- "Orwellian" FBI Says Citizens Should Have No Secrets That The Government Can't Access
Submitted by J.D. Heyes via NaturalNews.com,
The police and surveillance state predicted in the forward-looking 1940s classic “1984” by George Orwell, has slowly, but steadily, come to fruition. However, like a frog sitting idly in a pan of steadily-warming water, too many Americans still seem unaware that the slow boil of big government is killing their constitutional liberties.
The latest sign of this stealth takeover of civil rights and freedom was epitomized in recent Senate testimony by FBI Director James Comey, who voiced his objections to civilian use of encryption to protect personal data – information the government has no automatic right to obtain.
As reported by The New American, Comey testified that he believes the government’s spy and law enforcement agencies should have unfettered access to everything Americans may store or send in electronic format: On computer hard drives, in so-called i-clouds, in email and in text messaging – for our own safety and protection. Like many in government today, Comey believes that national security is more important than constitutional privacy protections or, apparently, due process. After all, aren’t criminals the only ones who really have anything to hide?
In testimony before a hearing of the Senate Judiciary Committee entitled “Going Dark: Encryption, Technology, and the Balance Between Public Safety and Privacy” Comey said that in order to stay one step ahead of terrorists, as well as international and domestic criminals, Uncle Sam’s various spy and law enforcement agencies should have access to available technology used to de-encrypt protected data. Also, he believes the government should be the final arbiter deciding when decryption is necessary.
What could go wrong there?
Government, at all levels, is responsible
During the hearing, TNA reported, technology experts warned the panel that giving the FBI limitless access to the personal electronic data of Americans would open it up to exploitation by “bad actors.” But Comey was having none of that.
“It is clear that governments across the world, including those of our closest allies, recognize the serious public safety risks if criminals can plan and undertake illegal acts without fear of detection,” he told the committee.
“Are we comfortable with technical design decisions that result in barriers to obtaining evidence of a crime?”
So, in essence, Comey – like many before him, especially since the global war on terror was launched – believes that, in the name of national security Americans ought to give up more of their individual and constitutional rights because that’s the only way we can be adequately protected.
Perhaps realizing that his Senate hearing testimony was public, Comey gave the Constitution a passing glance, noting that the government should respect the “requirements and safeguards of the laws” and the country’s founding document. However, as Americans now know, spy agencies during the past two presidential administrations have been tasked increasingly with conducting warrantless, unchecked surveillance of Americans’ electronic data and communications.
But all of this is not on men like Comey and Presidents George W. Bush and Barack Obama. Congress bears its share of responsibility, too.
This is the way it is – shut up and take it
When such activities of the National Security Agency were exposed in 2013 by former NSA contractor Edward Snowden, many in the media and among the American electorate were quick to blame the agency, as if it was somehow acting out of rogue instinct.
The reality is, however, that the agency is tasked to perform its duties– either by statutory law (think the USA Patriot Act) or by presidential directive (think Bush’s order after 9/11 to conduct warrantless surveillance).
“We are not asking to expand the government’s surveillance authority, but rather we are asking to ensure that we can continue to obtain electronic information and evidence pursuant to the legal authority that Congress has provided to us to keep America safe,” Comey said during the Senate hearing.
What does all this mean? It simply means that at every level, government considers its own citizens hostile.
Oh, and there’s nothing we can do about it.
- Something's Up with Elon
Although I’m a dyed-in-the-wool chartist, I appreciate when people make thoughtful conjectures about what’s going to happen to a company, a financial instrument, or a country based on their broad observations. Remember, “speculate” is derived from the Latin verb speculare, which means to observe. Successful investors notice things.
As such, I’d like to share something I’ve noticed. It first started back on July 29th, when I got an email from Elon Musk (errr, not personally, but it a spammy kind of way). It started off like this:
It went on to say, at some length, that for every person I’d refer that bought a Tesla Model S, they’d get $1,000 off, and I would likewise get $1,000 off my next car. Not a bad deal! But it did strike me as a little surprising to get an email like this, since Tesla really never seemed to be hurting for interest in their cars before. And besides, Musk is reported to have a net worth of something like $13 billion, so why is he stooping to use his name on an all-text email solicitation?
Then, about a week later, this showed up:
In this email, it described the same offer, but it kindly included a spammy email that I could send on my own to my friends. So now, not only was I getting spammed, but I was being provided with ready-to-use junk mail I could use as well.
My puzzlement reached critical mass when my Tesla app was updated. I noticed a button I had never seen before:
Ummm……….so precious screen real estate is being used on a button called From Elon? (And, to be clear, this isn’t temporary; it apparently is there forever). I clicked it, and, yep, there was something resembling the original email. However, there was something extra: I could click on a Find Friends button, and voila:
It was ready to go through all the contacts in my iPhone so I could start spamming them quickly and easily!
Now this is all getting to be a bit much. In March of 2013, I wrote an over-the-top review of the Tesla S, praising it to the skies (I did not have the intelligence to actually buy a bunch of TSLA, however, which was a mere $38 at the time). Back then, every touchpoint of the Tesla experience was amazing.
For instance, if you needed to bring your car in for service, you could get an appointment immediately, and they would give you another Tesla S to use for whatever time they needed your car. I was accustomed to having to rent a piece-of-crap vehicle from Enterprise whenever I had cars serviced in the past. At Tesla, they’d just hand you a new $100,000 car for free to enjoy while your own car was being fixed. Sweet!
Since then, though, things have started to slip……….badly. First off, Tesla remains a one product company. They sell just one thing – the Model S – and even though they keep coming up with goofy versions of it (with ‘Insane” mode……….and “Ludicrous” mode………) they have yet to ship their long-promised Model X, a fact I griped about in this post.
Tesla has taken pains to say they are finally going to release it in “Q3” – – and now they are saying that they will ship their first Model X on September 30th. Look, guys, I know that shipping a single car on the very last day of the quarter strictly qualifies as Q3, but this is a bit disingenuous. I’m also predicting, based on all the public whining Musk has done about what a bitch the gull-wing doors have been to get working, that a bunch of the early X’s shipped have problems. We’ll see.
In addition, service doesn’t seem what it used to be. Things are starting to go wrong with my Model S, the worst of which is that one of the fancy automatically-receding door handles no longer comes out. In other words, it’s totally unusable. It feels a little strange having a $100,000 car and explaining to a passenger that they have to walk around to the other side, since the goddamned handle doesn’t function. I might as well have a 1974 AMC Pacer.
So, when calling for a service appointment in July, I was told they could see me…………in September. Umm, gosh, I’m glad it’s not something serious.
Perhaps these festering problems explain why TSLA peaked eleven months ago, losing one third of its entire value afterward, and then (oddly) clamoring back to roughly its prior high. It is weakening again now, and based on my first-hand experiences, I’m starting to think this is a trend that is going to persist.
Don’t forget that only two years ago, Tesla was (secretly) approaching bankruptcy and was close to a deal with Google to sell itself. Tesla has been propped up with government loans and “green” credits of various kinds for all these years, and let’s face it, with gas prices collapsing, the appeal of an expensive all-electric car is diminishing.
The Model S is still the best car I’ve ever owned, and I’d still recommend it. But if Tesla doesn’t start to get its act together with respect to delivering new products and getting their service back into its former tip-top shape, I suspect the symbol TSLA will make a long, tortured trip back down to the double digits.
- Peak Insanity: Chinese Brokers Now Selling Margin Loan-Backed Securities
One of the reasons why the Chinese dragon quite often appears to be chasing its own tail is that the country is trying to re-leverage and deleverage at the same time.
Take China’s local government debt refi effort for instance. Years of off-balance sheet borrowing left China’s provincial governments to labor under a debt pile that amounts to around 35% of GDP and thanks to the fact that much of the borrowing was done via LGFVs, interest rates average between 7% and 8%, making the debt service payments especially burdensome. In an effort to solve the problem, Beijing decided to allow local governments to issue muni bonds and swap them for the LGFV debt, saving around 400 bps in interest expense in the process. Of course banks had no incentive to make the swap (especially considering NIM may come under increased pressure as it stands), and so, the PBoC decided to allow the banks to pledge the new muni bonds for central bank cash which could then be re-lent into the real economy. So, China is deleveraging (the local government refi effort) and re-leveraging (banks pledge the newly-issued munis for cash which they then use to make more loans) simultaneously.
We can see similar contradictions elsewhere in China’s financial markets. For instance, Beijing has shown a willingness to tolerate defaults – even among state-affiliated companies. This is an effort (if a feeble one so far) to let the invisible hand of the market purge bad debt and flush out failed enterprises. Meanwhile, Beijing is enacting new policies designed to encourage risky lending. In April for instance, the PBoC indicated it was set to remove a bureaucratic hurdle from the ABS issuance process, which means that suddenly, trillions in loans which had previously sat idle on banks’ books, will now be sliced, packaged, and sold. Specifically, the PBoC said regulatory approval would no longer be required to issue ABS (hilariously, successive RRR cuts have served to reduce banks’ incentive to package loans, but we’ll leave that aside for now). Once again, deleveraging (tolerating defaults) and re-leveraging (making it easier for banks to get balance sheet relief via ABS issuance), all at once.
There’s a parallel between this dynamic and what’s taking place in China’s equity markets. That is, a dramatic unwind in the half dozen or so backdoor margin lending channels (a swift deleveraging) has been met with a government-backed effort to prop up the market via China Securities Finance Corp., which has been transformed into a state-controlled margin lending Frankenstein that could ultimately end up with some CNY5 trillion in dry power (a mammoth attempt at re-leveraging).
Now, the PBoC will look to supercharge efforts to re-engineer a stock market bubble via leverage by pushing brokerages to issue ABS backed by margin loans. Here’s The South China Morning Post:
Huatai Securities is selling 500 million yuan of the country’s first asset-based securities product built on margin-financing loans as underlying assets.
The product is due to be listed and sold to investors through the Shanghai Stock Exchange.
The minimum investment for the product is 100,000 yuan, with exposure of a single borrower capped at 5 per cent. Investors will bear the risks for gains and losses in the underlying portfolio.
Approval to mainland brokerages to securitise margin loans was given by the China Securities Regulatory Commission on July 1. Brokerages have been encouraged to raise capital via securitisation to help them recapitalise.
A couple of things should be obvious here. First, this sets up the possibility that a perpetual motion margin doomsday machine is being created. That is, if brokerages simply offload the margin loan risk to investors and use the proceeds to fund still more margin lending which can also be turned into still more ABS, and so, then the effect will be to pile leverage on top of leverage on the way to constructing a monumental house of cards. Beyond that though, one certainly wonders what happens in the event the underlying stocks become completely illiquid (i.e. Beijing decides to suspend trading on three quarters of the market again). Here’s a bit more from Bloomberg:
China’s first asset-backed security tied to stock margin loans is raising concern that authorities are fueling new risks as they attempt to reverse an equities slump.
Guotai Junan Securities Co., the nation’s second-biggest listed brokerage, plans to sell 500 million yuan ($80.5 million) of bonds Friday backed by margin facilities it extended to stock investors, according to a company statement. The offering comes after a stock rout last month that prompted regulators to allow brokerages to securitize margin loans.
China is increasingly opening to ABS, having reversed course in 2012 to allow sales regulators had banned in 2009 after the products helped spark the global financial crisis. Investor concern has mounted that unintended risks could spread after unprecedented state intervention to help staunch the stock slide that wiped out as much as $4 trillion.
“The risk could be that brokers may not be able to execute forced liquidations in case of sharp declines in the overall stock market,” said Shujin Chen, a banking analyst at DBS Vickers Hong Kong Ltd. “Liquidity risk can also be a problem if there are too many stocks that suspend trading, as happened in July.”
“So far we don’t know how the brokerages are going to use the proceeds,” said Gao Qunshan, an analyst at Tianfeng Securities Co. “It can be positive if they are using the funds to develop new businesses but negative for China’s financial market if they keep lending out for margin financing.”
Yes, it certainly “could be a negative if they keep lending out for margin financing,” which they most certainly will if not of their own accord then by PBoC decree.
And the punchline: the senior tranche (which accounts for CNY475 million of the total CNY500 million deal) is rated AAA.
- You Live In A Country Run By Idiots If…
Via Monty Pelerin's World blog,
We truly live in a country run by idiots. The contradictions between common sense and government actions are just too many to have happened by accident or chance. But perhaps the leaders are not the idiots. Maybe the people tolerating such leaders and laws are the true idiots.
What follows is a contrast between common folk wisdom and what Washington considers wisdom. These contradictions are inconvenient for government, threatening to reveal their incompetence or hidden agenda. The author of this piece is unknown although it sounds like something that could have come from Jeff Foxworthy who popularized this presentation style.
Oh, and regarding the image above – we are the idiots for accepting this nonsense.
If you can get arrested for hunting or fishing without a license, but not for being in the country illegally, you live in a country run by idiots.
If you have to get your parent’s permission to go on a field trip or to take an aspirin in school, but not to get an abortion, you live in a country run by idiots.
If you have to show identification to board an airplane, cash a check, buy liquor or check out a library book, but not to vote who runs the government, you live in a country run by idiots.
If the government wants to ban stable, law-abiding citizens from owning gun magazines with more than ten rounds, but gives 20 F-16 fighter jets to the crazy leaders in Egypt , you live in a country run by idiots.
If, in the largest city, you can buy two 16-ounce sodas, but not a 24-ounce soda because 24-ounces of a sugary drink might make you fat, you live in a country run by idiots.
If an 80-year-old woman can be strip-searched by the TSA but a woman in a hijab is only subject to having her neck and head searched, you live in a country run by idiots.
If your government believes that the best way to eradicate trillions of dollars of debt is to spend trillions more, you live in a country run by idiots.
If a seven year old boy can be thrown out of school for saying his teacher is cute, but hosting a sexual exploration or diversity class in grade school is perfectly acceptable, you live in a country run by idiots.
If hard work and success are met with higher taxes and more government intrusion, while not working is rewarded with EBT cards, WIC checks, Medicaid, Subsidized Housing and Free Cell Phones, you live in a country run by idiots.
If the government’s plan for getting people back to work is to incentivize NOT working with 99 weeks of unemployment checks and no requirement to prove they applied but cannot find work, you live in a country run by idiots.
If being stripped of the ability to defend yourself makes you more safe according to the government, you live in a country run by idiots.
If you are offended by this article, I’ll bet you voted for the idiots who are running our great country into the ground.
* * *
GOD BLESS AMERICA
- Is China's 'Black Box' Economy About To Come Apart?
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
After 30 years of torrid expansion, perhaps the single most consequential factor in China’s economy is how much of it is a “black box”: a system with visible inputs and outputs whose internal workings are opaque.
There are number of reasons for this lack of transparency:
- Official statistics reflect what officials want to project, not the unfiltered data.
- Policy decisions are made behind closed doors by a handful of leaders.
- There is little institutional history of transparency.
- Many important statistics are self-reported and prone to distortion.
- Large sectors of the economy are informal and difficult if not impossible to measure accurately.
- Endemic corruption distorts critical economic yardsticks.
- There is little historical precedent to guide policy makers and individual investors.
None of these is unique to China, of course, with the possible exception of #7: few nations in history (if any) have experienced an equivalent boom in infrastructure, credit, housing and wealth in such a short span of time.
Saving Face By Editing Data
As anyone who has lived and worked in Asia can attest, public perception (i.e. "face") is of paramount concern. There is tremendous pressure to put a positive spin on everything in the public sphere. Negative publicity causes not just the individual to lose face, but his boss, agency, company and family may also be tarnished.
For this reason, reporting potentially negative numbers accurately may put careers and hopes for advancement at risk.
This accretion of fear of reprisal/disapproval builds as it moves up the pyramid of command. This process can lead to tragic absurdities being taken as truth. In one famous example in Mao-era China, officials ordered rice planted in thick abundance along a particular stretch of road, so that when Chairman Mao was driven along this roadway, he would see evidence of a spectacular rice harvest.
In reality, China was in the grip of a horrific famine resulting from disastrous state policies (The Great Leap Forward). But since everyone feared the consequences of telling Mao his policies were starving millions of Chinese people, the fields along the highway was planted to mask the unwelcome reality.
Even the most honest reports reflect the biases of those summarizing feedback for their superiors. As a result, when the feedback finally reaches the top leadership, it may be inaccurate or misleading in ways that are difficult to detect.
The Dangers Of Opaque Leadership Decisions
All leaders have their own biases and experiential limits, and left unchecked by accurate feedback and honest dissent, these have the potential to generate disastrous decisions.
Perhaps the top leadership in China is soliciting honest dissent, but without a vigorously free media and multiple unedited feedback loops, this is unlikely for systemic reasons.
Most people—leaders and followers alike—seek to confirm their own views (i.e. confirmation bias). A system in which key decisions are not aired publicly and the trustworthiness of the data being considered behind closed doors is also unknown is a system designed to reinforce confirmation bias and yes-men.
In this environment, destructive policies may be supported by the chain of command despite the consequences.
Lack Of Institutional History of Transparency
Institutions with a long history of independence and a policy of priding transparency have the potential to counter the tendency of hierarchies to encourage confirmation bias and fudged feedback.
But China’s tumultuous history in the 20th century—invasion, foreign occupation, civil war, revolution, mass famines, the Cultural Revolution’s mass disruptions and purges, the end of Mao’s Gang of Four and Deng Xiaoping’s “to get rich is glorious” reforms—has not been conducive to the establishment of independent institutions.
Developing the independence of institutions in the midst of such unprecedented political, social and economic turmoil is a long-term work in progress. Though no comparison is entirely analogous, we can look at the first equally tumultuous 30 years of the American Republic (1790 – 1820) and the French Republic (1789-1819) for historical examples of the difficulties in establishing enduringly independent institutions.
Self-Reported Statistics
Self-reported data plays a significant role in any economic snapshot that measures sentiment and expectations. But when it comes to income, outstanding loans and other data, there’s no substitute for accurate numbers.
As a general rule, the larger the informal cash economy and the greater the leeway and the incentives to under-report, the lower the quality of self-reported statistics.
Take income as an example. In the U.S., the vast majority of non-cash income is reported directly to the tax authorities: wages, 1099s, sales of securities, etc. The leeway to fudge income is low, which pushes the incentives to fudge onto the expense/deduction side of the ledger. For this reason, IRS income data is more trustworthy than self-reported measures of income and employment.
Consider this chart of household income in China. A survey of households found incomes were much higher than the officially collated numbers. In the case of the top earners, the difference was significant enough to skew a variety of key numbers such as household income as a percentage of GDP.
(Source)
The differences between official data and data collected by surveys is troubling for a number of reasons. Given the incentives to under-report (to avoid paying higher taxes), why should we trust the accuracy of self-reported income? Who’s to say that wealthy households don’t habitually under-report their true income even to surveys?
Given the ubiquity of the informal economy and shadow banking system in China, official data cannot accurately reflect peer-to-peer lending, private loans outstanding and many other data points that are critical to understanding income, risk and credit flows.
The Informal Economy & Shadow Banking
These discrepancies between actual debt and what’s reported could have monumental consequences should expansion turn to contraction and debts become uncollectible.
It’s been estimated that a third of all Chinese households engage in informal lending to friends and family, as well as to enterprises that pay high rates of interest due to the risky nature of their investments.
Interest can run as high as 34% — loan-shark rates.
Even the slices of the credit/investment sector that are reported—for example, Wealth Management Products (WMPs)—are more Wild West than staid banking. WMPs are managed off-balance sheet and don’t require any reserves:
“Legally WMPs are not deposits. They are investment products that are managed ‘off-balance-sheet’ by banks, and there is little transparency about where the funds are going,” said Stephen Green, head of Greater China research at Standard Chartered in Hong Kong, in a note.
According to Green, the funds from different WMP products are often mixed and deployed to finance a broad pool of assets that more often than not fall into the sectors of the economy that regulators have attempted to fence off from normal bank lending (real estate, local government infrastructure, etc.), partly because these sectors are deemed to be particularly risky. In addition, the banks hold neither reserves of WMP deposits nor capital against the assets.
(Source)
In other words, transparency is low while risk is unknown but possibly high. This volatile mix of opacity and risk is the perfect recipe for cascading defaults and catastrophic losses.
Endemic Corruption Distorts Data
In China, as in many developing economies, problems such as permit applications, tax bills or development rights are solved by greasing the skids of officialdom. Just received a big tax bill? Maybe a friendly tax official can help reduce the tax in return for promises of favors and an envelope of cash.
While the central government is cracking down on highly visible corruption, the system of buying privileges with influence, favors and cash is too deeply entrenched to be eliminated in a few months or years by high-level policies.
As with all the factors listed here, the impact of corruption is difficult to assess — and that’s what makes China’s economy such a black box: if what’s known is untrustworthy, and what’s not known is potentially destabilizing, then how reliable is any projection?
Few Historical Precedents to Guide Policy Makers and Individuals
In the U.S., analysts and policy makers can draw upon a long history of economic policies and debate their applicability to the present. Rising income disparity, for example, is often compared to the Gilded Age of the late 19th century. The financial crisis of 2008 is often viewed as an analog of the 1929 crash that triggered the Great Depression.
China’s recorded history stretches back thousands of years, but in terms of applicable financial and economic parallels to the current economy, there is no precedent. China’s leadership is truly in uncharted waters. This in itself heightens the risk of miscalculation and basing policies on faulty premises.
In Part 2: Why China Is Extremely Vulnerable Now, we zero in on China’s real estate bubble, and the outsized risks it poses to China’s economy — and the world.
As the housing bubble bursts, alongside the trillions of losses already experienced in the Chinese stock market, the flood of capital from China into world assets is going to be substantially compromised. Asset prices are set at the margin: what the highest buyer is willing to pay. For many years now, the world has become accustomed to China's dependable willingness to pay well in excess of everyone else. When China is no longer the highest buyer, how far will prices need to fall in order to match the next highest buyer's ability to pay?
Click here to read Part 2 of this report (free executive summary, enrollment required for full access)
- The Story Of America's Debt In 6 Easy Graphics
Despite incessant pundit parroting of the “deleveraging households” meme, America is and probably always will be, addicted to debt. If you need proof, have a look at the latest statistics on non-mortgage debt, which, thanks to America’s twin trillion-dollar bubbles, recently soared to its highest level in a decade. To wit, from HousingWire, citing Black Knight Financial:
What we’ve found is that mortgage holders today are carrying more non-mortgage debt than at any point in the past 10 years, with an average of $25,000 per borrower. That’s $1,400 more on average than one year ago, and nearly $2,600 more than in 2011. The primary driver of this increase is a rise in auto-related debt, which accounted for 81% of the overall non-mortgage debt increase over the past four years [and] student loan debt [which] is at all-time high.
Now, Pew is out with a new study entitled “The Complex Story Of American Debt” and as you might have imagined, the non-profit found that the past three decades have witnessed an unprecedented shift in Americans’ propensity to leverage household balance sheets. This tendency has not been accompanied by a concurrent and proportional increase in household income. Here is the story of America’s debt addiction in six graphics:
More, from Pew:
One of the biggest shifts in American families’ balance sheets over the past 30 years has been the growing use of credit and households’ subsequent indebtedness. In the years leading up to the Great Recession, the average household at the middle of the wealth ladder more than doubled its mortgage debt. Although Americans’ debt has decreased since then, housing—which still is the largest liability for most households—and other debt remain higher than they were in the 1990s, and student loan obligations have continued to grow.
And this rise in debt has not corresponded to a similar increase in household income. Debt is particularly problematic for low-income households, whose liabilities grew far faster than their income in the aftermath of the recession: Their debt was equal to just one-fifth of their income in 2007, but that proportion had ballooned to half by 2013. Even middle-wealth households held over $7,000 more debt, on average, in 2013 than in 2001 and previous years.
- When A Train Wreck Is No Accident
Submitted by Jeff Thomas via InternationalMan.com,
“In spite of all the rhetoric, we will go deeper in debt, the Fed will print more money, and the value of the dollar will continue to plummet.” – Ron Paul
Never in history have the economic and political structures been so manipulated by those who are responsible for their safekeeping; never has so much been at stake, in so many countries, and facing collapse, all at the same time.
The great majority of people in the First World recognise that the world is passing through an economic crisis. However, most are under the impression that there are some pretty smart fellows running the show and all they need to do is tweak the system a bit more and we’ll return to happy days.
Not so. The “smart fellows” who are in charge of fixing the problem are in fact the very same people who created it.
Understandably, this a hard concept for most people to even consider, let alone accept, as the very idea that those in charge of the system might consciously collapse it seems preposterous. So, we might wish to back up a bit here and present a very brief history of the system itself, in order to understand that the eventual collapse of the economic system was baked in the cake from the very beginning.
Creating a Central Bank
From the very earliest days of the formation of the American republic, bankers (along with inside help from George Washington’s secretary of the Treasury, Alexander Hamilton) sought to create a banking monopoly that would create the country’s currency and become the central banking system.
The first attempt at a central bank was a failure, and strong opponents, including Thomas Jefferson, prevented a second central bank for a time. Later, further attempts were made by bankers and their political cronies, and each central bank was either short-lived or defeated in its planning stages.
Then, in 1913, the heads of the largest banks met clandestinely on Jekyll Island, Georgia, to make another try. Having recently lost yet another bid to create a central bank, due to the public’s understandable concern that the big bankers were already too powerful, a new spin was placed on the idea. This time, they decided to present the idea as a government body that would be decentralised and would have the responsibility of restricting the power of the banks.
However, the new bill was in fact the same old bill, with a new title and some minor changes in wording. But this time, it would be presented by the new president, who was a liberal.
The president, Woodrow Wilson, had in fact been handpicked by the banks. The banks then scuttled their own conservative party’s candidate, got the Democrat Wilson elected, then installed a secretary of the Treasury whose job it would be to ensure that the Federal Reserve was created.
The bill was widely supported by the public, even though, in truth, it was not a federal agency, but a privately owned conglomerate, controlled by the banks. Neither was it a reserve. It was never intended to store money; it was intended to give the biggest bankers control of the economy. They followed the central principle of uber-banker Mayer Rothschild: “Let me issue and control a nation’s money and I care not who writes the laws.”
From the start, the new institution peddled itself as the protector of the people’s interests, but it was quite the opposite. Its purpose from its inception was to control the economy and the government by controlling the issuance of the currency. In addition, it was to be a system of taxation.
Typically, a population accepts a certain amount of direct taxation but has its limits of tolerance. Yet, the bankers understood that a less direct method of taxation was infinitely more profitable and infinitely safer from criticism.
Inflation as a Profit System
Inflation was not always the norm. At one time, prices were relatively static from one generation to the next. But the Federal Reserve touted the idea that “controlled” inflation was in fact necessary for a prosperous economy.
Of course, the greater the debasement of the currency through inflation, the more the central bankers profited. But at some point, the currency would have lost virtually all its value and it would be time for a reset. The currency would need to collapse and a new one created.
And so, the Fed set about its hundred-year programme of continuous inflation. Although there have been periods of lower inflation (and even deflation), the programme stayed more or less on course, and now, its hundred-year life has all but ended: the dollar has been devalued almost 100%.
And so, we find ourselves at the day of reckoning. The economic crisis we are now facing (not only in the US; it will be felt, to a greater or lesser extent, worldwide) is not a mere anomaly that we need to “push past”. It’s a systemic crisis. It’s been created by design and the system must collapse.
Of course, the central banks are in the process of protecting their interests, to make sure that, whilst this will be a major economic calamity, they themselves will continue to profit. The damage will be borne by the general public.
This began in earnest in 1999, with the repeal of the Glass-Steagall Act, allowing banks to create a massive, reckless mortgage spree. It was backed by the government’s “too big to fail” policy that guaranteed that, when the banks predictably became insolvent as a result of the loans, government would bail them out. (And by “government” we mean “the taxpayer”; it was he who picked up the bill for the banks’ recklessness.)
The End Game
The next step in getting ready for the collapse is an all-out effort to confiscate the wealth of the public. This can be seen in the effort to push investors away from solid forms of wealth protection such as gold and silver and into stocks, bonds and bank deposits. More recently, we’ve seen the emergence of an effort to end the use of safe deposit boxes and a push to end the use of paper currency in making transactions.
The end objective is to force as much money as possible into deposits in banks, then take it. The US, EU and a few other countries have passed confiscation legislation, allowing the banks carte blanche to confiscate and/or refuse to release deposits.
Of course a reset of these proportions will not be without its fallout. The public will be horrified at the outcome, at the realisation that the very institutions they thought had been created to protect them had never been intended to serve their interests at all.
Once they realise that the world’s greatest Ponzi scheme has been foisted on them, they will be hopping mad and justifiably so. Those who had not had the foresight to internationalise themselves, to remove themselves as much as possible from the system, will most certainly want to get even in some way.
And this makes clear why governments, particularly that of the US, are working so hard to create a police state. Unless a totalitarian state can be created, those who are presently taking the wealth may not be able to fully realise their objectives.
The coming train wreck is no accident. It has long been planned. That the “smart fellows in charge” will somehow save the day is therefore a vain hope indeed.
It’s still possible to back out of the system, but it’s getting more difficult every day. The window is closing, and the time to internationalise is now.
- The $12 Trillion Fat Finger: How A "Glitch" Nearly Crashed The Global Financial System – A True Story
For all the talk of how the financial world nearly ended in the aftermath of first the Lehman bankruptcy, then the money market freeze, and culminating with the AIG bailout, and how bubble after Fed bubble has made the entire financial system as brittle as the weakest counterparty in the collateral chain of some $100 trillion in shadow liabilities, the truth is that despite all the “macroprudential” planning and preparations, all the world’s credit, housing, stock, and illiquidity bubbles may be nothing when compared to the oldest “glitch” in the book: a simple cascading error which ends up taking down the entire system.
Like what happened in the great quant blow up August 2007.
For those who may not recall the specific details of how the “quant crash” nearly wiped out all algo and quant trading hedge funds and strats in a matter of hours if not minutes, leading to tens of billions in capital losses, here is a reminder, and a warning that the official goalseeked crisis narrative “after” the fact is merely there to hide the embarrassment of just how close to total collapse the global financial system is at any given moment.
The following is a true story (courtesy of b3ta) from the archives, going all the way back to 2007:
I.T. is a minefield for expensive mistakes
There’s so many different ways to screw up. The best you can hope for in a support role is to be invisible. If anyone notices your support team at all, you can rest assured it’s because someone has made a mistake. I’ve worked for three major investment banks, but at the first place I witnessed one of the most impressive mistakes I’m ever likely to see in my career. I was part of the sales and trading production support team, but thankfully it wasn’t me who made this grave error of judgement…
(I’ll delve into obnoxious levels of detail here to add color and context if you’re interested. If not, just skip to the next chunk, you impatient git)
This bank had pioneered a process called straight-through processing (STP) which removes the normal manual processes of placement, checking, settling and clearing of trades. Trades done in the global marketplace typically have a 5-day clearing period to allow for all the paperwork and book-keeping to be done. This elaborate system allowed same-day settlement, something never previously possible. The bank had achieved this over a period of six years by developing a computer system with a degree of complexity that rivalled SkyNet. By 2006 it also probably had enough processing power to become self-aware, and the storage requirements were absolutely colossal. It consisted of hundreds of bleeding edge compute-farm blade servers, several £multi-million top-end database servers and the project had over 300 staff just to keep it running. To put that into perspective, the storage for this one system (one of about 500 major trading systems at the bank) represented over 80% of the total storage used within the company. The equivalent of 100 DVD’s worth of raw data entered the databases each day as it handled over a million inter-bank trades, each ranging in value from a few hundred thousand dollars to multi-billion dollar equity deals. This thing was BIG.
You’d think such a critically important and expensive system would run on the finest, fault-tolerant hardware and software. Unfortunately, it had grown somewhat organically over the years, with bits being added here, there and everywhere. There were parts of this system that no-one understood any more, as the original, lazy developers had moved company, emigrated or *died* without documenting their work. I doubt they ever predicted the monster it would eventually become.
A colleague of mine one day decided to perform a change during the day without authorisation, which was foolish, but not uncommon. It was a trivial change to add yet more storage and he’d done it many times before so he was confident about it. The guy was only trying to be helpful to the besieged developers, who were constantly under pressure to keep the wretched thing moving as it got more bloated each day, like an electronic ‘Mr Creosote’.
As my friend applied his change that morning, he triggered a bug in a notoriously crap script responsible for bringing new data disks online. The script had been coded in-house as this saved the bank about £300 per year on licensing fees for the official ‘storage agents’ provided by the vendor. Money that, in hindsight, would perhaps have been better spent instead of pocketed. The homebrew code took one look at the new configuration and immediately spazzed out. This monged scrap of pisspoor geek-scribble had decided the best course of action was to bring down the production end of the system and bring online the disaster recovery (DR) end, which is normal behaviour when it detects a catastrophic ‘failure’. It’s designed to bring up the working side of the setup as quickly as possible. Sadly, what with this system being fully-replicated at both sites (to [cough] ensure seamless recovery), the exact same bug was almost instantly triggered on the DR end, so in under a minute, the hateful script had taken offline the entire system in much the same manner as chucking a spanner into a running engine might stop a car. The databases, as always, were flushing their precious data onto many different disks as this happened, so massive, irreversible data corruption occurred. That was it, the biggest computer system in the bank, maybe even the world, was down.
And it wasn’t coming back up again quickly.
(OK, detail over. Calm down)
At the time this failure occurred there was more than $12 TRILLION of trades at various stages of the settlement process in the system. This represented around 20% of ALL trades on the global stock market, as other banks had started to plug into this behemoth and use its capabilities themselves. If those trades were not settled within the agreed timeframe, the bank would be liable for penalties on each and every one, the resulting fines would eclipse the market capital of the company, and so it would go out of business. Just like that.
My team dropped everything it was doing and spent 4 solid, brutal hours recovering each component of the system in a desperate effort to coax the stubborn silicon back online. After a short time, the head of the European Central Bank (ECB) was on a crisis call with our company CEO, demanding status updates as to why so many trades were failing that day. Allegedly (as we were later told), the volume of financial goodies contained within this beast was so great that failure to clear the trades would have had a significant negative effect on the value of the Euro currency. This one fuckup almost started a global economic crisis on a scale similar to the recent (and ongoing) sub-prime credit crash. With two hours to spare before the ECB would be forced to go public by adjusting the Euro exchange rate to compensate, the system was up and running, but barely. We each manned a critical sub-component and diverted all resources into the clearing engines. The developers set the system to prioritise trades on value. Everything else on those servers was switched off to ensure every available CPU cycle and disk operation could be utilised. It saturated those machines with processing while we watched in silence, unable to influence the outcome at all.
Incredibly, the largest proportion of the high-value transactions had cleared by the close of business deadline, and disaster was averted by the most “wafer-thin” margin. Despite this, the outstanding lower-value trades still cost the bank more than $100m in fines. Amazingly, to this day only a handful of people actually understand the true source of those penalties on the end-of-year shareholder report. Reputation is king in the world of banking and all concerned –including me– were instructed quite explicitly to keep schtum. Naturally, I *can’t* identify the bank in question, but if you’re still curious, gaz me and I’ll point you in the right direction…
Epilogue… The bank stumped up for proper scripts pretty quickly but the poor sap who started this ball of shit rolling was fired in a pompous ceremony of blame the next day, which was rather unfair as it was dodgy coding which had really caused the problem. The company rationale was that every blaze needs a spark to start it, and he was going to be the one they would scapegoat. That was one of the major reasons I chose to leave the company (but not before giving the global head of technology a dressing down at our Christmas party… that’s another QOTW altogether). Even today my errant mate is one of the only people who properly understands most of that preposterous computer system, so he had his job back within six months — but at a higher rate than before 🙂
Conclusion: most banks are insane and they never do anything to fix problems until *after* it costs them uber-money. Did I hear you mention length? 100 million dollar bills in fines laid end-to-end is about 9,500 miles long according to Google calculator.
* * *
And here is Zero Hedge’s conclusion: the next time you think all those paper reps and warranties to claims on billions if not trillions of assets, are safe and sound in some massively redundant hard disk array, think again.
- Gibson's Paradox: The Consequences For Gold
Submitted by Alasdair Macleod via GoldMoney.com,
We now have an explanation for Gibson's paradox (posted here), a puzzle that has defeated mainstream economists from Fisher to Keynes and Friedman.
The best way to illustrate the puzzle is through two charts, the first showing empirical evidence that interest rates correlate with the price level.
And the second, showing no correlation between interest rates and the annual change in the price level, i.e. the rate of inflation.
The solution to the puzzle is simple: in free markets, interest rates are set by the demands of investing businesses which at the margin will pay a rate of interest based on whether their product prices are rising or falling: hence the correlation.
The second chart shows that central bank policies, which seek to control prices by setting interest rates, have no theoretical justification behind them. They are the consequence of blindly accepting the quantity theory of money, upon which macroeconomics is based.
A mistake made by central bankers is to believe that the price of money is its interest rate, instead of the reciprocal of the price of the products for which it is exchanged. Interest rates are money's time preference, which in free markets broadly reflects the average time preference of all the individual goods bought with money. The problem with monetarism is that it ignores this temporal aspect of exchange.
It is worth bearing in mind that tomorrow's prices, and therefore the purchasing power of money, are wholly subjective, or put another way cannot be known in advance: if they were, we would be able to buy or sell something today in the certain knowledge of a profit tomorrow, which is obviously untrue. It therefore follows that the relative quantities of money and goods are not the key factors in determining price relationships. Far more important are consumer preferences for money against goods, which taken to an extreme can render the purchasing power of a currency to be worthless, irrespective of its quantity. This insight is necessary to put monetary theory into its proper context.
Through monetary policy the Bank of England has overridden free market relationships since the mid-1970s, the Gibson relationship being apparent in the 240 years up to then. Chart 3 continues where Chart 1 left off.
The relationship ended when the Bank of England raised interest rates to 17.1% in 1974 to stop the hyperinflation of prices. For the first time the BoE set interest rates higher than the rate would have been in free markets relative to price levels, and the Fed did the same thing five years later. Since then prices have continued to rise, albeit at a declining pace, and sterling has lost a further 88% of its purchasing power and the US dollar 76%. Since that time interest rate management by these central banks has continued to suppress the Gibson relationship, as we should now call it.
Monetary policy impairs the market between borrowers and savers. We see this today, with zero interest rates suppressing the relationship between savers and investing businesses creating an economic stasis. This brings us to a second error exposed by Gibson. The Fed is expected to raise interest rates from the zero bound in a few months' time in an attempt to return to some sort of normality.
A rising interest rate trend would, according to Gibson, encourage prices to rise towards and likely through the Fed's 2% target inflation rate. This is not how financial traders see it, nor does the Fed. They expect the exact opposite, believing that rising interest rates are bad for demand and commodity prices, which is why the decision has been deferred for so long.
The evidence tells us this view is mistaken and that rising interest rates will be accompanied by rising commodity prices. For example, between 1970 and 1980 gold rose from $36 to $800, and US interest rates from 9% to 17% as shown in Chart 4.
This is a slightly different point, but is graphically illustrates the mistake of thinking the price of anything can be suppressed through higher interest rates.
- Greece's Collapse Was a Reversion to the Mean… Who's Next?
Because of the rampant fraud and money printing in the financial system, the real “bottom” or level of “price discovery” is far lower than anyone expects due to the fact that the run up to 2008 was so rife with accounting gimmicks and fraud.
The Greek debt crisis, like all crises in the financial system today, can be traced to derivatives via the large investment banks. Indeed, we now know that Greece actually used derivatives (via Goldman Sachs) to hide the true state of its debt problems in order to join the Euro.
Creative accounting took priority when it came to totting up government debt. Since 1999, the Maastricht rules threaten to slap hefty fines on euro member countries that exceed the budget deficit limit of three percent of gross domestic product. Total government debt mustn't exceed 60 percent.
The Greeks have never managed to stick to the 60 percent debt limit, and they only adhered to the three percent deficit ceiling with the help of blatant balance sheet cosmetics…
"Around 2002 in particular, various investment banks offered complex financial products with which governments could push part of their liabilities into the future," one insider recalled, adding that Mediterranean countries had snapped up such products.
Greece's debt managers agreed a huge deal with the savvy bankers of US investment bank Goldman Sachs at the start of 2002. The deal involved so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period — to be exchanged back into the original currencies at a later date.
The above story for Greece is illustrative of the story for all “emerging markets” starting in 2003: tons of easy money, rampant use of derivatives for accounting gimmick, and the inevitable collapse.
From a big picture scenario, in 2003, the global Central Banks abandoned a focus on inflation and began to pump trillions in loose money into the economy. Because large banks could loan well in excess of $10 for every $1 in capital on their balance sheets, global credit went exponential.
The effect was sharply elevated asset prices that greatly benefitted tourism-centric economies such as Greece.
As I stated in our issue Price Discovery:
If the foundation of the financial system is debt… and that debt is backstopped by assets that the Big Banks can value well above their true values (remember, the banks want their collateral to maintain or increase in value)… then the “pricing” of the financial system will be elevated significantly above reality.
Put simply, a false “floor” was put under asset prices via fraud and funny money.
Take a look at the impact this had on Greece’s economy.
Below is Greek GDP dating back to the 1960s. Having maintained a long-term trendline of growth the country suddenly saw its GDP MORE THAN DOUBLE in less than 10 years after joining the EU?
In many regards, this “growth” was just a credit binge, much like housing prices, stock prices, etc. By joining the Euro, Greece was able to borrow money at much lower rates (2%-3% vs. 10%-20%).
Rather than using these lower rates to pay off its substantial debts, Greece funneled as much money as possible towards Government employees (nearly one in three Greek workers).
As a result, Government wages nearly doubled to the point that your typical Government employee was paid 150% more than his or her private sector counterpart. Add to this a pension system in which retirees are paid 92% of their former salaries and you have a debt bomb of epic proportions.
In simple terms, Greece from 2003-2010 was an economic boom driven by incomes, which were in turn driven by cheap debt NOT real organic growth. Thus, the collapse in GDP was yet another case of “price discovery” in which asset prices fall to economic realities…
Another Crisis is brewing. It’s already hit Greece and it will be spreading throughout the globe in the coming months. Smart investors are taking steps to prepare now, before it hits.
If you've yet to take action to prepare for this, we offer a FREE investment report called the Financial Crisis "Round Two" Survival Guide that outlines simple, easy to follow strategies you can use to not only protect your portfolio from it, but actually produce profits.
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- What China Thinks Of Donald Trump
Donald Trump hates “losers” and he pretty clearly thinks there are too many of them in America.
“This country is in big trouble. We don’t win anymore. We lose to China. We lose to everybody,” the bellicose billionaire told a raucous audience at the first debate of the GOP Presidential primary on Thursday.
While it wasn’t clear what specific “losses” Trump was referring to or even whether he could cite any meaningful examples if pressed, he’s correct to say that when it comes to China, the US has suffered some serious setbacks of late, not the least of which is Beijing’s successful membership drive for the Asian Infrastructure Investment Bank.
There’s no question that the bank’s very existence represents something of an economic coup in that it, along with the BRICS bank and to a lesser extent, the Silk Road Fund, are a response to the perceived inadequacies of the US-dominated multilateral institutions that have dominated the post-war world. But the more immediate and palpable “loss” (to use Trump-speak) came courtesy of The White House’s failed attempt to dissuade Washington’s allies from joining the bank.
In addition to the AIIB, Beijing’s land reclamation efforts in disputed waters China shares with US allies in the region has also been portrayed by some analysts and commentators as evidence of America’s waning global influence. And then there are the standard arguments around trade and offshoring, to which Trump alluded on Thursday.
So Trump’s characterization of the US as a “loser” when it comes to the country’s relationship with China is probably accurate, even as it lacks nuance and any semblance of serious analysis. And while we know what Trump thinks of China, what we don’t yet know is what China thinks of Trump, and although we’re reasonably sure that Trump could care less what the Politburo (let alone the Chinese people) have to say, The Washington Post has nevertheless endeavored to offer a bit of insight which we think is worth highlighting as Trump attempts to hold on to his lead in the GOP polls. Here’s WaPo’s Ana Swanson:
The Chinese are not exactly the only people that Donald Trump has insulted. But China is a favorite punching bag of Trump’s, a jumping-off point for the Republican presidential candidate to emphasize his tough-minded negotiating skills and criticize Obama for having a feeble foreign policy. (“I beat China all the time,” Trump has said.)
In campaign speeches, Donald Trump has blamed China for stealing American jobs and breaking the rules. He has criticized China for currency manipulation and espionage, and proposed raising taxes on China “for each bad act” they commit. In July, he rebuked the White House for giving Chinese diplomats state dinners, saying they should be taken to McDonald’s instead.
The Chinese have begun taking notice. While most Chinese people still seem to be unaware of who Trump is, a growing number of people in the Chinese media and on social media are discussing the baffling political figure.
The Chinese foreign ministry also defended against Trump’s allegations that China is “ripping” the U.S. After Trump vowed to retake millions of jobs that China had stolen, Chinese media picked up on and translated criticisms of Trump’s statement by Alan Blinder, the former Federal Reserve vice chairman and a Princeton University economist. “It’s completely implausible,” Blinder had said of Trump’s plan.
Much of the reporting in the Chinese media has focused on explaining why America is entertaining Trump’s presidential aspirations.
In June, the Global Times, a mouthpiece of the Communist party, published an article titled: “The theme of Trump’s speech for running for president: I am really very rich.”
Other articles focus on the reasons Trump might be running for president, besides a desire to win. Some have commented that his campaign is just an effort to get more publicity before going back to being a business tycoon.
Yicai.com, the Web site of China Business Network, a financial media group, ran an article that said: “One of the purposes of running for president is to promote oneself, to become more famous, like Trump. … The nationwide exposure he gained is hard to measure in monetary terms.”
Of course all of the above really fails to touch on the most pressing issue when it comes to Trump and on that note, we’ll give the last word to an unnamed Chinese social media user quoted by WaPo:
“This guy’s hair so strange. I thought it was Photoshopped at first.”
- Chinese Trade Crashes, And Why A Yuan Devaluation Is Now Just A Matter Of Time
Two weeks ago we showed something very disturbing (something even the IMF is now figuring out): global trade is grinding to a halt…
… and in a dollar-denominated cases, has even gone into reverse.
Nowhere has this trend been more visible than in the IMF’s own admission that global trade, growing at 7% in 2011, has nearly halved its growth rate, and in 2016 global commerce is expected to rise at the slowest pace since the financial crisis.
Overnight we got another acute reminder of just who is lying hunched over, comatose in the driver’s seat of global commerce: the country whose July exports just crashed by 8.3% Y/Y (and down 3.6% from the month before) far greater than the consensus estimate of only a 1.5% drop, and the biggest drop in four months following the modest June rebound by 2.8%: China.
It wasn’t just exports, imports tumbled as well by 8.1%, fractionally worse than the -8.0% consensus, and down from the -6.1% in June as China’s commodity tolling operations are suddenly mothballed.
Goldman breaks down the geographic slowdown:
- Exports to the US contracted 1.3% yoy, down from the +12.0% yoy in June.
- Exports to Japan fell 13.0% yoy in July, vs -6.0%yoy in June
- Exports to the Euro area went down 12.3% yoy, vs -3.4% yoy in June.
- Exports to ASEAN grew 1.4% yoy, vs +8.4% yoy in June
- Exports to Hong Kong declined 14.9% yoy, vs -0.5% yoy in June.
Slower sequential export growth likely contributed to the slowdown in industrial production growth in July. Weaker export growth is likely putting more downward pressure on the currency, though whether the government will allow some modest depreciation to happen remains to be seen.
As CA’s Valentin Marinov summarizes:
“the collapse in exports seems to be driven by renewed weakness in the EU demand. Not great overall and highlights one distinct risk for the global asset markets we have been highlighting repeatedly of late. In particular, we were stressing the link between slowing global trade (both in manufacturing goods as well as commodities) and the recent sharp drop in central bank FX reserves. That drop should over time erode the sovereign demand for stocks and bonds. The resulting imbalance between supply and demand for global stock and bonds is still not fully reflected in equity risk premia (VIX is still quite law) as well as bond term premia (these are still low for the UST). A correction higher, presumably on the back of Fed liftoff, should weigh on a broad range of risk-correlated currencies.”
All of the above, of course, is something Zero Headers have known since last November when we wrote “How The Petrodollar Quietly Died, And Nobody Noticed.” More are starting to notice.
And while the above should not be news, neither should anyone be surprised that such ongoing trade collapse for the world’s largest mercantilist, spells doom for the Politburo’s 7% GDP target. From Bloomberg:
Along with weak domestic investment, subdued global demand is putting China’s 2015 growth target of about 7 percent at risk. The government has rolled out fresh pro-expansion measures, including special bond sales to finance construction, but has held off weakening the yuan as China seeks reserve- currency status.
“Exports are no longer an engine for China growth — no matter what the government does, it’s just impossible to see strong export growth as in the past,” said Bank of Communications economist Liu Xuezhi. “It means additional slowdown pressure, and it requires the government to be more aggressive in the domestic market.”
So while one can repeat that the PBOC will have to lower rates again until one is blue in the face (even as out of control soaring pork prices make it virtually impossible for the local authorities to ease any more), the realty is that, as we warned in March, a Chinese QE is now inevitable. Why? Because while the government is already clearly buying stocks thereby validating the “other” transmission mechanism, the only thing the PBOC still hasn’t tried is to devalue the Yuan. As global trade continues to disintegrate, and as a desperate China finally joins the global currency war, it will have no choice but to devalued next.
- Flushing Cash Into The Casino – The Media Stock Swoon Shows That It Works Until It Doesn't
Submitted by David Stockman via Contra Corner blog,
If you don’t think the Fed and other central banks have transformed financial markets into debt besotted gambling casinos, consider the last few days of carnage in the media stocks. That sector is rife with bubble finance infections.
To wit, hedge fund speculators feasting on zero interest carry trades and cheap options own 10% of the 15 companies which comprise the S&P Media index. That happens to be the highest hedge fund ownership ratio among all 23 S&P industry sectors.
So given that the essential modus operandi of hedgies is leveraged gambling, not hedging risk, it is not surprising that they have ganged-up on the media stocks. Indeed, as Zero hedge noted with respect to this week’s sharp and unexpected sell-off:
The love affair between hedge funds and media stocks is being tested. As Bloomberg reports, hedge funds have been near-constant champions of the industry, drawn in by its high cash generation and buybacks, takeover speculation and the straight-up momentum of the stocks themselves. This week’s retreat represents the sharpest rebuke to that thesis — and one of its only setbacks in a bull market well into its seventh year.
Indeed, it has been a perfect fit. These companies—–such as Disney, Time Warner Inc., Fox, CBS and Comcast——are notorious financial engineers, using massive amounts of the dirt cheap debt enabled by the Fed to fund incessant M&A takeovers and prodigious stock buybacks. That’s exactly the kind of financial milieu in which hedge funds thrive; and one, by the same token, that would not even exist in an honest free market.
Not surprisingly, therefore, the S&P media index went parabolic in response to the Fed’s post-crisis money printing spree. From an aggregate market cap of about $135 billion at the March 2009 bottom, the index had soared by 520% to nearly $700 billion before this week’s $50 billion or 8% loss. Needless to say, it wasn’t the geniuses who inhabit Mickey’s house or the machinations of Rupert Murdoch that made all the difference.
No, the S&P media index was propelled upward during the last six years by an endless flood of fresh cash into the Wall Street casino that kept hedge funds and robo-traders upping their bets on the next M&A deal or stock buyback announcement. Viacom (VIA) is a poster boy for the latter.
As shown below, this week’s body slam—triggered by the belated realization that the cable companies’ long suffering customers are now “cutting the chord”—— has taken VIA’s share price all the way back to its late 2010 levels.
But since customer defection has been a long-standing risk and wasn’t exactly new news, the question recurs. Exactly what was it that caused Viacom’s stock price to double in the interim and thereby shower upwards of $20 billion in market cap gains on the hedge fund gamblers who chased it?
The cause for the rip pictured below would most definitely not be growth of earnings or free cash flow. In the fiscal year ending in September 2011, Viacom posted $8.7 billion of EBITDA and that turned out to be the high water mark. Even as its stock price was soaring in the next two years, its EBITDA slithered downward to $8.2 billion in its most recent (June) LTM report.
Likewise, net income of $2.12 billion in 2011 has now slide to $1.77 billion on an LTM basis.
In fact, Viacom levitated its stock the new fashioned way. During the last 19 quarters it has plowed $17.6 billion back into the casino in the form of stock buybacks ($15.1 billion) and dividends ($2.5 billion). But before you praise VIA for its seemingly shareholder friendly ways, consider this: During the same period it only earned $10.2 billion of net income.
That’s right. It distributed 175% of its net income!
Under the rules of old-fashioned finance that kind of reckless self-liquidation would have been considered a flashing red warning signal to hit the sell button. That would have been especially appropriate in this case since Viacom’s business model has always depended upon the improbable capacity of its cable distributors to extract punitive monopoly prices from their residential customers indefinitely.
Yet when the fundamentals reared their ugly head in this quarter’s round of media company earnings releases, the gamblers professed to be downright shocked, Why the resulting sell-off, which lopped $8 billion off VIA’s market cap in a flash, was purportedly not on the level, at all:
People are shooting first and asking questions later…this indiscriminate selling, to me, is just nuts,” exclaims on billion-dollar AUM hedge fund CIO as media stocks faced a bloodbath this week.
Well, this week’s action wasn’t exactly shooting first; it was more like asking questions way too late. In fact, the entire $20 billion market cap bubble that the most nimble-footed hedge funds feasted upon was just the result of a leverage trick. Nearly the entire $7 billion gap between what Viacom earned and what it distributed to shareholders over the last 29 quarters was borrowed!
But here’s the thing. Viacom’s fundamentals are visibly deteriorating. Its $3.05 billion of revenue in Q2 2015 was down 10.6% from prior year and 17% from the June quarter two years ago.
Stated differently, Viacom’s peak price of $90 per share, which equated to about $40 billion of market cap one year ago, had nothing to do with “price discovery” in the equity capital markets. It was a pure case of debt-fueled speculation in the casino.
But VIA is a piker compared to most companies in the media index. Take Time Warner (TWX). Looking at the stock chart from March 2009 forward you would think that the company was a found of earnings growth and value creation. Alas, you would be wrong.
Time Warner’s pre-tax income was $4.5 billion in its most recent 12 month period—–compared to $4.4 billion way back in 2011. While 2% growth in three and one-half years is not much to write home about, the casino gamblers were not slowed in the slighted. Perhaps they were impressed with the 25% growth in its net income line, but if so they were capitalizing a one-time reduction in its tax rate—-from 34% to 19.4% over the period—-as if it represented permanent growth of earnings.
In either case, gamblers have been in a rambunctious mood. The companies stock price had rebounded by 6X from the March 2009 low. And even with this week’s sell-off, the TWX stock price had risen at a 35% compound rate during the last three years at a time when its actual pre-tax income was up by 2%.
Needless to say, there is no mystery as to how this disconnect occurred. The company simply pumped cash into the casino like there was no tomorrow. To wit, during the last six and one-half years, TWX distributed $29 billion in dividends and stock repurchases to shareholders compared to net income of just $20 billion.
So it was the same formula as Viacom’s. Distribute every dime of earnings, and then top it up with a big heap of money that could be borrowed on the cheap.
In TWX’s case, its net debt grew from $11.5 billion in 2009 to $20.7 billion in the quarter just ended. That is, it borrowed every single dime of its $9 billion of distributions over and above its earnings during the period.
The bottom line is pretty straight-forward. Just prior to this week’s correction TWX was valued at $90 billion versus operating free cash flow of $2.8 billion in the LTM period just posted. It could be said that 26X free cash flow is a pretty sporty valuation for a no-growth company.
But then you should try CBS. It too has been a stock market rocket, and it too flushed $11 billion into the casino in the last four and one-half years in the form of stock buybacks and dividends. That was 140% of it net income during the period.
Likewise, another member of the S&P Media index, Comcast, distributed $28 billion in stock repurchases and dividends during the last four and one half-years or just slightly less than its cumulative net income of $31 billion over the period. Needless to say, it made ends meet after hefty investments by borrowing; its net debt soared from $25 billion in 2010 to $45 trillion in the most recently ended quarter.
Even the mighty Disney had little use for its $31 billion of net income during the same four and one-half year period ending the recent June quarter. It flushed fully $27 billion or 88% of it net income back into the casino.
During the most recent quarter debt issuance by US companies reached an all-time high, raising a question as to why companies still need to borrow so much after selling $7 trillion of U.S. debt securities since 2008.
This weeks S&P Media index swoon leaves no doubt as to the answer. Companies have not been borrowing to grow; they have been borrowing in order to flush cash into the casino.
Charles Ponzi once had a scheme that was not essentially different. Yes, and it worked until it didn’t.
- Obamanomics Explained (In 1 Cartoon)
- China's Secret Gold Hoarding Strategy
Submitted by Stefan Gleason via MoneyMetals.com,
China’s recent stock market gyrations have some analysts now calling China the biggest bubble in history. But those who write off China because of market volatility are missing a more important long-term trend of Chinese geopolitical and monetary ascendancy. That trend shows no signs of abating.
China’s leaders have a clever strategy, and Western financial powers may someday wake up in shock when they realize what has occurred.
It’s true that the Chinese government has helped fuel artificial demand for property and equities. China skeptics who argue that these artificially inflated markets will crash to much lower levels could well prove to be correct. Some China doubters also argue that a downturn in China’s economy will put downward pressure on commodity prices.
Commodities – from crude oil to copper to gold and silver – have already suffered a severe cyclical downturn. Commodity markets tend to be leading indicators, moving in advance of whatever economic story of the day the financial media are telling.
But single-day drawdowns of more than 8% in the Chinese stock market this summer certainly caused some forced liquidations of precious metals positions.
The very fact that booms and busts in China’s markets and economy can now exert heavy influence in globally traded markets such as commodities proves the point that China’s influence isn’t on the wane. Not by a long shot. Even if China’s double-digit rates of growth in the early 2000s prove fleeting and never return, China’s economy still remains on track to eclipse the U.S. economy in the years ahead as the world’s largest.
China, Russia Are Quietly Emerging as World’s Gold Buyers
Chinese officials aim to ultimately to challenge the America’s standing as the world’s superpower. That’s why they’re forming a strategic alliance with Russia, an adversary of the U.S. That’s why both the Russian and Chinese central banks have quietly emerged as the world’s largest gold buyers.
In July, the People’s Bank of China reported that it has added more than 600 tons of gold bullion to its stockpiles since 2009, taking the total to 1,658 tons. That represents a 60% jump in gold assets in just six years.
In fact, all of that new metal was added to central bank’s ledger in June 2015.
With gold prices down in June, there's no way the actual buying had occurred then. It appears central bank officials simply moved that metal over from the books of China's state-owned banks which can hold metal secretly.
So that’s just what the Chinese are reporting officially.
Unofficially, according to MarketWatch columnist David Marsh, “China probably has a lot more gold than it admits.” That’s because the Chinese government regularly acquires gold directly from China’s mining industry.
The transactions are settled in yuan rather than dollars, so most or all of these “internal” gold purchases can avoid showing up as foreign reserve assets.
In examining gold flows into China as well as Chinese gold production, some experts believe that China actually holds more than 10,000 tons of gold, not the “paltry” 1,658 tons the People’s Bank of China is disclosing.
China Has an Incentive to Understate Its Gold Hoard
It makes logical sense that China would understate its gold aspirations. If you had the means to acquire hundreds, or even thousands, of tons of gold, you’d want to do so as stealthily as possible in order to avoid tipping off the market.
If your strategic objective was to dramatically boost gold reserves over a period of several years, you wouldn’t want to see the price rise – at least not while you’re still accumulating. And if you had no ethical qualms about interfering in the market, you’d want to rig prices lower so you could obtain more ounces.
Chinese officials are more than willing to manipulate markets, whether through subterfuge, deceit, or outright force. Recently, in an effort to prop up the stock market, they tried to forbid people from selling shares of stocks. How heavily involved China is in managing the gold market is impossible for an outsider to know.
But there is plenty of evidence to suggest that China is covertly buying gold while dumping U.S. Treasuries. JP Morgan analyst Nikolaos Panigirtzoglou calculated that China’s foreign exchange assets got depleted by $520 billion over the past five quarters. Most of that $520 billion in paper asset dumping comes, presumably, from China’s massive holdings of Treasury securities.
China Wants Admission to the Global SDR Club
If China continues to unload U.S. bonds at a feverish pace, the Federal Reserve might be forced to launch a new bond-buying campaign. That, in turn, would diminish the credibility of the U.S. dollar as China seeks inclusion of its yuan into the International Monetary Fund's Special Drawing Rights (SDR) currency basket.
As Reuters reported, China “is pushing for the increased use of the yuan for trade and investment as part of a long-term strategic goal to reduce dependence on the dollar.” The yuan’s ascendancy to the status of a top-tier SDR currency would go a long way toward making the Chinese currency a serious global competitor to the U.S. dollar.
However, if it were known that China actually had 10,000+ tons of gold on hand, other countries would more likely balk at China’s pending petition to join the International Monetary Fund’s exclusive SDR club. (A decision is expected this fall.)
China’s gold-accumulation strategy will go a long way toward making China more independent of the dollar and other fiat currencies.
If you actually believe what the People’s Bank of China reports as its gold reserves, then it has a long way to go to catch up with other countries. While China’s official stash is the world’s sixth largest in absolute terms, it ranks much lower in relation to its economy and its total foreign reserves.
China’s admitted gold hoard represents just 1.6% of its foreign exchange holdings. By comparison, Russia’s gold bullion accounts for 13.4% of reserves.
Whether it owns 1,658 tons or upwards of 10,000 tons, China’s appetite for gold is far from being satisfied. The Chinese government will continue to buy, both officially and unofficially.
China may never establish a model sound money system; nor is that its goal. China simply appreciates the universality of gold. And, as the saying goes, “gold goes where it’s most appreciated.”
Whether you’re a Communist or a capitalist, whether you speak Mandarin or English, gold remains the one permanent, immutable common denominator. Gold’s value has been recognized universally for hundreds of years and will continue to be recognized universally regardless of whatever market gyrations or economic or political strife the future may bring.
- "We Have A Civil War": Inside Turkey's Descent Into Political, Social, And Economic Chaos
Deflecting criticism surrounding Ankara’s anti-terror air campaign, Turkey’s foreign minister Mevlut Cavusoglu last week told state television that strikes against ISIS targets would pick up once the US had its resources in place at Incirlik which will supposedly serve as a hub for a new “comprehensive battle.”
Turkey has had a difficult time explaining why, after obtaining NATO support for a new offensive campaign to root out “terrorists”, its efforts have concentrated almost solely on the PKK and not on ISIS. As we’ve discussed in great detail (here, here, and here), and as the entire world is now acutely aware, Ankara’s newfound zeal for eradicating ISIS is nothing more than a cover for its efforts to undermine support for the PKK ahead of snap elections where President Tayyip Erdogan hopes to win back AKP’s absolute majority in parliament which it lost last month for the first time in 12 years.
Cavusoglu was effectively suggesting that the reason it appears as though Ankara is overwhelmingly targeting the PKK at the possible expense of efforts to weaken ISIS is because Turkey must wait for the US to show up first, at which point the “real” fight will begin with the possible assistance of Saudi Arabia, Jordan, and Qatar. In the meantime, the country is descending into civil war and for many Kurds, the frontlines are all too familiar. Here’s Al Jazeera:
Located on the Tigris River just upstream from Turkey’s Iraqi and Syrian borders, Cizre has been shaken by nocturnal gun battles between police and residents in recent days.
Its streets remain deserted after sunset, while families sleep in the innermost rooms of Cizre’s squat, cinderblock homes to protect themselves from gunfire.
Hostilities have smouldered here since Turkey’s government and the Kurdistan Workers’ Party (PKK) abruptly ended a two-year ceasefire in late July, imperilling the hard-won gains of Kurdish politicians and reversing prospects for a historic peace deal nearly achieved in March.
Since July 23, Ankara has launched hundreds of bombing missions against the PKK’s strongholds in northern Iraq, while the PKK has killed at least 18 members of Turkey’s security forces in guerrilla attacks throughout the country’s east.
Those attacks have put Cizre, a long-defiant bastion of pro-Kurdish sentiment, back on the front lines of a conflict that has cost more than 30,000 lives since 1984.
“They say war is coming, but it’s already here in Cizre,” said Rasid Nerse, a 26-year-old construction worker.
The ending of the ceasefire came less than two months after Turkey’s Kurdish-rooted People’s Democracy Party (HDP) scored a historic victory in national elections.
Though Kurdish deputies usually run for parliament as independents, the HDP cleared a daunting 10 percent electoral threshold to become the first pro-Kurdish bloc to formally enter parliament under its own name.
Though the HDP has called on both sides to end the subsequent hostilities, Turkish President Recep Tayyip Erdogan has attacked the political party, requesting last week that parliament strip Kurdish lawmakers of their legal immunity from prosecution.
Our citizens see the police as a threat to their security, not a provider of it said Kadir Kunur, HDP mayor of Cizre.
Ankara has ordered the detention of more than 1,000 HDP members in a national “anti-terror” probe that has focused on the PKK.
The PKK is listed as a “terrorist group” by Turkey, the European Union and the US.
In Cizre, that crackdown has helped bring about the present security crisis.
As mourners returned to their homes after Nerse’s funeral, many struggled past a series of makeshift walls and ditches that have recently been erected to encircle their neighbourhoods.
Armed members of the PKK youth wing (YDG-H) began setting up the improvised barriers on July 26, when 21-year-old resident Abdullah Ozdal was killed during a protest.
The vigilante youth group grew out of previous security crackdowns, which saw hundreds of Cizre youths radicalised while in Turkish prisons.
Operating at night and frequently armed, the YDG-H similarly encircled the town during anti-government riots across the region last year.
“Our citizens see the police as a threat to their security, not a provider of it,” said Kadir Kunur, the town’s HDP mayor. Kunur pointed to the dozens of bullet holes that pockmark the HDP’s building in Cizre, remnants from one of many deadly raids police launched here in the early 1990s.
And more from Vice:
The trenches have been dug in Cizre. Several feet wide and paired with mounds of earth and torn-up building material, they appeared blocking roads in this Kurdish enclave in southeastern Turkey after Ankara launched an intensive air campaign against the banned Kurdistan Workers’ Party (PKK) in July.
Children play on them during daylight hours. But at night, when police move in, they’re patrolled by groups of armed youths, who attempt to repel these official incursions in fierce clashes that have left at least one dead and many injured.
Cizre has spent years on the fringes of war. The unremarkable-looking town of just over 100,000 lies on the Tigris River, around 30 miles from the tripoint where Turkey meets conflict-ravaged Syria and Iraq, and violence regularly strays over the national boundaries. Now, the cycle of airstrikes and renewed PKK attacks on Turkish troops threaten a return to the three-decade-long struggle between the two sides that claimed more than 40,000 lives. And here, residents feel like they’re at the heart of the fight.
“There’s a saying, ‘if there’s peace, it will start from Cizre, and if there’s war, it will start from here as well,'” the town’s co-mayor Leyla Imret, 28, told VICE News recently. “And we can say we have a civil war in Turkey.”
While the most tragic consequence of the renewed violence will unquestionably be the human toll, there are real implications for the country’s economy and indeed, the political uncertaintly (and the war that’s come with it) threaten to undermine Turkey’s investment grade credit rating. Although Moody’s took no action on Friday, the risk of downgrade is very real. Here’s Goldman:
Turkey’s rating outlook has been “negative” since early 2014, which means there is a real (and arguably increasing) risk of a formal downgrade within the coming 6 months.
Our previous research on the impact of rating changes (from junk to IG status) suggest that a potential downgrade could result in a material widening in Turkey’s CDS spreads, by as much as 60bp cumulatively (20-100bp range for +/- 1 standard deviation; Exhibit 1-2), with the first downgrade instantly prompting a c. 20bp widening. Of course, this estimate is based on a stylised econometric model, and it is possible that the downgrade could lead to a more significant market impact given that it is not widely anticipated by market participants.
And Barclays has more on the intersection of war, politics, and financial conditions in Turkey:
Heightened geopolitical risk arising from the terror attack in Suruc is no accompanied by rising domestic risks from the renewed terror attacks by the PKK. These have inflamed political rhetoric and already tense coalition talks between the AKP and CHP, raising significantly the risks of a snap election and political instability. It remains to be seen whether the heightened tension will push the AKP and CHP further apart or bring together the AKP and MHP.
Escalating security risks may work in favour of the AKP in a snap election: The argument is that the perception of rising internal and external threats (PKK and ISIS) could increase the electorate’s preference for strong leadership and hence a singleparty government. It is also possible that AKP may attract some votes from MHP as a result of adopting a tougher stance against PKK (including the use of military force), ramping up the rhetoric against HDP and abandoning the Kurdish peace process.
Risk of HDP remaining below 10% is low for now: We do not see a significant likelihood that the HDP would score below the 10% national threshold in the event of a snap election, barring possible turbulence in the party caused by a potential ban on prominent politicians or party closure. The migration of votes from AKP to HDP appears to be a structural shift and unlikely to reverse in the near term, considering AKP’s increasingly nationalistic rhetoric and its stance on the Kurds in Syria.
Economic implications of recent developments are negative: We think: 1) the risks to the sovereign rating outlook have risen; 2) downside risks to growth are higher; 3) the perception of higher rising political/geopolitical risks could increase dollarization; and 4) corporate sector’s FX mismatches will be exposed.
Risks to the sovereign rating outlook have increased: Turkey’s gross external financing requirement remains large at c.USD200bn (or 25% of GDP), regardless of the improvement in the current account deficit. Needless to say, any rollover of this debt and/or the extent of re-pricing not only depend on global financial conditions but also investors’ perceptions of Turkey-specific risks. This naturally ties into the sovereign ratings outlook and associated risks to Turkey’s IG status, which moved back into focus during the election. The rating outlook revolves around whether political risks, policy uncertainties and government effectiveness could discourage capital inflows, thereby exposing Turkey’s external vulnerabilities. Rating agency commentary has generally been negative since the elections, highlighting rising political uncertainty and likely delay in structural reforms.
As for what happens next, expect Washington and Ankara (who, you’re reminded, both want Assad out of Damascus) to begin launching joint strikes against ISIS targets. Tragically, the plight of the Kurds in Turkey will fade into the background and Erdogan will be free to exterminate his political opposition with NATO’s blessing. Once US missions from Incirlik become a regular occurrence, expect Saudi Arabia (which was hit with another suicide bombing this week) and Qatar to enter the fray and from there, the excuses to put American (and Saudi) boots on the ground will mount until eventually, a full scale invasion will be undertaken on the excuse that it’s the only way to neutralize the ISIS threat.
On cue, Fox News reported on Friday that the US army is sending F-16s to Turkey, but perhaps more telling is the postioning of “a search-and-rescue team of elite Air Force pararescuemen, with their support helicopters and crews” which will stand ready to assist the Pentagon’s “elite” troop of Syrian freedom fighters in case they, like their commander and deputy, are prompty captured by militants the second they set foot on Syria’s (formerly) sovereign soil:
The U.S. Air Force is planning to send six F-16s from an undisclosed location in Europe to Turkey after the Turks agreed to allow manned flights from Incirlik Air Base and others last week. This would put U.S. jets only a 30-minute flight from ISIS targets in Syria.
The new jets are expected to arrive in the next few days. Strike missions against ISIS will begin shortly after their maintenance crews can get set up. Part of the mission of the new jets will be to support the fledgling U.S.-trained Syrian fighters.
Additionally, a search-and-rescue team of elite Air Force pararescuemen, also known as “PJs,” with their support helicopters and crews will be moved into position after the fighters arrive.
- Be Afraid: Japan Is About To Do Something That's Never Been Done Before
When the words "mothballed", "nuclear", and "never been done before" are seen together with Japan in a sentence, the world should be paying attention…
As TEPCO officials face criminal charges over the lack of preparedness with regard Fukushima, and The IAEA Report assigns considerable blame to the Japanese culture of "over-confidence & complacency," Bloomberg reports,
Japan is about to do something that’s never been done before: Restart a fleet of mothballed nuclear reactors.
The first reactor to meet new safety standards could come online as early as next week. Japan is reviving its nuclear industry four years after all its plants were shut for safety checks following the earthquake and tsunami that wrecked the Fukushima Dai-Ichi station north of Tokyo, causing radiation leaks that forced the evacuation of 160,000 people.
Mothballed reactors have been turned back on in other parts of the world, though not on this scale — 25 of Japan’s 43 reactors have applied for restart permits. One lesson learned elsewhere is that the process rarely goes smoothly. Of 14 reactors that resumed operations after four years offline, all had emergency shutdowns and technical failures, according to data from the World Nuclear Association, an industry group.
“If reactors have been offline for a long time, there can be issues with long-dormant equipment and with ‘rusty’ operators,” Allison Macfarlane, a former chairman of the U.S. Nuclear Regulatory Commission, said by e-mail.
In case you are not worried enough yet…
As problems can arise with long-dormant reactors, the NRA “should be testing all the equipment as well as the operator beforehand in preparation,” Macfarlane of the U.S. said by e-mail. Although the NRA “is a new agency, many of the staff there have long experience in nuclear issues,” she said.
Kyushu Electric has performed regular checks since the reactor was shut to ensure it restarts and operates safely, said a company spokesman, who asked not to be identified because of company policy.
“If a car isn’t used for a while, and you suddenly use it, then there is usually a problem. There is definitely this type of worry with Sendai,” said Ken Nakajima, a professor at Kyoto University Research Reactor Institute. “Kyushu Electric is probably thinking about this as well and preparing for it.”
It's not the first time a nation has tried this..
In Sweden, E.ON Sverige AB closed the No. 1 unit at its Oskarshamn plant in 1992 and restarted it in 1996.
It had six emergency shutdowns in the following year and a refueling that should have taken 38 days lasted more than four months after cracks were found in equipment.
* * *
Good luck Japan
- Peter Schiff: What Kind Of "Improvement" Does The Fed Want?
Submitted by Peter Schiff via Euro Pacific Capital,
Over the past few years observing changes in Federal Reserve interest rate policy has been a little like watching paint dry or grass grow…only not as exciting. That's because the Fed has not changed its benchmark Fed Funds rate since 2008 (Federal Reserve, FOMC). So with nothing else to talk about, Fed observers have focused on the minute changes in language that are included in Fed Policy statements. The minuscule revision in the July statement was the inclusion of the word "additional" to the "labor market improvements" that the Fed wants to see before finally pulling the trigger on its long-awaited rate increases. That should lead to a discussion of what kind of "additional" improvements those could be.
According to a good many of Main Street analysts, the labor market has already improved significantly over the past 5 years. During that time the unemployment rate has declined from 9.8% to just 5.3% (Federal Reserve Economic Data (FRED), St. Louis Fed). In the FOMC's June 2015 Summary of Economic Projections, Committee participants' estimates of the longer-run normal rate of unemployment had a central tendency of 5.0 to 5.2 percent. But that's not the kind of labor market success that has spurred Janet Yellen to action. She is looking for "additional improvements." Since it is very unusual for the unemployment rate to fall below 5% (having done so in only ten years in the 45 years since 1970), it must be that she is looking for improvements in other employment metrics, like wage growth, labor force participation, and the ratio of full time to part time job creation. On those fronts there is very little to inspire confidence.In late July the Dept. of Labor released the Employment Cost Index, which is considered the broadest measure of labor costs, that showed an increase of just .2% in the second quarter. Incredibly, this was the index's smallest quarterly increase since it was created back in 1982. The result came in far below the consensus expectation for an increase of .6%. If you believe as I do that the inflation measures that the government uses to calculate GDP growth are understated (its last GDP report assumed zero percent inflation) then such a minuscule change in wages would suggest that workers are losing ground, not gaining.But last week the Wall Street Journal's Jonathan Hilsenrath, who is by many considered the most well-connected reporter to the Fed's inner decision makers, posted an article citing recent Fed studies that show how wage movements have an uncertain effect on consumer prices. And given the Fed's consistent concern about "too low inflation", this leads him to the conclusion that wage growth may not be considered an important driver of monetary policy.So perhaps Yellen would be spurred to act by improvements in the labor participation rate, a metric that she has always talked about in reverential terms. But on that front she won't find much to cheer about either. Today's jobs report, though widely reported as a positive one, saw no change in the unemployment or participation rates. In fact, seasonally adjusted, July set a new record for those not in the labor force at almost 94 million people. And the headline number of 215k jobs was one of the weaker reports of recent years, all of which have not, as of yet, prompted a rate hike.As the unemployment rate has crept steadily downward, the participation rate has moved down with it. In fact, more people have dropped out of the labor force in recent years than have actually found jobs. In June, a staggering 640,000 Americans gave up on job hunting (Bureau of Labor Statistics, 7/2/15), pushing the participation rate down to 62.6%, the lowest figure since 1977 (FRED, St. Louis Fed). And contrary to the spin put on by the White House Council of Economic Advisers, these are not retiring baby boomers. Older people are actually staying in the workforce longer. Rather, these are prime age workers who have simply given up looking for work.In 2014 the Labor Department estimated that in June of this year 6.4 million workers who wanted full time work were just working part time jobs. This "involuntarily underemployed" category includes 56% more workers than it did in 2006.Such labor weakness would help to explain another recently released data set that shows that the economy remains much weaker than economists have expected. Last week we got the first look at Second Quarter GDP figures, which everyone hoped would confirm that the near-recession level figures of the first quarter were just a speed bump rather than a serious ditch. In fact, the numbers in the first quarter were so bad that they convinced government statisticians to go back to the drawing board to reformulate their GDP calculation methodology in order to eliminate the "residual seasonality" that many claimed was behind the disappointingly low Winter GDP results.The good news is that the new formula did revive First Quarter (it's now positive .6% instead of negative), and also showed that the second quarter rebounded modestly to 2.3% annualized growth (Bureau of Economic Analysis (BEA)). The results were enough to generate happy headlines from the pushover media establishment that declared the economy was back on track. But most reports failed to mention that most observers had expected First Quarter to be revised much higher (the Fed itself had estimated that Q1 GDP could be as high as 1.8% annualized if better seasonal adjustments were used) and that the 2.3% for Second Quarter was well below the consensus forecast.But the reduction in residual seasonality, which boosted First Quarter results, compelled the government to revise down other quarterly figures for the prior two years. The net result is that since 2012, the economy has not grown by an average of 2.3% per year as originally reported, but by just 2.0% (BEA). This makes what was already the weakest post-War expansion considerably weaker than economists believed. Maybe they will call for the revival of residual seasonality?So barring any further revisions to First Half 2015 GDP, (which are much more likely to be revised down not up), our economy is running at an annualized pace of just 1.45%. To even get to the 2.3% annual growth rate, which represents the extreme low end of the Fed's "central tendency" for 2015, the economy would have to grow at 3.15% annualized in the Second Half. That is looking extremely unlikely. If we fail to hit those numbers, 2015 will be the ninth consecutive year in which the economy failed to reach or exceed the low end of its forecasts.The weak labor market and the weakening economy may explain a couple of trends that should not be occurring in a strengthening economy: Americans' growing love for old cars, and the high rate in which young people of working age remain living with their parents.Recent statistics show that the average age of America's fleet of 257.9 million working light vehicles had an average age of 11.5 years, the oldest on record. The IHS Automotive survey (7/29/15) also showed that new car buyers were holding on to their vehicles for an average of 6.5 years, up from 4.5 years in 2006. When workers are doing well they tend to buy new cars more often. When things are lean they hold onto their rides longer. Interestingly, this trend has occurred while Americans are taking on more leverage in car loans.Similarly a recent study by Goldman Sachs, from Dept. of Commerce data, shows that the percentage of 18-34 year olds who live at home, which had shot up during the recession of 2008, finally began to decline slightly in 2014, but that declinestopped at the beginning of 2015. USA Today (8/5/15) noted that the number of Millennials living at home increased from 24% in 2010 to 26% in the first third of 2015, according to a Pew Research Center report, based on Census Data. Why would this be happening if the economy was really growing?Since the unemployment rate seems unlikely to drop and both wage growth and increased labor participation show no signs of life, and the percentage of those who want to work full time, but can't, is still highly elevated, should we conclude that the Fed will move forward with its rate hike plans this year? If Janet Yellen is being honest that the Fed will not raise rates until we have further improvements in the labor market and those improvements seem to be nowhere in sight, then why doesn't she just admit that the Fed will not be raising rates any time soon?If GDP growth only averages 2.0% in the Second Half (which I think is likely), then 2015 growth will only be about 1.7% annually. Given that the Fed didn't raise rates in 2012, 2013, and 2014, when growth was well north of 2%, why would they do so now? Yet Wall Street and the media stubbornly cling to the notion that 3% growth and rate hikes are just around the corner. Old notions die hard, and this one has taken on a life of its own.
- The political class and Central Banks are unable resolve debt issues in any meaningful way
Yesterday we assessed how elements of the financial media are either unbelievably lazy or completely complicit in helping to maintain the illusion of success for the Centralized powers (large governments and Central Banks).
Today we move on to addressing how the political class and Central Banks are unable resolve debt issues in any meaningful way.
Going into its financial crisis in 2009, Greece had a GDP of $341 billion. To put this into perspective, it’s roughly the size of the state of Maryland. Greek debt was roughly $370 billion that year, giving Greece a Debt to GDP ratio of about 108%.
It’s a strikingly small amount of money for a collective economy of nearly $18 trillion (the EU). Indeed, Greece contributes only 2% of the EU’s total GDP. And yet, the ECB working with the IMF has not been able to resolve Greece’s issues.
Let’s let that simmer for a bit…
A Central Bank, working with the IMF was unable to resolve a debt issue for a country that comprises less than 2% of the economy of which the Central Bank is in charge.
How is this possible?
First and foremost, the ECB had little if any interest in Greece’s well-being as an economy. For the ECB, the “Greek issue” was really more of a “large European bank issue.” In that regard, the ECB was focused on one thing.
That issue is collateral.
What is collateral?
Collateral is an underlying asset that is pledged when a party enters into a financial arrangement. It is essentially a promise that should things go awry, you have some “thing” that is of value, which the other party can get access to in order to compensate them for their losses.
For large European banks, EU nation sovereign debt (such as Greek sovereign bonds) is the senior-most collateral backstopping hundreds of trillions of Euros worth of derivative trades.
This story has been completely ignored in the media. But if you read between the lines, you will begin to understand what really happened during the last two Greek bailouts.
Remember:
1) Before the second Greek bailout, the ECB swapped out all of its Greek sovereign bonds for new bonds that would not take a haircut.
2) Some 80% of the bailout money went to EU banks that were Greek bondholders, not the Greek economy.
Regarding #1, going into the second Greek bailout, the ECB had been allowing European nations and banks to dump sovereign bonds onto its balance sheet in exchange for cash. This occurred via two schemes called LTRO 1 and LTRO 2, which were launched on December 2011 and February 2012 respectively.
Collectively, these moves resulted in EU financial entities and nations dumping over €1 trillion in sovereign bonds onto the ECB’s balance sheet.
Quite a bit of this was Greek debt, as everyone in Europe knew that Greece was totally bankrupt.
So, when the ECB swapped out its Greek bonds for new bonds that would not take a haircut during the second Greek bailout, the ECB was making sure that the Greek bonds on its balance sheet remained untouchable and as a result could still stand as high grade collateral for the banks that had lent them to the ECB.
So the ECB effectively allowed those banks that had dumped Greek sovereign bonds onto its balance sheet to avoid taking a loss… and not have to put up new collateral on their trade portfolios.
Which brings us to the other issue surrounding the second Greek bailout: the fact that 80% of the money went to EU banks that were Greek bondholders instead of the Greek economy.
Here again, the issue was about giving money to the banks that were using Greek bonds as collateral, to insure that they had enough capital on hand.
Piecing this together, it’s clear that the Greek situation actually had nothing to do with helping Greece. Forget about Greece’s debt issues, or protests, or even the political decisions… the real story was that the bailouts were all about insuring that the EU banks that were using Greek bonds as collateral were kept whole by any means possible.
This is why the ECB and the IMF failed to “fix” Greece. Indeed, the below chart makes it plain that all of the bailouts didn’t actually do anything to solve Greece’s debt problems: the country’s external debt has actually barely budged since 2010!
Note that after a brief dip in 2011-2012, Greece’s external debts rose right back to where they were in 2010 at the beginning of the debt crisis. Moreover, because Greek GDP dropped along with its debt levels in 2011-2012, the country’s Debt to GDP ratio has effectively flat-lined.
In short… neither of the first two bailouts actually solved ANYTHING for Greece from a debt perspective. Between this and the collateral discussion from earlier, the evidence is clear: the ECB has no interest in fixing Greece’s problems. Both bailouts were nothing but a backdoor means of funneling money to the large European banks using Greek debt as collateral on their derivatives trades!
Another Crisis is brewing. It’s already hit Greece and it will be spreading throughout the globe in the coming months. Smart investors are taking steps to prepare now, before it hits.
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Phoenix Capital Research
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