Today’s News 1st February 2016

• Star Wars VII: The Audience Awakens

   

  

   

   

  By EconMatters

  While I do not see EconMatters as a movie critic like Roger Ebert, sometimes it feels almost like civil duty to let people know not to waste money on a bad movie. I missed the Start War VII when it opened during Christmas last year and at the same time endured a horrible experience with Fandango. In retrospect, I should have taken it as an omen not to see the movie at all. But since everyone was telling me how “awesome” the movie was, I finally made it to the theater last night.

   

  One of the Worst Movies I’ve Ever Seen

   

  Compared to the previous installments, this Episode 7 was a major disappointment and it was the most excruciating 2.5 hours I’ve ever experienced in a movie theater. It was a bad movie compunded by an old and filthy movie theater (AMC Studio 30, located in the better part of Houston). The movie and the movie theater were so bad that I actually had the thought to short both Disney (NYSE:DIS) and AMC Entertainment (NYSE:AMC) stocks.

   

  When Disney bought Lucasfilm from George Lucas for $4 billion in 2012, it gave Disney ownership of the “Star Wars” franchise but also “Indiana Jones” franchise. Now, I can’t wait to see how bad Disney can mess up Indiana Jones.

   

  I like action, suspense, and thriller movies. Although I think the Twilight movie series is nothing more than a teen romance story wrapped in vampire myths and action (I am a fan of “The Underworld”, though), I do have certain appreciation and understanding of Twilight’s popularity — It has an interesting story line about the romance, marriage, family, etc. between a social misfit teenage girl and a vampire guy/boy (I think he is actually at least several hundred years old).

   

  Watch: The Silver Market, Jan. 31, 2016 (Video)

   

   

  Make a Movie That Tells a Story

   

  Anyway, I still believe movies are about story telling and Star War VII has no story line to keep me remotely interested. The movie has a very simple plot: a bunch of people (heroes and villains) chase a secret map to find Luke Skywalker, the last Jedi, to help fight the new evil power–the First Order. While there’s nothing wrong with a simple plot, it is a cinematic crime to have such a poor screenplay without any substance like Star Wars VII.

   

  “Making Something for the [Kardashian] Fans”

   

  Reportedly Lucas had some ideas for how Star Wars VII story could be told. According to Lucas, “All I want to do is tell a story…”, but Disney was keen on “making something for the fans.” I now totally understand why Disney told George Lucas and his story to take a hike — Disney sees no use to spend time and effort to develop any story in an established franchise with built-in audience like Star Wars.

   

  Yes, I can totally see how all the galaxy air fighting and bombs away can put the simpleton Kardashian-following crowd in awe. However, the repetitive explosions, shooting and space fighting gets old real quick. The 135-minute movie is way too long with cliché after cliché, and predictable outcome.

   

  “Jurassic World” and “Avatar” are two deservingly awesome movies with good story, production and beautiful high tech graphic scenes to boot. Star Wars VII is not even in the same zip code as the similarly cliché Transformers franchise, in my opinion.

   

  Only High Point: Original Han Solo & Chewie

   

  Even the space air fighting scenes are not that impressive as I’ve seen better alien, space fighting scenes from any number of high tech movies adapted from the Marvel or DC Comics.

   

  In fact, the only high point of the entire movie was when the original cast of Han Solo (Harrison Ford) and Chewie appear. The interaction between Han Solo, Chewie, and Princess Leia (Carrie Fisher) is interesting, nostalgic but too little too late to save the movie.

   

  Lipstick on a Pig Sold as a Beauty Queen

   

  In all fairness, I have to applaud Disney Studio’s Marketing Department for an outstanding job of promoting the movie a year in advance with a superb editing job on the promotional trailer. The trailer gives an impression of much more grandeur to build up hype, expectation and, in my opinion, directly led to the box office success.

   

  Yes Lucas, You Sold Your Children

   

  During a recent interview, George Lucas indicated he felt he sold the company he created, Lucasfilm, to “the white slavers,” referring to Disney (Lucas later issued an apology to Disney). Lucas also said he felt like he sold his children [for $4 Bn].

   

  After watching the first Star Wars movie by Disney, I can understand how Lucas must have felt after Disney butchered his legendary creation — Star Wars. However, in this case, Lucas made his bed (and was well-compensated) on Star Wars and now he must lie in it.   

   

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• Paul Craig Roberts: The West Is Being Reduced To Looting Itself

  Authored by Paul Craig Roberts,

  I, Michael Hudson, John Perkins, and a few others have reported the multi-pronged looting of peoples by Western economic institutions, principally the big New York Banks with the aid of the International Monetary Fund (IMF).

  Third World countries were and are looted by being inticed into development plans for electrification or some such purpose. The gullible and trusting governments are told that they can make their countries rich by taking out foreign loans to implement a Western-presented development plan, with the result being sufficient tax revenues from economic development to service the foreign loan.

  Seldom, if ever, does this happen. What happens is that the plan results in the country becoming indebted to the limit and beyond of its foreign currency earnings. When the country is unable to service the development loan, the creditors send the IMF to tell the indebted government that the IMF will protect the government’s credit rating by lending it the money to pay its bank creditors. However, the conditions are that the government take necessary austerity measures so that the government can repay the IMF. These measures are to curtail public services and the government sector, reduce public pensions, and sell national resources to foreigners. The money saved by reduced social benefits and raised by selling off the country’s assets to foreigners serves to repay the IMF.

  This is the way the West has historically looted Third World countries. If a country’s president is reluctant to enter into such a deal, he is simply paid bribes, as the Greek governments were, to go along with the looting of the country the president pretends to represent.

  When this method of looting became exhausted, the West bought up agricultural lands and pushed a policy on Third World countries of abandoning food self-sufficiency and producing one or two crops for export earnings. This policy makes Third World populations dependent on food imports from the West. Typically the export earnings are drained off by corrupt governments or by foreign purchasers who pay little while the foreigners selling food charge much. Thus, self-sufficiency is transformed into indebtedness.

  With the entire Third World now exploited to the limits possible, the West has turned to looting its own. Ireland has been looted, and the looting of Greece and Portugal is so severe that it has forced large numbers of young women into prostitution. But this doesn’t bother the Western conscience.

  Previously, when a sovereign country found itself with more debt than could be serviced, creditors had to write down the debt to an amount that the country could service. In the 21st century, as I relate in my book, The Failure of Laissez Faire Capitalism, this traditional rule was abandoned.

  The new rule is that the people of a country, even a country whose top offiials accepted bribes in order to indebt the country to foreigners, must have their pensions, employment, and social services slashed and valuable national resources such as municipal water systems, ports, the national lottery, and protected national lands, such as the protected Greek islands, sold to foreigners, who have the freedom to raise water prices, deny the Greek government the revenues from the national lottery, and sell the protected national heritage of Greece to real estate developers.

  What has happened to Greece and Portugal is underway in Spain and Italy. The peoples are powerless because their governments do not represent them. Not only are their governments receiving bribes, the members of the governments are brainwashed that their countries must be in the European Union. Otherwise, they are bypassed by history. The oppressed and suffering peoples themselves are brainwashed in the same way. For example, in Greece the government elected to prevent the looting of Greece was powerless, because the Greek people are brainwashed that no matter the cost to them, they must be in the EU.

  The combination of propaganda, financial power, stupidity and bribes means that there is no hope for European peoples.

  The same is true in the United States, Canada, Australia, and the UK. In the US tens of millions of US citizens have quietly accepted the absence of any interest income on their savings for seven years. Instead of raising questions and protesting, Americans have accepted without thought the propaganda that their existence depends upon the success of a handful of artificially created mega-banks that are “too big to fail.” Millions of Americans are convinced that it is better for them to draw down their savings than for a corrupt bank to fail.

  To keep Western peoples confused about the real threat that they face, the people are told that there are terrorists behind every tree, every passport, under every bed, and that all will be killed unless the government’s overarching power is unquestioned. So far this has worked perfectly, with one false flag after another reinforcing the faked terror attacks that serve to prevent any awareness that this a hoax for accumulating all income and wealth in a few hands.

  Not content with their supremacy over “democratic peoples,” the One Percent has come forward with the Trans-Atlanta and Trans-Pacific partnerships. Allegedly these are “free trade deals” that will benefit everyone. In truth, these are carefully hidden, secret, deals that give private businesses control over the laws of sovereign governments.

  For example, it has come to light that under the Trans-Atlantic partnership the National Health Service in the UK could be ruled in the private tribunals set up under the partnership as an impediment to private medical insurance and sued for damages by private firms and even forced into abolishment.

  The corrupt UK government under Washington’s vassal David Cameron has blocked access to legal documents that show the impact of the Trans-Atlantic partnership on Britain’s National Health Service. 

  For any citizen of any Western country who is so stupid or brainwashed as not to have caught on, the entire thrust of “their” government’s policy is to turn every aspect of their lives over to grasping private interests.

  In the UK the postal service was sold at a nominal price to politically connected private interests. In the US the Republicans, and perhaps the Democrats, intend to privatize Medicare and Social Security, just as they have privatized many aspects of the military and the prison system. Public functions are targets for private profit-making.

  One of the reasons for the escalation in the cost of the US military budget is its privatization. The privatization of the US prison system has resulted in huge numbers of innocent people being sent to prison, where they are forced to work for Apple Computer, IT services, clothing companies that manufacture for the US military, and a large number of other private businesses. The prison laborers are paid as low as 69 cents per hour, below the Chinese wage.

  This is America today. Corrupt police. Corrupt prosecutors. Corrupt judges. But maximum profits for US Capitalism from prison labor. Free market economists glorified private prisons, alleging that they would be more efficient. And indeed they are efficient in providing the profits of slave labor for capitalists.

  Here is a news report on UK Prime Minister Cameron denying information about the effect of the Trans-Atlantic partnership on Britains’ National Health.

  The UK Guardian, which often has to prostitute itself in order to maintain a bit of independence, describes the anger that the British people feel toward the government’s secrecy about an issue so fundamental to the well being of the British people. Yet, the British continue to vote for political parties that have betrayed the British people.

  All over Europe, the corrupt Washington-contolled governments have distracted people from their sellout by “their” governments by focusing their attention on immigrants, whose presence is a consequence of the European governments representing Washington’s interests and not the interest of their own peoples.

  Somthing dire has happened to the intelligence and awareness of Western peoples who seem no longer capable of comprehending the machinations of “their” governments.

  Accountable government in the West is history. Nothing but failure and collapse awaits Western civilization.

  

  

  

  

  

• Japanese Bond Yields Continue To Collapse As China Margin Suffers Longest Losing Streak On Record

  Following Kuroda’s panic policy measures from Friday, JGB yields continue to collapse across the curve (though notably 30Y is selling off – is someone actually concerned about long-term survival risk?). 2Y Yields have collapsed all the way to BoJ’s -10bps rate, 5Y is plunging – now close to -9bps, and 10Y has dropped 20bps to just over 6bps… with BofA warning a negative 10Y rate looms. However, Japan is not having all the excitement as China’s margin debt (driver of all animal spirits) dropped again today – making this the longest losing streak in history as China’s stock market investors continue to leave the levered building screaming fire.

  JGB yields are collapsing… not exactly the risk-on stock-buying euphoria Abe and Kuroda were hoping for
  

  With 10Y JGB yields closing in on negative, the percentage of global debt below 0% will explode.

  *  *  *

  And then there is China… where margin debt has collapsed for the longest losing streak in history…

  The outstanding balance of Shanghai margin debt dropped for 21st consecutive day on Friday, the longest streak since the exchange began compiling the data on April 1, 2010.

  

   

  But apart from that – everything is stable.

  

  

  

  

  

• So It Begins: Bloomberg Op-Ed Calls For An End Of Cash

  In a moment of curious serendipity, a little over 90 minutes after we showed what a dystopian, centrally-planned, cashless society unleashed in a negative interest rate world would look like (“by forcing people and companies to convert their paper money into bank deposits, the hope is that they can be persuaded (coerced?) to spend that money rather than save it because those deposits will carry considerable costs”), and briefly after we laid out the countless recent warnings from “very serious people” that cash is evil and should be banned:

  • Norway’s Biggest Bank Demands Cash Ban
  • Bank Of England Economist Calls For Cash Ban, Urges Negative Rates
  • Citigroup’s Gold “Expert” Demands A Cash Ban
  • Leading German Keynesian Economist Calls For Cash Ban

  … while warning to await a full-on coopted media assault about the dangers of cash “which is an anacrhonysm from a bygone era, and that the world will be so much better if only everyone dutifully exchanges the physical currency in their pocket for digital, traceable, and deletable 1s and 0s”, none other than Bloomberg issued an editorial Op-Ed in which it had one simple message: “Bring On the Cashless Future.”

  For those who were amused by our warning that a cashless world may be coming, here is precisely why the warning was issued, in Bloomberg’s digital ink:

  Bring On the Cashless Future

   

  Cash had a pretty good run for 4,000 years or so. These days, though, notes and coins increasingly seem declasse: They’re dirty and dangerous, unwieldy and expensive, antiquated and so very analog.

   

  Sensing this dissatisfaction, entrepreneurs have introduced hundreds of digital currencies in the past few years, of which bitcoin is only the most famous. Now governments want in: The People’s Bank of China says it intends to issue a digital currency of its own. Central banks in Ecuador, the Philippines, the U.K. and Canada are mulling similar ideas. At least one company has sprung up to help them along.

   

  Much depends on the details, of course. But this is a welcome trend. In theory, digital legal tender could combine the inventiveness of private virtual currencies with the stability of a government mint.

   

  Most obviously, such a system would make moving money easier. Properly designed, a digital fiat currency could move seamlessly across otherwise incompatible payment networks, making transactions faster and cheaper. It would be of particular use to the poor, who could pay bills or accept payments online without need of a bank account, or make remittances without getting gouged.

   

  For governments and their taxpayers, potential advantages abound. Issuing digital currency would be cheaper than printing bills and minting coins. It could improve statistical indicators, such as inflation and gross domestic product. Traceable transactions could help inhibit terrorist financing, money laundering, fraud, tax evasion and corruption.

   

  The most far-reaching effect might be on monetary policy. For much of the past decade, central banks in the rich world have been hampered by what economists call the zero lower bound, or the inability to impose significantly negative interest rates. Persistent low demand and high unemployment may sometimes require interest rates to be pushed below zero — but why keep money in a deposit whose value keeps shrinking when you can hold cash instead? With rates near zero, that conundrum has led policy makers to novel and unpredictable methods of stimulating the economy, such as large-scale bond-buying.

   

  A digital legal tender could resolve this problem. Suppose the central bank charged the banks that deal with it a fee for accepting paper currency. In that way, it could set an exchange rate between electronic and paper money — and by raising the fee, it would cause paper money to depreciate against the electronic standard. This would eliminate the incentive to hold cash rather than digital money, allowing the central bank to push the interest rate below zero and thereby boost consumption and investment. It would be a big step toward doing without cash altogether.

   

  Digital legal tender isn’t without risk. A policy that drives down the value of paper money would meet political resistance and — to put it mildly — would require some explaining. It could hold back private innovation in digital currencies. Security will be an abiding concern. Non-cash payments also tend to exacerbate the human propensity to overspend. And you don’t have to be paranoid to worry about Big Brother tracking your financial life.

   

  Governments must be alert to these problems — because the key to getting people to adopt such a system is trust. A rule that a person’s transaction history could be accessed only with a court order, for instance, might alleviate privacy concerns.

   

  Harmonizing international regulations could encourage companies to keep experimenting. And an effective campaign to explain the new tender would be indispensable.

   

  If policy makers are wise and attend to all that, they just might convince the public of a surprising truth about cash: They’re better off without it.

   

  To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.

  And so it begins. It will most certainly not end there.

  

  

  

  

  

• "This Is Much Larger Than Subprime" – Here Are The Legendary Hedge Funds Fighting The Chinese Central Bank

  One month ago, we first revealed that for one prominent winner from the subprime crisis, Hayman Capital’s Kyle Bass, “the greatest investment opportunity right now” is to short the Chinese Yuan: as he explained “given our views on credit contraction in Asia, and in China in particular, let’s say they are going to go through a banking loss cycle like we went through during the Great Financial Crisis, there’s one thing that is going to happen: China is going to have to dramatically devalue its currency.” He even went so far as to give a timeframe: “we think it’s going to be in the next 12-18 months.”

  Then, during the Davos boondoggle, none other than the man who broke the Bank of England, George Soros, noted that he too is shorting the Yuan, which in turn prompted China’s communist party mouthpiece, the People’s Daily to officially warn Soros to back off adding in a petulant, schoolyard bully-ish voice “You Cannot Possibly Succeed, Ha, Ha.” Yes, China really said that.

  Then, just last week, in a sad letter in which Bill Ackman blamed everyone and everything for his pathetic performance in 2015, most notably hedge fund herding and hotels, which he was so eager to exploit on the way up with presentation-filled idea dinners, and so eager to blame for dumping his names on the way down, we found out that Ackman had also decided to put on a Yuan devaluation trade just days before the Yuan devaluation announcement (perhaps he read our post from August 8, which said that a devaluation is imminent 3 days before it was revealed):

  “Last summer, we built large notional short positions in the Chinese yuan through the purchase of puts and put spreads in order to protect the portfolio in the event of unanticipated weakness in the Chinese economy…Two days after we began to build our position in the Chinese yuan, China did a 2% surprise devaluation which substantially increased the cost of the options we had intended to continue purchasing. We continued to build the position thereafter by buying slightly more out of the money puts and selling further out of the money puts so as to keep the cost and risk/reward ratio of the position attractive.”

  Sadly, Ackman has still to make money on this trade.

  But Bass, Soros and Ackman are not alone.

  In fact, as the WSJ writes today, the who’s who of hedge funds appears to agree with our post from December 11, in which we said that “anyone who thought that the Yuan devaluation is over, now that the currency is at the lowest level relative to the dollar since 2011, the reality is that the devaluation relative to everyone else is only just starting.”

  And, with the PBOC’s warning that the “RMB is relatively a strong currency among the major international currencies” the real devaluation is, just as we warned four months ago, about to be unleashed. Expect at least a 15% reduction in Trade-Weighted terms in the coming weeks and months, especially if the Fed hikes

  Sure enough, just a few weeks later we were proven correct again when the PBOC unleashed a second, far more violent devaluation round, one which has cost the PBOC hundreds of billions in FX intervention costs and a desperate attempt to plug capital control holes as the domestic population desperately wants out sensing that its currency is losing its value by the minute.

  So who are the brave souls who have decided to very openly fight the People’s Bank of China?

  Here is a sample: Soros, Bass, Ackman, Druckenmiller, Tepper, Schreiber, Einhorn, Scogging, and Carlyle, Nexus and many more.

  Some more details on just how massive these bets are:

  Kyle Bass’s Hayman Capital Management has sold off the bulk of its investments in stocks, commodities and bonds so it can focus on shorting Asian currencies, including the yuan and the Hong Kong dollar.

   

  It is the biggest concentrated wager that the Dallas-based firm has made since its profitable bet years ago against the U.S. housing market. About 85% of Hayman Capital’s portfolio is now invested in trades that are expected to pay off if the yuan and Hong Kong dollar depreciate over the next three years—a bet with billions of dollars on the line, including borrowed money.

  Why is Kyle Bass practically all in? Simple: for him “‘this is much larger than the subprime crisis, said Mr. Bass, who believes the yuan could fall as much as 40% in that period.”

  Then there are the legends: Billionaire trader Stanley Druckenmiller and hedge-fund manager David Tepper have staked out positions of their own against the currency, also known as the renminbi, according to people familiar with the matter.  David Einhorn’s Greenlight Capital Inc. holds options on the yuan depreciating.

   

  Mr. Druckenmiller, who now invests his own wealth, and one of his former protégés, Zach Schreiber, who runs the roughly $10 billion hedge-fund firm PointState Capital LP, also have had sizable shorts against the renminbi since last year, people familiar with the matter said.

   

  The funds’ bets come at a time of enormous sensitivity for China’s leaders. The government is struggling on multiple fronts to manage a soft landing for the economy, deal with a heavily indebted banking system and navigate the transition to consumer-led growth.

   

  Other firms that have profited from shorting China’s currency include the $2 billion Scoggin Capital Management and Carlyle Group LP’s Emerging Sovereign Group, according to people familiar with the matter.

   

  * * *

   

  The situation grew more tense after billionaire investor George Soros predicted at the World Economic Forum gathering in Davos, Switzerland, recently that “a hard landing is practically unavoidable” for China’s economy. He said he is betting against commodity-producing countries and Asian currencies as a result.

   

  Days later, a commentary appeared in China’s state-run Xinhua News Agency warning that “radical speculators” trying to short sell, or bet against, the Chinese currency would “suffer huge losses” as the Chinese monetary authority takes “effective measures to stabilize the value of the yuan.”

  To be sure, the show of force has scared off some fund managers from adding to their wagers. Some traders have scaled back or even exited from their short bets, saying they have little appetite to go up against the Chinese government. However, since it is merely a matter of time and having a large enough balance sheet to withstand the whipsaws by the PBOC, many will simply double down, and perhaps not so much on the Yuan but on parallel currencies who central banks aren’t as paranoid: “some say they are looking with new interest at shorting the currencies of other Asian countries that they expect would fall if the yuan keeps depreciating.”

  Finally, there is a saying “don’t fight the Fed,” Well, ironically, by devaluing the Yuan, China is doing precisely that: it is fighting the Fed’s aggressive attempts to push the USD ever higher with its obstinate push to hike rates even as the entire world slides into a global USD-denominated recession, by devaluing at appropriate intervals and shocking the global financial system. Perhaps all these “brave hedge fund warriors” are not so much fighting the PBOC as they are siding alongside the Fed, if only for the time being. However at this rate of credibility loss, between the US, China and most recently Japan, not to mention the ECB’s December debacle, pretty sure it won’t be fighting this or that central bank, but all of them at the same time.

  As of this moment, however, all these hedge funds who have taken on the PBOC are winning, because after another massive intervention round on Friday, one which cost the PBOC more billions of dollars from its rapidly dwindling FX reserve pile, the CNH is already weaker tonight: will the PBOC burn through another $10 billion just to teach these hedge funds a lesson even as the market is implying far more pain for the PBOC? 

  

  Worst of all, since they are not physically located in China, the local authorities will find it just a little more difficult to physically arrest these “evil shorts” and “disappear” them for good.

  

  

  

  

  

• This Question Should Not Be A Difficult One To Answer

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  At what point do we accede back to logic and rational thought? The Bank of Japan is “forced”, not my word, to unleash negative nominal interest rates and that is taken as a positive for everyone everywhere. Such a move is, without question, an open admission that QQE failed and failed spectacularly (since it was even expanded not really that long ago). That is cause for celebration and optimism?

  Bloomberg tells us that a grim January gets to now end on a high note (that was the article’s title, after all) without ever pausing to consume the fact that January was so grim to begin with because nothing central banks do actually matter beyond the very short run.

  U.S. stocks joined an advance in global equities, while bonds rallied as the Bank of Japan’s unexpected monetary stimulus boosted confidence that central banks remain vigilant of slowing economic growth. The yen tumbled, while oil gained.

  The story performs the usual magic trick of semantics in favor of a positive reinforcement on the central bank activity; “central banks remain vigilant”, as if vigilance is all that is required or offered. It is neither. In the Bank of Japan’s case, what was delivered was supposed to be an enormous monetary wave of such fury and power as to leave no doubt as to how this was going to end. In April 2013, BoJ officials were so confident that they even provided a timetable for its expected completion – sustainable 2% inflation by the middle of 2015 (the end of 2015 if “unforeseen” problems developed).

  Because inflation is taken as a signal of a healthy economy, that was all that was thought necessary. It obviously wasn’t, since not only was there a striking and deep recession in the middle of 2014 for Japan (which was and is blamed, wrongly, on the tax alteration) the BoJ actually scaled up QQE later that year.

  

  The initial conditions for QQE in April 2013 were questionable, but central bankers remained undeterred; going so far as to vow to keep doing QE in its last format until it worked.

  Former investment-bank economists Takahide Kiuchi and Takehiro Sato, who joined the board last year, opposed today’s statement that inflation is likely to reach 2 percent in the latter half of the three-year BOJ forecast horizon, Kuroda told reporters at a press briefing today. He said he personally thinks the goal will be achieved in the 2015 fiscal year.

   

  Kuroda said that no board member judged that additional easing was needed now, and that policy adjustments would be made if necessary. The bank will keep its stimulus until stable 2 percent gains in consumer prices are realized, he said.

  Even under the expanded version of QE10 (or 11, depending on how you define and count them) it isn’t enough. If the BoJ “has” to now add negative interest rates the only way to judge all the QE’s dating back to 2001 is as total failures. But that isn’t the full weight of reckoning, either, as it is plain that the Japanese people, households, have paid a very heavy price for all of the continuous balance sheet expansion and yen debasement.

  The idea of monetary intervention in this fashion is redistribution; that some economic agents will benefit at the expense of others. While that “expense” is acknowledged by the monetary central planners, they feel it necessary in order to achieve economic pump priming again. Thus, those who lose out in the initial stages of QE are expected to be eventually rewarded by the full recovery (omelets need broken eggs). Ben Bernanke was (in)famous in that respect, often talking about the woes of those savers depending upon fixed income who will be richly rewarded for their pain when his theory is proven correct.

  When I was chairman, more than one legislator accused me and my colleagues on the Fed’s policy-setting Federal Open Market Committee of “throwing seniors under the bus” (to use the words of one senator) by keeping interest rates low. The legislators were concerned about retirees living off their savings and able to obtain only very low rates of return on those savings…

   

  In recent years, several major central banks have prematurely raised interest rates, only to be forced by a worsening economy to backpedal and retract the increases. Ultimately, the best way to improve the returns attainable by savers was to do what the Fed actually did: keep rates low (closer to the low equilibrium rate), so that the economy could recover and more quickly reach the point of producing healthier investment returns.

  That last paragraph is tragic in all the ways that are evident right now and suggested for the upcoming intermediate term. Savers and households (true state of the labor market) not just in Japan have been bearing this burden of redistribution for more than a decade (and almost a decade in the US and Europe) and still they are forced to ask where is the recovery to reward their dictated drain? It’s all the more distressing given that question still unresolved just as concerns turn increasingly toward the “next” downturn. Why is the economy always in the initial stages of recovery so that, years upon years later, it still cannot withstand the slightest alteration of monetary genius? It stops being redistribution and takes on the proportions of unnecessary and even criminal torture. The banks must always win so that the people might in a generation or two down the road?

  This is madness, pure and simple. And it takes on just those characteristics in light of the ECB’s totally deficient experience with negative rates and QE. Consider: the BoJ is now supplementing QQE with negative rates just as the ECB has been supplementing negative rates with QE. What planet is this?

  The end of QE as a monetary appeal should be heralded as a huge victory for the forces of common sense, but instead it only demands the further death of money. Not merely content to squeeze “store of value” down to its last remaining elements, central banks apparently will take the next step and make it actually painful as if it wasn’t before. There are no “high notes” to this kind of affair, only lower lows.

  This is why economics is not in any way like a science, let alone an actual scientific discipline. It is the Aristotelian method of divining essence and then expecting the world to unfold according to that internal epistemology; and when it inevitably doesn’t, there is no mechanism for correction. The economist will declare in no uncertain terms that monetary policy works, and that a lot of it will undoubtedly work well. No matter how long that position remains in the negative, nothing causes feedback that dislodges the initial premise. Instead, as if to prove the anti-scientific nature of orthodox economics and especially econometrics, the economist will search high and low in everything but monetary policy for the potential answer (such is the holy grail of monetary neutrality).

  In March 2015, Kuroda had already essentially dismantled QE anyway by exposing that myth.

  First, the initial rounds of QE weren’t potent enough. “In order to escape from deflationary equilibrium, tremendous velocity is needed, just like when a spacecraft moves away from Earth’s strong gravitation,” Kuroda recently explained. “It requires greater power than that of a satellite that moves in a stable orbit.”

  This is hysteresis, an unnecessarily complicated word that essentially means an economy cannot move without external strength of monetary policy; you have to unleash enough force to get even small rock to roll down an incline. The bigger the rock, the more force necessary to get it rolling. That was the point of the “Q” in QE. The term itself was meant to convey the supposedly objective mathematics at work, harnessed by experts displaying immense technical knowledge. That economists working in central banks could precisely measure and determine the size of the rock and the degree of the slope so that they could exactly, quantitatively calculate the exact force necessary to start the forward rolling progress. Stock prices cheered when they made the claim, and now they cheer when it is disproven?

  Actually, the entire idea was disproven by time some time ago, instead stocks are nearly euphoric (even for just a day) that such was actually acknowledged by those central bankers moving on to another kind of “Q’ (and hoping you don’t notice). I wrote just last Friday:

  So in broad and general terms, we find that central banks all around the world have turned to increasingly absurd ways with which to make monetary policy find their intended depth; and still they never do. The things that have happened in the past few years would have in 2006 been judged utterly insane. We may have become far too desensitized by now, but if you told Bernanke that the Bank of Japan would be buying corporate debt at negative yields, as it did just this week, and that it wasn’t so outlandish to assume that the Fed might follow, he and everyone else would have dismissed you outright as insane. It no longer is.

   

  If this year turns out the way it is already shaping up, can you really not imagine Janet Yellen (or her successor, assuming she doesn’t survive the growing debacle) doing the same as the Bank of Japan? There has already been a steady growth of stories and rumors, all emanating carefully from that policy corridor, of intellectual flirtations with negative interest rates. Not only that, the FOMC in June 2003, just as Greenspan was achieving his “ultra-low”, ridiculed the Bank of Japan for its first two (of ten or eleven, depending on how you count) QE’s – only to follow them almost exactly just five years later.

  Ten years ago, all this would have been written off as the stuff of an insane mind or conspiracist. Now, it is just normal and economists would have you think it the only option. This is inflation; true inflation. The standards of actual conduct have been so eroded and degraded as to be totally meaningless; there is nothing left for honest trade except the further death of money. What we are finding is that it is not a “clean death”, however, but a tortured journey on a winding road of further and further madness. It only ends when someone finally gets to question why an economy needs monetary policy in the first place. Can an economy really not grow without it, or central banks? If there is only increasingly absurd monetarism in our future, the answer to that most fundamental question is not all that difficult.

  

  

  

  

  

• "Stable" China's Economic Bounce Is Over: PMIs Plunge In January

  After an almost unprecedented surge in credit (total social financing) and over-invoicing enabled a bounce in China’s PMI data in December, both Manufacturing and Services data tumbled in January, confirming South Korean trade data. While manufacturing continues its contraction (dropping to 49.4, the weakest since Aug 2012), it is non-manufacturing’s plunge from a one-year high “transition is happening, see” narrative to practically the weakest print since 2008. But apart from that all that, China is “stabilizing” according to officials.

  China’s economy is improving under medium-to high-speed growth, according to a People’s Daily commentary written by Zhong Sheng, who wasn’t identified.

   

  There is consensus in the international community that long- term basic element in the Chinese economy is still strong: commentary

   

  NOTE: Zhong Sheng is a homonym in Chinese for “voice of China” and commonly used in commentaries by the People’s Daily, which is published by the Chinese Communist Party

  Does this look like stabilization to you?

  

   

  Of course – if we just wait around long enough (like 45 minutes) Caixin’s PMI will print and explain all this ‘craziness’ away.

  Time for some more devaluation – which is exactly what China’s CDS is implying.

  

  

  

  

  

• America's #1 Import: Deflation

  Submitted by Erico Matias Tavares of Sinclair & Co.,

  It seems that everyone these days is exporting deflation to the US.

  The drop in commodity prices and the US dollar rally versus a broad basket of currencies in recent years had a big impact of course, but the magnitude of the decline of US import prices has been very significant indeed. And this matters for many reasons.

  Competition for the all-important US consumer remains fierce, as exporting countries devalue their currency and/or further reduce their costs to maintain market share. While imports represent a relatively small percentage of US GDP (typically <17%), the technocrats at the Federal Reserve will now have to work harder to fan the flames of inflation across the economy (hint: not by continuing to raise interest rates…). Moreover, these price patterns suggest that all is certainly not well in the global economy.

  

  The graph above shows the evolution of selected US import price indices by country of origin since January 2009 (=100), when the world was in the throes of the great recession, as provided by the US Bureau of Labor Statistics.

  The dotted line shows total import prices excluding oil, to isolate the direct impact of the recent collapse in crude oil prices. After staging a post-crisis rally, prices of overall imports pretty much remained in a range between mid-2011 and mid-2014. But then something happened: the US dollar started to rally hard and that price index quickly went the other way.

  How the major industrial exporters have responded is where things get really interesting.

  The price index of the three majors peaked at different times: Chinese import prices peaked in early 2012, the Japanese later that year and the Europeans kept raising their US dollar prices until mid-2014. While the composition of the imports varies from country to country, it were the diverging policy responses that largely dictated what followed.

  

  The graph above shows the 12-month change (in %) of each of those indices, providing a better sense of the magnitude of the price change. As a result of Abenomics and the crushing of the Yen, Japanese exporters have been the most aggressive in reducing their US dollar prices since 2013. The Chinese had started that process a few months earlier, but that has been more subdued until now. And the Europeans eventually jumped in the bandwagon, substantially cutting their prices throughout 2015.

  With Japan joining the negative interest rate club last week, any subsequent Yen weakness will further tighten the screws on its competitors. And as the US dollar price of a Lexus becomes cheaper compared to a Mercedes, probably the Europeans will have to follow suit.

  While the Chinese may not compete directly in the same high-end segments, with these dynamics it looks likely that they will have to further reduce their US dollar prices at some point. And if they do so in a meaningful way the impact on their competitors – from all over the world – could be quite dramatic.

  Meanwhile American companies will have a much harder time competing domestically and abroad, certainly if the US dollar remains elevated.

  

  The graph above shows the 12-month change (in %) for the EU import price index only, this time extended to the start of the data series in September 1993. When it goes negative it is usually associated with a major financial crisis, a global recession or both. So the recent price move suggests that there is trouble out there indeed.

  American consumers will be delighted with everyone sending cheaper goods their way. However, what this may do to their income and employment prospects is a whole different matter.

   

  

  

  

  

  

• Global Trade Collapsed In January: Bellwether South Korea Exports Crash "Most Since Lehman"

  As the first major exporting nation to report each month, all eyes and hopeful speculative capital was glued to tonight’s South Korean trade data. After a brief respite in November, December’s drop was worrisome, but January’s just reported 18.5% crash – the most since the financial crisis – has only been seen during a US economic recession. Worse still, South Korean imports plunged over 20% in January as it appears crashing crude and cliff-diving freight indices are less about supply and more about demand (there is none) after all.

  Annother red flag in the US recession looming camp…

  

   

  Furthermore, with China accounting for around one quarter of South Korean exports – and following a 16.5% YoY plunge in December – tonight’s headline data suggests January was a total disaster for the Chinese economy also… though later we will get the PMI data to explain everything.

  

  

  

  

  

• Is Germany Paying African Nations To Take Back Rejected Refugees?

  As Der Freitag reports (via Google Translate), if the German authorities do not get rid of a refugee, you can just change his nationality. African embassies are paid for their help…

  Joseph Koroma does not understand to this day why he was deported to Nigeria – a country in which he had never before set foot. When he fled to Germany in 2006, he applied for asylum and told his escape story: He had been persecuted in Sierra Leone, by supporters of the Poro secret society that controls whole regions in West Africa. They killed his father and threatened also to murder, unless he would join the Confederation him.

   

  But the Federal Office for Migration and Refugees rejected the application for asylum. Among other things, questioned the officials, whether Koroma really come from Sierra Leone. He made ??a subsequent application and put new documents in front of his persecution, including a recent newspaper article, who took up his case. However, the application was subsequently rejected, Koroma sued – and lost. According to the competent ended court one could easily launch newspaper articles in Sierra Leone.

   

  Now he was obliged to leave, but without a passport. So his stay by the German authorities was tolerated for many years – would be to his identity definitively clarified. In 2012, members of the Embassy of Nigeria changed his birthplace in the Nigerian state of Ogun – initially without Koroma's knowledge. A year later knocked policemen at his bedroom door. He should quickly grab a few things, the officials said, they would take him. His plane to Nigeria fly in a few hours. Koroma was stunned.

  As SputnikNews confirms, the procedure is claimed to take place in the framework of the so called "Readmission Agreements" and mainly applies to African countries.

  According to these agreements, the countries have to readmit their own citizens who were rejected an asylum status by Germany. But despite that, they are encouraged to accept rejected asylum seekers from other countries, who travelled through these transit countries to get to Europe.

   

  As reported by refugee rights organization Pro Asyl, African embassies are paid for their assistance. German immigration authorities have allegedly invited officials from African States to participate in special meetings where they "decide on refugees' nationality."

  This is by no means a small issue. As Der Freitag continues, based on the most recent figures from the year 2014…

  At that time, found, according to the Federal Police 50 mass hearings with representatives of African countries instead of 18. A total of 720 refugees were questioned, or an average of more than ten per appointment. In addition, an unknown number of hearings, organize the federal states. The "success rates" vary: In hearings by Nigerian delegations about half of the presented was declared citizens, at the Embassy of Benin there are three of the four escapees.

   

  But the method is not only error-prone. There are also conflicts of interest. The embassy staff get namely money if they allow deportation. For Germany, this is cheaper than the month-long tolerance of refugees.

   

  Cooperation with the Nigerian Embassy designed a long time difficult to staff a reimbursement for the hearings have been promised: 250 Euros per summons, another 250 euros for identification, including issuing the travel document. Benin employees will each receive 300 euros. The different levels will be officially on the grounds that it concerns charges of the respective embassy and Germany it had no effect.

   

  Officially, the federal police does not comment on this case.

  Away from the dubious method of establishing identity, the question arises whether it is reasonable to make precisely Nigeria one of the main deportation destinations in Africa. In 2012, a memorandum of understanding between Germany and Nigeria was signed, which determines the course of the hearings, and reaffirms the common will to work together. Even Frontex praises the close cooperation with Nigeria, there is a contract against "illegal migration".

  The situation in the African country is unstable.

  Since late 2010, the Islamist militia Boko Haram perpetrated regularly attacks on the population. Even the state security forces are accused of serious human rights violations such as killings, brutal mistreatment and torture. The Embassy of the Republic of Nigeria wants to express no opinion on repeated request.

  

  

  

  

  

• Shining A Light On Sociopaths In Politics

  Submitted by Doug Casey via InternationalMan.com,

  

  There are seven characteristics I can think of that define a sociopath, although I’m sure the list could be extended:

  1. Sociopaths completely lack a conscience or any capacity for real regret about hurting people. Although they pretend the opposite.

  1. Sociopaths put their own desires and wants on a totally different level from those of other people. Their wants are incommensurate. They truly believe their ends justify their means. Although they pretend the opposite.

  1. Sociopaths consider themselves superior to everyone else, because they aren’t burdened by the emotions and ethics others have – they’re above all that. They’re arrogant. Although they pretend the opposite.

  1. Sociopaths never accept the slightest responsibility for anything that goes wrong, even though they’re responsible for almost everything that goes wrong. You’ll never hear a sincere apology from them.

  1. Sociopaths have a lopsided notion of property rights. What’s theirs is theirs, and what’s yours is theirs too. They therefore defend currency inflation and taxation as good things.

  1. Sociopaths usually pick the wrong target to attack. If they lose their wallet, they kick the dog. If 16 Saudis fly planes into buildings, they attack Afghanistan.

  1. Sociopaths traffic in disturbing news, they love to pass on destructive rumors, and they’ll falsify information to damage others.

  The fact that they’re chronic, extremely convincing, and even enthusiastic liars, who often believe their own lies, means they aren’t easy to spot, because normal people naturally assume another person is telling the truth. They rarely have handlebar mustaches or chortle like Snidely Whiplash. Instead, they cultivate a social veneer or a mask of sanity that diverts suspicion. You can rely on them to be “politically correct” in public. How could a congressman or senator who avidly supports charities possibly be a bad guy? How could someone who claims he just wants the U.S. to defend some foreign minority possibly be a warmonger? They’re expert at using facades to disguise reality, and they feel no guilt about it.

  Political elites are primarily, and sometimes exclusively, composed of sociopaths. It’s not just that they aren’t normal human beings. They’re barely even human, a separate subspecies, differentiated by their psychological qualities. A normal human can mate with them spiritually and psychologically about as fruitfully as a modern human could mate physically with a Neanderthal; it can be done, but the results will be problematical.

  It’s a serious problem when a society becomes highly politicized, as is now the case in the U.S. and Europe. In normal times, a sociopath stays under the radar. Perhaps he’ll commit a common crime when he thinks he can get away with it, but social mores keep him reined in. However, once the government changes its emphasis from protecting citizens from force to initiating force with laws and taxes, those social mores break down. Peer pressure, social approbation, and moral opprobrium, the forces that keep a healthy society orderly, are replaced by regulations enforced by cops and funded by taxes. Sociopaths sense this, start coming out of the woodwork, and are drawn to the State and its bureaucracies and regulatory agencies, where they can get licensed and paid to do what they’ve always wanted to do.

  It’s very simple, really. There are two ways people can relate to each other: Voluntarily or coercively. The government is pure coercion, and sociopaths are drawn to its power and force.

  The majority of Americans will accept the situation for two reasons: One, they have no philosophical anchor to keep them from being washed up onto the rocks. They no longer have any real core beliefs, and most of their opinions – e.g., “We need national health care,” “Our brave troops should fight evil over there so we don’t have to fight it over here,” “The rich should pay their fair share” – are just reactive and comforting catch phrases. The whole point of spin doctors is to produce comforting sound bites that elude testing against reality. And, two, they’ve become too pampered and comfortable, a nation of overfed losers, mooches, and coasters who like the status quo without wondering how long it can possibly last.

  It’s nonsensical to blather about the Land of the Free and Home of the Brave when reality TV and Walmart riots are much closer to the truth. The majority of Americans are, of course, where the rot originates – the presidential candidates are spending millions taking their pulse in surveys and polls and then regurgitating to them what they seem to want to hear. Once a country buys into the idea that an above-average, privileged lifestyle is everyone’s minimum due, when the fortunate few can lobby for special deals to rake something off the table as they squeeze wealth out of others by force, that country is on the decline. Lobbying and taxation are replacing production and innovation as the national modus vivendi; parasites are unable to sustain prosperity. The wealth being squeezed took centuries to produce, but it is not inexhaustible.

  I suspect most now reading this tend to vote Republican. Republicans say they believe in economic freedom (they don’t), and they definitely don’t believe in social freedom. Compared to the Democrats, they are viewed (correctly) as hypocrites. At least the Democrats are honest about disliking economic freedom. Republican candidates are at once laughable and pathological – it doesn’t matter if Trump, Cruz, or Rubio get the nod. They’re all so horrible and embarrassing that I’ve heard they’re even desperately considering recycling Mitt Romney, an empty suit, only marginally better than the previous Republican nominee, the hostile and mildly demented John McCain.

  All candidates decry the upper classes, say they love what’s left of the middle class, and want to shower more goodies on the proletariat.

  People generally fall into an economic class because of their psychology and their values. Each of the three classes has a characteristic psychological profile. For the lower class, it’s apathy. They have nothing, they’re ground down, and they don’t really care. They’re not in the game, and they aren’t going to do anything; they’re resigned to their fate. For the upper class, it’s greed and arrogance. They have everything, and they think they deserve it – whether they do or not. The middle class, at least in today’s world, is run by fear. Fear that they’re only a paycheck away from falling into the lower class. Fear that they can’t pay their debts or borrow more. Fear that they don’t have a realistic prospect of improving themselves.

  The problem is that fear is a negative, dangerous, and potentially explosive emotion. It can easily morph into anger and violence. Exactly where it will lead is unpredictable, but it’s not a good place. One thing that exacerbates the situation is that all three classes now rely on the government, albeit in different ways. Bankruptcy of the government will affect them all drastically.

  With sociopaths in charge, we could very well see the Milgram experiment reenacted on a national scale. In the experiment, you may recall, researchers asked members of the public to torture subjects (who, unbeknownst to the people being recruited, were paid actors) with electric shocks, all the way up to what they believed were lethal doses. Most of them did as asked, after being assured that it was “all right” and “necessary” by men in authority. The men in authority today are mostly sociopaths.

  WHAT TO DO

  One practical issue worth thinking about is how you, as someone with libertarian values, will manage in a future increasingly controlled by sociopaths. My guess is poorly, unless you take action to insulate yourself. That’s because of the way almost all creatures are programmed by nature. There’s one imperative common to all of them: Survive! People obviously want to do that as individuals. And as families. In fact, they want all the groups that they’re members of to survive, simply because (everything else being equal) it should help them to survive as individuals. So individual Marines want the Marine Corps to survive. Individual Rotarians want the Rotary Club to prosper. Individual Catholics leap to the defense of the Church of Rome.

  That’s why individual Germans during World War II were, as has been asserted, “willing executioners” – they were supporting the Reich for the same reasons the Marines, the Rotarians, and the Catholics support their groups. Except more so, because the Reich was under attack from all sides. So, of course, they followed orders and turned in their neighbors who seemed less than enthusiastic. Failing to support the Reich, even if they knew it had some rather unsavory aspects, seemed an invitation to invading armies to come and rape their daughters, steal their property, and probably kill them. So, of course, the Germans closed ranks around their leaders, even though everyone at the top was sociopath. You can expect Americans to do the same.

  Americans have done so before, when the country was far less degraded. During the War Between the States, even saying something against the war was a criminal offense. The same was true during World War I. In World War II, the Japanese were all put in concentration camps on groundless, racially based suspicions of disloyalty. During the early years of the Cold War, McCarthyism was rampant. The examples are legion among humans, and the U.S. was never an exception. It’s even true among chickens. If a bird has a feather out of place, the others will peck at it, eventually killing it. That out-of-place feather is deemed a badge of otherness announcing that its owner isn’t part of the group. Chicken Autre must die.

  Libertarians, who tend to be more intelligent, better informed, and very definitely more independent than average, are going to be in a touchy situation as the crisis deepens. Most aren’t going to buy into the groupthink that inevitably accompanies war and other major crises. As such, they’ll be seen as unreliable, even traitors. As Bush said, “If you’re not with us, you’re against us.” And, he might have added, “The Constitution be damned.” But, of course, that document is no longer even given lip service; it’s now a completely dead letter.

  It’s very hard for an individualist to keep his mouth shut when he sees these things going on. But he’d better keep quiet, as even H.L. Mencken wisely did during both world wars. In today’s world, just keeping quiet won’t be enough; the national security state has an extensive, and growing, file on everybody. They believe they know exactly what your beliefs, desires, fears, and associations are, or may be. What we’re now facing is likely to be more dangerous than past crises. If you’re wise, you’ll relocate someplace where you’re something of an outsider and, by virtue of that fact, are allowed a measure of eccentric opinion. That’s why I spend an increasing amount of time in Latin America. In truth, however, security is going to be hard to find anywhere in the years to come. The most you can hope for is to tilt the odds in your favor.

  The best way to do that is by diversifying your assets internationally. Allocating your wealth into real assets. Linking up with sound, like-minded people who share your values. And staying alert for the high-potential speculations that inevitably arise during chaotic times.

  *  *  *

  A big part of any strategy to reduce your political risk is to place some of your savings outside the immediate reach of the thieving bureaucrats in your home country. Obtaining a foreign bank account is a convenient way to do just that.

  That way, your savings cannot be easily confiscated, frozen, or devalued at the drop of a hat or with a couple of taps on the keyboard. In the event capital controls are imposed, a foreign bank account will help ensure that you have access to your money when you need it the most.

  In short, your savings in a foreign bank will largely be safe from any madness in your home country.

  Despite what you may hear, having a foreign bank account is completely legal and is not about tax evasion or other illegal activities. It’s simply about legally diversifying your political risk by putting your liquid savings in sound, well-capitalized institutions where they’re treated best.

  We recently released a comprehensive free guide where we discuss our favorite foreign banks and jurisdictions, including, crucially, those that still accept Americans as clients and allow them to open accounts remotely for small minimums.

  

  

  

  

• How The Masses Deal With Risk (And Why They Remain Poor)

  By Chris at www.CapitalistExploits.at

  Last week I discussed how humans are wired to pay attention to scary things. In financial speak: risk. Darwinism has chastised those who ignore risk by rewarding them with an early grave, and by process of elimination rewarded those who stay out of the cross hairs.

  Thing is, we no longer live in a world where saber-toothed tigers threaten our existence. In today’s world far greater risk lies in the truly enormous and disproportionate emotional attitude to (and assessment of) risk.

  This has nothing to do with Darwin but rather more to do with an educational system designed and built for the industrial age. Education today is an advertising agency which leads us to believe we need the society on which it relies upon for its existence.

  Beginning with the schooling system and followed by “higher education”, the middle and upper middle class in developed societies are by and large serfs. And they’re serfs because they don’t understand risk.

  The overwhelming majority look at risk incorrectly. They look at it two dimensionally: “The more risk I take the more ‘volatility’ I have.” The fact is, risk is actually subjective to your own personal situation. Mismanaging your own personal situation increases risk disproportionately.

  Let me give you an example of how easily an otherwise intelligent person gets royally screwed by the system by routinely miscalculating risk.

  Let’s take Harry, a fictional guy from a middle class family who’s just left high school. Harry really wants to get ahead and has set himself a goal of becoming a millionaire by the time he’s 25. He figures that by 35 he’ll be worth north of $10 million.

  Truthfully, these figures don’t mean much to him but he’s had a small taste of the life and he knows it costs. There was that time he was trying to impress a brunette, and they dined at one of David Chang’s NY restaurants and he still remembers the almost palpable smell of money in the air as diners around him flashed Hublots, diamond necklaces and sophistication.

  He remembers how the waiter unscrewed the cap of the water as though defusing a nuclear bomb. And although the beef he ordered was so thin that he had to lick it off the plate because it kept falling off the fork, his friends were really impressed and the girl so floored that she showed her appreciation by keeping him up all night.

  The first thing poor Harry is told is to get an education. And so he does just that. Years of schooling have failed to developed in him critical thought. And so, though he has access to almost every resource one can think of, and at a cost approaching zero, he automatically associates education with a four-walled institution where people who like books theorize on how the real world operates, most never having experienced it first hand.

  Here he spends 3 years getting into girls’ pants, drinking too much and associating with the same type of people as himself, which does little to develop his critical thought processes. Harry is rewarded with two pieces of paper. One represents his qualification and the other represents the six figure debt he now owes. Remember that the knowledge acquired between the drinking and sex is already free.

  

  This is Harry’s first critical step in miscalculating risk. He exits university with a piece of paper and the world skills and street-smarts of a juvenile because his free time has been spent drinking and test driving anything in a skirt. Most importantly his future income is already tied up in debt repayments.

  Fresh out of university Harry now has two doors ahead of him…

  The Red Door

  Choosing the red door takes Harry into a job. This promises a monthly revenue stream which appears to offer security and consistency. The lure is strong. After all the need to pay off his student debt lurks high on Harry’s list. He’s excited to put himself to test in the “real world” and believes that he can really target becoming wealthy once he’s got his student debt paid off and a few years under his belt.

  The Green Door

  Here Harry must take his skills learned and rapidly obtain an education. A real education. He will need to do this by becoming an entrepreneur and building his own outcome. This option offers no monthly revenue stream and no security or consistency. It also offers unlimited upside and a real, not imagined, shot at becoming wealthy.

  Unfortunately, Harry has a distorted view of risk for two reasons:

  1. He has debt and must make debt payments. This distorts his view of real risk.
  2. He doesn’t have an education which shows him the real cost of risk.

  The red door option appears far less risky than the green door option. After all, none of  Harry’s friends are doing this and when he brought up the topic with his parents they nearly blew a gasket. “Don’t give up your future so early on,” they pleaded.  Once again, poor Harry’s lack of critical thought gets the better of him and he takes the red door believing it to be less risky.

  

  Fast forward a few years into cubicle hell and Harry is now earning $60,000 a year. His student debts are easily manageable and in an attempt to get ahead, Harry buys a house, reasoning that he needs somewhere to live and this is the first step towards fulfilling his goal of becoming wealthy.

  He reasons that buying the house is a step in the right direction, but he hates his job more every day and it’s now dawned on him that it’s a long hard slog up the corporate ladder in order to earn the sort of money that can make him wealthy.

  Once again, he’s faced with a dilemma. Does Harry risk kicking in the job and starting a business of his own, doing something that he really loves, or does he stay put?

  And This Is How Harry Analyses The Risk

  Scratching at his now receding hairline he thinks to himself, “I can’t take the risk of starting my own business because it may fail.”

  The downside now is losing not only the $60,000 salary but defaulting on the payments now tied to this revenue stream. The risk is no longer $60,000. The risk now is in losing the ability to keep up student debt payments as well as mortgage payments.

  Pretty soon he’ll fill that house he bought with “stuff” which will either come on hire purchase or simply be added to his mortgage. He lies to himself saying, “Hey, at least I’ve got the income, which I wouldn’t have had without the college education. And at least I’m on my way up because I now own an asset.”

  Wrong! On So Many Levels…

  Here is how Harry should analyse risk for something as simple as deciding whether to quit a $60,000 a year job or not in favour of having a crack at becoming wealthy.

  Let’s look at the downside: if Harry has a job paying $60,000, chances are he’ll be able to pick up another paying $60,000.

  Let’s say that those chances are 60%. So he has a 60% chance of getting back to where he is now if he screws up.

  Let’s further say that there is a 20% chance he can only get another job paying $50,000, and another 20% chance he will only manage to get a position paying $40,000.

  The worst case scenario is therefore a 20% chance of a $20,000 loss. This is his real risk. What then is the upside?

  The upside is unlimited. Literally!

  Even if Harry completely screws things up, a year running his own business will provide him with 10 years worth of “higher education” leaving him far more qualified than he’ll ever be if he stays in his job.

  Why wouldn’t Harry risk a 20% chance of losing $20,000 for a potentially unlimited upside?

  The reason Harry doesn’t make the trade is because he’s already tied his $60,000 revenue stream to a host of liabilities. Now I hear some of you saying, “Oh no, but he owns a house and that’s an asset”. No, it’s not!

  Assets make you wealthy. They provide you with more, not less freedom. Is Harry’s house doing any of those things?

  Harry has already fallen into a trap where he is no longer free to make rational choices. Freedom is wealth.

  The financial infrastructure surrounding Harry and the education he’s received is DESIGNED to ensure that debt is never repaid, but only serviced.

  If you, dear reader, and I can create a loan for a $1 million and collect an interest payment on it for eternity, all the while getting the poor sucker who’s taken the loan to sign up for even more loans on more liabilities, then that, my friend, is an awesome deal for us. This is what banks, insurance companies and credit agencies make a living out of.

  80% of people routinely make the same decisions Harry does and then continue to do so throughout their life. Is it any wonder why despite having cars, boats, a house and all the trappings of the enslaved, they reach middle age, exhausted, unfulfilled, and forever trapped in these damn payments, with some far off absurd goal to pay off the loans upon retirement?

  This brings me to that Italian mathematician I mentioned last week.

  The Law Of The Vital Few

  Vilfredo Pareto first observed the phenomenon that 80% of the land in Italy was owned by 20% of the people. Since then this phenomenon has been mathematically proved across literally every spectrum of society and business.

  The principle states that, for many phenomena, 20% of invested input is responsible for 80% of the results obtained. Put another way, 80% of consequences stem from 20% of the causes.

  What I discussed last week was how we’re hard wired to take notice of pain. This neurological fact is played upon by many industries where we are led to believe things which just ain’t so. We can see the results in wealth distribution, just as Vilfredo observed in the early 20th century.

  

  Take early stage venture capital for example. If I had a brick for every person who’s told me that I’m taking massive risk by investing in early stage private companies, I’d have enough to rebuild the Berlin Wall.

  Risk is not one dimensional. It’s a known fact that well over 50% of early stage deals go belly up. Risky? Sure, it is if viewed in isolation.

  What is also a fact is that the mean return of early stage VC investments is north of 50% per annum. This is the mean and like anything else with a little bit (OK, a lot) of work, outperforming the average in anything is entirely achievable if you put effort into it.

  Use proven laws to tilt the balance of probability massively in your favour. Turn off the TV. Travel. Educate yourself.

  Unless you want to be part of Pareto’s 80%, then don’t invest in what 80% of the market are invested in. Look for asymmetry. Look for what lies in the 20%.

  – Chris

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• "Fight Me!": "Shocking" Video Shows Migrant Melee In Swedish Refugee Home

  Tensions are running high in Sweden, the country with the highest per capita rate of sheltered asylum seekers.

  Just yesterday we brought you video footage depicting a gang of “football hooligans” who stormed the central train station in Stockholm on the way to assaulting migrants and generally running amok in a show of nationalistic furor.

  The incident came on the heels of an attack at a migrant house that left 22-year-old Alexandra Mezher dead. She was stabbed to death by an unaccompanied migrant child who was living at an asylum center in Molndal, where she had been working for several months.

  “We refuse to accept the destruction of our once to safe society. When our political leadership and police show more sympathy for murderers than for their victims, there are no longer any excuses to let it happen without protest,” a kind of manifesto distributed ahead of the train station melee read. “’The justice system has walked out and the contract of society is therefore broken – it is now every Swedish man’s duty to defend out public spaced against the imported criminality.”

  On Sunday, we go back to Sweden to bring you footage from inside a migrant shelter near Jonköping where a fight nearly broke out between a staff member and a distraught refugee.

  It’s not entirely clear what went wrong, but here’s what The Local has to say:

  In the video, one of the refugee youths is seen pleading with the worker “please, please, please”, before the worker erupts in anger.

   

  “You have a problem with me?” the youth then asks, getting closer, before he begins shrieking, “fight me! fight me! fight me!” and then breaks down screaming and sobbing uncontrollably on the floor.

   

  A broken table is visible. In the background, shouts of “fuck you!”, and “shut up!” are clearly audible.

   

  The worker told Swedish Radio that a disturbance had broken out shortly before the video was recorded which had forced him and other staff members to lock themselves in their rooms.

   

  He claimed that the man filmed apparently undergoing a nervous breakdown was the ringleader of the refugee youth, and was faking his apparent anguish for the camera.

  As you can see, the “integration” process is going swimmingly.

  

  

  

  

  

• "The Fed Suspended The Laws Of The Market In Order To Save It" – What Happens Next

  That the Fed has been boxed in by unleashing destructive monetary policies to “fix” decades of prior policy mistakes, is something we have been warning about since our first day. And, with every passing day that the Fed and its central bank peers pile up error upon error  to offset prior mistakes, the day approaches when this latest bubble, which some have dubbed it the “central banks all-in” bubble, will burst as well: Friday’s shocking announcement of NIRP by the BOJ just brought us one step closer to the monetary doomsday.

  However, the one saving grace for the central banks was that as long as none of the market participants who benefited from these flawed policies dared to open their mouths and point out that the emperor is naked, nobody really cared: after all, why spoil the party, especially since virtually nobody outside of finance knows, let alone cares, about monetary policy or why the Fed is the most important institution in the world.

  All of that has changed in recent weeks, when just one week ago in the aftermath of the Fed’s dovish quasi-relent, the billionaires in Davos were quite clear that in light of the upcoming bursting of the latest “policy error” bubble by the central banks, “The Only Winning Move Is Not To Play The Game.” As the WSJ summarized the Davos participants’ mood so well, “their mood here was irritated, bordering on affronted, with what they say has been central-bank intervention that has gone on too long.”

  There is just one problem: central bank intervention simply can not go away. Exhibit A: NIRP in Japan.

  To be sure, increasingly it is become a consensus view that central banks are trapped, with further intervention no longer beneficial and yet unable to relent; over this past weekend, this perspective was best summarized by Deutsche Bank’s credit derivatives strategist, Aleksandar Kocic, who writes that the Fed had to “suspend the laws of the market in order to save it.” He also adds that the market was not saved, and all the risk that piled up and was swept under the carpet courtesy of the Fed, is merely waiting for the outlet to be released in one risk explosion.

  Here is the full note previewing what the Fed hath wrought.

  Beyond the fourth wall

  It has been our contention for some time that when it comes to interaction between the Fed and the markets, the rules of the game have changed. There are two dimensions of this problem. One is the Fed/market communication and dynamic have been both transformed to resemble the Brechtian theatre where the fourth wall has been removed. The market is observing the Fed and the Fed is observing the market — the “audience” is actively involved in shaping the play. The actors look for clues from the audience and shape the script according to audience’s reaction. They are not merely passive spectator, but involved observers able to influence the play. The most explicit recognition of this has been the September FOMC. This type of circular reaction has been a consequence of the Fed assuming the role of a market stabilizer post-2008. However, as the stimulus is unwound, this type of interactive play will continue (this time in reverse) and stability of the markets could be compromised.

   

  The other dimension concerns the particulars of stimulus implementation. Policy response to the crisis consisted of unprecedented injection of liquidity, transfer of risk from private to public balance sheet, and reduction of volatility from its toxic levels. The net result was near-zero rate levels and collapse of volatility across the board, while different market sectors developed high degree of coordination. But, risk cannot disappear; it can only be transferred or postponed by temporarily suspending the existing transmission mechanisms and the rules of the markets.

   

  During QE days, Fed has acted as a non-economic actor. Its presence in the market was aimed at achieving “social” and not necessarily financial goals – bond purchasing was conducted in order to lower the yields rather than to make profit over any given time horizon. Markets laws had to be suspended in order to restore normal functioning of the markets. This was the intrinsic logic of QE.

   

  As such, policy response in its core is an extension of what in political context is known as the state of exception. The intrinsic contradiction of policy response to the crisis – suspend the laws of the market in order to save it – is resolved only by understanding that suspension is temporary. Stimulus will have to be unwound. But, and here lies the problem, accommodation has been in place for a very long time and this has had a profound impact on investors behavior, market functioning and its dynamics.

   

  At the moment, consensus is shaping around the view that the market is driving the “play” by demanding relent, suggesting the implication that stimulus withdrawal has been premature. Lack of relent, without improvements in Asia and global economy is a policy mistake territory. The Fed is hiking, while it is importing disinflation. The curve would continue to flatten while persistence of rate hikes supports USD and pushes the short end of the curve higher. This is unlikely to be supportive for risk and should cause higher risk asset vol. Continued decoupling and EM dilemma regarding the tradeoff between weaker currency and growth is likely to keep FX vol at elevated levels as well.

   

  Relent is supportive for risk and would mean return to carry trade in rates, while decoupling is no longer an issue and tensions in currency space and EM are no longer acute. This means lower vol across the board.

   

  As a consequence of this landscape, three themes would dominate the near term: Policy mistake, negative rates and risk assets range.

   

  In the background of all this looms the risk of massive, one time, devaluation by China and possibly entire region which could cause a significant repricing across the board and further destabilize global markets in the near term.

  Which brings us to the supreme irony: only a Fed which admits it has lost all credibility can “save” financial markets. However, since by definition its credibility would be henceforth lost, this would also be the final intervention that the Fed could engage in without proceeding to the next and final state of play: paradropping money in hopes of unleashing (hyper)inflation, as the opportunity cost to preserving credibility will, at that point, be zero.

  And since even market participants now have the courage to admit that “the Fed emperor is naked”, it is only a matter of time before the Fed has to decide: either welcome the crash, or relent and do everything in its power to unleash the BTFD animal spirits one final time.

  

  

  

  

  

• The Civil War Of "The Right"

  Submitted by Patrick Buchanan via Buchanan.org,

  The conservative movement is starting to look a lot like Syria.

  Baited, taunted, mocked by Fox News, Donald Trump told Roger Ailes what he could do with his Iowa debate, and marched off to host a Thursday night rally for veterans at the same time in Des Moines.

  Message: I speak for the silent majority, Roger, not you, not Megyn Kelly, not Fox News. Diss me, and I will do fine without Fox.

  And so the civil-sectarian war on the right widens and deepens.

  And two questions arise: Will the conservative movement and Republican Party unite behind Trump if he is the nominee? And will the movement and party come together if Trump is not the nominee?

  A breakdown of the balance of forces in this civil-sectarian war finds most of the media elite of the right recoiling from Trump, while Trump leads by a huge margin in Middle America.

  National Review, Commentary, The Weekly Standard, Wall Street Journal, and the conservative and neocon columnists on the op-ed pages at The Washington Post and The New York Times have almost all come out viscerally against Trump.

  He, in turn, has trashed several by name. Wounds have been inflicted that will not soon be forgiven or forgotten.

  But while columns and magazines appear in print twice weekly, weekly, biweekly and monthly, millions listen to talk radio every hour of every day. And though websites might be updated daily, radio, more than print, is a medium that moves people.

  Among the top talkers, Trump gets more than a fair hearing. Some of the talk shows with the largest audiences are sympathetic, others are supportive. And the Drudge Report, the daily newspaper of Middle America, tracks Trump’s every move.

  In the media battle, then, the media elite are being swamped by Trump. And Trump is winning the political battle as well. According to almost every poll, state or national, Trump is ahead of all rivals, with his closest challenger trailing by 10 or more points. Among the populist and Tea Party right, Trump has lapped the field, and he is now competitive among Evangelicals.

  

   

  How will the civil war on the right end?

  Because the differences are not simply about personalities and politics, but principles and policies, it may not end with this election.

  There is talk of having the anti-Trump conservatives unite behind the one establishment candidate — Jeb Bush, Marco Rubio, John Kasich, Chris Christie — who emerges strongest after New Hampshire, to storm through the later primaries and take down Trump.

  Yet such a scenario seems implausible.

  That audience of 24 million that tuned in to the first Fox News debate and the 22 million that tuned in to the CNN debate were drawn to Trump, and Ben Carson, Ted Cruz and Rand Paul, because these men seemed to represent real change.

  Democrats who support Bernie Sanders and Republicans who support Trump may disagree on where America should go, but both agree on the need for America to radically change direction.

  Yet, if this battle for the GOP nomination should yield another establishment Republican, would not all the fire and energy of the campaign of 2015-2016 soon disappear?

  Consistency not being their long suit, some among the conservative elites who denounced Trump’s walkout from the debate, threaten to walk out of the party should Trump win.

  But walkout is an option open to populists as well. And if, after the rise of the Tea Party, the capture of Congress in 2014, the Trump-Cruz-Carson rebellion, the GOP offers the silent majority yet another establishment candidate, will populists and Tea Party types rally to him?

  Perhaps. One recalls that, after the Revolution of 1789, the march on Versailles, the guillotining of Louis XVI, the rise of Robespierre, and the Era of Napoleon, the French got the Bourbon Restoration — Louis XVIII, brother of the beheaded king, sitting on the old throne.

  Still, if the populist-conservative struggle of the last five years, to put behind them the days of Bush 41 and Bush 43, produces Bush 45, or his moral equivalent, how many would shoulder arms and march for him?

  And, again, the argument over the acceptability of Trump aside, there is a deeper conflict within the GOP and conservative movement that may be irreconcilable. Millions of conservatives and independents believe it was the Republican policies of the recent past that also failed America.

  The Bush-Clinton-Obama trade policies produced the $12 trillion in trade deficits, which measures the net export of U.S. factories and manufacturing jobs, which explain the wage stagnation.

  The Republican-neocon foreign policy of intervention and nation building is a primary cause of the present disasters in Afghanistan, Iraq, Libya and Yemen.

  The immigration policies championed by Bush Republicans as well Clinton and Obama Democrats produced the immigration crisis that propels the Trump campaign.

  In short, it will be difficult for populists to unite with Beltway conservatives in 2016, when the former see the latter as part of the problem, not the solution.

  

  

  

  

  

• WalMart "Absolutely Shafted" Washington DC; Here's How

  It’s been nearly a year since a grinning Doug McMillon recorded a video message to the world in which he explained that WalMart was set to raise the minimum wage for its lowest paid employees.

  After all, McMillon said, “it’s our people that make the difference.”

  11 months later, those “people” (the lowly shelf stockers and cashiers) aren’t materially better off than they were before, because handing someone $10/hour instead of $9 is such a small concession that you might as well have done nothing. In other words, $10 is no more of a “living wage” than $9 is.

  But while the impact on the retailer’s legions of hourly employees has been minimal, the consequences for the company have been nothing short of dramatic.

  As we’ve explained on any number of occasions, you can’t very well just implement an across-the-board wage hike if you’re WalMart without making up for it somewhere. Why? Because the business model runs on razor thin margins and because WalMart is determined to maintain “everyday low prices” which means the cost of the raises can’t be passed on to the consumer.

  First WalMart tried squeezing the supply chain by asking vendors to pass along savings to Bentonville and by charging a variety of storage fees. When that didn’t work, the company started firing people and cutting hours. Here’s how that works:

  

  Some of the cuts came at the home office in Bentonville, meaning that the move to put a few extra pennies in the pockets of hourly workers resulted in the loss of hundreds of breadwinner jobs.

  Finally, in October, WalMart threw in the towel and announced a shocking guidance cut that prompted the stock to plunge by the most in 17 years.

  Earlier this month WalMart doubled down on the wage hike debacle by promising to raise wages for employees higher up the corporate ladder (something we predicted would happen last year). The retailer announced the new wave of raises just days after saying it would close 269 stores and fire 16,000 people.

  Apparently, the good folks in Bentonville are oblivious to the connection between the closures and previous wage hikes.

  Also oblivious are policy makers who have pushed for wage hikes without thinking through the consequences.

  “Washington, D.C., is beginning to look like a cautionary example of what can happen when bastions of liberalism throw caution to the wind in raising the minimum wage,” IBD wrote, earlier this month. “The nation’s capital is now losing about 700 jobs a year at restaurants, hotels and other leisure and hospitality sector venues, a sharp reversal from the gain of 2,000 such jobs per year the city was enjoying before it hiked the minimum wage by 27%, first from $8.25 to $9.50 an hour in July 2014 and then to $10.50 in July 2015.” Here’s more: 

  Now, as D.C. employers brace for yet-another minimum-wage hike to $11.50 set for this coming July, Wal-Mart has called off two of the city’s most-prized retail developments.

   

  Wal-Mart said it would close 154 stores in the U.S., mostly small-format locations. But even as the nation’s biggest retailer said it would keep opening supercenters, including 50 to 60 in the coming year, it told District officials that it won’t go forward with plans for two huge stores that were expected to create hundreds of new jobs in one of the city’s poorer sections.

   

  Company officials cited the city’s coming minimum-wake hiketo $11.50 an hour as one of the reasons for its change of heart. Wal-Mart has signaled to investors that its already-narrow profit margins could shrink by one-third as it voluntarily hikes its own base wage to $10 an hour.

  DC officials aren’t happy. 

  “It’s an outrage,” said former mayor Vincent C. Gray, who The Washington Post notes in 2013 completed the handshake deal for the stores. “This is devastating and disrespectful to the residents of the East End of the District of Columbia.”

  “I’m blood mad,” D.C. Mayor Muriel E. Bowser (D) fumed.

  As WaPo went on to recount, “under the initial deal, Walmart could build stores almost anywhere in the District, as long as it opened two stores in its poorest wards and areas of the city sometimes referred to as food deserts, with few — if any — options for fresh produce and groceries.” 

  While WalMart apologized and cited its own internal P&L calculations for the decision, officials say the real reason is the rising pay floor. Here’s WaPo again: 

  Council member Jack Evans (D-Ward 2), head of the council’s finance committee, sat in on the meeting Friday morning with Walmart officials and Brian Kenner, Bowser’s deputy mayor for planning and economic development.

   

  Evans said that, behind closed doors, Walmart officials were more frank about the reasons the company was downsizing. He said the company cited the District’s rising minimum wage, now at $11.50 an hour and possibly going to $15 an hour if a proposed ballot measure is successful in November. He also said a proposal for legislation requiring D.C. employers to pay into a fund for family and medical leave for employees, and another effort to require a minimum amount of hours for hourly workers were compounding costs and concerns for the retailer.

  “If I were mayor, I’d get on a plane and go to Bentonville,” Gray said. “We have absolutely been shafted. They should be held accountable.” 

  Yes, Mr. Gray, someone should be “held accountable” for the hundreds of jobs poor residents won’t get thanks to the city’s move to aggressively hike the pay floor. But when it comes to who should be held accountable, perhaps you should ask the city’s unemployed if they’d rather have a job with the minimum wage at $10/hour or be jobless with the minimum wage at $11.50/hour.

  Once you get your answer, look inward on the whole “accountability” thing.

  

  

  

  

  

• Did A Central Banker Just Margin Call All Other Central Banks' Credibility?

  Authored by Mark St.Cyr,

  In a stunning policy move Bank of Japan Governor Haruhiko Kuroda introduced and adopted negative interest rates. The word “stunning” is fitting, for just weeks prior he stated there was no need to adopt such measures. It seems by all accounts his mind changed (or was made right?) after returning from Davos.

  Whether or not this is the case one thing is certain: The Bank of Japan (BOJ) has thrown not just a monkey wrench into the financial system. He may have simultaneously made every other central bankers toolbox irrelevant, as well as incapable, to deal with the resulting damage. It’s one thing to have the right tool at the right time to tweak or fix. It’s quite another to lose grip of that tool where it falls into the running gears of the machinery. That’s when far more can (and usually does) go awry than just the original issue. (Think losing the small water pumps that keep water in a nuclear reactor as an analogy.)

  No matter what anyone in the “smart crowd” would argue different. Today, both the financial world along with business in general is currently being manipulated made possible via crony capitalism as well as simultaneously being stymied by central bank policies. All occurring through the direct myriad of interventions into the capital markets globally. I believe that in no other time since the days of direct rule of Kings and Queens has such a small cabal of people had so much influence, as well as control, of global finance and business influence. Ever.

  Politicians of all stripes sway or prestige are pale in comparison today as to the dictates coming from one central banking authority or another. However, with such authority comes a very heavy price. That price? It’s becoming easier to spot both the “who,” as well as the “where,” catastrophic mistakes in policies effecting societies well-being may originate from. And I don’t think many central bankers truly understand just how precarious in that position they now sit.

  We were told (“we” being the business world) ad nauseam by the central bankers themselves that they knew precisely what they were doing. In 2008 as the financial markets as well as the economy came-off-the-rails the Federal Reserve stepped in and stabilized what seemed to be an out of control death spiral. Many will argue valid points on both sides whether it was good, bad, or an ugly way the tools used to stem that tide were employed. Personally I believe there was a legitimate and valid argument to step in.

  However: It was the remaining “in” while supplying ever more of the very things that made the original crisis inevitable in the first place that had/has anyone with a modicum of business acumen apoplectic.

  The relentless iterations of QE (quantitative easing) and an unrelenting stance to remain at the zero bound on interest rate policies for years could be seen for the ever ballooning, ticking time bomb they were. It didn’t take too much imagination and thought thru to envision just how difficult along with its disruption in both financial as well as business thing would become once the proverbial punch-bowls were taken away.

  Economic theory as to explain and guide central banks through this malaise are suddenly finding themselves squarely in the line of fire of business and financial fact: They’ve created an absolute mess. And what’s worse? It may be the bankers themselves that may no longer trust their own omnipotence to deal with what’s coming. i.e., They aren’t going to wait or care any longer about coordination of moves. It’s now everyone for themselves as just witnessed by what many are now calling a “Kamikaze” bank policy move from the BOJ.

  Why is this so troubling many are asking. After all, it seems that the BOJ governor’s mind changed after meeting with all the other bankers and attendees at Davos. And if one is to believe all the reports; more QE, and negative interest rates were what was being called (as well as begged) for as to help stem the tide of this current market malaise. Maybe the BOJ just decided to emulate what’s now taking place in the EU? Sounds logical right?

  Well yes, maybe. However, what may be far more front-of-mind for the BOJ is the current meltdown in China. Japan may try to sweep away concerns regarding contamination of any meltdown at their nuclear plants. What they can’t turn a blind eye to is the potential for contagion in any currency meltdown in the CNY. e.g., Chinese Yuan. And it seems that potential grows stronger with each passing day.

  And just like the potential for radiation effects are at first unseen to the naked eye. The possible ramification of suddenly throwing one of the most heavily traded currencies (e.g., ¥Yen) into an anytime, anywhere, out-of-the-blue change in monetary pricing stability can affect carry trades across the global markets in ways far more treacherous, as well as dangerous than anyone ever considered. Especially in today’s highly levered, correlated, high frequency trading (HFT) algorithmic based market. The resulting effects are yet to be felt. After all – this all just happened Friday.

  I would garner there were many a meeting across many financial houses over the weekend than will admit. For when it comes to a carry trade – any carry trade – stability of perceived pricing models is key. A change of just one fractional amount too far in the wrong direction for assumption can render a fortress balance sheet into a falling house of cards with an immediacy most never truly comprehend. One would think 2007/08 would still be well-remembered. By the way many are talking – it seems as if it was ancient history. It’s unnervingly surreal.

  Today the markets are gyrating widely reminiscent of those early stage stresses and/or warning signs just prior to the first real downdraft experienced during the initial stages of the financial crisis. Back then we had one policy move, or jawboning official after another announcing plans to do this or that, sending the market into fits and starts near daily.

  Many times these daily knee-jerk rises of 1% plus moves were only to be followed with subsequent selloffs erasing (and then some) any gains made prior. Sometimes with incalculable speed and disruption. Today, with an ever infected market now under near complete and utter dominance via HFT parasitic trading programs, these swings may become even more violent as well as fear induced as supposed “liquidity” vanishes and/or appears from markets faster than the laser beams can quote stuff that “liquidity” in the first place.

  The problem now is: Which central banker or policy is to be believed? And more importantly: for how long? Couple that with: Who will now be trusted as having credibility both in stating what they mean, and doing what they said? As well as: doing what they said because they know what they are doing? Quite the conundrum, yes?

  The issue at hand is answering the question of: just why did the BOJ do what it just did – in the way that it did it? The ramification to those questions could not be more explicit in their meaning than almost any other in my opinion. For the global markets may be in far more perilous a position than the central bankers themselves ever imagined, let alone – contemplated.

  For those who never seen the movie “Margin Call” there’s a great scene as it’s then irrefutable and understood that it’s all about to fall apart where Sam Rogers (Kevin Spacey) is expressing concerns to John Tuld (Jeremy Irons) that he believes the firm is panicking in selling everything all at once, causing a possible run on everything and melting down the system. The response from Tuld is quite fitting when he states, “It’s not panicking if you’re first.”

  Today, as many of the financial media and others are trying to explain away this monetary move by the BOJ as something as simple as “Kuroda has said he likes to shake things up, or be unpredictable.” I think they may be looking in the wrong direction. For what now must be considered into that equation is something that portends to far more concern than meets the eye at first blush. To wit:

  Did the BOJ’s out-of-the-blue reversal on its monetary stance which was refuted just weeks prior by Mr. Kuroda himself take place because after listening to the arguments, suggestions, as well as concerns, from the participants at Davos he concluded much like what the movie “Margin Call” depicted: It was all about to unravel? And if so: is this him deciding to be “first” and considered it his only choice?

  And if so, what does his actions pose for the credibility of his brethren bankers? Do they now act from a place of “Who can they trust?” And what does that mean for the rest of us? The implications are staggering when you begin to open those doors for they have the potential of making Pandora’s box seem harmless in comparison.

  However, maybe this is all hyperbole and should be disregarded as over the top rhetoric from Chicken Little types with no actual central banking policy experience. Maybe we should take comfort in the unwavering hand of credibility that never saw the great financial crisis to begin with when he argued that subprime mortgages and the crisis they foretold were “contained.” Then Fed. chairman Ben Bernanke.

  What does he say today? Well, when he was speaking in Hong Kong at the Asian Financial Forum as Davos was also transpiring he stated, “I don’t think China’s economic slowdown is that severe to threaten the global economy, ” along with “The U.S. and China are not as closely tied as the market thinks.”

  Maybe “Margin Call” was one of the movies available on demand in the rooms at Davos, and all Mr. Kuroda is now doing is channeling his inner “Jon Tuld” moment. And why not? “It’s not panicking if you’re first.”

  However, for the rest of us, we can only wait and see what happens next.

  

  

  

  

  

• Who Warned "Be Careful What You Wish For… If Interest Rates Go Negative"

  Now that the Bank of Japan has joined other central banks such as Denmark, Sweden, the ECB, and Switzerland into pushing its rates into what until just two years ago was considered the monetary twilight zone below the zero bound, and in the process sending a record $5.5 trillion in government bond yields negative…

  

   

  … which quickly puts into in context all the recent warnings about physical cash being eliminated (because as a reminder negative rates and cash simply can not coexist as the latter provides a ready immunity from the former), such as the following:

  • Norway’s Biggest Bank Demands Cash Ban
  • Bank Of England Economist Calls For Cash Ban, Urges Negative Rates
  • Citigroup’s Gold “Expert” Demands A Cash Ban
  • Leading German Keynesian Economist Calls For Cash Ban
  • The War On Cash Is Advancing On All Fronts

  Perhaps the only open question is which comes first i) Japan hinting at a cash ban, or ii) the Fed going NIRP as well.

  So in light of all this monetary lunacy, we have dug up the following blast from the not so distant past, which contains several rather dire warnings about the dystopian future of a NIRP world:

  • if rates go negative, the U.S. Treasury Department’s Bureau of Engraving and Printing will likely be called upon to print a lot more currency as individuals and small businesses substitute cash for at least some of their bank balances.
  • I might even go to my bank and withdraw funds in the form of a certified check made payable to myself, and then put that check in a drawer.
  • If bank liabilities shifted from deposits to certified checks to a significant degree, banks might be less willing to extend loans, because certified checks are likely to be less stable than deposits as a source of funding.
  • As interest rates go more negative, market participants will have increasing incentives to make payments quickly and to receive payments in forms that can be collected slowly
  • if interest rates go negative, the incentives reverse: people receiving payments will prefer checks (which can be held back from collection) to electronic transfers

  And the punchline:

  • we may see an epochal outburst of socially unproductive—even if individually beneficial—financial innovation

  But the biggest surprise to all of the above is who the source of the warning is. First, however, here is the full text of said warning:

  If Interest Rates Go Negative . . . Or, Be Careful What You Wish For

   

  [T]his post examines some of the possible consequences. We suggest that significantly negative rates—that is, rates below -50 basis points—may spawn a variety of financial innovations, such as special-purpose banks and the use of certified bank checks in large-value transactions, and novel preferences, such as a preference for making early and/or excess payments to creditworthy counterparties and a preference for receiving payments in forms that facilitate deferred collection. Such responses should be expected in a market-based economy but may nevertheless present new problems for financial service providers (when their products and services are used in ways not previously anticipated) and for regulators (if novel private sector behavior leads to new types of systemic risk). 

   

  Cash and Cash-like Products 

   

  The usual rejoinder to a proposal for negative interest rates is that negative rates are impossible; market participants will simply choose to hold cash. But cash is not a realistic alternative for corporations and state and local governments, or for wealthy individuals. The largest denomination bill available today is the $100 bill. It would take ten thousand such bills to make $1 million. Ten thousand bills take up a lot of space, are costly to transport, and present significant security problems. Nevertheless, if rates go negative, the U.S. Treasury Department’s Bureau of Engraving and Printing will likely be called upon to print a lot more currency as individuals and small businesses substitute cash for at least some of their bank balances.

   

  If rates go negative, we should also expect to see financial innovations that emulate cash in more convenient forms. One obvious candidate is a special-purpose bank that offers conventional checking accounts (for a fee) and pledges to hold no asset other than cash (which it immobilizes in a very large vault). Checks written on accounts in a special-purpose bank would be tantamount to negotiable warehouse receipts on the bank’s cash. Special-purpose banks would probably not be viable for small accounts or if interest rates are only slightly below zero, say -25 or -50 basis points (because break-even account fees are likely to be larger), but might start to become attractive if rates go much lower.

   

  Early Payments, Excess Payments, and Deferred Collections

   

  Beyond cash and special-purpose banks, a variety of interest-avoidance strategies might emerge in connection with payments and collections. For example, a taxpayer might choose to make large excess payments on her quarterly estimated federal income tax filings, with the idea of recovering the excess payments the following April. Similarly, a credit card holder might choose to make a large advance payment and then run down his balance with subsequent expenditures, reversing the usual practice of making purchases first and payments later.

   

  We might also see some relatively simple avoidance strategies in connection with conventional payments. If I receive a check from the federal government, or some other creditworthy enterprise, I might choose to put the check in a drawer for a few months rather than deposit it in a bank (which charges interest). In fact, I might even go to my bank and withdraw funds in the form of a certified check made payable to myself, and then put that check in a drawer.

   

  Certified checks, which are liabilities of the certifying banks rather than individual depositors, might become a popular means of payment, as well as an attractive store of value, because they can be made payable to order and can be endorsed to subsequent payees. Commercial banks might find their liabilities shifting from deposits (on which they charge interest) to certified checks outstanding (where assessing interest charges could be more challenging). If bank liabilities shifted from deposits to certified checks to a significant degree, banks might be less willing to extend loans, because certified checks are likely to be less stable than deposits as a source of funding.

   

  As interest rates go more negative, market participants will have increasing incentives to make payments quickly and to receive payments in forms that can be collected slowly. This is exactly the opposite of what happened when short-term interest rates skyrocketed in the late 1970s: people then wanted to delay making payments as long as possible and to collect payments as quickly as possible. Some corporations chose to write checks on remote banks (to delay collection as long as possible), and consumers learned to cash checks quickly, even if that meant more trips to the bank, and to demand direct deposits. However, if interest rates go negative, the incentives reverse: people receiving payments will prefer checks (which can be held back from collection) to electronic transfers. Such a reversal could impose novel burdens on payment systems that have evolved in an environment of positive interest rates.

   

  Conclusion

   

  The take-away from this post is that if interest rates go negative, we may see an epochal outburst of socially unproductive—even if individually beneficial—financial innovation. Financial service providers are likely to find their products and services being used in volumes and ways not previously anticipated, and regulators may find that private sector responses to negative interest rates have spawned new risks that are not fully priced by market participants.

  So who is the the source of the above critical warning about the coming global NIRP, which clearly neither ther Bank of Japan, nor the ECB, nor the SNB, nor the Sveriges Riksbank nor the Danmarks Nationalbank read?

  Who Warned “Be Careful What You Wish For… If Interest Rates Go Negative”

  The answer: the Federal Reserve. And this time, they will not be able to say “we never saw it coming…”

  

  

  

  

  

• What A Cashless Society Would Look Like

  Submitted by Erico Matias Tavares of Sinclair & Co., and reposted from the original as of May 19, 2015 in light of the recent decision by the Bank of Japan to launch negative interest rates.

  What A Cashless Society Would Look Like
  

  Calls by various mainstream economists to ban cash transactions seem to be getting ever louder, while central bankers have unleashed negative interest rates on economies accounting for 25% of global GDP, with $5.5 trillion in government bonds yielding less than zero. The two policies are rapidly converging.

  Bills and coins account for about 10% of M2 monetary aggregates (currency plus very liquid bank deposits) in the US and the Eurozone. Presumably the goal of this policy is to bring this percentage down to zero. In other words, eliminate your right to keep your purchasing power in paper currency.

  By forcing people and companies to convert their paper money into bank deposits, the hope is that they can be persuaded (coerced?) to spend that money rather than save it because those deposits will carry considerable costs (negative interest rates and/or fees).

  This in turn could boost consumption, GDP and inflation to pay for the massive debts we have accumulated (leaving aside the very controversial idea that citizens should now have to pay for the privilege of holding their hard earned money in a more liquid form, after it has already been taxed). So at long last we can finally get out of the current economic funk.

  The US adopted a policy with similar goals in the 1930s, eliminating its citizens’ right to own gold so they could no longer “hoard” it. At that time the US was in the gold standard so the goal was to restrict gold. Now that we are all in a “paper” standard the goal is to restrict paper.

  However, while some economic benefits may arguably accrue in the short-run, this needs to be balanced in relation to some serious distortions that could rapidly develop beyond that.

  Pros and Cons

  To be most effective, banning cash would most likely need to be coordinated between the US and the EU. Otherwise if only one of the two Western economic blocks were to do it, the citizens of that block might start using the paper currency of the other, thereby circumventing the restrictions of this policy. Can’t settle your purchase in paper euros? No problem, we’ll take US dollar bills.

  This is just one aspect that can give us a glimpse of the wide ranging consequences this policy would have. Let’s quickly consider some pros and cons, as we see them:

  Pros:

  • Enhance the tax base, as most / all transactions in the economy could now be traced by the government;
  • Substantially constrain the parallel economy, particularly in illicit activities;
  • Force people to convert their savings into consumption and/or investment, thereby providing a boost to GDP and employment;
  • Foster the adoption of new wireless / cashless technologies.

  Cons:

  • The government loses an important alternative to pay for its debts, namely by printing true-to-the-letter paper money. This is why Greece may have to leave the euro, since its inability or unwillingness to adopt more austerity measures, a precondition to secure more euro loans, will force it to print drachma bills to pay for its debts;
  • Paper money costs you nothing to hold and carries no incremental risk (other than physical theft); converting it into bank deposits will cost you fees (and likely earn a negative interest) and expose you to a substantial loss if the bank goes under. After all, you are giving up currency directly backed by the central bank for currency backed by your local bank;
  • This could have grave consequences for retirees, many of whom are incapable of transacting using plastic. Not to mention that they will disproportionately bear the costs of having to hold their liquid savings entirely in a (costly) bank account;
  • Ditto for very poor people, many of whom don’t have access to the banking system; this will only make them more dependent, in fact exclusively dependent, on government handouts;
  • We wonder if the banks would actually like to deal with the administrative hassle of handling millions of very small cash transactions and related customer queries;
  • Illegal immigrants would be out of a job very quickly – a figure that can reach millions in the US, creating the risk for substantial social unrest;
  • If there is an event that disrupts electronic transactions (e.g. extensive power outage, cyberattack, cascading bank failures) people in that economy will not be able to transact and everything will grind to a halt;
  • Of course enforcing a government mandate to ban cash transactions must carry penalties. This in turns means more regulations, disclosure requirements and compliance costs, potentially exorbitant fees and even jail time;
  • Banning cash transactions might even propel the demise of the US dollar as the world’s reserve currency. The share of US dollar bills held abroad has been estimated to be as high as 70% (according to a 1996 report by the US Federal Reserve). One thing is to limit the choices of your own citizens; another is trying to force this policy onto others, which is much harder. Foreigners would probably dump US dollar bills in a hurry and flock to whichever paper currency that can offer comparable liquidity.

  In light of the foregoing does banning cash transactions make sense to you? Aren’t the risks at all levels of society just too large to be disregarded?

  Unintended Consequences

  Paper money can be thought of as a form of interest-free government borrowing and therefore as a saving to the taxpayer. Given the dire situation of Western government finances, probably the very last thing we should do right now is to ban cash transactions.

  Think about it. If the government prints bills and coins to settle its debts, rather than issuing bonds, it does not add to its snowballing debt obligations. Of course the counterargument is that this might result in significant inflation once politicians put their hands directly on the printing press. But isn’t this what the mainstream economists are so desperately trying to do to avoid deflation?

  And it’s not like people in the West have tons of cash under the mattress. Let’s do the math. If only 30% of US paper money is held by residents, this is only about 2% of GDP, and probably unevenly distributed. It is therefore very dubious that any boost to economic activity will be that significant. In fact there is no empirical evidence that demonstrates this policy will work as intended (not that this has ever stopped a mainstream economist)

  Moreover, an economy’s ability to create money would be even more impaired if its banking system were to crash – exactly at the time when it would need it the most. In reality it could be hugely deflationary because there would be no other currency alternatives. Talk about unintended consequences.

  As to who could replace the US in providing paper liquidity to the world, we don’t need to think too hard. China will surely not ban cash transactions given that almost a billion of its citizens are still quite poor and most have no access to banking services (plus it seems that their own economic advisors are much more sensible). Replacing the US in offshore cash transactions would create substantial demand for the Chinese yuan, at that stage without any real competition from other major economies as presumably none would be using paper.

  It is therefore doubtful that US political leaders would ever endorse such a policy; they would be effectively giving up on an incredible advantage – the US dollar ATM, to the benefit of their main geopolitical competitors. However, given the considerable influence of mainstream economists in financial and political circles this cannot be ruled out, especially during a crisis.

  And it would be just the latest in a set of unprecedented economic policies:

  “A depression is coming? Let’s put interest rates at zero. The economy is still in trouble? Let’s have the central bank print trillions in new securities. The banks are not lending? Let’s change the accounting rules and offer government guarantees and funds. People are still not spending? Let’s have negative interest rates. The economy is still in the tank? LET’S BAN CASH TRANSACTIONS!”

  More Central Planning

  The problem is that central planners never know how and where to stop. If a policy doesn’t work, they just find a way to tinker somewhere else – and with more vigor. Devolving the initiative back to the private sector is never an option.

  Micromanagement of every single detail of our economic lives thus seems to be inevitable. And at that point there will be no more free markets. As pointed out by Friedrich von Hayek, “the more the state plans the more difficult planning becomes for the individual.”

  Banning cash transactions seems like yet another excuse to postpone implementing real solutions to our financial problems. How can we have sustainable growth in the economy if:

  • The banks are not solid enough to lend?
  • Consumers are not solid enough to borrow?
  • Overindebted municipalities, states and governments seek ever more tax revenues?
  • An already overburdened private sector is underwriting the cost of every policy error?

  The guys and gals who generate real wealth and employment need encouragement and support, not more penalties on how they choose to go about their business.

  A cash ban does not address any substantive issues. What is needed is a sensible economic proposal and above all political courage to implement it, which so far seems to be lacking.

  There are no free lunches in economics. A cashless society is promising to have very tangible costs to our liberties and future prosperity.

  

  

  

  

  

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