- The Neocon's Hegemonic Goal Is Driving The World To Extinction
Authored by Paul Craig Roberts,
My warning that the neoconservatives have resurrected the threat of nuclear Armageddon, which was removed by Reagan and Gorbachev, is also being given by Noam Chomsky, former US Secretary of Defense William Perry, and other sentient observers of the neoconservatives’ aggressive policies toward Russia and China.
Daily we observe additional aggressive actions taken by Washington and its vassals against Russia and China. For example, Washington is pressuring Kiev not to implement the Minsk agreements designed to end the conflict between the puppet government in Kiev and the break-away Russian republics. Washington refuses to cooperate with Russia in the war against ISIS. Washington continues to blame Russia for the destruction of MH-17, while preventing an honest investigation of the attack on the Malaysian airliner. Washington continues to force its European vassals to impose sanctions on Russia based on the false claim that the conflict in Ukraine was caused by a Russian invasion of Ukraine, not by Washington’s coup in overthrowing a democratically elected government and installing a puppet answering to Washington.
The list is long. Even the International Monetary Fund (IMF), allegedly a neutral, non-political world organization, has been suborned into the fight against Russia. Under Washington’s pressure, the IMF has abandoned its policy of refusing to lend to debtors who are in arrears in their loan payments to creditors. In the case of Ukraine’s debt to Russia, this decision removes the enforcement mechanism that prevents countries (such as Greece) from defaulting on their debts. The IMF has announced that it will lend to Ukraine in order to pay the Ukraine’s Western creditors despite the fact that Ukraine has renounced repayment of loans from Russia.
Michael Hudson believes, correctly in my view, that this new IMF policy will also be applied to those countries to whom China has made loans. The IMF’s plan is to leave Russia and China as countries who lack the usual enforcement mechanism to collect from debtors, thus permitting debtors to default on the loans without penalty.
In other words, the IMF is presenting itself, although the financial media will not notice, as a tool of US foreign policy.
What this shows, and what should concern us, is that the institutions of Western civilization are in fact tools of American dominance. The institutions are not there for the noble reasons stated in their founding documents.
The bottom line is that Western Capitalism is simply a looting mechanism that has successfully suborned Western governments and all Western “do-good” institutions.
As in George Orwell’s 1984, the IMF is dividing the world into warring factions — the West vs. the BRICS.
To avoid the coming conflict that the neoconservatives’ pursuit of American hegemony is bringing, the Russians have relied on fact-based, truth-based diplomacy. However, neocon Washington relies on lies and propaganda and has many more and much louder voices. Consequently, it is Washington’s lies, not Russia’s truth, that most of the Western sheeple believe.
In other words, Russia was misled by believing that the West respects and abides by the values that it professes. In fact, these “Western values” are merely a cover for the unbridled evil of which the West consists.
The Western peoples are so dimwitted that they have not yet understood that the “war on terror” is, in fact, a war to create terror that can be exported to Muslim areas of Russia and China in order to destabilize the two countries that serve as a check on Washington’s unilateral, hegemonic power.
The problem for the neocon unilateralists is that Russia and China—although misinformed by their “experts” educated abroad in the neoliberal tradition, people who are de facto agents of Washington without even knowing it—are powerful military powers, both nuclear and conventional. Unless Russia and China are content to be Washington’s vassal states, for the neoconservatives, who control Washington and, thereby, the West, to press these two powerful countries so hard can only lead to war. As Washington is not a match for Russia and China in conventional warfare, the war will be nuclear, and the result will be the end of life on earth.
Whether ironic or paradoxical, the US is pushing a policy that means the end of life. Yet, the majority of Western governments support it, and the insouciant Western peoples have no clue.
But Putin has caught on. Russia is not going to submit. Soon China will understand that US dependency on China’s workforce and imports is not a protection from Washington’s aggression. When China looks beyond its MIT and Harvard miseducated neoliberal economists to the writing on the wall, Washington is going to be in deep trouble.
What will Washington do? Confronted with two powerful nuclear forces, will the crazed neocons back off? Or will their confidence in their ideology bring us the final war?
This is a real question. The US government pays Internet trolls to ridicule such questions and their authors. To see the people who sell out humanity for money, all you have to do is to read the comments on the numerous websites that reproduce this column.
Nevertheless, the question remains, unanswered by the Western presstitute media and unanswered by the bought-and-paid-for stooges in the US Congress and all Western “democracies.”
Indications are that Russia has had enough of American arrogance. The Russian people have elevated a leader as they always do, and which Western countries seldom, if ever, do. The West has triumphed by technology, not by leadership. But Vladimir Putin is Russia’s choice of a leader, and he is one. Russia also has the technology and a sense of itself that no longer exists in the diversified West.
There is nothing like Putin anywhere in the West, over which presides a collection of bought-and-paid-for-puppets who report to private interest groups, such as Wall Street, the military-industrial complex, the Israel Lobby, agribusiness, and the extractive industries (energy, mining, timber).
At the 70th Anniversary of the United Nations (September 28), Putin, backed by the President of China, announced that half of the world no longer accepts American unilateralism. Additionally, Putin said that Russia can no longer tolerate the state of affairs in the world that results from Washington’s pursuit of hegemony.
Two days later Putin took over the fight against ISIS in Syria.
Putin, still relying on agreements with Washington, relied on the agreement that Russia would announce beforehand its attacks on ISIS installations in order to prevent any NATO-Russian air encounters. <a href=" http://sputniknews.com/analysis/20151211/1031591091/us-defense-analyst-s… “>Washington took advantage of this trust placed in Washington by Russia, and arranged for a Turkish jet fighter to ambush an unsuspecting Russian fighter-bomber.
This was an act of war, committed by Washington and Turkey, and thereby Washington’s European NATO vassal states against a nuclear power capable of exterminating all life in every one of the countries, including the “superpower US.”
This simple fact should make even the American super-patriots, who wear the flag on their sleeve, wonder about the trust they place in “their” government and in Fox “news,” CNN, NPR, and the rest of the presstitutes who continually lie every minute of every broadcast.
But it won’t. Americans and Europeans are too insouciant. They are locked tightly in The Matrix, where the impotent creatures are content to live without understanding reality.
Realizing that it is pointless to attempt to communicate to the Western sheeple, who have no input into their government’s policy, Putin now sends his message directly to Washington.
Putin’s message is loud and clear in his order directed against any US/NATO operations against Russia in its Syrian operations against ISIS:
Putin followed up this order with another order to the Russian Defense Ministry Board:
Russia’s Defense Minister Sergei Shoigu reported at the Defense Ministry meeting that 56 percent of Russia’s nuclear forces are new and that more than 95 percent are at a permanent state of readiness. The few Western news sources that report these developments pretend that Russia is ”saber-rattling” without cause.
To make it clear even for the insouciant Western populations, everything that Reagan and Gorbachev worked for has been overthrown by crazed, demented, evil American neoconservatives whose desire for hegemony over the world is driving the world to extinction.
These are the same bloodthirsty war criminals who have destroyed seven countries, murdered, maimed, and displaced millions of Muslim peoples, and sent millions of refugees from the neocon wars into Europe. None of these war criminals are protected from terrorist attack. If the alleged “Muslim threat” was real, every one of the war criminals would be dead by now, not the innocent people sitting in Paris cafes or attending parties in California.
Neocons are the unhumans who created on purpose the “war against terror” in order to gain a weapon against Russia and China. You can witness these unhumans every day on talk TV and read them in the Weekly Standard, National Review, the Wall Street Journal, the New York Times, the British, German, Australian, Canadian, and endless Western newspapers.
In the West lies prevail, and the lies are driving the world to extinction. An expert reminds us that it only takes one mistake and 30 minutes to destroy life on earth.
- "Reassured?"
- Guest Post: The Ugly Truth Donald Trump Has Exposed
Authored by Karl Denninger via The Market Ticker blog,
The fear in both the GOP and Democratic party is visible at the surface when it comes to Trump, and it's not that he's any of what they've accused him of. No, it's really much simpler than that, and both Republican and Democrat parties, along with the mainstream media, are utterly terrified that you, the average American, is going to figure out what underlies all of these institutions in America.
No, it's not that they're evil.
It's worse, for evil frequently is recognized and fought back yet for decades America has not awakened to what has been going on in the political and media establishment. It was evident during the Vietnam war and has only gotten worse since.
For those who don't recall the Tet Offensive was an attack launched by the NVA and VietCong by some 70,000 troops in a coordinated series of attacks across more than 100 targets. It was an attempt to foment rebellion among the South's population.
Tet failed in its military objective, in that there were too few troops spread too thinly, and once the US and South Vietnamese figured out what was going on they literally slaughtered a huge number of the attackers. To put perspective on this at the Battle of Hue roughly 500 US Marines and South Vietnamese were killed but over 5,000 NVA and VietCong died in that one battle alone.
The story was repeated through the country; while the North managed to attack they lost virtually the entire attacking force, while not managing to take one mile of territory. They also failed to incite rebellion, which was the primary goal of the offensive in the first place.
Our media, however, reported that we lost. They were present and they lied, including Walter Cronkite. Cronkite reported in February of 1968 that the war "was a stalemate and probably unwinnable" despite knowing that the NVA had virtually been rendered soldierless in the Tet offensive as their casualty rate ran ten times the South's.
Tet was a desperation move; the North was in serious trouble. They were failing to take territory and losing men and material at an ridiculous rate compared to the Americans and South. Simply put we were the better fighting force and it wasn't a close call. In the first few days of their "offensive" they lost ten thousand men against about 750 on the other side and it just got worse from there with total losses on their side being close to 50,000, or virtually all of their remaining fighting-age force.
Cronkite didn't care about the truth. He wasn't evil, he was indifferent. He didn't give a damn about the fact that a totalitarian government was being handed a victory over millions of citizens, he simply wanted to make a further name for himself and push his political agenda.
Likewise there are those who claim that Obama and similar are evil in their view of Muslims and terrorism and of course they wish to draw a distinction between left and right sides of the aisle. Wrong. They're all indifferent.
The political goal is more power for them and their friends, mostly economic power. More ability to extract from you by force and threaten you with jail or worse if you try to resist. More power over your daily life. More power to tell you that you must bake a cake for gays (because your religious convictions don't matter) but if your religious convictions are Muslim then they do matter and must be protected because that's where one of the big reservoirs of oil and undeveloped people that can be exploited in the future reside.
They literally don't care if you get blown up or shot and it doesn't matter if they're Democrat or Republican. They don't care if you live under a freeway overpass because your health "insurance" that you are forced to buy covers so little that you have to spend $6,000 before one dime is covered, and you don't have $6,000. They don't care that a Christmas Party was shot up by a couple of Islamic Nutjobs who they could have identified if they did care and in fact they shut down an investigation on "civil rights" grounds that probably would have identified the shooters years before.
Jeb Bush has never apologized for giving Driver Licenses to the majority of the 9/11 hijackers in Florida because he doesn't care. What he cared about was making sure that illegal immigrants could roof houses during the housing bubble so his buddies could make money. That 3,000 Americans died as a plausibly direct consequence doesn't matter to him.
Marco Rubio supports allowing the illegal invaders to remain here because he doesn't care if it screws you out of a job. Like Bush, what he cares about is his corporate patrons that want cheap labor. He cites all these Fortune 500 companies that were started by immigrants but I'll bet that not one of them was an illegal invader. Ditto for his Nobel Prize winner claims. Oh sure, they've been immigrants — the legal variety. The illegal ones are the roofers working under the table or the gang members. That there is immense criminal and economic collateral damage doesn't matter to him; he's not evil, he's indifferent.
Ben Carson refuses, despite being a surgeon, to speak against the medical monopolies. He knows exactly what's wrong in that regard both in the hospital and drug field. He's not evil, he's indifferent to the damage that his own profession has done to you over the last 30 years.
Hillary Clinton knows damn well that during the Benghazi attacks there were military resources available to interdict them. But she has famously said "what difference does it make" and, in her view, she's right. She's not evil, she's indifferent — to the lives lost there and to any other collateral damage including the arming of what has turned into Daesh! Her goal is globalism, socialism and statism, all for her own personal aggrandizement. That you are harmed or even killed doesn't matter to her.
Folks, this is where Trump is really freaking the establishment out. See, Trump already has anything material that he wants, and if something pops up he wants and doesn't have he can simply stroke a check. He has no need to play the indifference game; there is no amount of money he can gain or lose in his lifetime that will change his lifestyle. He has his own security and doesn't need yours, he has his own money and also doesn't need yours.
The visceral reaction you're seeing in the media isn't about Trump's policies. It's fear that's motivating them.
They fear that you might come to realize that you can't demonize the "other side" for being evil; rather, they are both equally guilty almost to a single man and woman at being simply indifferent as to how much you get screwed and by whom, up to and including your death and the death of your children, so long as their desire for more power and control, either for them or their friends, is realized.
If that happens — if you quit the left/right, republican/democrat, liberal/conservative game and instead demand the indictment of all of them for their treasonous and outrageously unlawful behavior along with their removal from office and are willing to back that up with action up to and including a general strike until they are all gone and in chains then they are all screwed.
That is what is driving the animus toward Trump.
Wake up America.
- China's Currency Continues To Tumble As AsiaPac Credit Markets Plunge, EM Stocks Lowest Since 2009
Following weakness in the middle-east and as WTI prices slide back into the red (on the heels of record speculative shorts in crude oil), Asia-Pac stocks are opening to the downside (but only modestly). On the bright side, the ZARpocalypse has been delayed briefly as the Rand is rallying on the back of Zuma hiring a new finance minister. On the dark side, offshore Yuan continues to plummet, down 6 of the last 7 days (down 14 handles!) and the Yuan fixed weaker for the 6th day in a ro wto July 2011 lows. and signaling more turmoil ahead of The Fed's decision. AsiaPac credit markets are gapping notably wider, EM stocks down 9th day in a row to 2009 lows, and EM FX is plunging.
AsiaPac credit markets are gapping wider… Worst day in over 2 months..
- *JAPAN ITRAXX INDEX CLIMBS 5.25BPS TO 79BPS
- *AUSTRALIA ITRAXX INDEX RISES 7.9BPS TO 135BPS
- *ASIA ITRAXX INDEX RISES 6.5BPS TO 149.5BPS
Offshore Yuan was extending recent weakness into the Fix…
Earlier we asked…
Will the PBOC set the CNY at another 4 year low today
— zerohedge (@zerohedge) December 13, 2015
And the answer is… yes
for the 6th day in a row – and in growing size – PBOC fixed the Yuan weaker to its weakest since July 2011
The Middle-East closed weak…
As Oil faded…
After Speculative crude shorts hit a new record high…
Japanese bond futures price just hit a record high…
And Nikkei plunged as China came to life…
The ZARpocalypse has been delayed a little, after South Africa's president Zuma reappointed Pravin Gordan as finance minister, replacing David van Rooyen who was appointed 5 days ago only to unleash a record collapse in the Rand. It remains to be seen if the market will stabilize after an initial kneejerk spike higher in the ZAR.
As Zuma hired a new "cooperative" finance minister.. which rallied the South African Rand briefly… but even that is fading fast now…
Other currencies are turmoiling…
- *RUPIAH FALLS 0.9% VS USD, SET FOR BIGGEST DROP SINCE OCT. 29
MSCI AsiaPac (MXAPEXA) is drifting lower…
- *INDIA'S NIFTY FUTURES DROP 0.8% IN SINGAPORE
- *FTSE CHINA A50 DECEMBER FUTURES DECLINE 1.7% IN SINGAPORE
- *TAIWAN'S TAIEX INDEX FALLS 0.7% to 8,058.67 AT OPEN
- *SINGAPORE'S STRAITS TIMES INDEX FALLS 0.5% TO 2,819.78 AT OPEN
- *S.KOREA KOSPI INDEX FALLS 1.5%; SAMSUNG ELECTRONICS DROPS 2%
And EM is getting hammered…
- *MSCI EMERGING MARKETS INDEX FALLS FOR 9TH DAY
- *MSCI EMERGING MARKETS INDEX HEADS FOR LOWEST CLOSE SINCE 2009
Metals are all lower…
- *COPPER OPENS 0.5% LOWER AT $4,680.00 A TON IN LONDON
- *NICKEL OPENS 0.2% LOWER AT $8,680.00 A TON IN LONDON
- *ZINC OPENS 0.2% LOWER AT $1,549.00 A TON IN LONDON
There is some good news… China's Warren Buffett is back from the dead…
- *FOSUN CHAIRMAN GUO SAID TO ATTEND INTERNAL CONFERENCE
- *FOSUN’S 6.875% 2020 BONDS JUMP 4.8 CENTS TO 96.8 CENTS ON DLR
But…
- *FOSUN INTL FALLS 13.5% AFTER CHAIRMAN GUO ASSISTED PROBE
And that is not helping Chinese stocks… at 2-week lows…
Charts: Bloomberg
For now US equity futures are flat.
- In Dramatic Twist, CEO Of "Gating" Third Avenue Is Fired, "Not Allowed Back In The Building"
And just like that last week’s junk bond debt fund liquidation and redemption suspension, which first struck at the mutual fund giant Third Avenue and promptly spread to a hedge fund launched by the former heads of distressed and high yield trading from, get this, Bear Stearns, and was supposed to be quietly buried, went front page and nuclear following a WSJ report that the CEO of Third Avenue, David M. Barse, who had been with the company for 23 years, has been fired.
The less than amicable “parting of the ways” follows the decision to gate withdrawals from its junk-bond fund which as we reported on Friday, roiled all asset classes, and sent junk bond prices to the lowest level since 2009.
The WSJ adds that a security guard at the firm’s New York headquarters said Sunday that Mr. Barse had been let go and isn’t allowed back in the building.
Mr. Barse had led Third Avenue since 1991, according to the company’s website, and is a large shareholder. He was the public face of the firm’s announcement Thursday that it was closing its $789 million Third Avenue Focused Credit Fund and would bottle up investors’ money for months or more as it tries to liquidate its assets.
The move roiled credit markets Friday and sparked widespread concern about other mutual funds with large holdings of corporate junk bonds.
Mr. Barse didn’t reply to requests for comment. Third Avenue and its representatives didn’t respond to requests for comment.
This dramatic escalation now means that every single hedge and mutual funds will spend all Sunday night and Monday morning trying to ferret out any bonds that are especially illiquid or are mispriced (based on the traditional hedge fund mismarking methodology of marking an illiquid bond pretty much anywhere one wants because in the absence of an active market, that’s precise where the price is: anywhere). It also means that what was already an illiquid market will, paradoxically, get even worse as BWIC after BWIC slam trading desks, and cause panic as stunned PMs ask themselves just what cockroaches are hiding in their own balance sheets.
As a result, instead of looking for bargains, everyone will be eager to dump as much illiquid exposure as they can since nobody wants to be the next David Barse.
* * *
Finally, here are some final thoughts from JPM on what one should be on the lookout for as fund liquidations and gates suddenly become the entire story, ironically enough, in the week in which Yellen is supposed to hike rates to demonstrate how solid the economy is and how stable financial conditions are.
This week’s experience also exposes the major disadvantage of mutual funds relative to ETFs in terms of “first mover advantage” in periods of stress: with bond ETFs trading continuously during the day like equities and with prices able to deviate significantly from their end-of-day NAV, the first move advantage disappears. In other words this deviation from NAV represents the market mechanism by which the first move advantage is cancelled.
In all, redemption gates appear to be a rather problematic tool relative to other options such as redemption fees in the debate on how to prevent runs in the mutual fund industry in the future.
Another issue that arises from this week’s decision by Third Avenue Management to suspend redemptions from its Third Avenue Focused Credit Fund is about the cash levels of bond mutual funds. How healthy are these cash balances overall to prevent a more widespread repeat of Third Avenue’s redemption suspension?
ICI data allow us to calculate the cash balances as % of assets for both HG and HY bond mutual funds in the US. These cash balances are shown in Figure 4. The cash balances of HY bond funds had risen in September and October but they remain rather low by historical standards. HG bond funds look less vulnerable than HY funds, but they have seen steady erosion of cash balances since mid 2014. In other words HG bond funds look a lot more vulnerable relative to a year a go.
We look forward as first bond, then stock, then all other mutual funds seeks to shore up cash balances in the aftermath of the Third Avenue fiasco. Or, in other words, as everyone tries to sell at the same time.
- Credit Suisse Is "Worried" These Two Charts May Abort The Fed Hiking Cycle
Despite the bloodbath in corporate credit markets, talking heads remain cognitively dissonant as to the reality lurking under the surface of this colossal leap in cost of funds for every firm. However, Credit Suisse is "worried" about the implications of these two disheartening charts expose, suggesting a default environment that might abort the Fed hiking cycle – which in this case is not a market-reassuring outcome.
As Credit Suisse's William Porter explains, the percentage of North American companies losing money on an LTM basis in Q3 rose to a cycle high, while the ratio in Europe stayed stable, at the low end of its recent range.
The burden of this is the correlation with the default rate. Moody's 2016 forecast is 3.8% but the relationship with this ratio now suggests something much higher, and we watch that outcome as a risk. Arguably the only market remotely priced to a much higher default rate as an outcome is US rates.
This is not a forecast, but an observation and a watching point. With the ECB now apparently less friendly as we examine below, we become more cautious ahead of the presumed Fed hike on 16 December, particularly in terms of total return dynamics.
Ironically, if defaults were to rise to anything like the degree this analysis suggests, it might abort the Fed hiking cycle which is a source of concern for the credit market. But we would hardly take this as a reassuring outcome.
There is a theme at present that credit is leading other markets, and is predicting "recession." We are worried…
- India's Failing Gold Monetization Scheme: Seizure Imminent?
Submitted by Paul-Martin Foss via The Mises Institute,
India’s newest gold monetization scheme has been a colossal failure. After one month, it has netted only one kilogram (2.2 pounds avoirdupois) out of an estimated 20,000 tonnes (44 million pounds avdp) of privately-held gold. Why is that? Well, let’s look at how the program works.
- Gold-holders turn their gold over to a bank. The banks melt the metal down and provide it to the central bank to loan to jewellers.
- In exchange, the central bank provides gold accounts to the banks on behalf of the gold depositors and pays interest on those deposits.
- The interest rate on those deposits is a little over 2%, while the inflation rate in India right now is over 5%.
- The deposits are time deposits, meaning that depositors receive their principal repaid at the end of the term; short-term depositors receive gold or rupees back, while medium- and long-term depositors receive only rupees.
So you give up all your gold, get at most a -3% rate of return on your investment, and might get both your interest payments and principal paid in rupees that the government has historically devalued at up to 15% per year. And the government wonders why gold-holders aren’t flocking to offload their gold?
But not to worry, the government will make sure this scheme works:
“A finance ministry official said if banks fail to win over temples, the government could intervene directly as it is looking for a big boost to the scheme to keep both imports and the current account deficit under control.”
Shades of 1933 all over again. One would imagine that outright gold confiscation from Hindu temples would result in massive protests and quite a bit of bloodshed. And while most rational people would assume that the government would be smart enough to avoid doing something so drastically stupid, this is the same government that developed the cockamamie gold monetization scheme in the first place. Never underestimate the idiocy of government bureaucrats, especially when those bureaucrats are trying to save face.
Let’s hope for the sake of the Indian people that their government learns its lesson and quietly shelves its futile attempts to monetize private gold holdings. If it really wanted to monetize gold, it would end any restrictions on the importation, transfer, and use of gold as money and allow markets to determine what money they wanted to use. Control is hard to give up, but the Indian economy would be far better off with gold as money instead of rupees.
- The Donald Responds To "Dopey, Daddy's Boy" Saudi Prince's Slur
"Shots fired"
Following Saudi Prince Alwaleed Bin Talal's statement on Friday…
.@realDonaldTrump You are a disgrace not only to the GOP but to all America. Withdraw from the U.S presidential race as you will never win.
— ?????? ?? ???? (@Alwaleed_Talal) December 11, 2015
… we said, "we now anxiously await Trump's twitter response."
We no longer have to wait, because as of late last night, the Donald responded:
Dopey Prince @Alwaleed_Talal wants to control our U.S. politicians with daddy’s money. Can’t do it when I get elected. #Trump2016
— Donald J. Trump (@realDonaldTrump) December 12, 2015
Ironically, as The Hill reports,
Bin Talal told The Economist in 1999 that he started his business with a $30,000 loan from his father and by mortgaging a house his father had given him for $400,000.
Trump, the son of a wealthy real estate developer, has said he received a "small" $1 million loan from his father after he graduated from college in 1968. Forbes estimates his net worth at $4.5 billion.
Black pots and kettles everywhere…
- "Ferocious Surprises" Await Bonds Traders In 2016
Submitted by Salil Mehta via Staistical Ideas blog,
It should be easy to at least get the direction of interest rate changes correct, most of the time. Instead as we see in the chart here, professional money managers always get this wrong (and truth be told this pattern has been going on for many cycles). The problem is just as bad when it comes to predicting stock price changes for the following year. Nevermind that the brash financial pundits have assured you that now is a great time to rotate into stocks, given that we are both in the middle of a “Santa Claus rally” and within a year ending in “5”! Nothing could be more cockamamie.
Next week we have the highly-anticipated, Federal Open Market Committee meeting where there is a chance that the discount rate will be hiked for the first time since before the recent financial crisis. While both risks in stock and bond markets are again smouldering in advance (note we correctly forewarned exactly 2 years ago today in the New York Times that we’d suddenly have a few ~3% or more daily drops in the stock market during 2014-2015), we focus our attention here on the knottier and more pertinent idea of the dispersion about interest rates expected for 2016. In other words, what should this probability distribution of outcomes or errors best look like?
We will combine the best concepts from modern interest rate modeling, macroeconometrics, and probability theory. To start, see the blue color graphical representation below of the 10-year treasury bond yield distributions, over the past 30 years (1986 through today).
We notice an astonishingly large and complex shape to the rate disturbances over the course of a year, making the job of borrowers, business planners, and traders, far more interesting.
We know from modern interest rate modeling (used for various purposes through finance) that these bond rates can follow either an equilibrium rate, or an arbitrage-free rate class of models (the main difference being that the former assumes that the inputs are reliable). Both of these model types can then be further split into risk-neutral, and a realistic class of models (the main difference being the former assumes the current pricing can be used). The idea (in theory) is that this volume of bond math work focuses on capturing the guidance of bond rates, to their more natural level. However it does little to describe the enormous amount and differing quality of the error dispersions about any progressing path.
And the typical macroeconometric model tries to take on some of these opposing considerations into account, on the front of pricing and parameter inputs. It would incorporate too much autocorrelation within important market variables, which we know from probability theory (combined with personal market observations over decades) can be erroneous. We’ll also provide below an exploration of exponential weighting of past empirical distributions (as opposed to the simple aggregation that most analysts already use).
We’ll show the relevant de-trended, daily yield changes across time, for the blue raw chart above. You can see this in the green color chart below. One can see the breach of modern interest rate modeling formulas that target volatility proportional to the level of the rate, yet we see on this left hand chart that there is a theoretically insurmountable violent pick-up in volatility only from 2008 onwards! And we have a second version on the right, which trains the eye to better focus on the shape of the distributions, as opposed to the magnitudes of the extreme gyrations. We do this by rescaling the distributions across time so that they have an equal higher-order dispersion.
Now we can use these rate modeling changes as our historical data, from which we can peer into 2016. We use the current 10-year yield of 2.1%, unite it with the blue raw yield distributions further above, and then redraw below the new, red color interest rate distributions. The chart on the right, again, has been rescaled to our 30-year average (which -as we noted early in this article- the current 2015 volatility in bond yields are reasonably above average).
We can also see from this vast distance of time (e.g., in the green charts further above) what a legendary treasury market wreck occurred on October 15, 2014. But notice as well how this sorely magnanimous deviation no longer glares at us in the red charts immediately above?
Now to look into 2016, we can then combine our insights into the 3-year history of balanced and rescaled distributions of rate changes, and give a natural and more reliable probability distribution that better reflects what could happen at the end of 2016 (beyond any subtle, underlying trend ensued by a chaotic and random path.) The first distribution, on the gold color chart below on the left, we can think of as the error distribution given 100% weight still on the 2015 data.
We can then show this (sticking with the same left chart immediately above), for the scenario where we provide a lower 50% weighting on the 2015 data, but then this would now accommodate a 25% [or 50% weighting of the (100%-50%) remaining] on the 2014 data, etc. One can see the weighting formulae through the example below, for the case where we assume a parameter estimate is 20%:
- 2015 weight = 20%
- 2014 weight = 20%*(100%-20%) = 16%
- 2013 weight = 20%*[100%-20%-20%*(100%-20%)] = 20%*[100%-20%-16%] = 10%
- 2012 weight = 20%*(100%-20%-16%-10%) = 6%
Where we can see relative to the 50% parameter estimate (and particularly the 100% parameter estimate), the probability weight becomes more naturally spread across past history.
As we have done previously, we look at the right hand chart above, for the 2016 dispersion likelihood accompanying the same averaging parameters, except for the scale-standardized distributions.
We notice in the charts that we can expect that once the bond volatility climaxes next year or beyond, that it should simmer down to levels more modest than what we had in 2015. Further we can shrewdly notice below, from the difference in the standardized distribution shapes, between the 100% and the 1% parameter weighting, that the 2016 bond rates can present a distribution with fatter tails (in both directions!) Similar to above, all of the distributions below have the same median and standard deviation.
This implies that there is slightly greater probability room (maybe equally in both directions) to experience a ferocious surprise in the 2016 end-of-year rates. Again however, these engaging distinctions in the shape of next year’s distribution shouldn’t detract you from another important message here: that the lift-off in treasury rates –once it happens– should right away also be a significant consideration.
- Goldman Confirms China's New FX Index Signals Further Yuan Devaluation To Continue
Confirming what we explained here, Goldman Sachs notes that the publication of a new CNY exchange rate index suggests an increased focus on broader CNY moves against other non-USDollar currencies and reinforces the likelihood of further depreciation versus the USD.
Goldman Sachs writes…
The China Foreign Exchange Trade System (also known as CFETS), a sub-institution of the People's Bank of China whose main function is organizing the inter-bank FX market, published a new CNY exchange rate index on its website on December 11th. The stated intention of the new index is to help bring about a shift in how the public and the market observe RMB exchange rate movements–emphasizing broader (trade-weighted) currency moves rather than simply bilateral moves versus the US dollar. The PBOC re-posted the CFETS announcement on its own website. In our view, this reinforces the likelihood of moderate depreciation versus the USD, should the broad USD continue to strengthen per our forecast.
The new index references 13 currencies, with their weights reportedly based on the countries' importance for China's trade, after adjusting for re-exports. Compared to BIS's China effective exchange rate index, which has previously often been referred to in official communications, weights assigned to the USD and EUR are noticeably higher (Exhibit 1)–the total effective weight assigned to the most major currencies (USD, EUR, JPY and GBP, including weight to the HKD in that of USD) is about 73%, compared to 54% in the BIS index. Note that CFETS mentioned yesterday that it would also start publishing CNY exchange rates based on the BIS basket and the SDR basket.
Since the decision by the IMF Executive Board to include the RMB in the Special Drawing Rights Basket on November 30, the authorities have more clearly allowed a weakening of the currency. The depreciation also followed the recent rise in the euro (vs. USD) in light of the less dovish than expected ECB move on Dec 3rd–this development caused the RMB TWI to ease on the margin, and all else being equal, might help mitigate the market sell-off pressure on the currency. Nevertheless, the recent rise in onshore CNY trading volume and widening of the CNH-CNY gap suggests that FX outflow might have picked up (Exhibit 2), likely reflecting increased expectation of RMB depreciation against the dollar as the weakening trend became visible.
Looking ahead, the news does not necessarily mean the PBOC will now peg the RMB on this basket. In recent days, the RMB depreciated not only against the USD, but indeed by even more against this CFETS basket (by 1.3% since Dec 3rd, by our calculation; Exhibit 3).
It remains to be seen whether the PBOC may decide to explicitly adopt this basket at some point in the future. In any case, however, in our view, the fact that the authorities have increasingly drawn public focus to RMB's performance on TWI basis rather than simply against USD reinforces the likelihood of moderate depreciation versus the USD, should the broad USD continue to strengthen per our forecast. This communication appears to signal the authorities' intention to maintain broad CNY stability in TWI terms, and may also make it easier for the authorities to offset USD strength without causing a major increase in policy uncertainty or expectations of a sharp one-off devaluation ahead.
Taken in conjunction with our global currency views, our baseline forecast of USDCNY at 6.60 on a one-year horizon implies a small (roughly 2.4%) appreciation of the CNY vs. the new basket over the coming year.
* * *
Of course, as we noted previously, the real purpose of the PBOC's exercise in FX management today was, just like in August, to fire a warning shot at the Fed's rate-hiking plans. Only this time the warning shot is far, far louder.
In September the Fed postponed its rate hike as a result of China's devaluation. Will it do the same again next week? Because if China is about to unleash a 15% deval of the CNY against the entire world, expect a flood of Chinese FX reserves as the PBOC tries to control the glidepath of its currency, and avoid an all out collapse driven by soaring capital outflows.
In other words, we are now right back where we were in mid-August, just before the bottom fell out of the market.
- Hit-And-Run Driver Arrested After Her Car Calls Police
Submitted by Mike Krieger via Liberty Blitzkrieg blog,
As technology generally continues to advance, one thing you can be sure of is the criminal justice system’s use of innovative new “tools” will grow exponentially. This can be a good thing, but it can also be a very dangerous thing. Pennsylvania’s new law that permits the use of data showing whether people are “deemed likely to commit additional crimes” in criminal sentencing, is a perfect example of how an over reliance on technology can be a threat to liberty and due process.
– From the post: Pennsylvania to Become First State to Use “Precrime” Statistics in Criminal Sentencing
Welcome to the future, ladies and gentleman.
From ZDNet:
A driver allegedly involved in two hit-and-run incidents was tracked down after her car alerted the police.
As reported by local news outlets, an unusual 911 call to emergency services took place on Friday in Port St. Lucie, Florida. You would usually expect a human voice on the end of the line, but in this scenario, a Ford vehicle alerted the police to a collision.
57-year-old woman Cathy Bernstein allegedly hit a truck before ploughing into a van on Prima Vista Boulevard, fleeing the scene after each collision. While Bernstein allegedly ran for the hills, her car had already recorded the crash and automatically contacted 911 after recording the time and date of the collision.
The car’s safety features, used by by Ford, BMW and other automakers, make use of sensors and Internet connectivity to shave down the time emergency responders take to get to the scene of an accident.
As an example, Ford’s SYNC‘s Emergency Assistance portal pushes the car to send a direct call to emergency services when the airbag is deployed or the fuel pump is deactivated — such as when a car suffers a sudden jolt against an object.
The system also gives 911 information including the car model, time, and GPS coordinates.
Usually, this would mean that drivers involved in an accident who are knocked out or cannot reach for their phones can be assisted as quickly as possible. However, in the case of hit-and-run drivers there will be nowhere to hide — as their car may snitch on them. You are automatically linked to a record of a collision’s time, the vehicle involved — and therefore the accompanying registration details — and the location.
By 2018, every new vehicle sold within the grasp of the European Union must have this kind of emergency responder technology installed. While originally planned for 2015, despite delays, the EU says eCall emergency responder technology could save up to 2,500 lives a year.
It’s a brave new world out there.
- If Washington Were Serious About Defeating Terrorism, It Would Have An Entirely Different Playbook
Excerpted from Stephen Walt’s “The Unbearable Lightness of America’s War Against the Islamic State” originally published in FP
If Washington were really serious about defeating terrorism, it would have an entirely different playbook.
In the classic World War II novel The Caine Mutiny, author Herman Wouk quoted an “ancient adage” about the typical bureaucratic response to a crisis:
“When in danger or in doubt, Run in circles, scream and shout.”
That couplet summarizes the prevailing U.S. response to global terrorism perfectly. All one has to do is read the panicky, narrow-minded, and irresponsible ravings of the current GOP presidential aspirants, as well as look at the latest poll numbers, and it’s clear that a good portion of the U.S. electorate is prepared to follow them off the deep end.
Yet the unhinged nature of the current discourse on terrorism also reveals how profoundly unserious U.S. counterterrorism efforts really are. To say this sounds odd, given the hundreds of billions of dollars that have been thrown at the problem, and the tens of thousands of lives (both American and foreign) that have been lost waging the “global war on terror” (or if you prefer, the “campaign against violent extremism”), is an understatement. It sounds even odder when one considers the vast army of people who are now employed to protect us from terrorism, not to mention the countries we’ve invaded, the drone strikes and targeted assassinations we’ve performed, and the mountains of metadata we’ve collected. Surely all this effort shows that Washington is deeply engaged in the challenge of thwarting al Qaeda, the Islamic State, and other violent radicals.
If only. For starters, consider what we have to show for all this effort and expense. We now have a vast counterterrorism industry, much bigger intelligence budgets, and more energetic government surveillance, but the basic counterterrorist playbook has evolved little over the past 20 years. In particular, our national security establishment is still convinced that the main way to defeat extremist groups is U.S. military intervention, despite the nagging suspicion that it just creates more ungoverned spaces and makes it easier for groups like the Islamic State to recruit new members. The New York Times reported this week that the Pentagon is now seeking a new set of military bases in or around the Arab and Islamic world so that it can prosecute the military campaign against the Islamic State et al. more effectively.
Excuse me, but isn’t that exactly what we’ve been doing since the 1990s and with greater energy and effort over time? Yet there are more al Qaeda affiliates now than there were back in 2001, and organizations like the Islamic State didn’t even exist back then. Is it possible that our entire approach here has been ill-conceived and has been making the problem worse instead of better? And what would a more serious approach to terrorism look like?
If the United States were truly serious about terrorism, it would start by gauging the level of threat properly and communicating that appraisal to the American people.
As numerous scholarly studies have shown, the actual risk of terrorism to the average American is remarkably low. In their new book Chasing Ghosts, John Mueller and Mark Stewart estimate the odds that an American will be killed by a terrorist are about one in 4 million each year. Compared with more prosaic dangers that we accept on a daily basis, this level of risk is absurdly small. Yet instead of using logic and evidence to reassure the American people, leaders from both parties have encouraged, since 9/11, the irrational fear of terrorism to drive a host of counterproductive policies. Even President Barack Obama, who seems to have a more measured view than many of his counterparts, did a rather limp job of reassuring the public in his Oval Office speech last Sunday.
* * *
If the United States were truly serious about terrorism, we would also have a more honest and open discussion about our own role in generating it.
Our reluctance to consider whether certain aspects of U.S. foreign and defense policy inspire anti-American extremism began as early as the 9/11 Commission. As the late Ernest May, a distinguished historian who worked with the commission, later acknowledged:
“[T]he report skirts the question of whether American policies and actions fed the anger that manifested itself on September 11…. [it] is weak in laying out evidence for the alternative argument that the World Trade Center, the Pentagon, and the Capitol might not have been targeted absent America’s identification with Israel, support for regimes such as those in Saudi Arabia, Egypt, and Pakistan, and insensitivity to Muslims’ feelings about their holy places. The commissioners believed that American foreign policy was too controversial to be discussed except in recommendations written in the future tense. Here we compromised our commitment to set forth the full story.”
Wow.
* * *
If the United States were truly serious about terrorism, we would now be having a frank discussion about the role of the media.
I’m positive organizations like Fox News and CNN do not intend to help al Qaeda or the Islamic State, but that is in fact precisely what they are doing. Whenever a terrorist incident occurs, TV and radio outlets immediately offer up a frenzy of overheated reportage, most of it intended to keep people scared and their eyeballs glued to the screen or their ears glued to the radio. (It’s the nature of modern media; the Weather Channel does the same thing with every major storm.) Yet this Pavlovian response is precisely what groups like the Islamic State are hoping for: It gives them more free publicity; convinces people who are in little to no danger that they should be really, really scared; and makes a comparatively weak movement like the Islamic State seem like a vast multi-headed hydra that is penetrating our society and threatening every one of us. Frankly, the media couldn’t be doing more to help these movements if they were being paid by them directly.
* * *
If the United States were truly serious about terrorism, we’d also see more creative efforts to discredit, marginalize, spoof, and embarrass the groups we oppose.
The Islamic State has a pretty sophisticated social media operation, designed to convince recruits that they are joining a movement that is exciting, visionary, dedicated, and that will change the world. There are many ways to combat this message, but let’s not leave out the role of humor and ridicule. One of the best ways to discredit extremist movements is to make them look ridiculous, so that joining or backing them is seen as stupid, uncool, or embarrassing. Instead of constantly portraying the Islamic State and its ilk as cruel, cunning, fanatical, dedicated, dangerous, etc., we should spend at least as much time depicting them as ignorant, backward, inept, misguided, and absurd.
* * *
If the United States were truly serious about terrorism, you’d see a more hardnosed approach to the various American “allies” who are part of the problem rather than being part of the solution.
U.S. officials would be calling out Turkey publicly for its actions against the Kurdish forces battling the Islamic State, for the porosity of its border with Islamic State-controlled territory, and for its blind eye toward smuggling and other actions that are keeping the militant group in business. Instead of going overboard to reassure Saudi Arabia in the wake of the deal with Iran, we’d be having some unpleasant conversations about the Saudi role in promoting Wahhabism and its connection to extremist movements like the Islamic State. And, by the way, putting that issue at the top of the agenda is not an unfriendly act, given that al Qaeda and the Islamic State are themselves potential threats to the House of Saud. We would also make it clear to the Israeli government that its treatment of the Palestinians is a national security issue for us, and we would make our “special relationship” conditional on the creation of Palestinian state and not just the usual empty promises (I know, I’m dreaming here, but our failure to take this obvious step just shows how unserious our policy still is).
* * *
Read the full article at FP
- Hilsenrath Just Reset Market Expectations: "Fed Is Worried Rates Will End Up Right Back At Zero"
Two weeks ago, we predicted that if the same September storm clouds return, and if December, which is increasingly looking as shaky as August as a result of a return of China deval fears, soaring dollar concerns and – the cherry on top – the collapse in junk bonds, forcing the Fed to have some literally last minute concerns about a rate hike, then the Fed’s official mouthpiece, Jon Hilsenrath will be very busy…
If Fed has any doubts about December, Hilsenrath will soon be very busy
— zerohedge (@zerohedge) November 30, 2015
… as he scarmbles to realign market expectations of a rate hike “because the economy is oh so strong“, with the reality that a rate hike may just unleash the next Lehman event of the past 8 years.
It looks like Hilsenrath indeed had a very busy weekend with his Fed “sources”, as he attempts to readjust the market consensus for a December rate hike lower, warning that the Fed’s “big worry is they’ll end up right back at zero.”
For some inexplicable reason, he also adds that “Federal Reserve officials are likely to raise their benchmark short-term interest rate from near zero Wednesday, expecting to slowly ratchet it higher to above 3% in three years. But that’s if all goes as planned.” Well, just how many things can take place in the next 72 hours that derail the Fed’s “planning?” And just what kind of lift-off is this, if the Fed’s decision is quite literally dependent on daily market, pardon economic, fluctuations?
It was not immediately clear what the answer to these questions is. What Hilsenrath did answer, however, is why and how the Fed will proceed to cut rates right back to zero. Here is Hilsy:
Any number of factors could force the Fed to reverse course and cut rates all over again: a shock to the U.S. economy from abroad, persistently low inflation, some new financial bubble bursting and slamming the economy, or lost momentum in a business cycle which, at 78 months, is already longer than 29 of the 33 expansions the U.S. economy has experienced since 1854.
Sounds an awful lot like setting the stage for an imminent, and confidence destroying, rate cut unleashed by, drumroll, the Fed’s own rate hike. In fact, so likely is that the Fed’s rate hike will be the catalyst for the Fed’s next easing cycle, that practically nobody has any doubt:
Among 65 economists surveyed by The Wall Street Journal this month, not all of whom responded, more than half said it was somewhat or very likely the Fed’s benchmark federal-funds rate would be back near zero within the next five years. Ten said the Fed might even push rates into negative territory, as the European Central Bank and others in Europe have done–meaning financial institutions have to pay to park their money with the central banks.
Traders in futures markets see lower interest rates in coming years than the Fed projects in part because they attach some probability to a return to zero. In December 2016, for example, the Fed projects a 1.375% fed-funds rate. Futures markets put it at 0.76%.
Among the worries of private economists is that no other central bank in the advanced world that has raised rates since the 2007-09 crisis has been able to sustain them at a higher level. That includes central banks in the eurozone, Sweden, Israel, Canada, South Korea and Australia.
“They effectively have had to undo what they have done,” said Susan Sterne, president of Economic Analysis Associates, an advisory firm specializing in tracking consumer behavior.
Here is the bigger problem: what the Fed has done – which is very little for the actual economy – is to push the S&P from 666 to 2100. It is the undoing of that most market participants are terrified about, and what will be to most, very unpleasant.
The pre-emptive excuses continue:
The Fed has never started raising rates so late in a business cycle. It has held the fed-funds rate near zero for seven years and hasn’t raised it in nearly a decade. Its decision to keep rates so low for so long was likely a factor that helped the economy grow enough to bring the jobless rate down to 5% last month from a recent peak of 10% in 2009. At the same time, waiting so long might mean the Fed is starting to lift rates at a point when the expansion itself is nearer to an end.
Ms. Sterne said the U.S. expansion is now at an advanced stage and consumers have satisfied pent-up demand for cars and other durable goods. She’s worried it doesn’t have engines for sustained growth. “I call it late-cycle,” she said.
Actually, there is one time when the Fed waited this long to tighten conditions, in fact waited too long: the economy was already in recession. That was back in 1936. What happened next was the second part of the Great Depression and a 50% collapse in the Dow Jones.
Hilsenrath’s odd litany of preemptive excuses continues:
Several factors have conspired to keep rates low. Inflation has run below the Fed’s 2% target for more than three years. In normal times the Fed would push rates up as an expansion strengthens to slow growth and tame upward pressures on consumer prices. With no signs of inflation, officials haven’t felt a need to follow that old game plan. Moreover, officials believe the economy, in the wake of a debilitating financial crisis and restrained by an aging population and slowing worker-productivity growth, can’t bear rates as high as before. Its equilibrium rate–a hypothetical rate at which unemployment and inflation can be kept low and stable–has sunk below old norms, the thinking goes.
That means rates will remain relatively low even if all goes as planned. If a shock hits the economy and sends it back into recession, the Fed won’t have much room to cut rates to cushion the blow.
This goes to the question of what r* is, or the Equilibrium Real Interest rate, one which as we showed last week, is almost entirely a function of nominal US economic growth rate (very low) and consolidated debt/GDP (at 350%, it’s very high). Under current conditions, it is either negative or just barely in the positive, suggesting any Fed rate hike will be followed by an immediate rate cut, something Hilsenrath just acknowledged.
The excuses continue:
Among the risks to the economy are financial booms that could turn to busts. One is in commercial real estate. Another in junk bonds is already fizzling. Each of the past three expansions was accompanied by an asset price bust–residential real estate in 2007, tech stocks in 2001 and commercial real estate in the early 1990s.
Normally in a recession the Fed cuts rates to stimulate spending and investment. Between September 2007 and December 2008 it cut rates 5.25 percentage points. Between January 2001 and June 2003 the cut was 5.5 percentage points, while from July 1990 to September 1992 it was 5 percentage points.
If the Fed wants to reduce rates in response to the next shock, it will be back at zero very quickly and will have to turn to other measures to boost growth.
Yup: such as QE4 and NIRP, which are inevitable, but which the Fed wants to “hike” rates first just so it has the alibi to unleash even more easing. And now even Hilsenrath is warning that this is the endgame:
Fed officials worry a great deal about the risk. The small gap between zero and where officials see rates going “might increase the frequency of episodes in which policy makers would not be able to reduce the federal-funds rate enough to promote a strong economic recovery…in the aftermath of negative shocks,” they concluded at their October policy meeting, according to minutes of the meeting.
In short, the age of unconventional monetary policy begun by the 2007-09 financial crisis might not be ending.
Coming from Hilsenrath, it does not get any clearer than that.
- About That Rate Hike…
On Wednesday of this week (December 16, 2015 to be precise) The FOMC committee at the Federal Reserve is slated to follow through on the 2nd most anticipated, telegraphed, jawboned, as well as hand-wrung policy dictates to end the now maligned zero-bound policy, and raise rates ever so slightly by 25 basis points. Some Fed. officials have publicly stated that many around the world are calling for them to “just do it.” Sure they were. Maybe a few weeks ago. But as we get closer to the actual moment where “should” turns to “will?” Things change, and change fast. Especially when that change looks awfully familiar as what transpired last time the global markets held its collective breath. i.e., As the market held its breath – all the air began streaming out of the balloon.
So once again we await the results for the monetary policy game of “Will they? – Won’t they?” The issue this time? The consequences may be in fact a little more costly than previously. For the world is a much changed place than what is was just this past September. And looking back less than 90 days later, it seems raising then may have been a cakewalk as compared to now. Like I said, “A lot has changed over the last few months.” And they all point to the same thing: Potential for disaster.
One thing that’s changed and yet remains the same? China. What’s changed is things seem to have taken a turn for the worse. What hasn’t changed? The blatant ham-fisted style of dealing with its monetary and market fiascos via its politburo.
A few weeks back I wrote in an article “Dec. 16th A Date Which Will Live On In Monetary Infamy”
“Well, don’t look now, but there indeed looks to be trouble brewing on the global stage (or should I say “international developments”) that could turn out to be just as big of a headache to the Fed’s reasoning’s on whether or not to “just do it.” Just one of those issues is – once again: China.”
And guess what has transpired since? Not only has the Asian markets nearly mirrored what took place during that period. China itself has done things far more damaging to their own credibility of making their markets more transparent and stable. This time they’ve devalued their currency via backroom operations more frequently in moves that are causing outright consternation across the for-ex markets.
The inclusion into the SDR (Special Drawing Rights) Basket which was supposedly a coveted milestone awarded as to assign stability and confidence seems to have done anything but. As a matter of fact it seems to have done quite the opposite. Adding to this the PBoC signaled just the other day their intention to loosen the Yuan’s peg to the $Dollar. How’s that going to work for a Fed. rate hike? Can anyone say “importing deflation via Made In China?” And here the Fed. is said to be all worried about inflation. I wonder if we’ll see “Ooopsy” in any of the corresponding releases via the Fed. minutes. I’m of the belief that word is going to come front-of-mind quite a lot over the next few months. We’re now seeing just how much turmoil waiting for the “right moment” Fed. style is about to unleash.
Another actuality which shouldn’t be lost on anyone is just how many top Chinese business leaders or market participants have suddenly gone missing. If one is perceived in any way as not towing the Party’s line (which is what happens in communist countries which far too many forget China is) whether they are talking negative, selling shares, cashing out, or a myriad of other factors deemed “improper” by the politburo – they are gone. Gone as in: Are they still alive?
But not to worry we’ve heard from many a next in rotation fund manager appearing in the financial media. “Their markets are just fine. They’re working out issues that come with any growing economy. After all, don’t forget China’s economy and GDP is still growing some 6% plus! We wish we had such growth!! And now they’re moving from manufacturing to a service economy, Oh, the riches to be had by all, Just back up the truck and BTFD!”
Sure thing. After all, what’s a little market turmoil when you can just “ghost” those you decide are the cause of any selling or market turmoil. And even if they aren’t, that’s OK too. For as Mao stated “You have to break a few eggs to make an omelet.” And that’s when millions were “ghosted.” So what’s a few business leaders for the sake of “the markets” hmmm?
And that’s just China. Or, should I say the “international developments” excuse implied last time the Fed. was going to “just do it” and didn’t. How about a few other real international developments taking place this time that weren’t so front and center last time. e.g. Nearly every other Developed as well as other EM nation whose economy is linked heavily to commodities. With some EM’s looking into the real possibility of returning to Frontier statuses if there’s even further calamity in the markets. That catalyst being the now collapsing commodities market.
Today, if you are a nation that’s tied to commodities – your economy is either in turmoil, or, outright free-fall. Saudi Arabia for one is burning through reserves at a pace only equaled with their oil output. Canada is suddenly finding itself at the precipice of an economic tailspin. The once driving economic hot-spots such as Alberta , and Saskatchewan have been particularly hard hit, and the worst is far from over as the price of oil continues to fall to levels many suggested would never be seen again in generations.Yet; not only are they here. They seem to be going even lower.
Brazil? Disaster, and getting worse by the day. Venezuela? Worse. And I haven’t even mentioned problems such as in Puerto Rico, Mexico, and a few others. However, let’s do mention Europe. e.g., The EU, and specifically Mario Draghi and the ECB.
Not more than two weeks ago Mr. Draghi took to the media as to announce what the market presumed to be an even more dovish toned statement. i.e., More QE in one form or another. The issue? They didn’t get it – and the markets fell in unison.
Once again in less than 90 days since the August plunge the markets reacted in similar fashion and many market participants found out what the meaning of “liquidity” meant when playing in this HFT fueled world supposedly “full of it.” Only when Mr. Draghi came out the next day at a speech at the Economic Club of New York™ to reassure (or triage the rout) stating “We are ready at any time to re-calibrate our array of tools” did the markets reverse rewarding the parasitic, algorithmic, headline reading, stop running, HFT programs to front-run his soothing tones and vaulted the markets upwards.
When pressed after his speech by other participants if he had iterated these passages as to help quell market fears. He responded at first with some push back, only to relent at the same time stating, “No…not really. Well, of course.” Welcome to monetary policy 2015 style. If you need reminding just how adulterated and far the markets have come. You needn’t look any further. Only this time – they aren’t staying there. They’re falling, and falling quickly. What’s worse? The Euro is climbing if not outright spiking upwards crushing many carry trades where the carnage is still yet to be felt, as well as fully identified. However, there are clues to just how bad it is under the surface.
Unprecedented losses in hedge funds caused other ECB members such as Ewald Nowotny to state “I think it was really a massive failure of market analysts.” Yes it was. Problem was the markets thought the ECB were not only going to keep the pipes open – they’d turn the valve up to 11! And why wouldn’t they when the ECB continued to give soundbites as late as Nov. 2nd such as: Nowotny says, “ECB has to act as inflation target to be missed.” Massive failure indeed is all I’ll say.
The entire Euro-Zone is in chaos with many of its member states not only arguing about national sovereignty. They are literally beginning to once gain erect barricades and border crossings that were once thought never to be seen again. Yet, there they are. Again.
The Syrian refugee crisis is bringing out old tensions and new fears across Europe. Greece is finding out the hard way just how much of its sovereignty it did indeed relinquish when it signed it away to EU oversight for loans. My how costly those interest payments seem today. Think Portugal and Spain are going to do the same as they begin demanding better terms? In this current light? I dare say – I think not. You think Germany has more solid ground to put a halt to such demands today? Give that scenario a thought through while remembering the ongoing Volkswagen™ scandal, as well as demanding millions more refugees be accepted into member states with their own 50% youth unemployment. I believe Mr. Schäuble would be in-store for a little unwanted Schadenfreude during discussions this time.
Then there’s Russia. You know, that other communist country that is currently engaged in a real kinetic engagement in Syria. A country whose leader has basically called out the U.S. for outright manipulation, and the root cause of all the Middle East turmoil and militant uprising. The same country whose leader, and military have made it known they are “To strengthen Russian nuclear forces” while simultaneously launching cruise missiles from a sub into Syria. Add to this, that Turkey (a NATO ally) has subsequently shot down a Russian fighter jet. Does one think a mishap (any mishap) is possible that may launch WW3? How about a monetary one? Think it’s implausible or lunacy? I would urge you to think again, as well as quite carefully. For it’s not as far-fetched as one might first think.
Back in October I proposed this very idea that a monetary policy action could in fact be construed by other nations as an outright act of war if the situations presented themselves in just the right way, at just the wrong time. Whether or not it was intentional the results could be the same. Here’s a passage to reiterate:
“With the way the current global markets are now predisposed to HFT – If one wanted to put a hurt on a presumed or proposed adversaries economy; why wait for sanctions to be reimposed or, tightened or, a number of other financial weapons that need to be brought for a vote or, announced or, whatever: when it could be done today through various other means with only a nod-of-the-head.”
The premise of such an idea at that time was shouted at as being “preposterous!” However, let me now add a detail that no one. And I mean, no – one thought would happen. Especially in these turbulent moments. To wit:
“The IMF Just Entered The Cold War, Forgives Ukraine’s Debt To Russia” And just how do you think this was viewed last week in Putin’s war council deliberations? Better yet, how do you think it’s going to be viewed when it’s contrasted against the Fed. raising interest rates against a backdrop of every other DM across the globe devaluing theirs in a response to an outright commodity driven rout crushing not only those economies, but also swelling government burdens causing social unrest?
An interest rate hike here by the U.S. Federal Reserve could in fact be a catalyst that all but crushes their current fragile economies outright. Remember, this will be needed to be thought through enlisting the eyes of one Vladimir Putin. You know, the one installing ICBM’s where we also have forces. And had a plane shot down by one of our ally’s. Think he’s going to look at this as “Oh well, the Fed. had to save its credibility. Pass the vodka?”
Which brings us back to the first player – who is also a co-player with the last in the same arena: China.
China as of what has been demonstrated publicly sides with Russia, not the U.S. And has also been moving its alliances with others that we are now having difficulties with. i.e., Iraq and more. And it will also be China’s economy that may suffer just as bad as Russia if and when the Fed. raises rates. Yep, nothing to see here. Move along. thanks for stopping by. As we can now see the Fed. knew exactly what it was doing by delaying all these years. For this sure looks like the absolute best time to “just do it.” Right?
This is where the Fed. now finds itself. Here they were. Just holding policy lines doing what they in their Ivory Tower contemplated and the so-called “smart crowd” insisted they do. And now the saying of “Between a rock and a hard place” might be an understatement. The world sits atop a tinderbox fueled by monetary policies that created them and awaits a match that could set it off in a blaze of who knows what. All in short order.
Unless they don’t do anything except try their best Draghi impersonation and declare, “They too are once again at the ready to do what ever it takes!” Except – just not now. Or worse. They do raise – and near immediately need, and do issue – QE. At that point who knows which is worse. For what it won’t be, is:
Predictable.
- "Stick With The Bull" Indeed: 10 Out Of 10 Barrons "Experts" Again Predict The S&P Will Rise 10% In 2016
One year ago, as part of its one-year forward forecast issue, the ten “experts” polled by Barrons in its one year forward forecast, predicted that the S&P would close at an average of 2209.
Instead, with just 13 trading days to go in the year, the S&P is down just over 2% for the year.
No wonder the name of that particular Barron’s article was “Stick With the Bull“, although we doubt Barrons meant it in the more accurate in retrospect, “secondary” meaning of the phrase.
Fast forward to this weekend, when the same ten experts unanimously agree that while they may all have been wrong about 2015 (barring some last minute miracle in which the S&P soars by 200 points in the next two weeks), it is only far to double down on 2016, and they all expect the S&P500 to not only rise, but do so with style, hitting an average of 2220 on December 31, 2016 (at least there was no reference to male bovine excrement in this year’s title which was the far more muted “Stocks Have Room to Rise 10% in 2016, Market Strategists Say“)
This is what Barron’s says:
Based on their mean forecast, the Standard & Poor’s 500 index will end next year at 2220, an increase of 10% from Friday’s close of 2012. An advance of that magnitude is more reflective of the market’s rout last week, however, than undue exuberance among our prognosticators. To the contrary, the strategists were more cautious in their comments than in recent years past.
Actually, not really: only two “strategists” lowered their year end target for 2016 compared to 2015, as just Adam Parker and Dubravko Lakos-Bujas now see a “more cautious” 2016 (cutting their forecasts from 2275 to 2175 and 2250 to 2200, respectively). At the same time Chris Auth, eager to overcompensate for being wrong, has taken his year end forecast from 2350 to 2500, while Glionna and Koesterich both expect the S&P to be higher than their expectations for 2015. 5 “experts” are unchanged in their forecasts from a year ago.
however, not even Barrons’ can avoid to be sarcastic with the panel’s performance:
Any advance would be superior to this year’s 2.3% loss (through Dec. 11). A year ago, the pros predicted stocks would rally 10% in 2015; that target seems far-fetched today, with just 13 trading days left in the year.
There is more in the forecast but it is all very much worthless, because far from actually attempting to predict the future correctly, what these “prediction calls” are merely an exercise in setting the echo chamber, and making sure that everyone is on the same page. After all if everyone is wrong, it is the same as if nobody is wrong: just one outlier would make the entire panel of “experts” look idiotic.
And speaking of idiotic forecasts, we can’t help but laugh at Barron’s 2007 year end prediction “A Bullish Call” laying out where all these same (and some different) “experts” predicted the market would close.
Come to think of it, back then both Lehman’s Ian Scott and Bear’s Jonathan Golub were both really bullish. We wonder why they no longer grace Barron’s “expert” roundtable?
- The Coincidences Are Just Too Eerie: This Is The Last Time CCC Yields Were Here And Rising
Yesterday, we highlighted the all too eerie coincidence that the very first hedge fund (not mutual fund) to gate investors late on Friday, was operated by none other than the two former heads of distressed/high yield trading of the bank that started it all, Bear Stearns.
Today, things get even eerier, because while we already have the Bear Stearns link, an even more curious coincidence emerged when according to the BofA-Merrill index of “CCC and below” bond yields, the index just hit 17.24%, soaring nearly 2% in just the past two weeks, and rising fast.
When was the last time the same index was at precisely 17.24% and rising? The answer: the weekend Lehman Brothers filed for bankruptcy (check for yourselves: on Sept 15, 2008, the closing effective yield was 17.27%).
What happened next? This.
And while no bank has blown up this time (to the best of our knowledge) the irony is that the catalyst driving the long, long overdue blow out in yields is the trifecta of plunging oil, the soaring dollar, and of course, fears about the tightening financial conditions as a result of the an “imminent” rate hike.
In other words, the Fed.
And while history rhymes, it usually does so in very ironic ways, and we can’t wait to find out if indeed Yellen’s first rate hike in 9 years this Wednesday unleashes a Lehman-like neutron bomb that leads to the full collapse of the junk bond market first, and then the shockwave spreads across all asset classes leading to the same financial devastation witnessed at the end of 2008, unleashing the longest period of “free capital markets” central planning the world has ever seen.
- France's Far-Right Nationalist Party Swings From First To Worst; "Routed' In Regional Election Run-Off
A week ago, fear was tangible as France's far-right Front National party won an unprecedented 2 provinces in the nation's first elections since the Paris terror attacks. With 40% of the votes, Marine Le Pen's party dominated the mainstream political parties and status quo maintainers were beginning to quake. Now, a week later, with turnout surging from 50% to 59%, Front National has been "routed" according to AP, failing to win any regions.
- *FRENCH NATIONAL FRONT FAILS TO WIN ANY REGIONS IN ELECTION
- *FRENCH VOTER TURNOUT RISES TO ABOUT 59% VS ABOUT 50% LAST WEEK
As voters cast their ballots in the second-round runoff, Le Pen’s party is hobbled by a lack of allies from which it can draw fresh support. France’s two main parties are even working together in some districts to keep Le Pen out of power.
Prime Minister Manuel Valls, a Socialist like Hollande, said on Friday that he was “convinced” his party’s supporters would engage in tactical voting to defeat Le Pen. The Socialists pulled their party out of both races and it appears that many voters cast ballots to prevent the once-pariah National Front from gaining power.
Keep in mind: Front national was only defeated today because Socialists withdrew candidates qualified for run-off and let conservatives win.
— Mathieu von Rohr (@mathieuvonrohr) December 13, 2015
It appears to have worked, as AP reports, pollsters project France's far right is routed in regional elections after winning 1st round…
Three polling agencies are projecting that anti-immigrant National Front has been routed in regional election runoffs despite dominating the first-round vote.
Party leader Marine Le Pen and her niece lost their bids to run two French regions in elections Sunday seen as an important test for the anti-immigrant party.
Polling agencies Ipsos, Ifop, TNS-Sofres projected that the opposition conservatives and governing Socialists won control of France's 13 regions.
They showed Le Pen won around 42 percent of the vote in the Nord-Pas de Calais region, and rival conservative Xavier Bertrand about 57 percent.
Le Pen's niece, Marion Marechal-Le Pen, was projected to win about 45 percent in the southern Provence-Alpes-Cote d'Azur region. Conservative Nice Mayor Christian Estrosi was projected to win about 55 percent.
* * *
No Dark Blue FN wins…
Europe is "safe" once again… just ask Diebold.
- Cuomo, Schumer Unveil Cunning "No Guns For Dangerous Terrorists" Plan
In what is possibly the most inane political statement ever, U.S. Senator Charles Schumer and Governor Andrew M. Cuomo today announced a push to prevent known or suspected terrorists from purchasing guns in New York State. Schumer and Cuomo areasking the federal government to officially add the U.S. Terror Watch List to the criteria it uses for federal background checks in New York State, exclaiming "we need to move to close the Terror Gap once and for all."
States – Like New York – Cannot, On Their Own, Block Sales of Guns to Those on Terror Watch List Because Watch List Is Restricted; Schumer & Cuomo's Efforts Come On Heels of Federal Failure to Close Terror Gap
U.S. Senator Charles Schumer and Governor Andrew M. Cuomo today announced a push to prevent known or suspected terrorists from purchasing guns in New York State.
Schumer and Cuomo are asking the federal government to officially add the U.S. Terror Watch List to the criteria it uses for federal background checks in New York State. This would prevent known or suspected terrorists from legally purchasing guns and would cross-check the terror watch list with a National Instant Criminal Background Check System (NICS) request, effectively closing the Terror Gap within the state and barring individuals on federal terror watch lists from legally arming themselves.
Schumer noted that the terror watch list is restricted by the federal government. Cuomo said that, if the federal government won't use the terrorist watch list in conducting background checks to restrict guns to known or suspected terrorists, Congress must develop a mechanism to grant states access to the list and allow them to keep their residents safe.
Schumer and Cuomo say there is urgency to stop terror suspects from gaining legal access to weapons of war, something Congress has failed to prevent on the national level.
Senator Schumer said: “We need to move to close the Terror Gap once and for all. We will continue to push again and again at the national level to put into practice this common sense provision that would do so much to protect the American public, but until we do, today’s push with Governor Cuomo will add momentum to this larger effort. Railing to close the Terror Gap in New York State will send a message to other states – and Congress – to act. The federal government has always been there for New York when it comes to giving us the tools we need to fight terrorism and I remain hopeful that they’ll work with us on preventing terror suspects from passing gun background checks. The feds should move ASAP on this request and I will fight tooth and nail to see that they meet the mark.”
Governor Cuomo said: “The fact that known or suspected terrorists continue to legally buy guns is mindboggling and we cannot allow gridlock, dysfunction and the NRA's stranglehold on Washington to continue to place the safety of New Yorkers at risk. If Congress refuses to act, the federal government needs to step up and either take proactive action to right this wrong once and for all, or allow states to do so. I thank Senator Schumer for his strong and consistent leadership on this critically important issue, and am proud to fight with him to close the Terror Gap.”
In the aftermath of the terrorist attacks that struck Paris in November, Senator Schumer has led a renewed push in Congress for passage of the “Denying Firearms and Explosives to Dangerous Terrorists Act of 2015,” which would give the Department of Justice authority to prevent a known or suspected terrorist from buying firearms or explosives nationwide. Governor Cuomo has also been vocal in calling on members of Congress to stand with Senator Schumer and pass this common-sense legislation.
Sound like a no-brainer … stopping terrorists from having guns? But as Daily Beast points out, in an article called “My Fellow LIBERALS, DON’T Support Obama’s Terror Watch List Gun Ban“:
As Americans we understand well how important due process is. No one, for instance, should be thrown in jail just on the say-so of some government official who declares they deserve it. Such is the behavior of tyrants, the Founding Fathers understood, and so we enshrined in our Constitution the right to counsel, the right against being compelled to testify against oneself, the right to trial by jury, etc.All of these rights are checks to ensure the government can’t simply pluck innocent people out of their lives and strip them of their life, liberty, or property. Only after fairly testing the charges against them can the government punish people with such deprivation.
But none of these hurdles must be overcome for the government to put someone on a list, especially not a list like this, which is a watch list. It is a list of people that for whatever reason (a reason that no one outside the government knows) the government has decided deserve closer scrutiny of their actions.
Is the government right to be concerned about these people? Maybe yes, but maybe not, and there is no way for ordinary citizens to know. Which means there is also no way for ordinary citizens to know whether any of them, even people who in no way intend to commit acts of terrorism, are also on that list.
In other words, there is no way to know whether you are on that list. Nor is there any way to know how to get off it.
That there is any list at all should give us all pause. It has not historically been the hallmark of a healthy democracy when governments have kept lists of people they didn’t like. It is hard to be a government of the people, by the people, and for the people when the government keeps track of the people, including those dissidents who would challenge it (which is something that in a democracy they are allowed, and even supposed, to do).
***
What this proposal calls for is the government using the list as a basis to deny the people on it a right to which they were otherwise entitled.
***
Based on the plain text of the Second Amendment and subsequent jurisprudence it is clear that some right is in there somewhere, and what this proposal calls for is for the government to arbitrarily and un-transparently deny this right to certain people without any sort of the due process ordinarily required. And that’s a problem.
***
With this proposal we would be authorizing the government to act capriciously and unaccountably for any reason, including—and this point cannot be emphasized enough—bad reasons or no reasons at all, and against anyone, including—and this point cannot be emphasized enough, either—people just like you. There would also be no reason why, if the government could take away this right this way today, it couldn’t take away other rights you depend on having tomorrow the same way.
As we concluded previously, we've got to stop mass shootings … but using a Kafkaesque, fatally flawed watchlist system is not the way. A top liberal Constitutional law expert explains:
Like many academics, I was happy to blissfully ignore the Second Amendment. It did not fit neatly into my socially liberal agenda.
***
It is hard to read the Second Amendment and not honestly conclude that the Framers intended gun ownership to be an individual right. It is true that the amendment begins with a reference to militias: “A well regulated militia, being necessary to the security of a free state, the right of the people to keep and bear arms, shall not be infringed.” Accordingly, it is argued, this amendment protects the right of the militia to bear arms, not the individual.
Yet, if true, the Second Amendment would be effectively declared a defunct provision. The National Guard is not a true militia in the sense of the Second Amendment and, since the District and others believe governments can ban guns entirely, the Second Amendment would be read out of existence.
***
More important, the mere reference to a purpose of the Second Amendment does not alter the fact that an individual right is created. The right of the people to keep and bear arms is stated in the same way as the right to free speech or free press. The statement of a purpose was intended to reaffirm the power of the states and the people against the central government. At the time, many feared the federal government and its national army. Gun ownership was viewed as a deterrent against abuse by the government, which would be less likely to mess with a well-armed populace.
Considering the Framers and their own traditions of hunting and self-defense, it is clear that they would have viewed such ownership as an individual right — consistent with the plain meaning of the amendment.
None of this is easy for someone raised to believe that the Second Amendment was the dividing line between the enlightenment and the dark ages of American culture. Yet, it is time to honestly reconsider this amendment and admit that … here’s the really hard part … the NRA may have been right. This does not mean that Charlton Heston is the new Rosa Parks or that no restrictions can be placed on gun ownership. But it does appear that gun ownership was made a protected right by the Framers and, while we might not celebrate it, it is time that we recognize it.
And liberal icons Gandhi and the Dalai Lama accept gun ownership as moral.
- The End Of The Bubble Finance Era
Submitted by David Stockman via The Daily Reckoning blog,
We are nearing a crucial inflection point in the worldwide bubble finance cycle that has been underway for more than two decades. To wit, the world’s central banks have finally run out of dry powder. They will be unable to stop the credit implosion which must inexorably follow the false boom.
We will get to the Fed’s upcoming once in a lifetime shift to raising rates below, but first it is crucial to sketch the global macroeconomic context.
In a word, we are now entering an epic deflation. Its leading edge is manifested in the renewed carnage in the commodity pits.
This week the Bloomberg commodity index, which encompasses everything from crude oil to soybeans, copper, nickel, cotton and livestock, plunged below 80 for the first time since 1999. It is now down nearly 70% from its all-time high on the eve of the financial crisis, and 55% from its 2011 recovery high.
Wall Street bulls and Keynesian apologists for the Fed want you to believe that there isn’t much to see here. They claim it’s just a temporary oil glut and some CapEx over-exuberance in the metals and mining industry.
But their assurances that in a year or so current excess supplies of copper, crude, iron ore and other commodities will be absorbed by an expanding global economy couldn’t be farther from the truth. In fact, this error is at the heart of my investment viewpoint.
We believe the global economy is vastly bloated with debt-based spending that can’t be sustained. And that this distortion is compounded on the supply side by an incredible surplus of excess production capacity. As well as wasteful malinvestments that were enabled by dirt cheap central bank credit.
Consequently, the world economy is actually going to shrink for the first time since the 1930s. That’s because the plunging price of commodities is only a prelude to what will amount to a worldwide CapEx depression — the kind of thing that has not happened since the 1930s.
There has been so much over-investment in energy, mining, materials processing, manufacturing and warehousing that nothing new will be built for years to come. The boom of the last two decades essentially stole output from many years into the future.
So there will be a severe curtailment in the production of mining and construction equipment, oilfield drilling rigs, heavy trucks and rail cars, bulk carriers and containerships, materials handling machinery and warehouse rigging, machine tools and chemical processing equipment and much, much more.
The crucial point, however, is that sharp curtailment of the capital goods industries has far more destructive implications for the macro-economy than a reduction in consumer appliance sales or restaurant and bar tabs.
Service operations have virtually no working inventories and the supply chains for durable consumer goods such as dishwashers and cars typically have perhaps 50 to 100 days of stocks on hand. So when excessive inventory investments accumulate, the destocking and resulting supply chain curtailments are relatively short-lived.
But when it comes to capital goods the relevant inventory measure is capacity in place. That’s where the bubble finance policies of the Fed and other central banks have done so much damage.
Prolonged periods of below market capital costs induce business customers to drastically over-estimate investment returns. And therefore to eventually accumulate years and years worth of excess capacity.
This is very different than your grandfather’s consumer goods recessions of the 1950s and 1960s. Those typically involved moderate production cutbacks and several quarters of inventory destocking. But this time the capital goods adjustment will take years, perhaps more than a decade.
Here’s why.
When iron ore mines are drastically overbuilt, for example, new orders for Caterpillars’ (CAT) big yellow mining machines can drop to nearly zero. That’s why CAT is already in the longest string of dealer sales declines — 35 straight months and running — in its 100 year history.
That’s also why the coming global recession will be so prolonged and stubborn. When cheap credit generates a boom in long-lived and expensive capital goods, it gives rise to a pipeline of new capacity.
This pipeline is not easy to shut-off and often makes sense to complete — say containerships, steel plants or new field mines — even if pricing and profitability have already headed south. That’s known as the sunk cost problem.
Mining equipment orders are likely to remain deeply depressed for the rest of the decade. And this syndrome will be repeated in most other sectors such as heavy trucks, shipyards, oil drilling equipment etc.
This depression in the capital goods industries, in turn, means the disappearance of thousands of typically high pay, high skill jobs at companies like Caterpillar. The same will happen among their extensive chains of outsourced components, materials and service suppliers. And the cascade of those contractions down the economy’s food chain will further intensify and extend the deflationary dynamic.
The graph below give some hint of the massive downturn which lies ahead on a worldwide basis.
During the last 25 years CapEx spending by the publicly listed companies of the world grew by an incredible 500%. Much of this happened in China and the Emerging Market (EM) economies, and in the transportation and distribution infrastructure that connects them.
Yet this massive explosion of investment spending didn’t happen because several billion Asian peasants suddenly decided to save-up a storm of new capital.
Instead, this unprecedented construction and CapEx campaign was financed almost entirely by a massive issuance of printing press credit at virtually zero real interest rates.
That means capital was drastically underpriced and that waste, excess and inefficiency abounded.
At length, the global economy became dangerously unbalanced. And these adverse consequences of the false central bank credit boom, in fact, highlight the investment opportunity ahead.
Healthy capitalist investment based on market prices and savings set aside from current income can go on indefinitely, fueling rising efficiency, output and wealth.
But CapEx based on printing press credit only temporarily enabled the world economy to have its cake and eat it, too. Now it’s payback time.
Needless to say, during the expansion phase of central bank enabled bubble finance, optimism reigns and bulls and speculators insist that “this time is different.”
Yet the laws of sound finance and market economics never change. It often just takes an extended time for all the excesses to work their way through the system and finally reach the blow-off stage.
The graph below summarizes this great deformation.
Over the last two decades, global credit market debt outstanding has soared from $40 trillion to $225 trillion. This represents an incredible $185 trillion debt expansion. That eruption would be simply unimaginable without the help of money printing central banks.
By contrast, global GDP only expanded by $50 billion during the same period, and even that’s an overstatement. Much of that reported gain merely represented the one-time pass-through of fiat credit, not real savings put to work in efficient production.
Consequently, it is likely that the global economy accumulated more than $4 of new debt for every $1 of incremental GDP.
Not only is that self-evidently an unsustainable financial equation, it also means that when credit growth stops, the bottom will drop out of reported GDP. It wasn’t new wealth in the first place, just production stolen from the future.
And this gets us to the Fed’s upcoming move to raise interest rates for the first time in 10 years. It will amount to a sea-change that in due course will shatter the entire regime of bubble finance that gave rise to the false credit and CapEx boom depicted above.
As I have often said, the Fed has become addicted to the “Easy Button.” During more than 80% of the 300+ months during the last quarter century it has either cut rates or left them unchanged.
Accordingly, the professional gamblers in today’s Wall Street casino have no real experience of a time when the “Fed is your friend” adage failed to work. They have experienced essentially false one-way markets, knowing that the Greenspan/Bernanke/Yellen “put” under stocks and other risks assets would come to the rescue.
But here’s the thing. After 84 months of zero interest rates — and folks that’s pure lunacy by all historic standards — the Fed has run out of time and excuses.
If it doesn’t begin to normalize rates at last, and as repeatedly promised, its credibility will be shattered. And what it long has been deathly afraid of will happen. That is, the market will plunge into a hissy fit that will shatter confidence in what is essentially a giant credit-based Ponzi.
And the other major central banks of the world are in the same boat.
Just last week we saw the ECB stopped short by its powerful Germany contingent that essentially said to Draghi that $1.3 trillion of money printing is enough.
Likewise, the People’s Bank of China (PBOC) has run out of dry powder, too. And that’s of monumental importance.
The epicenter of the global commodity, industrial and CapEx boom was in China. Thanks to the greatest money printing spree by the PBOC in recorded history, outstanding public and private debt there has exploded from $500 billion in 1994 to $30 trillion at present.
That’s a 60-fold gain. Is it any wonder that the commodity and CapEx charts shown above went nearly vertical during the peak of the global boom?
But now China is facing the collapse of its credit Ponzi, and capital is fleeing the country at a prodigious pace.
In the last 15 months alone, nearly $1 trillion has high tailed it for London, New York, Australia, Vancouver and other resting places for flight capital.
So the PBOC is being forced to stop its printing presses in order to prevent the Yuan exchange rate from collapsing and the capital outflow from getting totally out of hand.
Even in Japan, the Bank of Japan’s printing press is no longer accelerating. That because notwithstanding trillions of new money conjured from thin air during recent years, Japan is on the verge of its 5th recession in seven years. Even in Japan, bubble finance is losing its credibility.
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