cash to view it as suspicious and dangerous.
For many years, the Argentine government refused to issue larger notes. Fortunately, that’s changing under the recently elected pro-market president Mauricio Macri. His government has promised to introduce 200-, 500-, and 1,000-peso notes in the near future.
This is the opposite of what’s happening in the U.S., where the $100 bill is the largest bill in circulation. That wasn’t always the case. At one point, the U.S. had $500, $1,000, $5,000, and even $10,000 bills. The government eliminated these large bills in 1969 under the pretext of fighting the War on Some Drugs.
The $100 bill has been the largest ever since. But it has far less purchasing power than it did in 1969. Decades of rampant money printing have debased the dollar. Today, a $100 note buys less than a $20 note did in 1969.
Even though the Federal Reserve has devalued the dollar over 80% since 1969, it still refuses to issue notes larger than $100.
Pennies and Nickels Under Sound Money
For perspective, consider what a penny and a nickel would be worth under a sound money system backed by gold. From 1792 to 1934, the price of gold was around $20 per ounce. Under this system, it took around 2,000 pennies to make an ounce of gold. At today’s gold price, a “sound money penny” would be worth about 55 modern pennies. A “sound money nickel” would be worth about $3.
I don’t pick up pennies off the sidewalk. But I would if pennies were backed by gold. If that were to happen, I doubt there would be many pennies sitting on busy New York sidewalks.
Ron Paul said it best when he discussed this issue…
“There is an old German saying that goes, ‘Whoever does not respect the penny is not worthy of the dollar.’ It expresses the sense that those who neglect or ignore the small things cannot be trusted with larger things, and fittingly describes the problems facing both the dollar and our nation today.
Unless Congress puts an end to the Fed’s loose monetary policy and returns to a sound and stable dollar, the issue of U.S. coin composition will be revisited every few years until inflation finally forces coins out of circulation altogether and we are left with only worthless paper.”
There’s an important lesson here.
Politicians and bureaucrats are the biggest threats to your financial security. For years, they’ve been quietly debasing the country’s currency… and inviting a currency catastrophe.
Most people have no idea how bad things can get when a currency collapses… let alone how to prepare.
- Crypto-Wars Escalate: Congress Plans Bill To Force Companies To Comply With Decryption Orders
Seemingly angered at the temerity of Apple's Tim Cook's defense of individual's privacy and security, Congress has escalated the 'crypto-wars' that are dividing Washington and Silcon Valley. In its most directly totalitarian move yet, WSJ reports that Senate Intelligence Committee Chairman Richard Burr (R., N.C.) is working on a proposal that would create criminal penalties for companies that don’t comply with court orders to decipher encrypted communications. It seems Edward Snowden was right, The FBI is creating a world where citizens rely on Apple to defend their right, rather than the other way around.
Liberty Blitzkrieg's Mike Krieger provides some much-needed background in the escalation of the crypto-wars. The feds, and the FBI in particular, have been very vocal for a long time now about the desire to destroy strong encryption, i.e., the ability of citizens to communicate privately. A year ago, I wrote the following in the post, By Demanding Backdoors to Encryption, U.S. Government is Undermining Global Freedom and Security:
One of the biggest debates happening at the intersection of technology and privacy at the moment revolves around the U.S. government’s fear that the American peasantry may gain access to strong encryption in order to protect their private communications. Naturally, this isn’t something Big Brother wants to see, and the “solution” proposed by the status quo revolves around forcing technology companies to provide a way for the state to have access to all secure communications when they deem it necessary.
Many technology experts have come out strongly against this plan. Leaving aside the potential civil liberties implications of giving the lawless maniacs in political control such power, there’s the notion that if you create access for one group of entitled people, you weaken overall security. Not to mention the fact that if the U.S. claims the right to such privileged access, all other countries will demand the same in return, thus undermining global privacy rights and technology safeguards.
We are already seeing this play out in embarrassing fashion. Once again highlighting American hypocrisy and shortsightedness, as well as demonstrating that the U.S. government does’t actually stand for anything, other than the notion that “might means right.” Sad.
And today's decision by Tim Cook not to comply with the government's latest demands confirms what Edward Snowden noted on Twitter:
The @FBI is creating a world where citizens rely on #Apple to defend their rights, rather than the other way around. https://t.co/vdjB6CuB7k
— Edward Snowden (@Snowden) February 17, 2016
Krieger adds that Tim Cook deserves tremendous credit for the courage to come out and so aggressively and publicly denounce what the FBI is trying to do.
If he hadn’t decided to publicly challenge the court order and write a detailed treatise on precisely why, the American citizenry would be left completely in the dark. This would be an unethical and unacceptable position.
Second, this case could very well be headed up to higher courts. The greatest risk in these sorts of cases revolves around judicial ignorance when it comes to technology issues. The government knows all too well that most judges are clueless when it comes to tech, and that all they have to do is scaremonger with the word “terrorism” and judges will almost always default to the government position. Cook’s very public stance will at least shine some light on the issue and hopefully fuel robust, intelligent public debate which could inform judges ahead of being presented with technology related cases they don’t really understand.
Which is perhaps why Congress is escalating the situation, as The Wall Street Journal reports,
Senate Intelligence Committee Chairman Richard Burr (R., N.C.) is working on a proposal that would create criminal penalties for companies that don’t comply with court orders to decipher encrypted communications, four people familiar with the matter said, potentially escalating an issue that is dividing Washington and Silicon Valley.
…
Mr. Burr hasn’t finalized plans for how legislation would be designed, and several people familiar with the process said there hasn’t been an agreement among any other lawmakers to pursue criminal penalties. It’s also unclear whether Mr. Burr could marshal bipartisan support on such an issue during an election year that has divided Washington in recent months.
The bill could be written in a way that modifies the Communications Assistance for Law Enforcement Act, a 1994 law that compels telecommunications companies to construct their systems so they can comply with court orders.
…
Mr. Burr has spent months pressuring technology companies to work more closely with law enforcement and others to prevent encryption tools from being used to plan and carry out crimes. He warned technology firms that they need to consider changing their “business model” in the wake of the widening use of encrypted communications.
Read that last sentence again!! Since the scale of criminal penalty could be anything – as opposed to the 'cost of doing business' fines associated with the US banking system – this theoretically forces tech companies to comply, no matter what.
The critical question then, once again, as Mike Krieger concludes, is:
Do we really want to sacrifice overall privacy and security in order to get information from one person’s phone?
Or what about the following question posed by cryptography professor Matthew Green:
If the US government dictating iPhone encryption design sounds ok to you, ask yourself how you'll feel when China demands the same.
— Matthew Green (@matthew_d_green) February 17, 2016
These are enormous questions with tremendous implications. I just hope we as a society choose wisely.
- Swiss Politicians Slam Attempts To Eliminate Cash, Compare Paper Money To A Gun Defending Freedom
As we predicted over a year ago, in a world in which QE has failed, and in which the ice-cold grip of NIRP has to be global in order to achieve its intended purpose of forcing savers around the world to spend the taxed product of their labor, one thing has to be abolished: cash.
This explains the recent flurry of articles in outlets such as BBG and the FT, and op-eds by such “established” economists as Larry Summers, all advocating the death of cash, a process which would begin by abolishing high denomination bills and continue until all physical cash in circulation is eliminated, something we warned about when the first made it first NIRP hint last September.
We were s rather surprised by the candor of a WSJ piece overnight which actually told it how it is:
The real reason the war on cash is gearing up now is political: Politicians and central bankers fear that holders of currency could undermine their brave new monetary world of negative interest rates. Japan and Europe are already deep into negative territory, and U.S. Federal Reserve Chair Janet Yellen said last week the U.S. should be prepared for the possibility. Translation: That’s where the Fed is going in the next recession.
* * *
By all means people should be able to go cashless if they like. But it’s hard to avoid the conclusion that the politicians want to bar cash as one more infringement on economic liberty. They may go after the big bills now, but does anyone think they’d stop there? Why wouldn’t they eventually ban all cash transactions much as they banned gold and silver as mediums of exchange?
Beware politicians trying to limit the ways you can conduct private economic business. It never turns out well.
We were even more surprised when we read that in Switzerland, the place which offers the highest denomination banknote in Europe, the 1,000 Swiss Franc note (and the second highest in the world after the Singapore $10,000 note) two politicians, Philip Brunner and Manuel Brandberg, members of the right-wing Swiss People’s Party, have proposed a motion that they hope Zug will support for a cantonal initiative seeking changes to the federal currency law.
They argue that the creation of 5,000-franc notes will ensure that the Swiss franc maintains its status as a safe haven currency.
As we reported previously, this proposal is the diametrical opposite of what the ECB hopes to do, and of where the European Union wants to go, where finance ministers have talked about withdrawing 500-euro bills from circulation to deter their use for “financing terrorism, money laundering and other illegal activities”, all made up terms designed to give the impression that politicians are slowly eliminating physical currency in circulation for your own good.
They are not.
This is what the Swiss politicians admit too: Brunner and Brandberg maintain that the tendency in the EU and in OECD member countries is to “weaken individual liberties” and to exercise greater control over citizens.
But it is what they say next that may define the libertarian political platforms around the globe for the next several years – also known as the global NIRP period – because it is 100% spot on:
In this context “cash is comparable to the service firearm kept by Swiss citizen soldiers,” the pair argued in their motion, saying they both “guarantee freedom”.
“In France and Italy already cash payments of only up to 1,000 euros are allowed and the question of the abolition of cash is being seriously discussed and considered in Europe, “ Brunner said on his Facebook page.
The move toward electronic payments allows governments “total surveillance” over individuals, the pair claim.
Of course, the proposal was promptly shot down by the Swiss National Bank: “Walter Meier, a spokesman for the Swiss National Bank, which is responsible for Switzerland’s money, told 20 Minuten newspaper the introduction of banknotes of a higher denomination is “not an issue.”
Keep in mind this is the same central bank which in late 2014 pushed hard against a popular referendum to replenish Swiss sovereign gold by buying gold in the open market, only to generate billions in paper losses months later when it admitted defeat in the currency war with the ECB; a central bank which then lost even more billions when it decided to buy shares of AAPL at their all time high price and is now sitting on substantial paper losses.
As for the Swiss proposal to print higher denomination currencies, we are confident it won’t pass now: if it did, there would be an unprecedented rush from around the globe to park savings in Swiss cash, just like in the good old days.
But the time of big currency denominations is coming one way or another: after all, NIRP is the falling Keynesian system’s penultimate hope. When it fails, there is just one last option, the one we have said is coming ever since 2009, the one which even the “smartest money in the world” agreed today is inevitable: helicopter money.
And as Ben Bernanke made it all so clear in 2002, once the helicopter money comes, hyperinflation is very close behind. And one thing hyperinflation always brings with it, is very highly denominated bank notes. Just ask Zimbabwe.
- "I Guess It's Food Stamps": 400,000 Americans In Jeopardy As Giant Pension Fund Plans 50% Benefit Cuts
Dale Dorsey isn’t happy.
After working 33 years, he’s facing a 55% cut to his pension benefits, a blow which he says will “cripple” his family and imperil the livelihood of his two children, one of whom is in the fourth grade and one of whom is just entering high school.
Dorsey attended a town hall meeting in Kansas City on Tuesday where retirees turned out for a discussion on “massive” pension cuts proposed by the Central States Pension Fund, which covers 400,000 participants, and which will almost certainly go broke within the next decade.
“A controversial 2014 law allowed the pension to propose [deep] cuts, many of them by half or more, as a way to perhaps save the fund,” The Kansas City Star wrote earlier this week adding that “two much smaller pensions also have sought similar relief under the law, and still more pensions are significantly underfunded.”
“What’s happening to us is a microcosm of what’s going to happen to the rest of the pensions in the United States,” said Jay Perry, a longtime Teamsters member.
Jay is probably correct.
Public sector pension funds are grossly underfunded in places like Chicago and Houston, while private sector funds are struggling to deal with rock bottom interest rates, which put pressure on expected returns and thus drive the present value of funds’ liabilities higher.
Illinois’ pension burden has brought the state to its knees financially speaking and in November, Springfield was forced to miss a $560 million payment to its retirement fund. In the private sector, GM said on Thursday that it will sell 20- and 30-year bonds in order to meet its pension obligations.
“At the end of last year GM’s U.S. hourly pension plan was underfunded by $10.4 billion,” The New York Times writes. “About $61 billion of the obligations were funded for the plan’s roughly 360,000 pensioners.” Maybe it’s time for tax payers to bail themselves out.
Speaking of GM, Kenneth Feinberg – the man who oversaw the distribution of cash compensation to victims who were involved in accidents tied to faulty ignition switches – is now tasked with deciding whether the Central States Pension Fund’s proposal to cut benefits passes legal muster. “Central States’ proposal would allow the retirees to work and still collect their reduced benefits. But some are no longer able to work, and the idea didn’t seem plausible to others,” the Star goes on to note.
“You know anybody hiring a 73-year-old mechanic?” Rod Heelan asked Feinberg. “I’m available.”
“I’ll have to go find a job. I don’t know. I’m 68,” Gary Meyer of Concordia, Mo said. “It would probably be a minimum-wage job.”
To be sure, retirees’ frustrations are justified. That said, the fund is simply running out of money. “We simply can’t stay afloat if we continue to pay out $3.46 in pension benefits for every $1 paid in from contributing employers,” a letter to retirees reads.
The fund is projected to go broke by 2026. Without the proposed cuts, no benefits at all will be paid from that point forward.
According to letters shared with The Star, cuts range from around 40% to 61%. “[The] average pension loss was more than $1,400 a month,” the paper says.
As for what will become of those who depend upon their benefits to survive, the above quoted Gary Meyer summed it up best: “I guess food stamps. Hopefully not. It would be a last resort.”
Don’t worry Gary, you aren’t alone…
- Why Negative Interest Rates Spell Doom For Capitalism
Submitted by Robert Romano via NetRightDaily.com,
Interest rates in Switzerland, Denmark, Sweden, the European Central Bank and now the Bank Japan have now plunged into negative territory, starting a new phase in the era of central banking that is very much uncharted.
Time will tell if it leaves the global economy lost at sea.
So far, banks are primarily being charged for keeping excess reserves on account at these central banks, a policy designed to jumpstart lending by making it more expensive for banks to sit on reserves. In some cases, like Sweden, the deposit rates have gone negative, too.
Whether it will all work out or not remains to be seen — initiating inflation and economic growth. Maybe it will, but so far it’s not really looking good.
So what if it doesn’t work? The longer term implication is that central banks will then feel compelled to move their discount rates and other rates negative, too. Once that Pandora’s Box is open, it will mean that when financial institutions borrow money from the central bank, they will earn interest instead of owing it.
You read that right. When, not if, central banks go completely negative, they will wind up paying banks to borrow money from them.
That’s quantitative easing by another name.
Say, the interest rate is -1 percent. For every $1 trillion that is lent, the central bank in theory would owe an additional $10 billion in interest to the borrowing banks.
Fast forward 10 or 20 years into the future. Can you imagine a world where commercial banks pay their customers to borrow money?
Sure, scoff now. But mark my words. Central banks are so desperate to kick start the economy and credit creation, they will do almost anything. So, if they have to bribe you to borrow money to start acquiring more things, then that’s exactly what they’ll do.
A few problems immediately emerge.
If it ends up costing money for banks to lend money, how will they make any profits?
The answer might be that the profits will be the difference between the interest earned from that bank borrowing the money from the central bank less the interest owed to the borrowing customer.
So, say the bank borrowed from the central bank at -5 percent and then issued a loan with that money at -1 percent. The customer still earns 1 percentage point of negative interest, and the bank still gets to pocket the remaining 4 percentage points of negative interest from the central bank.
But what about savers? Would they be charged just to put money into the bank? If so, why would they keep it there?
Since banks depend on deposits to make up their capital requirements, they would have a powerful disincentive against charging customers to keep deposits, lest it provoke a run on the banks.
But why invest in bonds?
This is where the real rub comes. Already the Japan 10-year treasury is testing 0 percent levels.
Can you imagine a retirement fund that earns less than zero percent? That would mean less than zero percent return on investment. An investor has to pay to hold the bond, only to have principal returned when it comes due. Why bother?
The only way that might make sense would be in an outright deflationary environment. So, say, inflation is at -10 percent, and you’re in a bond that charges -1 percent to hold the bond. In theory, the investor would come out 9 percent ahead because the value of holding cash is still technically appreciating via increased purchasing power.
But even then, it would still make more sense to simply just hold cash to begin with.
So to incentivize bond-buying still and deposits, central banks would simply ban keeping cash. Already the discussion is of discontinuing higher-denomination bills like €500 or $100 bills. To fight crime, they say. Yeah, sure it is. This forecasts eventually our society will be cashless.
In the future, perhaps the only way to get paid will be via a bank account. Then it would be a simple equation. Keep money in an account for too long, pay more. Put it into a bond or spend it all immediately, pay less or nothing.
Then, buying bonds could become the digital equivalent of stockpiling physical gold or silver to prepare for a financial Armageddon. You can see the slogans now: “Buy bonds now and only lose 2 percent this year!”
Okay, so we’ve worked through how financial institutions might survive the scourge of negative interest rates and remain profitable, and how central banks would forestall any more bank runs by simply banning them. And how even investors could in theory still come out “ahead” by putting money into bonds that cost less than keeping it idle.
Which brings us to the issue of deflation. By going negative, are not central banks basically forecasting that deflation — that is, outright asset price depreciation whether in stock prices or home values — is at hand? Perhaps banks can get by in such an environment since they apparently plan on getting paid to borrow money. But what about everyone else?
For, what negative interest rates are really projecting are low-to-no growth and zero-profit environments for the entire global economy sometime in the future, where businesses simply cannot make money. Not now, but perhaps soon.
In the Great Depression, when it came to such price volatilities for, say, farmers, the government instituted a series of agricultural subsidies to keep the farms profitable so they could pay their mortgages.
The implication of no growth and deflation today are that all businesses will come to the government seeking subsidies. We already see it in agriculture. Education. Health care. Housing. Whether it is loan programs for customers or outright grants. There will be more.
This is why capitalism cannot survive no growth. Economies would naturally revert to some form of subsistence, where the need to trade is reduced greatly. But investors demand return on investment. Remember, it’s a world without profits. In a no-growth, deflationary environment, those who over-produce are the ones who get punished by markets. So businesses will demand subsidies for their surplus stock, or for not producing at all, as in the Depression.
Of course, this is all madness. Negative interest rates have never really been tried before. And if they fail to jumpstart the economy and inflation now, the implication is that deflation and low-to-no growth are already at hand. Can you say, “Sell?” It’s almost as if central banks are trying to create the conditions for a bear market. Maybe they’ll ban those, too.
- This Is The Real Reason For The War On Cash
Originally posted Op-Ed via The Wall Street Journal,
These are strange monetary times, with negative interest rates and central bankers deemed to be masters of the universe. So maybe we shouldn’t be surprised that politicians and central bankers are now waging a war on cash. That’s right, policy makers in Europe and the U.S. want to make it harder for the hoi polloi to hold actual currency.
Mario Draghi fired the latest salvo on Monday when he said the European Central Bank would like to ban €500 notes. A day later Harvard economist and Democratic Party favorite Larry Summers declared that it’s time to kill the $100 bill, which would mean goodbye to Ben Franklin. Alexander Hamilton may soon—and shamefully—be replaced on the $10 bill, but at least the 10-spots would exist for a while longer. Ol’ Ben would be banished from the currency the way dead white males like him are banned from the history books.
Limits on cash transactions have been spreading in Europe since the 2008 financial panic, ostensibly to crack down on crime and tax avoidance. Italy has made it illegal to pay cash for anything worth more than €1,000 ($1,116), while France cut its limit to €1,000 from €3,000 last year. British merchants accepting more than €15,000 in cash per transaction must first register with the tax authorities. Fines for violators can run into the thousands of euros. Germany’s Deputy Finance Minister Michael Meister recently proposed a €5,000 cap on cash transactions. Deutsche Bank CEO John Cryan predicted last month that cash won’t survive another decade.
The enemies of cash claim that only crooks and cranks need large-denomination bills. They want large transactions to be made electronically so government can follow them. Yet these are some of the same European politicians who blew a gasket when they learned that U.S. counterterrorist officials were monitoring money through the Swift global system. Criminals will find a way, large bills or not.
The real reason the war on cash is gearing up now is political: Politicians and central bankers fear that holders of currency could undermine their brave new monetary world of negative interest rates. Japan and Europe are already deep into negative territory, and U.S. Federal Reserve Chair Janet Yellen said last week the U.S. should be prepared for the possibility. Translation: That’s where the Fed is going in the next recession.
Negative rates are a tax on deposits with banks, with the goal of prodding depositors to remove their cash and spend it to increase economic demand. But that goal will be undermined if citizens hoard cash. And hoarding cash is easier if you can take your deposits out in large-denomination bills you can stick in a safe. It’s harder to keep cash if you can only hold small bills.
So, presto, ban cash. This theme has been pushed by the likes of Bank of England chief economist Andrew Haldane and Harvard’s Kenneth Rogoff, who wrote in the Financial Times that eliminating paper currency would be “by far the simplest” way to “get around” the zero interest-rate bound “that has handcuffed central banks since the financial crisis.” If the benighted peasants won’t spend on their own, well, make it that much harder for them to save money even in their own mattresses.
All of which ignores the virtues of cash for law-abiding citizens. Cash allows legitimate transactions to be executed quickly, without either party paying fees to a bank or credit-card processor. Cash also lets millions of low-income people participate in the economy without maintaining a bank account, the costs of which are mounting as post-2008 regulations drop the ax on fee-free retail banking. While there’s always a risk of being mugged on the way to the store, digital transactions are subject to hacking and computer theft.
Cash is also the currency of gray markets—amounting to 20% or more of gross domestic product in some European countries—that governments would love to tax. But the reason gray markets exist is because high taxes and regulatory costs drive otherwise honest businesses off the books. Politicians may want to think twice about cracking down on the cash economy in a way that might destroy businesses and add millions to the jobless rolls. The Italian economy might shut down without cash.
By all means people should be able to go cashless if they like. But it’s hard to avoid the conclusion that the politicians want to bar cash as one more infringement on economic liberty. They may go after the big bills now, but does anyone think they’d stop there? Why wouldn’t they eventually ban all cash transactions much as they banned gold and silver as mediums of exchange?
Beware politicians trying to limit the ways you can conduct private economic business. It never turns out well.
- Jobless Benefits Claims Soar 100% In Canada's Dying Oil Patch As Construction Jobs Plunge 84%
2015 was not a good year for job creation in Alberta.
In fact, the net 19,600 jobs the province shed marked the worst year for job losses since 1982.
Alberta is of course suffering from the dramatic collapse in oil prices, which look set to remain “lower for longer” in the face of a recalcitrant Saudi Arabia and an Iran which is hell bent on making up for lost time spent languishing under international sanctions.
Suicide rates are up in the province, as is property crime and foodbank usage. The malaise underscores the fact that Canada’s oil patch is dying. WCS prices are teetering just CAD1 above marginal operating costs, and the BoC failed to cut rates last month, meaning it’s just a matter of time before the entire Canadian oil production complex collapses on itself.
On Thursday, a new industry report shows that crude’s inexorable decline could end up costing 84% of oilsands construction jobs over the next four years.
“The oilsands sector is in danger of losing its reputation as a job-creating machine,” The Calgary Herald writes. “A new industry report shows the sector may require 84% fewer construction workers in 2020 compared to 2015 as project cancellations pile up amid a crippling oil-price environment.” Here’s more:
“Overall workforce requirements for the oil and gas industry has been severely impacted by a reduction in investment,” said Carol Howes, vice-president of communications at Petroleum Labour Market Information, part of the industry-funded Enform based in Calgary.
As crude oil prices plunged, capital expenditures in the oilsands declined 30 per cent last year from $35 billion in 2014. Canada has led the world in project deferrals during the 16-month downturn, as oilsands projects with a combined production of three million barrels per day have been shelved, according to Tudor Pickering Holt & Co.
The downturn has taken the shine off Alberta’s job-creating engine and has wiped out 100,000 direct and indirect jobs according to one industry estimate.
Recruitment consultancy Hays estimates Canadian oil and gas workers saw a 1.4 per cent decline in their paychecks last year, compared to a cumulative eight per cent growth over the previous five years.
“Hiring has pretty much seized, unless it’s for a business critical position,” said Neil Gascoigne, global business development expert at Hays, based in Houston.
“A lot of the E&P business are going through significant restructure and looking to further reduce costs, and wages and salaries are one of their high costs.”
“Companies have cut as much as they can without jeopardizing their actual business.”
That reflects something we said back in October. Namely, there’s no more “fat” to be trimmed. In other words, further cost savings will have to come from salary cuts because going forward, cutting jobs altogether will imperil companies’ ability to operate.
Meanwhile, the number of people receiving jobless benefits in Alberta jumped more than 100% in December. “Statistics Canada said 62,500 Alberta residents received job-insurance benefits in December, up from 31,200 a year earlier and accounting for most of the 7.3% increase in job-insurance beneficiaries nationally,” WSJ wrote on Thursday, adding that Vancouver-based Finning International Inc., the world’s largest dealer of Caterpillar Inc. equipment, “said it would cut 400 to 500 jobs globally on top of the 1,900 positions since the start of last year.”
Going forward, the outlook is bleak as underlined by Canada’s Conference Board which on Thursday reported that its business-confidence index “suffered its third consecutive decline in the fourth quarter of 2015, falling 1.5 percentage points to 86.6.” That’s the lowest level since the crisis.
But don’t worry, “the decline was modest compared with the previous quarter, when the index plunged from 105.6 to 88.1.”
So things are still getting worse in Canada. Just at a slower pace. Allahu akbar.
- Bear Market Rallies & Bailing-Out Bad Behavior
Submitted by Lance Roberts via RealInvestmentAdvice.com,
Biggest Rallies Occur In Bear Markets
As expected, the market was oversold enough going into last Friday to elicit a short-term reflexive bounce. Not surprisingly, it wasn’t long before the “bulls” jumped back in proclaiming the correction was over.
If it were only that simple.
First, as I have discussed in the past, market prices remain in a “trend” until something causes that trend to change. This can be most easily seen by looking at a chart of the S&P 500 as compared to its 400-day moving average.
As you will notice in the main body of the chart, during bull markets, prices tend to remain ABOVE the 400-dma (orange-dashed line). Conversely, during bear markets, prices tend to remain BELOW the 400-dma.
The one event in 2011, where all indicators suggested the market was transitioning back into a bear market, was offset by the Federal Reserve’s intervention of “Operation Twist” and eventually QE-3.
During cyclical bear markets, bounces from short-term oversold conditions tend to be extreme. Just recently Price Action Lab blog posted a very good piece on the commonality of short-term rebounds during market downtrends:
“The S&P 500 gained 3.63% in the last two trading sessions. About 75% of back-to-back gains of more than 3.62% have occurred along downtrends. Therefore, a case for a bottom cannot be based solely on performance.”
“It may be seen that 73.85% back-to-back gains of more than 3.62% have occurred along downtrends, i.e., this performance is common when markets are falling. The sample size consists of 195 back-to-back returns greater than 3.62%.
Therefore, strong rebounds along a downtrend cannot be used to support a potential bottom formation.”
After a rough start to the new year, it is not surprising that many are hoping the selling is over.
Maybe it is.
But history suggests that one should not get too excited over bounces as long as the downtrend remains intact.
I Bought It For The Dividend
One of the arguments for “buy and hold” investing has long been “dividends.” The argument goes this way:
“It really doesn’t matter to me what the price of the company is, I just collect the dividend.”
While this certainly sounds logical, in reality, it has often turned into a very poor strategy, particularly during recessionary contractions.
A recent example was Kinder Morgan (KMI). In late-2014, as I was recommending that individuals begin to exit the energy sector, Kinder Morgan was trading around $40/share. The argument then was even if the share price of the company fell, the owner of the shares still got paid a great dividend.
Fast forward today and the price of the company has fallen to recent lows of $15/share (equating to a 62.5% loss in value) and the dividend was cut by 80%.
Two things happened to the investor’s original thesis. The first, was that after he had lost 50% of his capital, the dividend was no longer nearly as important. Confidence in the company eroded and the individual panic sold his ownership into the decline. Secondly, when a company gets into financial trouble, the first thing they will do is cut the dividend. Now you have lost your money and the dividend.
But it is not just KMI that has cut dividends as of late. Many companies have been doing the same to shore up internal cash flows. As pointed out recently by Political Calculations:
“Speaking of which, the pace of dividend cuts in the first quarter of 2016 has continued to escalate. Through Friday, 12 February 2016, the number of dividend cuts has risen into the “red zone” of our cumulative count of dividend cuts by day of quarter chart.”
Importantly, while the media keeps rambling on that we are “nowhere” close to a recession, it is worth noting the following via NYT:
“The only year in recent history with more dividend cuts was 2009, when the world was staggering through a great financial crisis. A total of 527 companies trimmed dividends that year, Mr. Silverblatt’s data shows. Coca-Cola and other dividend-paying blue chips like IBM and McDonald’s were under severe stress in those days, too, but their financial resources were deep enough to allow them to keep the dividend stream fully flowing.”
Buying “dividend yielding” stocks is a great way to reduce portfolio volatility and create higher total returns over time. However, buying something just for the dividend, generally leads to disappointment when you lose your money AND the dividend. It happens…a lot.
Preservation of capital is first, everything else comes second.
Empathy For The Devil
Danielle DiMartino Booth, former Federal Reserve advisor and President of Money Strong, recently penned an excellent piece that has supported my long-held view on the fallacy of “consumer spending.” To wit:
“As for the strongest component of retail sales, it’s not only subprime loans that are behind the 6.9-percent growth in car sales over 2015. Super prime auto loan borrowers’ share of the pie is now on par with that of subprime borrowers – each now accounts for a fifth of car loan originations. What’s that, you say? Can’t afford that new set of wheels? Not to worry. Just lease. You’ll be in ample company — some 28 percent of last year’s car sales were made courtesy of leases, an all-time high. ”
What has been missed by the vast majority of mainstream economists is that in a country driven 68% by consumer spending, there are limits to that consumption. A consumer must produce (work) first to be paid a wage with which to consume with. Each dollar is finite in its ability to create economic growth via consumption. A dollar spent on a manufactured good has a greater multiplier effect on the economy than the same dollar spent on a service. Likewise, a dollar spent on a manufactured good or service has a greater economic impact than a dollar spent on paying taxes, higher healthcare insurance costs, or interest payments.
The only way to increase the level of spending above the rate of income is through leverage. However, rising debt levels also suggests more of the income generated by households is diverted to debt service and away from further consumption. The chart below shows the problem.
Over the 30-year period to 1982, households accumulated a total of $2 trillion in debt in an economy that was growing at an average rate of 8%. Wages grew as stronger consumption continued to push growth rates higher. Over the next 25-year period, households abandoned all fiscal responsibility and added over $10 trillion in debt as the struggle to create a higher living standard outpaced wage and economic growth. Since the turn of the century, average economic growth has been closer to 2%. See the problem here.
The bailouts following the financial crisis kept households from going through a much needed deleveraging. Likewise, since banks were taught they would be bailed out repeatedly for bad behavior, no lessons were learned there either. Not surprisingly, as shown by the recent Fed Reserve 2016 Loan Officer Opinion Survey, lending standards are now back to levels seen just prior to the financial crisis.
What could possibly going wrong? The problem is the consumer is all spent out and all leveraged up. While you shouldn’t count the consumer out, just don’t count on them too much.
Just some things to think about.
- Gold Glows, Bonds Bid, Crude Crumbles, FANGs Fizzle
It was all too easy there eh? Never. Gets. Old…
The US Open and NYMEX Close were the triggers today…
Stocks did not go higher today confounding business TV anchors worldwide…
But off last Thursday's lows, it is still impressive…
The "short squeeze" ended today…
FANGs dropped 1.4% on the day – the biggest drop in 8 days (after 5 straight up days)…
Ugly afternoon for the FANGs…
Credit wasn't buying it again…
Treasury yields declined for the first time in 4 days, led by a 6bps plunge in 30Y (3.5bps 2Y)…
As extreme options skews unwind…
The USD gained modestly again today, led by EUR weakness but we note JPY was bid (following overnight comments from Kuroda)…
USDJPY plunged into the close of NY trading…
Extending The BoJ's utter fail even more… NKY back below 16000
Crude tumbled back to earth a little but gold (and silver) were the best performers today with a ramp starting as US opened and accelerating after EU closed…
Gold's 2nd best day in 13 months…
Crude roundtripped its gains from API 'draw' overnight…
Charts: Bloomberg
Bonus Chart: You Are Here
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