- “The People Who Cast The Votes Don’t Decide An Election, The People Who COUNT The Votes Do.”
Stealing Elections Is Easier Than You Can Imagine
Princeton University scientists showed how easy it is to steal elections by tampering with Diebold voting machines:
Here’s a summary:
So did University of California at Santa Barbara computer scientists:
So did a documentary filmmaker, to the shock of an election official and poll worker:
Indeed, a computer programmer admitted under oath to creating such a vote-switching program:
Argonne National Laboratories showed that voting machines can be hacked without any programming knowledge whatsoever … using around $20 worth of hardware:
Many videos have also been shot showing votes being switched in real-time. For example:
Note how this machine switches votes even after being “recalibrated”:
Vote fraud doesn’t occur just through electronic shenanings …
Last week local Iowa poll officials were caught on video changing vote tallies:
A quick explanation of what you’re watching (voter fraud):
The important problem is that the Bernie counters recounted everyone, while the Hillary counter was literally recorded telling someone else that she only added newcomers to the count she had before, and then when asked if she recounted everyone, she lied to the organizer and said “Yes”. This means that if anyone left the caucus site who was supporting Bernie, then they were removed by Bernie’s recounters, but any Hillary supporter who left the caucus site was treated as though they were still there for the purposes of the recount. Thus, artificial inflation of her numbers occurred unless everyone who left was a Bernie delegate, on top of the Hillary campaign surrogate lying to an election official to cover up her (negligent at best, malicious at worst) mistake.
And they left the recount up to a Yea Nay vote, which is just ridiculous.
The Des Moines Register noted “something smells” in the primaries.
Something similar happened in 2012:
The Wall Street Journal wrote in a 2008 article entitled “Will This Election Be Stolen?“:
Since early voting started recently, worried voters have reported seeing their votes flipped from Barack Obama to Mr. McCain in West Virginia and Texas.
We reported in 2006:
The non-partisan and highly-respected government agency, the Government Accountability Office, verified that the electronic voting machines used in 2004 were wide open to fraud, and that fraud likely occured in Ohio, Iowa, Nevada, New Mexico, and other states.
The security flaws in electronic voting machines are so complete that anyone can instantaneously install software which will change the vote counts. See this New York Times’ Magazine analysis, and also E-Voting Machine an Easy Hack from Wired Magazine.
Exit polling data shows that there was vote fraud.
And Robert F. Kennedy Jr. and leading reporter Greg Palast have shown that the emperor’s cronies intentionally spoiled, rejected, purged and otherwise refused to count enough ballots to take the election away from Kerry (not that I like Kerry). See also this article.
And spend 10 minutes at this website and you’ll realize that electronic vote fraud is not some raving conspiracy theory, but is real.
Indeed, the following headlines from the last two weeks hint at the magnitude of the fraud:
- Black Box Voting – one of the most credible organizations investigating voting issues – has received unofficial reports that political operatives have urged citizens NOT to ask too many questions and NOT to take photos or video of precinct caucus results, warning them that only “conspiracy theorists” would want to independently confirm the announced results.
And President Carter said that the 2000 election was stolen.
It’s not just skulduggery by one particular party …
Sonoma State University professor and Project Censored Director Peter Phillips noted in 2005:
There is little doubt key Democrats know that votes in 2004 and earlier elections were stolen. The fact that few in Congress are complaining about fraud is an indication of the totality to which both parties accept the status quo of a money based elections system. Neither party wants to further undermine public confidence in the American “democratic” process (over 80 millions eligible voters refused to vote in 2004)…. Future elections in the US will continue as an equal opportunity for both parties to maintain a national democratic charade in which money counts more than truth.
Some voting machine companies are partisan Republicans, and other partisan Democrats.
But some aren’t even American. For example, a global internet voting company headquartered in Spain purchased America’s dominant election results reporting company in 2012.
“It’s All Over But the Counting. And We’ll Take Care of the Counting”
Stalin said:
The people who cast the votes don’t decide an election, the people who count the votes do.”
Before the 2004 election, U.S. Congressman Peter King said, “The election is over. We won.”
When a reporter asked, “How do you know that?”, King replied:
It’s all over, but the counting. And we’ll take care of the counting.
Indeed, both the Democrats and Republicans rig votes at their own conventions.
As Mark Twain said:
If voting made any difference they wouldn’t let us do it.
- Personal Freedom Versus Political Paternalism
Submitted by Richard Ebeling via EpicTimes.com,
What is the role of government in society? This has been and remains the most fundamental question in all political discussions and debates. Its answer determines the nature of the social order and how people are expected and allowed to interact with one another – on the basis of either force or freedom.
The alternatives are really rather simple. Government may be narrowly limited to perform the essential task of protecting each individual’s right to his life, liberty, and honestly acquired property. Or it may be used to try to modify, influence, or dictate the conduct of the citizenry.
In the first case, the government is assigned the duty of impartial umpire, enforcing the societal rules against assault, murder, robbery, and fraud. All human relationships are to be based on mutual consent and voluntary association and exchange.
In the second case, government is an active player in people’s affairs, using its legitimized power of coercion to determine how the members of the society may live, work, and associate with each other. The government tries to assure certain outcomes or forms of behavior considered desirable by those who wield political authority.
More Government Means Increased Government Force
We need to remember what government ultimately is all about. The Austrian economist Ludwig von Mises concisely explained this:
“Government is in the last resort the employment of armed men, of policemen, of gendarmes, soldiers, prison guards, and hangmen. The essential feature of government is the enforcement of its decrees by beating, killing, and imprisoning. Those who are asking for more government interference are asking ultimately for more compulsion and less freedom.”
Under a political regime of liberty, each individual gives purpose and moral compass to his own life. He is treated as independent and self-governing; as long as he does not violate the rights of others he is sovereign over his own affairs. He may choose and act wisely or absurdly, but it is his life to live as he pleases.
If any of us – family members, friends, or just concerned fellow human beings – believe someone has chosen a path to perdition, we may try to persuade him to mend his ways. But we are expected to respect his freedom; we may not threaten or use force to make him change course.
Nor are we allowed to use political power to manipulate his options so that he does what we want him to do. Using taxation and regulation to induce conduct more to our liking is no less a political imposition than the sterner and more explicit police power.
The totalitarian systems of the twentieth century used the direct means of command and prohibition to get people to do what a Stalin, Hitler, Mussolini, or Mao wanted done. In the interventionist-welfare state such brute means are normally shunned for the more indirect and subtle method of influencing people’s behavior through manipulation of incentives.
Government Control Through Choice Manipulation
Suppose an individual stands at a crossroads and is told he may choose which way to go. But in front of one of the roads is a government tollbooth that charges him a fee if he chooses that route; while in front of the other is a machine that dispenses a cash subsidy from the state, if the individual decides to follow that road. The choice is his, but the tradeoffs he faces have been manipulated to influence his decision.
In the 1950s the French coined a term for this type of political control: indicative planning. Through the use of fiscal and regulatory powers the government could get people to do what the politicians, bureaucrats, and various special-interest groups wanted, all the while maintaining the illusion that people were freely deciding where to invest or work or carry on their business.
We see this at work in America with government tax credits up to 30 percent of the purchase and installation costs to induce people to invest in solar panels on the roofs of their homes or office buildings; or the use of a similar tax credit of up to $7,500 if an individual purchases the Tesla electric automobile.
On the other hand, there is the use of taxes to induce less consumption or use of a product. A leading example of this is taxes on cigarettes. To the manufacturers’ retail prices are added “sin taxes” for indulging in a “vice” that others in society consider disgusting and/or an unnecessary health risk.
While in Missouri it is as low as merely 17 cents per pack, in New York City, the state and municipal taxes add an additional $5.85 per pack to the manufacturers’ retail price. Chicago has the highest of these sin taxes in the United States, with $6.16 in taxes added to the price of a pack of cigarettes.
The new code name for this type of political paternalism is “nudging.” Those in power and those among the behavioral “experts” who claim to know how individuals should better live their lives than when left on their own, do not assert the right to directly command people to live “right” and “rational” for themselves or society.
No, instead, they merely wish to influence and modify the incentives in society to get people to live and act in that better way, when if they were as enlightened as the government-advising experts those people would realize was the way they should and would live and act without the manipulation of the trade-offs people face in the marketplace.
The Danger from “Soft” Tyranny
We might call this a “soft” tyranny under which the commanding hand remains hidden behind an outward veneer seeming to respect the right of people to live and choose as they like and desire, but all the time manipulating the taxing and regulatory surroundings to see that the citizenry really ends up doing what the regulators and planners want them to do, or at least more it.
This form of “democratic despotism” over the conduct of the citizenry was, of course, explained, feared and warned about 180 years ago in Alexis de Tocqueville’s deservedly famous Democracy in America, written in the 1830s after an extended visit by the Frenchman to the United States:
“After having thus taken each individual one by one into its powerful hands, and having molded him as it pleases, the sovereign power extends its arms over the entire society; it covers the surface of society with a network of small, complicated, minute, and uniform rules, which the most original minds and the most vigorous souls cannot break through to go beyond the crowd; it does not break wills, but it softens them, bends them and directs them; it rarely forces action, but it constantly opposes your acting; it does not destroy, it prevents birth; it does not tyrannize, it hinders, it represses, it enervates, it extinguishes, it stupefies, and finally it reduces each nation to being nothing more than a flock of timid and industrious animals, of which the government is the shepherd.
“I have always believed that this sort of servitude, regulated, mild and peaceful, of which I have just done the portrait, could be combined better than we imagine with some of the external forms of liberty, and that it would not be impossible for it to be established in the very shadow of the sovereignty of the people.”
There is a duel hubris in the thinking and attitude of such paternalistic “experts.” First, they presume to possess superior knowledge and insights greater than and superior to that of the ordinary citizen about how best people should live their lives. Second, they unreflectively presume that they, even though mere mortals as like the rest of us, do not suffer from similar behavior, psychological and social shortcomings, and therefore are intellectual demi-gods sitting atop a self-positioned political Mount Olympus far above the common man.
The Hubris of the Paternalist
Some psychological and behavioral scientists frequently claim that they are able to demonstrate the failings and conceptual and logical errors that the ordinary man commits, and on the basis of which they can assert a judgment concerning the “rationality” or “irrationality” of human beings and their choices and decision-making.
For instance, the person who consumes large quantities of “junk food” when they get anxious or depressed; or the cigarette smoker who can’t quit because he needs the “nicotine fix” during or after a rough day at the office; or the individual who doesn’t weigh on the basis of objective, rational statistical calculation whether it is really worth spending money on a lottery ticket; or a person who fails to logically plan for his own future retirement needs when they are in the 20s or 30s. And on-and-on.
The fact is that these and similar human “failings” have plagued mankind for all of its time on this earth. Read the accounts of the ancient Greeks written 2,500 years ago by those living among the people of that time, or the words of advice on good and ethical living given by the ancient Chinese philosopher, Confucius, to his disciples and the political leaders of his time, also around 2,500 years ago.
It soon becomes clear that human nature, when compared and judged against some notion of a machine-like rational calculating device, appears to be stumbling, bumbling, and unfit for successful existence on this planet.
Human Improvement Without the Political Paternalists
Yet, here we are, the human race having survived in spite of its frailties, imperfections and less than perfect rationally logical thinking processes. Of course, we have become more intelligent, informed, and rational. We no longer pray to rain gods for precipitation or (well, at least, rarely!) throw human beings into volcanoes to appease the angered gods; we stopped burning people as witches or heretics (at least in the Western world for the most part); and we’ve learned to harness the forces of nature to serve man’s purposes (and often without too much of a screw up).
With only a limited degree of nagging and bullying, the number of people smoking in the U.S. has decreased from over 42 percent of the population in 1965 to barely more than 14 percent fifty years later in 2015. “Sin taxes” have certainly raised the cost of smoking, but it is also likely the case that a large majority of those who have given up the habit, did so because they decided to live a healthier life, through information and non-coercive peer-pressure by family members and friends – a method far more consistent with liberty than armies of busy-buddies playing political paternalists.
Obesity has increased from around 45 percent of the U.S. population in the 1960s to nearly 65 percent in the early part of the twenty-first century. But in one sense this is an indication of how wealthy we are and how inexpensive in general foods of all kinds have become compared to the past. In 1900 Americans spent around 43 percent of their family budget on food; in the first decade of the twenty-first century that had fallen to around 13 percent, or a 70 percent decline in the cost of putting food on the family dining table.
But at the same time, over the decades a significant number of people have gotten off the couch and gotten to the gym or on the park trails to run or bike regularly. More people try to eat and drink right. Since 1980, per capita alcohol consumption in the U.S. has decreased by about 15 percent.
Life expectance has dramatically improved over the last 75 years in the United States. In 1940 the average expected life span of all Americans was about 63 years; by 2010, this had increased to almost 79 years, for around a 25 percent increase in how long you can, on average, look forward to living. (For whites, in general, there has been a 23.5 percent increase in life expectancy between 1940 and the present. For blacks, in general, the increase in life expectancy during this period has been a dramatic 41.5 percent!)
Now, certainly, a good part of this improvement in the human condition has been due to advances in medicine, and improved education and information accessibility. But, nonetheless, the changes for the better are also due to people making their own choices and decisions about how to live their own lives based on what they consider to be a good and happy existence in a general economic and social environment of improved opportunities and choices.
In other words, Americans have not needed paternalist “experts” to control and manipulate their lives and twist the choice sets that such political elites think is necessary and “good” for the masses of the population.
Whose Life: Yours or the Government’s?
And this gets, I would suggest, to the heart of the matter. Whose life is it anyway? Even if individuals make decisions and act in ways that others may consider misguided and harmful to themselves, the first principle of any free society should and must be that the individual is sovereign over his own life.
Otherwise, he is a pawn to the paternalistic presumptions of those who arrogantly claim a right to control his existence in both small and great ways. Which gets to the second assumption behind the thinking and desires of the political “nudgers,” that they have the knowledge, wisdom and ability to know better the right choices that people should make for a rational, productive, and meaningful life.
Are not some of these “experts” the same people who were shown in the release of confidential emails a few years ago that they were determined to suppress and professionally bury any scientific evidence that ran counter to their absolute certainty that global warming was man-made and a threat to all living things on Earth?
Are not some of them the same people who have been found occasionally to falsify statistical and related data in their professional articles upon which they attempt to build their academic careers for purposes of position and financial reward?
Are not some of them the same people who before their appointment to positions as an economic advisor or bureaucratic overseer in government may have said that economic theory and historical evidence demonstrates that minimum wage laws tend to cause unemployment by pricing the unskilled or the low skilled out the labor market, but once in those positions of political authority suddenly say that such government regulations have little or none of such negative effects on such workers in general, if that fits in with the ideological and political agenda of those whom they serve in government?
In other words, are they not people just like some of the ones they criticize and “scientifically” sneer at for their claimed “irrationalities” and presumed emotional short-sightedness, for which they say there is only one answer: their guiding hand to dictate or “nudge” the “common man” into the elite’s conception of the “good,” the “right” and the “rational”?
Paternalism on the “Left” and the “Right”
At the same time, too many people believe that the only problem with all this is that the “wrong” individuals have been given such power and authority. Too often both American “progressives” on the political left and political conservatives on the right want government to intervention, regulate and “nudge” people into directions different than the ones they might have peacefully followed if left alone; their only difference being into which direction they want people to be nudged and who they would like to see elected or appointed to do the regulatory restricting, manipulating and controlling.
For too long, too many conservatives have forgotten or chosen to ignore in their quest for political control that once the state is given the responsibility to see that we do the “right thing,” they have no certainty that those empowered to implement the necessary policies will share their values and beliefs. They may be setting up or reinforcing or extending the political institutional mechanisms for the government to undermine the very ideals, values and beliefs you hold most dear when others they don’t like get into power.
It is only in the arena of freedom that individuals can find their own way, guided by their own beliefs, values and purposes without the fear of some others attempting to bend them to a vision, ideal or a meaning for life different to their own.
But to secure the opportunity to live your life and practice the values you consider important, there must be a “first principle.” That first principle must be the right of the individual to his own life, liberty and honestly acquired property without violence or political manipulative interference by the government powers-that-be.
This requires, at the same time, a rejection of the prevailing alternative first principle of modern society: the collectivist premise that the individual is subordinate and subject to the national, ethnic, religious, or social groups or tribes into which accident of birth or circumstances have placed him.
This should be the burning issue and alternatives debated and discussed in an election year: individualism versus collectivism. Instead, the campaign trail is filled with those who are more focused on trying to persuade the electorate on how they, respectively, have the “plan” to set everything right and assure every one of a better life and a happy future.
All of them are implicitly paternalistic “nudgers” and manipulators, merely arguing over how they each would better design society and control various aspects of people’s lives.
- The "Minimum Wage" Surged In 6 Cities Last Year; Then This Happened
Submitted by Jed Graham via Investors.com,
Hiring at restaurants, hotels and other leisure and hospitality sector venues slowed markedly last year in metro areas that saw big minimum-wage hikes, new Labor Department data show.
Wherever cities implemented big minimum-wage hikes to $10 an hour or more last year, the latest data through December show that job creation downshifted to the slowest pace in at least five years.
Liberals fighting for a dramatic increase in the minimum wage have insisted that there would be a negligible impact on job creation. Though the data are preliminary and overly broad, Washington D.C., Oakland, Los Angeles, San Francisco, Seattle and Chicago seem to be finding out that the reality isn’t so benign.
A slowdown in job growth can fly below the radar, at least for those who aren’t seeking low-wage work. But the risk of raising the minimum wage too high became fairly obvious last month, when Wal-Mart (WMT) bolted from Oakland and Los Angeles and scrapped plans for two stores in low-income areas of D.C.
The big shortcoming in the available data for 5 of the 6 cities is that they cover broad metro areas, far beyond the city limits where wage hikes took effect. Still, the uniform result of much slower job growth in the low-wage leisure and hospitality sector, even as the pace of job gains held steady in surrounding areas, sends a pretty powerful signal.
D.C.’s Great Stagnation
The data from D.C. are the most reliable because they are confined to the city limits. The latest data show that job gains ground to a halt in the nation’s capital in 2015, with average monthly leisure and hospitality sector employment in the fourth quarter virtually unchanged from a year earlier. That was a sharp drop from the 3% annual job gains in 2014, meaning restaurants, hotels and other employers went from adding 2,000 jobs to adding zero. That’s no small thing in a city with a 6.6% jobless rate.
The timing coincides with the $1 minimum-wage hike to $10.50 an hour last July. That jump followed a boost from $8.25 to $9.50 an hour that took effect in mid-2014. Another jump to $11.50 is set for this July.
Chicago Hiring Halved
The Chicago area saw its weakest year of leisure-and-hospitality sector job growth since 2009. The Windy City’s $1.75-an-hour minimum-wage hike to $10 an hour took effect in July. Annual employment gains averaged just 1.1% from October through December, less than half the pace seen in 2014.
Chicago’s minimum wage will get another bump to $10.50 an hour on July 1, another stop on the way to $13 by 2019.
The Chicago data cover the Chicago-Naperville-Arlington Heights area, of which Chicago represents only about 40% of the population.
The Bay Area’s Twin Wage Peaks
Leisure and hospitality sector job growth in the Bay Area slumped to a five-year low after San Francisco and Oakland adopted what was, at the time, the highest citywide minimum wage in the country of $12.25 an hour last spring.
Employment gains slowed to just 2.5% from a year ago in fourth quarter, down from 4.7% a year earlier. Meanwhile, such employment rose 4.8% last year in the rest of California, where the minimum wage was generally $3.25 lower — before the $1 statewide hike to $10 on Jan. 1.
Oakland’s minimum wage got an inflation-related bump to $12.55 with the start of 2016. San Francisco’s will jump to $13 in July.
The Bay Area data cover the entire San Francisco-Oakland-Hayward metro area, of which the two cities’ population is one-third.
L.A.’s Red Carpet For Hotel Workers
Los Angeles hotel workers get the biggest minimum wage in the country, but their ranks got slightly smaller in 2015. Accommodation industry employment averaged 0.8% lower in the fourth quarter of 2015 compared to a year earlier, the first annual decline since 2009.
In late 2014, the L.A. City Council mandated that hotels with at least 300 rooms start paying workers a minimum of $15.37 an hour, starting last July. The same wage will apply to workers at 150-room locations this coming July.
That move was separate from the council’s adoption of a $15-an-hour citywide minimum wage by 2020. The wage will rise to $10.50 in July, then $12 in July 2017. Los Angeles County followed the city’s lead and will gradually move its wage to $15 over the same period in unincorporated areas of the county.
The hotel employment data cover all of Los Angeles County, of which the city accounts for about 40% of the population.
Seattle Restaurants Stew
Job gains at Seattle-area restaurants rose just 1.8% from a year ago, down from 4.6% growth a year earlier, in their worst year for employment since 2009. Meanwhile, in the rest of the Washington state, restaurant employment gains accelerated to 6.3%.
Yet Seattle’s minimum-wage hikes were only just getting started. The minimum wage rose last April from the statewide $9.47 to $11 an hour for companies with more than 500 employees. For smaller employers, the minimum got a smaller bump to $10. That rose again to $10.50 at the start of 2016, or $12 for employees who don’t get employer health insurance.
The Seattle-area data cover the entire Seattle-Bellevue-Everett metro, of which Seattle is one-fourth of the population.
* * *
So the real minimum wage is $0 after all…
- P2P Cracks Start To Show As LendingClub Write-Offs Double Forecasts
Peer-to-peer lending is probably a bad idea.
Securitizing peer-to-peer loans is definitely a bad idea.
Despite these virtually irrefutable truths, the P2P industry is thriving and Wall Street’s securitization machine couldn’t be happier about it. As we reported last May, P2P loan volume was set to surpass $76 billion in 2015 and one driver of the boom is demand from the likes of BlackRock, Morgan Stanley, and Goldman, who have all underwritten securitizations of loans originated on P2P platforms like LendingClub, the number one player in the space.
As we noted last summer, P2P loans create the conditions whereby borrowers can refi high-interest debt via personal loans, transferring credit risk from large financial institutions to private lenders in the process.
It’s not entirely clear what the implications of that shift might ultimately be, especially if the market continues to grow rapidly. “One thing,” we said, “is clear”: Using a relatively low-interest P2P loan to pay off a high-interest credit card is no different in principle than using a new credit card that comes with a teaser rate to pay off an old credit card.
In the end, the borrower will very often max out the old card again and thus end up with twice the original amount of debt.
The same dynamic applies to P2P lending. “So what’s to stop consumers from levering their credit cards back up?” Bloomberg asked last year. “Such behavior could spell bad news for investors in P2P loans if an interest rate hike or an unforeseen shock pressures borrowers,” Michael Tarkan, an equities analyst at Compass Point Research said.
“We’ve created a mechanism to refinance a credit card into an unsecured personal loan,” he added. “This may prove to be a superior model, but we just don’t know because it hasn’t been tested yet through a full credit cycle.”
No, we “just don’t know”, but we may be about to find out because a new presentation from LendingClub indicates that the cracks are starting to show. “LC Advisors, an investment adviser owned by LendingClub that helps people buy loans arranged by the company, said last week in a presentation that some of the debt is ‘underperforming vs. expectations,’” Bloomberg wrote on Friday. “A chart on one of the slides shows that write-off rates for a portion of five-year LendingClub loans were roughly 7 percent to 8 percent, compared with a forecast range of around 4 percent to 6 percent.” Here’s the slide in question:
In other words, the algorithms LendingClub uses to assess credit risk aren’t working. Plain and simple.
“Their business is to take data and use that to underwrite risk,” the aforementioned Michael Tarkan told Bloomberg by phone. “If you’re an investor in the loans on the platform, this creates a concern around that underwriting model.”
It sure does, as does common sense. Matching up individual borrowers and lenders may sound like a good idea in principle, but effectively, you’ve got a brand new set of companies (the P2Ps) attempting to assess individual borrowers’ credit risk on the fly in cyberspace, an absurdly difficult proposition and one that obviously comes with myriad risks especially when those credits are sliced up and sold to investors.
Securitizations of these loans are just consumer ABS deals. That is, they’re no different than securitized credit card receivables or the nightmarish deals that emanate from Springleaf and OneMain.
What the slide above shows is that LendingClub is terrible at assessing credit risk. A write-off rate of 7-8% may not sound that bad (well, actually it does, but because P2P is relatively new, we don’t really have a benchmark), it’s double the low-end internal estimate. That’s bad.
Throw in the fact that LendingClub is raising rates “to prepare for a potential slowdown in the US economy” and the fact that 70% of the jobs created by America’s supposedly “robust” labor market are in the food and bev/ retail sector, and you can bet that charge-offs will skyrocket should the US careen into a recession.
Then again, it could be worse for LendingClub investors. The company could be run by Ding Ning.
- Chinese Factory Worker Explains What "The Government Is Most Fearful Of"
No it is not, a slowing economy crippled by 346% in debt/GDP; it’s not the artificially high exchange rate (which was pegged to a dollar when it was plunging during QE1-3 and is now soaring) yet which China can’t aggressively lower either as that would mean a disorderly flight of capital from the mainland; it’s not the feedback loop of plunging commodity prices and highly levered domestic corporation which can not pay their annual interest expense payments; it’s not the recently burst housing bubble; nor is it the burst stock market bubble which recently popped, or the bond bubble which is about to blow; nor is it the country’s non-performing loans, which may be as high $4 trillion.
According to ordinary Chinese workers, i.e., those who know best, what the local government is most fearful of is precisely what we said three months ago is the “biggest and most under reported risk facing China.” From Reuters:
At a printing factory in the western city of Chongqing, a Reuters reporter was present when a local official visited last week to make sure the boss paid his workers before the Year of the Monkey begins.
The official declined to speak with Reuters, although the boss later said it was an attempt to prevent unrest.
“That’s what the government is most fearful of,” said the factory owner, who did not want to be named.
Indeed it is, and all those economic and financial factors, while ultimately leading to social unrest, are secondary: what Beijing is most terrified about is an accelerating to the recent surge in worker anger and increasing incidents of violence.
According to Reuters laborer Fan Fu and 20 or so colleagues working on the Zixia Garden apartment complex in Hebei province have not joined China’s legion of migrant workers returning home to celebrate new year with their families.
Instead, they have camped in the offices of the property developer’s subcontractor, demanding almost a year’s unpaid wages and too angry and proud to go back to native towns and villages empty-handed.
As we warned in November, “with China’s economy growing at its slowest in 25 years, more workers face Fan’s predicament and labor unrest is on the rise, a concern for Beijing as it seeks to avoid social unrest even as financial pressures build.
“The developer has kept using the fact that they have no money as an excuse. As of now they haven’t paid us a single penny,” said Fan, who brought others from his home town in the western province of Sichuan to work on the apartments.
“We really don’t have any other options,” he told Reuters in the subcontractor’s offices, crowded with bedding and personal possessions.
The group had earlier petitioned local authorities for redress and staged protests outside government offices in Qian’an, a city in Hebei in China’s north.
However, while the government will do almost anything to cool tempers, it won’t do what is critical: provide the underpaid workers with what they are owed for the simple reason that China, unlike western nations, simply does not have an established welfare state with features comparable to unemployment insurance. Fan and about 530 other workers on the apartment project are owed paychecks of between 20,000 and 50,000 yuan ($3,000-$7,500). They said the government had offered each non-local laborer 2,000 yuan in cash if they left for the holidays. It was unclear if they would get some extra cash if they never came back.
Angry unpaid workers skip China’s big holiday: https://t.co/jP5UfgR8Zr
— Reuters TV (@ReutersTV) February 6, 2016
One thing is certain: worker anger is building at a torrid pace, and it is only a matter of time before the fury of of millions of angry recently unemployed or unpaid workers spills over on the streets.
As travel ramped up ahead of the holiday, beginning on Sunday, it was not only construction workers who prepared to celebrate with less money in their pockets.
An online survey by the job recruitment company Zhilian Zhaopin said two-thirds of more than 10,000 white-collar workers it surveyed were not expecting Lunar New Year bonuses.
In Dongguan, a city in the southern province of Guangdong known as a manufacturing hub, some factories sit idle behind locked, rusty gates, with advertisements pasted on their walls seeking new tenants.
Some of those still in business were withholding bonuses until after the Lunar New Year, workers, factory owners and recruiters interviewed by Reuters said.
Brothers Zhang Guantian, 23, and Zhang Guanzhou, 21, quit temporary, hourly paid jobs at two plants, one making earphones, the other computer cables, to go home for the holiday.
“It’s hard to find a permanent job now,” said the elder Zhang, while waiting for a bus with two large suitcases.
Still, he is hopeful of finding another job when he comes back to Dongguan in mid-February. “My aim is to find a permanent job after Chinese New Year, something I like. But it will be difficult.”
It will be almost impossible, and soon even those with temporary jobs will be considered lucky.
Finally, Reuters uses a data set first presented on this website, one showing the record surge in labor strikes. Its data show that in December and January, there were 774 labor strikes across China, from 529 in the previous two months, most of them over wage arrears.
Finally, here is why what as recently as three months ago was the “most underreproted risk facing China” is suddenly the most popular topic of coverage among the mainstream press:
- "Back Then I Was A True Believer" – How A Military Officer's Life Changed Forever 13 Years Ago
Submitted by Simon Black via SovereignMan.com,
Thirteen years ago my life changed forever.
Colin Powell, then US Secretary of State and the most credible person in George W. Bush’s cabinet, made the case for war in Iraq on February 5, 2003.
As a young military intelligence officer at the time, watching from a makeshift army base in Kuwait not far from the Iraq border.
Back then I was a true believer, trusting that the government was a force for good “making the world safe for democracy. . .”
But that night it all changed.
Powell told the world unequivocally that Iraq had weapons of mass destruction, an assertion that history has proven categorically wrong.
But within the intelligence community, many people knew the appalling truth immediately.
That night it became clear to me that the government was lying and that the whole case for war was being fabricated.
It was crushing, like finding out everything I’d been told throughout my life was total bullshit.
So for the first time, I broke out of the spell and began questioning. Everything.
I started learning about the extraordinary political power of the military industrial complex that President Eisenhower warned about.
That led me to the fraud of many previous wars going as far as the Mexican War in 1845, one deeply criticized by Abraham Lincoln himself.
That led me to the Constitution, to which all military officers swear an oath to support and defend…
… and it surely didn’t seem like supporting or defending the Constitution in waging an ill-conceived, illegal war.
Needless to say I couldn’t talk to my professional colleagues. Everyone was so gung-ho, I felt like an outcast.
When I returned home, things didn’t improve.
While I was away the country had noticeably turned into a police state.
Yet people seemed oblivious to the change, drinking in the propaganda like a spiked punch bowl.
All the loud, bombastic nonsense and pledges of allegiance were merely illusions masking modern day serfdom.
It was the summer of 2004, I remember hearing on TV that the Libertarian Party’s national convention was starting in Atlanta.
I immediately hopped in the car hoping to find some sympathetic minds.
And at the convention I did meet some wonderful, freedom-minded people.
But the event was an unproductive circus, something like a cross between a high school pep rally and a Star Trek convention.
People in costume ran up and down the aisles chanting for their favorite candidate and getting into impromptu debates about the Constitution and Ayn Rand.
As nice and intelligent as everyone was, it felt like a giant freedom pity party.
I didn’t just want to complain. I wanted to fix it. I wanted to do something about it. And solutions were sorely lacking.
So I started educating myself more.
I dove into the federal balance sheet. I learned about the petrodollar and the debt.
That led me to the complete scam of central banking, fiat currency, and the fractional reserve system.
I realized that the political and banking elite have given us more war, instability, and epic financial crises.
They’ve turned Western civilization into a giant police state. And they’ve managed to brainwash the great masses so effectively that the people are crying out for more.
And after this emotional, gut-wrenching awakening, I spent years traveling to more than 100 countries looking for freedom and opportunity.
Eventually I learned that education, prudent planning, and global thinking can rebuild much of our stolen liberty.
Yes, things are crazy.
Freedom is in decline. Governments are bankrupt. Central banks are borderline insolvent.
The financial system is in precarious condition barely held together by a patchwork of negative interest rates, currency manipulation, and misguided confidence.
We award our most esteemed prizes for intellectual achievement to phony scientists who tell us to spend our way into prosperity and borrow our way out of debt.
We give absolute power to control the money supply (and hence manipulate the price of nearly everything) to unelected bureaucrats who have a track record of failure.
Yet we call ourselves ‘free’.
It’s complete madness. And it gets crazier with each passing month.
But history shows that in any episode of great turmoil, there are always winners and losers.
I learned that by taking some basic, sensible steps, it’s possible to drastically eliminate my exposure to the risks and avoid being a loser.
So no matter what happens or how crazy things get, I know I’ll be OK.
For years I’ve called this my “Plan B”.
I know I won’t be worse off for being able to grow my own organic food, holding some savings in a well-capitalized bank outside of my home government’s jurisdiction, or keeping some physical gold and cash.
Having another passport gives me more freedom to live, work, and travel.
Legally reducing my tax burden helps me vote my conscience with my dollars and put my money where my mouth is.
I’ve learned that all of these steps make sense no matter what happens. Or doesn’t happen.
But should the negative trend in freedom and global finance get worse, I know I’ll be OK.
This confidence has allowed me to focus on all the incredible opportunities I’ve seen.
Institutions that have existed for centuries are now being disrupted by digital technology.
Banking as we know it, for example, is finished thanks to digital technology.
The digital age is even changing the way we organize ourselves as a society.
Geography no longer matters, and nearly everything is global.
A billion people are rising into the middle class in Asia and Africa. Countries are emerging from war and isolation. Wealth and power are shifting.
These extraordinary changes bring extraordinary opportunity.
So as crazy as things are, I think this is an incredibly exciting time to be alive.
I’m grateful to be active in a time that future scholars will likely regard as one of the most tumultuous and revolutionary in history.
And I’m grateful for having started the philosophical journey that began thirteen years ago today.
- A Wounded Deutsche Bank Lashes Out At Central Bankers: Stop Easing, You Are Crushing Us
Ten days ago, when Deutsche Bank stock was about 10% higher, the biggest German commercial bank declared war on Mario Draghi, as we put it, warning him that any further easing by the ECB would only push stocks (with an emphasis on DB stock which has gotten pummeled over the past few months) lower. What it got, instead, was a slap in the face in the form of a major new easing program when the Bank of Japan announced it is unveiling negative rates just three days later.
Which is why overnight a badly wounded Deutsche Bank has expanded its war against the ECB to include the BOJ as well, and in a note titled “The Risks From Further ECB and BOJ Easing” it wants that with the Zero Lower Bound already breached in nearly a third of global markets, the benefits to risk assets from further easing no longer exist, and in fact it says that while central banks have hoped that such measures would “push investors out the risk spectrum” the “impact has been exactly the opposite.”
In other words, we have reached that fork in the road within the monetary twilight zone, where Europe’s largest bank is openly defying central bank policy and demanding an end to easy money. Alas, since tighter monetary policy assures just as much if not more pain, one can’t help but wonder just how the central banks get themselves out of this particular trap they set up for themselves.
Here is DB’s Parag Thatte explaining the “The risks from further ECB and BOJ easing”
The BOJ surprised with a move to negative rates last week, while ECB rhetoric suggests additional easing measures forthcoming in March. While a fundamental tenet of these measures, in particular negative rates, has been to push investors out the risk spectrum, we remind that arguably the impact has been exactly the opposite:
- Declining bond yields have been robustly associated with larger inflows into bonds at the expense of equities. Though a large over allocation to fixed income at the expense of equities already exists as a result of past Fed QEs and a lack of normalization of rates, further easing by the ECB and BOJ that lower bond yields globally will only exacerbate the over allocation to bonds;
- Asynchronous easing by the ECB and BOJ while the Fed is on hold risks speeding up the dollar’s up cycle, pushing oil prices lower and exacerbating credit concerns in the Energy, Metals and Mining sectors. It is notable that the ECB’s adoption of negative rates in mid-2014 which prompted the large move in the dollar and collapse in oil prices, marked the beginning of the now huge outflows from High Yield. These flows out of High Yield rotated into High Grade, ironically moving up not down the risk spectrum. The downside risk to oil prices is tempered somewhat by the fact that they look cheap and look to be already pricing in the next leg of dollar strength;
- Asynchronous easing by the ECB and BOJ that is reflected in the US dollar commensurately raises the trade-weighted RMB and increase the risk of a disorderly devaluation by China. The risk of further declines in the JPY is tempered by the fact that it is already very (-29%) cheap, but there is plenty of valuation room for the euro to fall.
Broad-based move across asset classes towards neutral amidst uncertainties
- US equity fund positioning inched closer to neutral; as anticipated the returning buyback bid is being offset by large persistent outflows (-$42bn ytd);
- European equity positioning is also close to neutral amidst slowing inflows; Japanese funds trimmed exposure from very overweight levels while flows turned negative for the first time in 2 months;
- The large short in US bond futures has started to be cut; 2y bond shorts were cut by half this week while short-dated rates futures are already long. Robust inflows into government bond funds which began this year have continued while the pace of outflows from HY and EM funds has slowed;
- A move toward neutral was also evident in FX positions. The surprise BoJ cut to negative rates caught yen longs by surprise, with the large initial subsequent depreciation in the yen partly reflecting a paring of positions. Meanwhile, the euro rose to a 3 month high as crowded leveraged fund shorts were being covered despite the ECB’s dovish rhetoric;
- As the dollar fell, net speculative long positions in oil rose, reflecting mainly an increase in gross longs while shorts remain at record highs; copper shorts continue to edge back from extremes; gold longs are rising.
Declining bond yields mean larger inflows into bonds at the expense of equities
- A fundamental tenet of central bank easing has been to push investors out the risk spectrum. The impact has arguably been exactly the opposite
- Beyond any negative signal further monetary easing sends on underlying growth prospects, historically falling bond yields with the attendant capital gains on bonds have seen inflows rotate into bonds at the expense of equities. The correlation between equities and bond yields remains strongly positive. Notably, the best period of inflows for equities was after the taper announcement in 2013 when bond yields rose sharply
Large over-allocation to fixed income already
- Past Fed QEs, a lack of normalization of Fed rates and easing by other central banks means that a large over-allocation already exists in fixed income while the underallocation in equities remains massive
- Additional easing by the ECB and BoJ by encouraging inflows into bonds will only exacerbate the over allocation to fixed income
Asynchronous easing behind decline in oil and flight from HY
- Asynchronous monetary easing by the ECB or BoJ while the Fed is on hold puts upward pressure on the dollar, downward pressure on oil prices and heightens credit concerns in the Energy, Metals and Mining sectors
- It is notable that the huge outflows from HY began to the day with the ECB’s adoption of negative rates in Jun 2014. Those outflows from HY moved into HG, ironically moving up not down the risk spectrum
- The risk to oil prices is somewhat tempered by the fact that oil prices are cheap to fair value and look to be pricing in the next leg of dollar strength
Asynchronous easing that is reflected in a higher dollar is reflected commensurately in the trade-weighted RMB
- By virtue of the near-peg to the US dollar, by early 2015 the trade-weighted RMB had risen along with the US dollar by 32% in trade-weighted terms and has been in a relatively narrow range since
- A variety of Chinese economic indicators have been strongly negatively correlated with the US dollar: Chinese data surprises (-42%); IP (-65%); and retail sales (-59%)
Further dollar strength raises the risk of a disorderly Chinese devaluation
- Asynchronous easing by the ECB and BOJ reflected in the US dollar and in turn the trade-weighted RMB increases the risk of a disorderly devaluation by China
- The risk of further declines in the JPY is tempered by the fact that it is already very cheap (-29%), but there is plenty of valuation room for the euro to fall
- The surprise BoJ easing in January prompted a paring of longs, while investors are unwinding short positions in the euro despite dovish rhetoric by the ECB
* * *
A few last words. Since DB, whose CDS has soared to very dangerous levels in recent days suggesting the market is suddenly concerned about its counterparty status, is effectively the Bundesbank, one can make the argument that any incremental easing by the jawboning Mario Draghi during the ECB’s next meeting suddenly looks very precarious.
On the other hand if Draghi once again isolates Weidmann and does cut rates to -0.40% as the market has largely priced in, because the ECB head fulfills the desires of his former employer Goldman Sachs first and foremost, one would wonder if as we speculated last summer Deutsche Bank is not indeed the next Lehman, if for no other reason than Goldman has decided the German financial behemoth should be the next bank to fail, and unleash the next global taxpayer-funded bailout episode.
- Economics Explained (In 1 Simple Cartoon)
“That’s good, right?”
h/t @BrattleStCap
- The Federal Reserve – The Deep State's Central Bank
Submitted by Bill Bonner of Bonner & Partners (annotated by Acting-Man.com's Pater Tenebrarum),
Fighting to Lose
An election has been described as two wolves and one lamb voting on what to have for dinner.
We’re going to make a difference on election day! Or maybe not…
Actually, there was never any doubt about what was on the menu. An election is really when the wolves scrap over who gets the choicest pieces. To bring new readers fully into the picture… It doesn’t matter who won in Iowa. Major policies are not determined by the voters but by the more or less permanent elite who run the government, aka the “Deep State.”
The Fed is an instrument of the Deep State, not of the people. This sounds conspiratorial. But it doesn’t require any hidden agenda or secret handshakes. Most people want power, money, and status. If you can get control over the government – the only institution that can steal and kill, legally – you’ve got it made. That’s why so much money is spent trying to get elected or to influence public policy.
The U.S. presidential campaign has seen surprisingly strong showings from two “outsiders”: Donald Trump and Bernie Sanders. Why? As former Congressional staffer turned Deep State whistleblower Mike Lofgren recently told Bonner & Partners Investor Network editor Chris Lowe, it’s because each in his own way warns voters about the wolves. The insiders, according to Trump and Sanders, are predatory and incompetent.
Bernie and the Donald – voters like them because they are seen as the anti-establishment choices. The press decries them as “populists” and “nutcases”, which means they must be doing something right. As an aside, the European press is completely apoplectic over Trump, to our unending amusement.
But the Deep State is more predatory and less incompetent than it appears. It fights wars, for example, not to win them… but to lose them. The War on Poverty has been going on for more than 50 years. Still no sign of victory. But it has financed countless careers and retirements of government operatives.
The resounding “success” of the so-called “war on poverty” – click to enlarge.
The War on Drugs has raised profit margins for the drug dealers… and for the drug fighters too. But the public has suffered higher levels of violence and billions of dollars in prisons and crime-fighting costs.
Likewise, there are more terrorists now than when the War on Terror was announced – after trillions of dollars were spent and millions of people were killed. The more the U.S. bombs, drones, and bullies… the more people join the fight against it.
George Orwell recognized the principle in 1949 already – these wars were never meant to be won. This is also why we already know that the “war on terror” will never end – and it is one of the greatest threats to individual liberty yet.
The Long Emergency
Why fight wars you intend to lose? Because it suits the Deep State. The wars are just a way of marshaling support for a transfer of wealth and power from fly-over states to the suburbs of Washington, D.C. and New York. That is to say from the public… to the elite. Which brings us back to our beat: money.
When the 2008 financial meltdown came along, the Fed announced what was effectively another war: the War on the Credit Cycle. In a fiat money world, consenting adults are no longer able to set the price of credit. So, the Fed does it for them.
And after 2008, the Fed decided to take the “emergency” measure of dropping short-term interest rates to zero to try to stimulate the economy. But like so many other government programs, it was an intentional failure.
Labor force participation rate vs. federal funds rate – yet another boondoggle in a long list of intentional failures – click to enlarge.
With the labor participation rate now at its lowest level ever, the typical American man is more likely to be unemployed today than at any time in history. The rich have gotten richer; the poor have gotten poorer. (No wonder Trump and Sanders are doing so well!)
And after eight years of the most extravagant stimulus efforts in history, in the last quarter, the U.S. economy grew by just 0.7% – “stall speed” in other words. That too looks like incompetence. But it was really another predatory measure.
By evaporating interest rates, the Fed transferred trillions of dollars from savers on Main Street to the speculators on Wall Street. The bankers got their bonuses. Mission accomplished!
Not another bonus… then again …
A Miracle-Gro Economy
But now, the Fed has put its “credibility on the line,” reported the Financial Times.
That was a shocker; we didn’t think the Fed had any credibility left. But there it was, sitting on the line between higher rates and lower ones.
The PhDs running the Fed are no fools. They know they have not entirely defeated the credit cycle. They only hope to manage it. They know, too, that there are contractions as well as expansions… bear markets as well as bull markets… winter as well as summer.
The idea of raising rates was to get in position before the weather turned cold again. They would need to cut rates again to fight the next downturn. So, last December, the Fed put its credibility on the line. It announced a program of gradual increases that was supposed to bring the short-term interest rates back into their normal range by 2019.
What could possibly happen?
Last year, we argued that this was not going to come to pass as planned. The weird and wonderful plants of the Bubble Epoch had been raised in a hothouse with Miracle-Gro sprinklers on 24/7. Now, the Fed was proposing to shut off the spigots!
Surely this would trigger the very crisis the Fed hoped to avoid. That was always the problem with the “data dependent” path Ms. Yellen announced. If your course depends on numbers rather than principles, you are bound to see some numbers you don’t like. Then you have to react.
And the only possible reaction for the Fed is to reverse course. Besides, its main mission is to protect the Deep State’s finances – the flow of real wealth from you to it. And now we find the world’s elite – the Deep State financiers and economists – planning, explaining, and preparing the world for a U-turn.
An uncanny sense of timing…
Last week, for instance, the Wall Street Journal reported that the Fed was “having second thoughts about hiking rates three or four times this year.”
And yesterday, the Financial Times called Ms. Yellen’s plan to return to normal a “rate rush.”
“Few believe [the Fed] will stick to its plan for more increases this year,” it continued.
Count us among the non-believers.
- North Korea Launches Long-Range Rocket
After “preparing” for over a week, moments ago at 00:31 UTC time, North Korea – which has failed to shock the world with some “news” for over a month when it tested a “hydrogen” bomb which according to experts was anything but – launched a long-range rocket which some say is being used as a cover for banned missile test. North Korea has called the launch an attempt to “peacefully launch a satellite.” Japan, however, is not happy as according to initial reports, it flew over its airspace in proximity to Okinawa.
N. Korea launches long-range rocket https://t.co/bkiKxJUV9P
— Yonhap News Agency (@YonhapNews) February 7, 2016
N Korean missle contrails from this morning’s launch. pic.twitter.com/pcwvGYIzGA
— Brendan C. Vargas (@BrendanVargas) February 7, 2016
#NorthKorea fires long-range rocket. Japanese TVs following flight live. Via @martyn_williams pic.twitter.com/50aiP05S1O
— José Miguel Sardo (@jmsardo) February 7, 2016
NHK image highlighting #DPRK missile. #VOAalert pic.twitter.com/GSBEX7ZWrn
— Steve Herman (@W7VOA) February 7, 2016
NHK live following #DPRK launch. pic.twitter.com/Dns3qvs4yE
— Steve Herman (@W7VOA) February 7, 2016
TBS reporting from just over the border in China close to launch site with video of the N Korea launch contrails.
— Brendan C. Vargas (@BrendanVargas) February 7, 2016
The missile appears to have promptly fallen apart shortly after launch with NHK reporting that three “fallen objects” from missile fell in ocean; 1st object fell in Yellow Sea at 9:37 a.m.; 2nd at 9:39 a.m.; 3rd at 9:45 a.m.: broadcaster NHK
NHK broadcast info from #Japan gov’t on #DPRK missile stages post launch. pic.twitter.com/j3VZ7W5woQ
— Steve Herman (@W7VOA) February 7, 2016
While few care where the NK rocket will end up, most likely deep in the Pacific Ocean (unless it misses it), and according to this graphic the rocket flew wildly off course before crashing…
Graphic via MBN pic.twitter.com/F3MQuaj1Vf
— Christopher Green (@Dest_Pyongyang) February 7, 2016
… a more relevant question is whether Japan will retaliate. As a reminder, about a week ago, Japan’s Self Defense Forces deployed a Patriot missile launcher in downtown Tokyo over the weekend, as North Korea geared up for a missile launch. The launcher, deployed among a maze of high-rise office buildings and parked outside the Ministry of Defense headquarters, would function as a last-ditch defense should a missile head towards Japan’s capital.
For now, there are no signs Japan will engage the NK rocket, even though PM Shinzo Abe, who recently lost his right hand man to the latest Japanese corruption scandal, calls the launch a grave violation:
#Japan PM @AbeShinzo calls #DPRK launch a grave violation. pic.twitter.com/4QCaL7DnPc
— Steve Herman (@W7VOA) February 7, 2016
#Japan gov’t urges public to “remain alert” for further info via radio, TV following #DPRK missile launch. https://t.co/WunAfUQhcD
— Steve Herman (@W7VOA) February 7, 2016
According to some reports, the missile flew in proximity to Japan’s Okinawa, where a major US military base is located. If that is the case, one wonders if the “western” powers are done responding with just words, and if there may be an actual military reaction this time.
South Korea has likewise also issued a diplomatic response:
(URGENT) Park convenes emergency security meeting over N.K. rocket launch https://t.co/GtDsRCdQ1S
— Yonhap News Agency (@YonhapNews) February 7, 2016
#ROK convenes emergency national security council meeting following #DPRK firing of long-range missile. #VOAalert #Korea
— Steve Herman (@W7VOA) February 7, 2016
For now, the most likely outcome is nothing. However, if this launch leads to anything more than another round of harsh language and dire warnings by Japan, South Korea and the US, we will update this post, for now however, here is an artist’s rendering of a happy Kim Jong Un during today’s launch
- Ukraine Bonds Crash After Economy Minister Resigns Over "High-Level Corruption"
While the rest of the world's bond yields are collapsing and prices soaring (as NIRP sweeps the globe), Ukraine's 'young' implicitly-US-taxpayer-backed bonds have plunged to record lows. The reason – aside from simply disturbing economics…
…is, as The FT reports, the dramatic resignation of the economy minister accusing a senior presidential ally of blocking his attempts to root out graft and stymieing his plans for reform. Abromavicius exclaimed, of the Washington-installed elite at Kiev's heart, "I realised there is an intention to unwind the process of making all of this transparent."
Speaking in Kiev, Aivaras Abromavicius said he had no desire “to serve as a cover-up for covert corruption, or become puppets for those who, very much like the old government, are trying to exercise control over the flow of public funds”.
Ukraine already ranked dismal last among European nations for Corruption (rubbing off from its Washington overlords?)
As The FT details, Mr Abromavicius also made an acid reference to his presentation on behalf of Ukraine at the annual gathering of economic and business luminaries at the world economic forum in Switzerland, saying:
“I am not willing to travel to Davos and talk about our successes to international investors and partners, all the while knowing that certain individuals are scheming to pursue their own interests behind my back.”
Mr Abromavicius is the highest-profile departure so far from Ukraine’s governing coalition, which is struggling to deliver on the promise of the pro-European Maidan revolution that brought it to power two years ago.
As the government has floundered, many Ukrainians have come to fear a repeat of the Orange revolution a decade earlier, when infighting and corruption dashed similar hopes.
Widespread anger at entrenched corruption and the slow pace of reform is sparking calls for early elections — yet the results could jeopardise attempts to implement reforms agreed under the country’s $40bn rescue package, led by the International Monetary Fund.
The upheaval is also threatening the peace process in eastern Ukraine, which also requires Petro Poroshenko, the president, to push unpopular measures through a hostile parliament.
Mr Abromavicius told the Financial Times he decided to resign after his attempts to restructure Ukraine’s state-owned companies ran into resistance from powerful figures with vested interests.
“We just hit a wall recently,” Mr Abromavicius said. “We have come to a point where, unfortunately, the technocrats within the government are simply no longer needed.”
And the result is a further loss of faith in the Washington-installed elite as the youngest bonds plunge to record lows…
And as The FT concludes, Abromavicius' allegations are already reverberating among the western allies on whom Ukraine depends to avoid default and stave off Russian pressure.
A group of ambassadors, including those representing the G7 nations, released a joint statement echoing his concerns, saying: “It is important that Ukraine’s leaders set aside their parochial differences, put the vested interests that have hindered the country’s progress for decades squarely in the past, and press forward on vital reforms.”
Mr Poroshenko’s reticence has particularly worried Washington, which has asked him to fire the prosecutor-general several times and threatened to make further financial support conditional on progress against corruption.
But a senior Ukrainian official said the allegations of Mr Abromavicius were likely to lead to a broader government reshuffling rather than early elections, despite constant political infighting.
“At the very least, Poroshenko is deaf to information about corruption. He will only act when society forces him to do it,” said Serhii Leshchenko, a critical MP in his party.
Balazs Jarabik, a visiting fellow at the Carnegie Endowment for International Peace, said western policymakers were also likely to back Ukraine’s coalition due to fears over Russian pressure and the country’s economic fragility. “If you push too hard, this country may not stand,” he said.
- You Get What You Deserve
- How Did The World Get This Way?
Submitted by Jeffrey Snider via Alhambra Investment Partners,
How did the world get this way? I don’t mean the oncoming recession, if that is indeed, as it appears, the economy’s fate. How did the payroll statistics ever attain this kind of deference and even religious zeal?
U.S. manufacturing is shrinking, corporate profits are declining and goods are piling up on warehouse shelves. Those trends have elevated concern that a U.S. recession may loom in the next year or two.
Yet in the one area that matters most, the economy has continued to shine: Hiring.
Those two paragraphs are at extreme odds with each other, so much so that they are mutually exclusive. It cannot be both. Forced to choose, the media and economists pick the latter every time no matter how much of the former forces its way into the analysis (and not voluntarily). It makes no sense for today but perhaps more meaningfully it hasn’t meant anything this whole time. Hiring has supposedly been robust all throughout the past two years and still “manufacturing is shrinking, corporate profits are declining and goods are piling up on warehouse shelves.” There can be but unbreakable ideology to the blindness.
That is visited on the other side of this equation, too. By that I mean the financial and what is ailing the global version of related US malaise. Here, too, convention and orthodoxy prevents full recognition in favor of debt, debt and more debt – the very death trap of monetarism.
Beneath the surface of the global financial system lurks a multitrillion-dollar problem that could sap the strength of large economies for years to come.
The problem is the giant, stagnant pool of loans that companies and people around the world are struggling to pay back. Bad debts have been a drag on economic activity ever since the financial crisis of 2008, but in recent months, the threat posed by an overhang of bad loans appears to be rising. China is the biggest source of worry. Some analysts estimate that China’s troubled credit could exceed $5 trillion, a staggering number that is equivalent to half the size of the country’s annual economic output.
This analysis continues without ever asking how all that happened to begin with; where did all the debt and deference to banking come from and how did it get there? The main economic commentator at the New York Times preaches nothing but credit-based “demand” from every single economic outlet any government or central bank might be able to reach (and a great deal more that he would prefer they just co-opt and direct should any resistance be exercised). Debt is the tool of the statist monetarist, so it is a little late now for someone inside the orthodoxy to suddenly attain conscious awareness.
The idea that you can fix bad debt with more debt is as prevalent as the idea that the US economy can be binge hiring while careening into recession. What’s truly sad is that those two mistakes are really, at root, the same. The road ahead to real recovery and sustainable growth starts with “unlearning” monetarism. It is a huge task.
Furthermore, and I write this with increasing frequency, you would think the current problems would be easily and obviously recognizable to any such orthodox persuasion. Collapsing commodities, inability with and even zero “inflation”, only further economic questions and indications of recession; all those add up in traditional format of declining “money supply.” Thus, even if more debt actually were a good idea (and it’s not), there isn’t any way to actually do it. Such enormous piles of bad debt are only serviceable under rapidly expanding money growth; the useless byproducts of QE, or what the Fed calls bank reserves, are nothing of the required monetary component. If money growth is declining then that means all that past debt never created the economy as was intended; without that economy, there will only be less “money.”
For the immediate future, that starts with the curves and RHINO. There is only more trouble lurking there under exactly those terms.
- 65,000% Spike In Reported Radioactivity After Tritium Leaks At Indian Point Nuclear Power Plant
Two years after being fined for falsifying safety records, nine months after a transformer exploded at the Indian Point Nuclear Reactor just 37 miles from midtown Manhattan, and two months after Entergy – the plant’s operator – shut down the Unit 2 reactor after a major power outage cut power to several control rods (when the company assured that no radioactivity was released into the environment), this afternoon NY Governor Andrew Cuomo said he learned that “radioactive tritium-contaminated water” had leaked into the groundwater at the nuclear facility in Westchester County.
Cuomo, in a letter Saturday to the state Health Department and the Department of Environmental Conservation, called for the probe into the Indian Point NPP after he said Entergy, the plant’s owner, reported “alarming levels of radioactivity” at three monitoring wells, with one well’s radioactivity increasing nearly 65,000 percent.
It is unclear if the facility was taking a page out of the Fukushima “crisis response” book, or was being honest when it said that the contamination has not migrated off site “and as such does not pose an immediate threat to public health.” For the sake of millions of downriver New Yorkers, we hope it was the latter.
From Cuomo’s statement:
“Yesterday I learned that radioactive tritium-contaminated water leaked into the groundwater at the Indian Point Nuclear facility. The company reported alarming levels of radioactivity at three monitoring wells, with one well’s radioactivity increasing nearly 65,000 percent. The facility reports that the contamination has not migrated off site and as such does not pose an immediate threat to public health.
“Our first concern is for the health and safety of the residents close to the facility and ensuring the groundwater leak does not pose a threat.
“This latest failure at Indian Point is unacceptable and I have directed Department of Environmental Conservation Acting Commissioner Basil Seggos and Department of Health Commissioner Howard Zucker to fully investigate this incident and employ all available measures, including working with Nuclear Regulatory Commission, to determine the extent of the release, its likely duration, cause and potential impacts to the environment and public health.”
The Governor’s letter directing Acting Commissioner Seggos and Commissioner Zucker to their begin investigation can be viewed here. The text of that letter is also available below:
Despite Indian Point’s denial that the contamination has migrated off site, Cuomo said that the incident requires a full investigation.
There was no immediate comment from Indian Point on the situation, Lohud reported.
The plant, located in Buchanan, NY which supplies about 30 percent of the energy to New York City, has been under increased scrutiny from Cuomo’s office, and the Democratic governor supports closing the plant, even as he supports keeping open two other upstate nuclear facilities.
In December, Cuomo ordered an investigation into Indian Point after a series of unplanned shutdowns, citing its risks being just outside the city and in the populated suburbs.
Cuomo said the “latest failure at Indian Point is unacceptable” adding that the DEC and health department should “employ all available measures, including working with Nuclear Regulatory Commission, to determine the extent of the release, its likely duration, cause and potential impacts to the environment and public health.”
In other words, nothing will change.
Which is probably why such failure escalations, which lead to a lot of verbal jawboning and shuffling of papers and nothing else, will continue until one day the failure leads to tragic consequences and everyone will say how nobody could have possibly seen this coming.
* * *
Cuomo’s full letter directing Acting Commissioner Seggos and Commissioner Zucker to their begin investigation can be viewed here. The text of that letter is also available below:
Dear Commissioners Zucker and Seggos:
I am deeply concerned to have learned that radioactive tritium-contaminated water has recently leaked from operations at the Entergy Indian Point Energy Center (Indian Point) into groundwater at the site. This is not the first such release of radioactive water at Indian Point, nor is this the first time that Indian Point has experienced significant failure in its operation and maintenance. This failure continues to demonstrate that Indian Point cannot continue to operate in a manner that is protective of public health and the environment.
The levels of radioactivity reported this week are significantly higher than in past incidents. Three of forty monitoring wells registered alarming increases. In fact, one of the monitoring well increased nearly 65,000 percent from 12,300 picocuries per liter to over 8,000,000 picocuries per liter.
Our first concern is for the health and safety of the residents close to the facility and ensuring the groundwater leak does not pose a threat. As such, I am directing you to fully investigate this incident and employ all available measures, including working with Nuclear Regulatory Commission, to determine the extent of the release, its likely duration, its causes, its potential impacts to the environment and public health, and how the release can be contained. We need to identify whether this incident could have been avoided by exercising reasonable care. We also need to know how a recurrence of this episode can be avoided by specific steps that Entergy should be taking.
Please report back at the completion of the investigation.
Sincerely,
ANDREW M. CUOMO
- The Mechanics Of NIRP: How The Fed Will Bring Negative Rates To The U.S.
Over one year ago, when the “conventional wisdom” punditry was dreaming up scenarios in which the Fed could somehow hike rates to 3% and in some magical world where cause and effect are flipped, push the economy to grow at a comparable rate we said that not only is the Fed’s tightening plan going to be aborted as it represents “policy error” and tightening in the middle of a global recession, but it will result in the Fed ultimately cutting rates back to zero and then, to negative.
Gradually the market is agreeing with us, and as the following chart shows, the probability of a negative 3 month Libor rate in 2 years has risen to 10%.
It is also why, as we showed earlier, the bets on NIRP within two years have spiked in recent months, in what is the “shadow market crash” trade du jour.
* * *
So now that talking about NIRP in the US is no longer anathema but a matter of survival for market participants for whom frontrunning the Fed’s policy failure has emerged as a prerequisite trade, the question is: what are the mechanics of NIRP, what are the implications of negative rates for US markets.
Here is the handy answer courtesy of Bank of America’s Marc Cabana
Mechanics of negative rates
Negative interest rates have generally been employed after a central bank has already lowered their deposit rate to zero and they either desire to (1) further ease monetary policy to fight the growing threat of deflation, i.e. ECB, BoJ, Riksbank policies, and / or (2) reduce capital inflows that were resulting in undesired currency strength, i.e. SNB and DNB policies.
To implement negative rates, central banks set their “deposit rate” or rate at which banks can deposit funds with monetary authority at a negative level. This results in banks paying a fee for holding their reserves with the central bank. Most countries that have adopted negative rates do not apply them to required reserves but only apply them to all or some of the deposits at the central bank, Table 1.
So why don’t banks holding excess reserves just move them off of their balance sheet via lending or asset purchases to avoid the fee? Recall, monetary policy generally runs through a closed system and the central bank is the only entity that can permanently change the amount of reserves outstanding. Funds loaned by one bank or used to purchase securities will eventually end up re-deposited at another, which means that reserves can only be re-allocated within the system but not independently withdrawn from it. Banks could convert their excess reserves to cash but storage costs generally make this unattractive unless rates are deeply negative.
Taking rates negative in the US
To implement negative interest rates in the US, the Fed could utilize the overnight reverse repo facility (ON RRP) and interest rate on reserves. These tools could potentially shift the fed funds effective into negative territory, though the amount of negative fed funds trading would likely depend on the cost of holding reserves.
ON RRP: If the Fed desired to take rates negative they could set the ON RRP rate below zero or temporarily suspend the facility. Setting the ON RRP rate below zero would lower the “soft floor” it establishes on interest rates and likely shift lower levels on other money market instruments. It is also possible that the Fed could temporarily suspend the ON RRP facility, which would move money market rates lower as money funds and GSEs would no longer have a backstop investment option at the Fed. We guess that the Fed would maintain the ON RRP facility in a negative rate environment since they would likely view any period of negative rates as temporary and set the ON RRP rate at 20 to 25 basis points below IOER. Note that the Fed did not see the existence of the ON RRP and the temporary reserve draining that it provides as contradicting prior periods of expansionary monetary policy accommodation, Chart 2 (the ON RRP was used for “testing” purposes at that time).
Interest on reserves: The Fed could also lower the interest rate on required (IORR) and excess reserves (IOER) to below zero. The Board could choose to move these rates below zero in tandem or move them in an asymmetric manner. For example, the Board could keep the IORR rate at zero in order to avoid an explicit tax on required bank reserve holdings while moving the IOER rate to a negative level. This is the case in Europe, where required reserves are remunerated at the MRO rate of +5 basis points, with reserve holdings in excess of required subject to the -30 basis point rate.
In all likelihood, the Fed would only take the IOER rate negative and leave the IORR rate at zero. If the Fed were to adopt such an approach before it begins the process of winding down its balance sheet, it would be subjecting nearly $2.3 trillion in excess reserves to negative rates, Chart 3. Assuming the Fed took the IOER rate to negative 10 basis points, this would result in an annual cost to those holding excess reserves of nearly $2.3 billion. In order to limit the costs, the Fed could consider exempting a certain amount of excess reserves by institution similar to the policies of the BoJ, SNB, and Danish central bank. However, negative interest rates would be yet another cost to holding reserves in addition to the FDIC assessment fee for domestic banks and SLR for large banks.
Fed funds target: The Fed could also work to set a target range for the fed funds effective below zero. At present, fed funds trading is driven largely by Federal Home Loan Bank (FHLB) lending as they seek to earn a higher rate on their cash versus what can be provided on overnight deposit with banks, in the ON RRP, or in their non-interest bearing account at the Fed. In a negative rate environment, FHLB activity in the fed funds market would likely depend on the cost of keeping funds with banks or at the Fed. If banks or the Fed charged FHLBs on their account holdings, the FHLBs might still be willing to lend funds at rates where other banks would find it profitable to engage in fed funds – IOER arbitrage, even at negative rates. However, if banks or the Fed did not pass along such charges, there would be little incentive for the FHLBs to sell funds below zero and volumes would decline from their already low level of around $50 billion per day.
What are the Implications of negative rates
Negative rates would shift the structure of interest rates lower which should theoretically be stimulative by lowering borrowing costs. In the US, we would expect Treasury bills to trade at negative levels and for rates on other money market instruments to decline. Negative rates have indeed been effective at shifting broader interest rates lower, with yields on German and Japanese sovereign debt trading negative out the 7 year tenor and Swiss government debt trading negative out to 15 years. While it is difficult to separate the effects of negative interest rates from increased forward guidance or asset purchase expectations, negative rates are effective at removing a lower bound that investors may have once believed to be a floor.
Despite the declines in interest rates, our European colleagues have found mixed evidence of the negative rate impact on lending conditions. Their findings suggest that banks may try to offset the negative deposit rate impact on their profitability by raising loan borrowing costs.
Negative rates also weaken the domestic currency which should be stimulative for the export sector. There is clearer evidence that negative rates serve to weaken domestic exchange rates when they are applied to stimulate growth and boost inflation, as in the case of the BoJ, ECB, and Riksbank,Table 2. Foreign exchange rates are inherently relative so if the US were to move rates into negative territory it would likely cause the dollar to weaken, though this might only be temporary if other central banks responded by further lowering their policy rates below zero.
Negative rates would likely hurt bank profitability given an increased pressure on net interest margins. Assuming the Fed does not cut rates this year, US banks are expected to benefit from over $12 billion in interest on reserves payments. In a negative rate environment, banks would be reverting payments to Federal Reserve and they also might be reluctant to pass negative borrowing costs along to their retail depositors. Additionally, there is no guarantee that banks would increase lending given lower spreads across its loans. Charges or fees on smaller retail depositors would likely be avoided for as long as possible, though it may be difficult to avoid explicit deposit charges depending on the extent of negative rates. In Europe, many banks have applied fees for large corporate account deposits and some have also extended fees to retail deposits, especially where rates are more deeply negative, such as Switzerland and Denmark.
Negative rate complications in the US
Negative rates would present a variety of challenges in the US, especially for the functioning of money markets and money market mutual funds. The US Treasury would also likely need to adjust their auction systems to allow for bill and nominal coupon offerings to close above par. There could also be shifts in savings and payment behavior to avoid potential costs from negative rates.
Money markets and implications for money funds
Federal Reserve officials have often noted concerns over money market functioning when discussing negative rates. However, the Fed’s thinking on this issue has likely shifted over recent years as negative rates abroad have generally not been associated with broad strains in money market functioning. The Fed has also questioned whether the infrastructure underlying securities transactions in the US could readily adapt to negative interest rates in trading, settlement, and clearing systems. We believe that the Fed will work with industry participants to address some of these technical issues before taking rates negative, though they would probably like to see rates higher before seriously engaging in these discussions to avoid signals about near term policy.
Another complication of negative rates is the $3 trillion money fund industry and its ability to operate in such an environment. Money funds struggled to offer low positive yields over recent years and cut their fees in order to retain business amidst low frontend rates, Chart 4 & Chart 5. Should money market rates decline further, it is likely that the majority of money funds would be challenged to generate positive returns even if weighted average maturities or lives were extended to their full 60 or 120 day maximums. To deal with low returns, money funds could consider charging customers, reducing management fees, seeking subsidies from fund sponsors, or closing their doors.
Negative rate impacts on money fund asset totals would likely depend on what alternative investment options were yielding. Investors in government money market funds would likely only consider withdrawing their funds only after comparing money fund rates to other alternatives, such as bank deposits or negative yielding Treasury bills. Similarly, investors in prime funds might compare the liquidity and convenience of money funds to what could be provided by investing directly in low-yielding CD or commercial paper markets.
Although negative rates have posed challenges for the $1.15 trillion (€1.04 trillion) in European money funds, the industry has adapted. European money fund assets have increased since the fourth quarter of 2013 even as ECB deposit rates went negative, Chart 6. European money funds have responded to the challenging rate environment by taking their yields negative. In January, the Institutional Money Market Fund Association euro prime and government money fund 7-day averages yielded negative 17 and negative 43 basis points, respectively. To apply this, some European money funds employ “reverse stock splits” or “reverse distribution mechanisms” where outstanding shares in the fund are gradually reduced to reflect the negative yield. Some European funds have also applied explicit customer charges as a result of negative yields. Both mechanisms allow European money funds to generate management fees while rates are negative.
US money funds might consider applying similar mechanisms in a negative rate environment. However, there would likely be numerous legal questions and substantial amendments to pre-existing fund documentation in order to apply such terms. If such changes were not possible, money funds might need to receive sponsor support or consider closing their doors. Any large shifts out of money funds would risk meaningful disruptions to typical intermediation channels, given that corporates and financial firms are beneficiaries of more than $1 trillion in existing prime fund investments. Any permanent shrinkage in money fund assets could also complicate the Fed’s eventual exit strategy and diminish the importance of the ON RRP facility, where money funds are the largest participants.
Negative Treasury rates and elevated auction demand
Negative Fed policy rates would place further downward pressure on Treasury yields, increase the scope of issues trading below zero, and likely necessitate changes to US Treasury Department auction systems to allow bill and nominal coupon offerings to close above par. Treasury auction rules do not allow for issuance of bills or nominal coupons at negative rates. According to current rules, in the event that bills or nominal coupons are auctioned at par, auction participants are awarded a pro-rata share of their bid amount for the issue. This results in elevated bid-to-cover ratios when issues are expected to trade negative in the secondary market, as auction participants are incented to overbid, expecting that their ultimate allocation will be pared back, Chart 7. Current auction rules effectively amount to a subsidy for auction participants when issues are trading at negative rates, since auction participants pay the Treasury par but can then quickly sell in the secondary market at a premium. Should the Fed adopt a negative rate policy, we expect that Treasury would work to quickly update its auction systems to capture this implicit subsidy.
Note that similar auction issues do not apply to all Treasury securities, as TIPS can be issued at a negative yield while floating rate notes (FRN) can be auctioned with negative discount margins and issued at a premium. Since TIPS and FRNs have floors on the indexed or floating-rate portion of their issues, investors will not be required to make periodic payments to Treasury during periods of deflation or with negative bill rates.
Shifts in systems and payment behaviors
New York Fed researchers have written about shifts in savings and payment behavior to avoid potential costs from deeply negative rates. Should rates move substantially below zero and banks begin to charge depositors, it is possible that cash vault holdings would increase or that special banks could be formed to store physical currency. Consumers and businesses might also seek to pre-pay credit card, account payable, or tax bills in order to reduce their cash holdings. Similarly, those who are expecting payments from creditworthy entities might prefer to defer them while those receiving checks might wait longer periods before depositing them. We do not expect the Fed would find such behavioral shifts particularly productive and might view them as an additional cost to negative interest rates. However, these behavioral shifts have yet to meaningfully manifest themselves in Europe and it may require an environment of more deeply negative interest rates before they emerge.
- Why The Bulls Will Get Slaughtered
Submitted by David Stockman via Contra Corner blog,
Well, they got that right. Detecting that “parts of the U.S. jobs report for January seem fishy”, MarketWatch offered this pictorial summary:
Needless to say, none of that stink was detected by Steve Liesman and his band of Jobs Friday half-wits who bloviate on bubblevision after each release. This time the BLS report actually showed the US economy lost 2.989 million jobs between December and January. Yet Moody’s Keynesian pitchman, Mark Zandi described it as “perfect”
Yes, the BLS always uses a big seasonal adjustment (SA) in January – so that’s how they got the positive headline number. But the point is that the seasonal adjustment factor for the month is so huge that the resulting month-over-month delta is inherently just plain noise.
To wit, the seasonal adjustment factor for the month was 2.165 million. That means the headline jobs gain of 151k reported on Friday amounted to only 7% of the adjustment amount!
Any economist with a modicum of common sense would recognize that even a tiny change in the seasonal adjustment factor would mean a giant variance in the headline figure. So the January SA jobs number cannot possibly reveal any kind of trend whatsoever—-good, bad or indifferent.
But that didn’t stop Beth Ann Bovino, US chief economist at Standard & Poor’s Rating Services, from dispatching the usual all is swell hopium:
“Today’s numbers are about momentum, so while 151,000 new jobs in January is below expectations and off pace from prior months, the data shows America’s recovery is continuing.
Amid all the global economic turmoil and domestic market gyrations, positive job growth, the drop in the unemployment rate to 4.9%, and the uptick in wages show the U.S. is heading in the right direction.”
Actually, it proves none of those things. For one thing, the January NSA (non-seasonally adjusted) job loss this year of just under 3 million was 173,000 bigger than last January—-suggesting that things are getting worse, not better. In fact, this was the largest January job decline since the 3.69 million job loss in January 2009 during the very bottom months of the Great Recession.
So are we really “heading in the right direction” as claimed by Bovino, Zandi and the rest of the Cool-Aid crowd?
Well, just consider two alternative seasonal adjustment factors for January that have been used by the BLS in the last five years. Had they used the January 2013 adjustment factor this time, the headline gain would have been 171,000 jobs; and had they used the 2010 adjustment factor there would have been a headline loss of 183,000 jobs.
We could say in a variant of the Fox News motto—–we report, you decide. But believe me, you can look at years of seasonal adjustment factors for January (or any other month) and not find any consistent, objective formula. They make it up, as needed.
Likewise, you would think anyone paying half attention would realize by now that the 4.9% official unemployment rate (U-3) is equally meaningless due to the vast number of workers who have exited the “labor force”. In a nearby post, Jeff Snider puts this in perspective by juxtaposing the bottom dwelling trend of the adult employment-to-population rate with the U-3 headline.
His graph makes plain as day that when the U-3 unemployment rate dropped in the past, it was logically correlated with a rising share of the civilian population being employed; and that 5% or better unemployment usually meant a 63-64% employment ratio for the civilian population.
Since the financial crisis of 2008, however, that correlation has broken down completely, and the ratio still has not risen above 59.5%. Yet given the 250 million adult population today, it would take about 10 million more jobs than reported on Friday to achieve the reported 4.9% unemployment rate at the historic 63.5% employment ratio.
The larger point is that the monthly jobs report has now become the essential vehicle for propagating a false recovery narrative that serves the interest of Wall Street and Washington alike.
Month after month the artificially concocted and misleading headline jobs number is used to drive home a comforting meme. Namely, that the nightmare of the financial crisis and recession is fading into the rearview mirror; that the Fed and Washington have fixed the underlying ills, for instance, via Dodd-Frank; and that the soaring values of stocks and other financial assets since the March 2009 bottom are real, sustainable and deserved.
In that context, Obama’s crowing about the alleged success of his economic policies, as evidenced by the 4.9% unemployment rate reported on Friday, was especially annoying. You might have thought that the former community organizer would have noticed that notwithstanding the unfailing appearance of improvement in the BLS charts that prosperity does not seem to be trickling down.
Food stamp participation rates are the still the highest in history, and bear no resemblance to where these ratios stood during earlier intervals of so-called full employment. In a word, 4.9% unemployment can’t be true in a setting where the food stamp participation rate is nearly 15%.
Nor did he mention the “good jobs” aspect of the usual Washington blather about employment. The chart below is the reason why. There has been no recovery in the number of full-time, full-pay jobs since the pre-crisis peak.
On the margin, the US economy swapped-out 1.4 million manufacturing jobs for only a slightly higher number of waiters and bartenders. Never mind the fact that the average manufacturing job pays $55,000 on an annualized basis compared to less than $20,000 for gigs in restaurants and bars.
We have previously called this the bread and circuses economy, and the January numbers once again did not disappoint. Nearly one-third of the 151,000 gain for January was in this category alone. Moreover, the 1.83 million job gain in this sector since the December 2007 pre-crisis peak accounts for 38% of all the net new jobs generated by the entire US economy during that period.
Another large—–and aberrant—–chunk of the January jobs gain was in retail. Consistent with normal post-holiday patterns the NSA count of retail sector jobs dropped from 16.3 million in December to 15.7 million in January, representing a loss of nearly 600,000 jobs.
You could call that par for the seasonal course, but you would be wrong. In defiance of all logic, the BLS seasonally adjusted the number into a gain of 58,000, thereby accounting for another one-third of the headline total.
Nor is this a one month aberration, either. When you combine the leisure and hospitality category of the nonfarm payroll with retail, temp agencies, personal services like gardeners and maids etc., you get a larger subset that we have labeled the Part Time Economy.
Not only did it account for well more than half of the of the January gain, but also a similar portion of the eight-year peak-to-peak gain since December 2007. That is, the US economy has generated 4.875 million additional nonfarm payroll jobs since we were at 5% unemployment last time around.
But as is evident from the graph, nearly 2.6 million or 53% of these gains represented part-time jobs. On an income equivalent basis, however, the payroll slots amount to a 40% job. Most of them a generate less than 25 hours per week and pay rates of less than $14 per hour. So on a full year equivalent basis that is an annualized pay rate of $20,000 per year compared to $50,000 for full time jobs, or what we have labeled as the Breadwinner Jobs category.
Needless to say, we are still not there yet when it comes to full-pay, full-time jobs. There are still a million fewer of these jobs today than there were at the pre-crisis peak. And nearly 2 million fewer than when Bill Clinton was vacating the White House back in January 2001.
At the end of the day, the monthly jobs report is an economic sideshow. The nonfarm payroll part of it, in particular, is a relic of your grandfather’s economy when most jobs represented 40-50 hours per week of paid employment on a year round basis.
You could compare both short-term changes and longer-term trends because jobs slots where pretty much apples-to-apples units, and the BLS had not yet invented most of the insane trend-cycle modeling manipulations and dense and obscurantist birth/death and seasonal adjustment routines that have turned the report into quasi-fiction.
As I have suggested before, the world would be far better off if they simply shutdown the BLS. There are already far more timely, accurate and honest price and inflation indices published by a variety of private sources.
And if we need aggregated data on employment trends, the US government itself already publishes a far more timely and representative measure of Americans at work. It’s called the treasury’s daily tax withholding report, and it has this central virtue. No employer sends Uncle Sam cash for model imputed employees or for 2.1 million seasonally adjusted payroll records that did not actually report for work.
Stated differently, the daily tax withholding report is the real thing and the whole thing; it captures the labor input of the entire US economy in real time, and does not get revised and manipulated endlessly over the course of months and years from its original release.
Why is this important. My colleague Lee Adler has been tracking the daily withholding reports for more than a decade and knows their details and rhythms inside-out. He now reports that tax collections are swooning just as they always do when the US economy enters a recession.
In fact, he latest report as of February 6th indicates that,
“The annual rate of change in withholding taxes has shifted from positive to negative. It has grown increasingly negative in inflation adjusted terms for more than a month. Following on the heels of a weak December, it is a clear sign that the US has entered recession……..the implied real growth rate is now roughly negative 4.5% per year……it is the most negative growth rate since the recession. It follows the longest stretch of zero growth in several years, This can no longer be considered temporary or an anomaly. It has all the earmarks of a trend reversal and is getting worse.”
We will have more on this next week, but here’s the thing. Wall Street’s fast money boys and girls and robo-machine’s will have the mother of all hissy fits when it becomes apparent once again that the US is plunging into recession, and that all those sell-side hockey sticks on corporate earnings will be going up in smoke.
The talking heads have spent the entire first five weeks of this year insisting that the market’s rough patch is simply the pause that refreshes because there is never a bear market outside of recession.
Well, exactly. The recession is arriving; the bear market has incepted; and the bulls are heading for the slaughter. Again.
- "Folly For The Ages": After Buying Back 63 Million Shares At $83, Hess Just Sold 25 Million Shares At $39
Having long mocked the sheer idiocy of using organic cash or worse, debt proceeds, to fund buybacks just so management can eek out a few more million in equity-linked compensation while activists enjoy a few extra points in P&L on the back of naive bondholders managing ‘other people’s money’, we were delighted to see the buyback bubble begin to burst in the middle of 2015 starting with Michael Kors (as detailed in “When Stock Buybacks Go Horribly Wrong“) and Monsanto (“When Buybacks Fail…”), when each respective stock plunged far below the average buyback price.
But nothing compares to what Hess did yesterday.
A quick recap: back in 2013, when it was trading at a discount to its peers, Hess became the target of an activist campaign led by Paul Singer’s Elliott Management who demanded a quick boost in the stock price, as a result of which the energy producer decided to exit its refining business (arguably the only line of business that would have benefited from the current depressed oil price) while not only raising its dividend but also authorizing a $4 billion share buyback.
The company then boosted its buyback further with proceeds from the sale of its retail gas stations (for $2.9 billion) while growing its debt by $1 billion from 2013 to 2015, leading to the repurchase of a total of 62.7 million shares through the end of 2014 at an average price of $83.
The stock price reacted as expected: it soared past $100 from below $60 before Elliott turned up. It then continued to spend more billions under additional buyback all the way through the third quarter of 2015, which however took place just as the worst oil downturn in history was taking place. The full history of Hess’ stock buybacks is shown below.
And then the stock crashed, as investors finally realized that plunging oil, sliding cash flow and surging debt meant the company found itself in a life and death fight for survival.
Which brings us to yesterday, when in an attempt to shore up liquidity and avoid halting its dividend, Hess sold 25 million shares at a price of $39/share: a 10% discount to the prior closing price.
As Reuters puts it, the “Hess folly is one for the ages.”
The silver lining? Unlike before, when Hess’ weak management team was kicked around by a hedge fund, at least it is being proactive now and scrambling to preserve its business even it means huge pain and dilution for shareholders.
The company ended 2015 with $2.7 billion in cash and a big revolving line of credit it hasn’t dipped into yet. Capital just raised will push net debt from 5.4x EBITDA to below four times, according to Cowen estimates. That should allow Hess to keep investing in future production and pay dividends. If oil remains at $30, however, it has just bought itself a few quarters of time.
Still, that does not absolve management of pandering to a vocal shareholder: if instead of spending billions on buybacks Hess had done the right thing and saved the cash, it would not only have avoided the wild swings in the stock price which rewarded just activist investors while punishing long-term holders, and have a far bigger war chest to defend itself from $30 oil.
The bottom line: Hess just sold 25 million shares at a price of $39 after purchasing 63 million shares through 2015 at an average price that was more than double, or $83 share.
As Reuters concludes, “this modern Hess era is a case study that should be required reading in boardrooms everywhere.”
Which brings us to a warning we presented back in November 2012 when we showed “where the levered corporate cash on the sidelines is truly going” and cited Andrew Lapthorne who prudently warned:
We know that buybacks are contrarian indicators, occurring at the top (and not the bottom) of the market. Why, we ask, are companies leveraging up now and not 12 months ago, when equity prices were much lower? We conclude that (contrary to what we read), US dividend payments are not enjoying a revival relative to cash flows and that buybacks remain the distribution channel of choice for corporates wishing to boost EPS and limit the effects of option dilution. Indeed, some of the biggest US names have issued debt to pay for buybacks (Home Depot, Microsoft, Amgen, Hewlett Packard, McDonalds, DirectTV, to name but a few) but there are also firms in Europe that have been doing the same (Siemens, Telenet, Adecco). In the current economic climate, you may find this surprising – we do too! A buyback in this form is not a return to shareholders – it’s called gearing or balance sheet risk and will come to haunt some firms when the economy enters a downswing.
But can this time around be different? I seriously doubt it. When the next leg in the “structural bear market” occurs, expect the equity buybacks to end, contributing to a renewed steep downturn in bank borrowing and monetary aggregates.
For most corporations the equity buybacks have now ended (which luckily means the period of “activist investing” is now over): for some with a whimper, for Hess – with both a bang and an equity offering. The only thing missing is the realization the the next leg of the “structural bear market” has arrived.
- "They'll Return To Their Countries In A Wooden Coffin": Iran, Syria Warn Saudis, Turks Against Ground Troops
Two days ago, a Saudi military spokesperson told AP that the kingdom is ready to send ground troops to Syria “to fight ISIS.”
That served as confirmation of what we’ve been saying for months and represented an affirmative answer to the following question that we posed in December: “Did Saudi Arabia just clear the way for an invasion of Syria?“
Four months ago, we previewed the “promised” battle for Aleppo, Syria’s second largest city, which is controlled by a mishmash of rebels and is one of the hardest hit urban centers in Syria. In October, Iran called up Shiite militias from Iraq, rallied thousands of Hezbollah troops, and coordinated with the Russian air force on the way to planning an assault on the city. Victory would mean effectively restoring Assad’s grip on power. So important was the battle, that Iran sent Quds commander Qassem Soleimani to the frontlines to spearhead a kind of pep rally prior to the assault.
Fast forward four months and Russia, Iran, and Hezbollah are on the verge of routing the Syrian opposition. After an arduous push north from Russia’s air field in Latakia, Aleppo is now encircled. Rebels and terrorists alike (assuming there’s a difference) are cut off from their supply lines in Turkey and Moscow’s warplanes are bearing down. Tens of thousands of people are fleeing the city ahead of what promises to be a truly epic battle.
Put simply: this is it. It’s almost over for the opposition.
That’s not to say ISIS isn’t still operating in the east. That, as we’ve said on a number of occasions, is another fight.
But the “moderate” opposition backed by the West and its regional allies is on the ropes. That’s why Saudi Arabia is floating the ground troop trial balloon. It has nothing to do with Islamic State and everything to do with making a last ditch effort to keep arch rival Iran from restoring the Alawite government in Damascus on the way to preserving the Shiite crescent and the supply line to Hezbollah in neighboring Lebanon.
Now, it’s do or die time. Either the Saudis and the Turks invade or it’s all over for the rebels.
And Iran knows it.
“I think Saudi Arabia is desperate to do something in Syria,” Andreas Krieg of the Department of Defence Studies at King’s College London, told AFP. He also notes that “the ‘moderate’ opposition is in danger of being routed if Aleppo falls to the regime.”
“Turkey is enthusiastic about the ground troop option since the Russians started their air operation and tried to push Turkey outside the equation,” Mustafa Alani of the independent Gulf Research Centre added, underscoring Russia’s warning that Turkey may be preparing a ground assault.
On Saturday, Tehran openly mocked the Saudis. “They claim they will send troops (to Syria), but I don’t think they will dare do so,” Maj. Gen. Ali Jafari told reporters. “They have a classic army and history tells us such armies stand no chance in fighting irregular resistance forces.”
In other words, Iran just said the Saudis are useless when it comes to asymmetric warfare.
Readers will recall what we said back in October: “… it’s worth noting that using Hezbollah and Shiite militias to fight the ground war decreases the odds of Moscow getting mired in asymmetric warfare with an enemy they don’t fully understand.”
In other words, Hezbollah has no problem engaging in urban warfare – they practically invented it.
The Saudis – not so much. “This will be like a coup de grace for them,” Jafari continued. “Apparently, they see no other way but this, and if this is the case, then their fate is sealed.”
Yes, “their fate will be sealed,” or, as Syrian Foreign Minister Walid al-Moualem said on Saturday, “I assure you any aggressor will return to their country in a wooden coffin, whether they be Saudis or Turks.”
- Is Shorting The Yuan Dangeorus?
Submitted by Alasdair Macleod via GoldMoney.com,
Last Sunday (31 January) Zero Hedge ran an article drawing attention to the big names in the hedge fund community who are betting heavily that the yuan will suffer a major devaluation any time between the next few months and perhaps the next three years.
The impression given is that this view is universal, almost to the exclusion of any other.
A market cynic would point out that when everyone is short, there is no one left to sell, so it is a good time to buy. This may indeed be true, and gives the Chinese authorities the opportunity to squeeze the bears mercilessly should they so choose. However, as Zero Hedge points out, some bear positions are in the form of put options rather than naked shorts, so hedge fund losses in this case would be limited to option money if the trade goes wrong. Instead, whoever sold the options to them will ultimately absorb the losses to the extent they have not hedged their corresponding positions in turn.
The advantage of buying long-dated OTC put options is that you can wait for a financial strategy to come right. The motivation for buying them is therefore less to do with market timing, and more to do with economic expectations.
At its simplest, the common view appears to be that China is suffering from the debt problems that follow an excessive expansion of bank credit, the unwinding of which is expected to lead to crippling deflation. This view is variously informed by the findings of Irving Fisher in his analysis of the 1930s depression, and perhaps the Austrian school's description of credit-driven business cycles thrown in. To these can be added the experience of modern credit bubbles, particularly the aftermath of the sub-prime crisis of 2007/08, which remains fresh in hedge-fund managers' minds. It amounts to a rag-bag of impulsive thought, and consequently it is assumed a large devaluation will be required to reduce the prices of China's exports, so that China's labour force will remain competitive and employed.
There are many empirical examples that disprove the idea that devaluation is the route to export success, so it is something of a mystery why it should be seen as a certain outcome for the yuan. The root of the idea that devaluation for China is an economic cure-all is the supposed improvement it gives to the balance of trade. And here the mystery deepens, because the fall in prices for imported commodities has actually increased China's trade surplus, so much so that the trade surplus for all of 2014, which was $382bn equivalent, was exceeded by just the last seven months of 2015, while at the same time the economy was supposed to be collapsing. The total trade surplus for 2015 at $613bn was a record by a very large margin. A devaluation is definitely not required on trade grounds.
Instead, China's trade surplus is a secure platform from which to pursue market-based reforms. And here the objective is more about permitting the population to build personal wealth, increasing the numbers of the middle class instead of destroying it. This is an alien concept to western macroeconomists, leaving them uncomfortable with their anti-market, pro-interventionist ambitions. They have a monetarist and Keynesian notion that devaluation counters the price deflation they think China faces, encourages moderate inflation, and stimulates animal spirits. This depends on the broad question as to whether or not a retreat into monetary manipulation actually solves anything, and more importantly, whether or not the Chinese authorities also believe in these theories.
The Chinese authorities appear to show little interest in fashionable macroeconomic suppositions. Instead, the leadership's motivation runs counter to western political thinking. China is made up of over forty different ethnic groups, which without a strong central government, would probably be at each other's throats. Western-style democracy would simply lead to civil war and a disintegration of the state, as evidenced elsewhere in Iraq, Afghanistan, Egypt, Libya and now Syria. It is for this reason that the state communist party ruthlessly suppresses all political discord.
The Chinese leaders know that political oppression can only work if it is not in the masses' economic interest to oppose their government. For this reason, they use the market to enhance individual wealth, and are acutely aware that a failure to better the people's condition risks fomenting dissent. Economic factors align the leadership's interest with those of the people, not democratic representation.
This is what drives economic policy. The leadership is mercantilist in its approach, rather like the East India Company when it ruled India. Individuals working with John Company, as it was known, had the opportunity to accumulate great fortunes, and if they survived the diseases and fevers, these nabobs returned home to Britain and became landed gentry. The elite in China is motivated in a similar fashion and are conditioned on loyalty to the state and its commercial objectives.
This forms the basis of the cycle of five-year economic plans, which can be regarded as the equivalent of business plans, something unknown in western politics. The thirteenth version commences with the year of the monkey on Monday, the full details of which are due to be released in March. We already know that it will tell us how production will be directed to improve the earnings and the standard of living of the lowest paid workers. Greater controls will be imposed on pollution and the use of water resources. The internet will be accorded greater economic resources within the "Internet Plus" project. Social insurance will be increased and extended towards better healthcare and pensions. And lastly, financial reforms will continue to liberalise markets.
What will not be mentioned in these plans, which are for domestic consumption, is geopolitics, the financial war between China and America. It is this aspect of China's future about which the hedge fund managers seem woefully ignorant. And it is a bad mistake to ignore the importance of geopolitics to both China and America, because it has the potential to have a far larger effect on the CNY/USD exchange rate than anything else. If there is any doubt in the reader's mind that there is a financial war being waged, it is worth reading in its entirety a speech given last April by Major-General Qiao Liang, the Peoples Liberation Army strategist. There is a translation here. Of the many quotes available the best one to show why financial power is seen by the Chinese to supplant military power is the following:
"A few strokes on a computer keyboard can move billions or even trillions [of dollars] of capital from one location to another. An aircraft carrier can keep up with the speed of logistics, but it can't keep up with the flow of capital. It is thus unable to control global capital."
It is appropriate at this juncture to make a simple observation: you do not win a financial war by undermining your own currency. Instead, you should undermine the enemy's currency.
This is precisely what China is doing to the dollar. Last year China elevated her currency's standing on the world stage by forcing the IMF, against America's will, to include it in the SDR basket. This year she plans to establish gold and oil contracts priced in yuan, two key commodity markets which Chinese demand now dominates. China has also established the Asian Infrastructure Investment Bank to act as the financing arm for an Asia-wide industrial revolution, to be spearheaded by China. She has successfully replaced, for the purpose of this trans-Asia project, the various multinational organisations set up in the wake of the Bretton Woods agreement.
So 2015 was the year when China did the groundwork to replace the dollar throughout Asia, the Middle East and North Africa, as well as sub-Saharan Africa, which she also dominates commercially. 2016 will be the year when the dollar finds its hegemonic status is increasingly confined to the Americas, Western Europe, Japan, diminishing parts of South-East Asia and western financial markets.
This brings us to another consideration ignored by the US-centric hedge fund community: the dollar itself is likely to take a big hit in 2016. Besides the damage inflicted by the internationalisation of the Chinese currency and the loss of hegemonic status that it imparts to the dollar, deflationary forces are increasing in America's domestic economy, because it is suffocating under a debt burden now too great to bear. The analysis hedge funds are applying to China would be more appropriately applied closer to home, and in this case the Fed will probably seek ways to devalue the dollar to counter a gathering slump. And unlike China, which has a record trade surplus, the US has an increasing trade deficit.
American monetary policy is failing, and the Fed is on the back foot. China meanwhile has a plan, and that is to redeploy labour currently making cheap price-sensitive goods for America and elsewhere. The low-end of the labour force will be retrained and re-employed into both higher-value production and in the development of infrastructure on an Asia-wide basis. Asian development will be spearheaded by the yuan as the common currency for cross-border settlements.
In summary, a significant devaluation for the yuan is neither necessary nor desired by the Chinese authorities. The announcement that China will start targeting the yuan against a basket of currencies and not the dollar is consistent with the strategy of undermining the dollar's value. With dollar reserves accumulating at a record rate because of the trade surplus, China should have no problem maintaining a yuan rate of her choosing. If anything she will seek to dispose of dollars on the basis they are over-valued relative to the commodities she needs for the future. China will sell her dollars not to protect the yuan, but to dispose of an overvalued currency.
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