- Historic Iran Nuke Deal Resets Eurasia's "Great Game"
Originally authored by Pepe Escobar, via Asia Times,
This is it. It is indeed historic. And diplomacy eventually wins. In terms of the New Great Game in Eurasia, and the ongoing tectonic shifts reorganizing Eurasia, this is huge: Iran — supported by Russia and China — has finally, successfully, called the long, winding 12-year-long Atlanticist bluff on its “nuclear weapons.”
And this only happened because the Obama administration needed 1) a lone foreign policy success, and 2) a go at trying to influence at least laterally the onset of the new Eurasia-centered geopolitical order.
So here it is – the 159-page, as detailed as possible, Joint Comprehensive Plan of Action (JCPOA); the actual P5+1/Iran nuclear deal. As Iranian diplomats have stressed, the JCPOA will be presented to the United Nations Security Council (UNSC), which will then adopt a resolution within 7 to 10 days making it an official international document.
Iranian Foreign Minister Javad Zarif has described the deal — significantly — as a very Chinese “win-win” solution. But not perfect; “I believe this is a historic moment. We are reaching an agreement that is not perfect for anybody but is what we could accomplish. Today could have been the end of hope, but now we are starting a new chapter of hope.”
Zarif also had to stress — correctly — this was a long-sought solution for an “unnecessary crisis”; the politicization — essentially by the US — of a scientific, technical dossier.
Germany’s Foreign Minister Steinmeier, for his part, was euphoric; “A historic day! We leave 35 years of speechlessness + more than 12 years of a dangerous conflict behind us.”
Looking ahead, Iranian President Hassan Rouhani tweeted now there can be “a focus on shared challenges” – referring to the real fight that NATO, and Iran, should pursue together; against the fake Caliphate of ISIS/ISIL/Daesh, whose ideological matrix is intolerant Wahhabism and whose attacks are directed against both Shi’ites and westerners.
Right on cue, Russian President Vladimir Putin stressed the deal will contribute to fighting terrorism in the Middle East, not to mention “assisting in strengthening global and regional security, global nuclear non-proliferation” and — perhaps wishful thinking? — “the creation in the Middle East of a zone free from weapons of mass destruction.”
Russian Foreign Minister Sergey Lavrov stressed the deal “fully corresponds” with Russia’s negotiating points. The fact is no deal would have been possible without extensive Russian involvement — and the Obama administration knows it (but cannot admit it publicly).
The real problem started when Lavrov added that Moscow expects the cancellation of Washington’s missile defense plans, after the Iran deal proves that Tehran is not, and won’t be, a nuclear “threat.”
There’s the rub. The Pentagon simply won’t cancel an essential part of its Full Spectrum Dominance military doctrine simply because of mere “diplomacy.” Every security analyst not blinded by ideology knows that missile defense was never about Iran, but about Russia. The Pentagon’s new military review still states — not by accident — major Eurasian players Iran, China and Russia as “threats” to U.S. national security.
Now from the brighter side on Iran-Russia relations. Trade is bound to increase, especially in nanotechnology, machinery parts and agriculture. And on the all-pervasive energy front, Iran will indeed compete with Russia in major markets such as Turkey and soon Western Europe, but there’s plenty of leeway for Gazprom and the National Iranian Oil Company (NIOC) to coordinate their market share. NIOC executive Mohsen Qamsari advances that Iran will prioritize exporting to Asia, and will try to regain the at least 42% of the European market share that it had before sanctions.
Compared to so many uplifting perspectives, Washington’s reaction was quite pedestrian. US President Barack Obama preferred to stress — correctly — that every pathway to an Iranian nuclear weapon has been cut off. And he vowed to veto any legislation in the US Congress that blocks the deal. When I was in Vienna last week I had surefire confirmation — from a European source — that the Obama administration feels confident it has the votes it needs in Capitol Hill.
And what about all that oil?
Tariq Rauf, former Head of Verification and Security Policy at the IAEA and currently Director of the Disarmament and Non-Proliferation Program at the Stockholm International Peace Research Institute (SIPRI), hailed the deal as “the most significant multilateral nuclear agreement in two decades – the last such agreement was the 1996 nuclear test ban treaty.” Rauf even advanced that the 2016 Nobel Peace Prize should go to US Secretary of State Jon Kerry and Iran’s Foreign Minister Zarif.
Rebuilding trust between the US and Iran, though, will be a long and winding road.
Tehran agreed to a 15-year moratorium on enriching uranium beyond 3.67 percent; this means it has agreed to reduce its enrichment capacity by two-thirds. Only Natanz will conduct enrichment; and Fordo, additionally, won’t store fissile material.
Iran agreed to store no more than 300 kg of low-enriched uranium — a 96% reduction compared to current levels. The Arak reactor will be reconfigured, and won’t be used to produce plutonium. The spent fuel will be handled by an international team.
The IAEA and Iran signed a roadmap in Tehran also this Tuesday; that was already decided last week in Vienna. By December 15, all past and present outstanding issues — that amount to 12 items — should be clarified, and the IAEA will deliver a final assessment. IAEA access to the Parchin military site — always a very contentious issue — is part of a separate arrangement.
One of the major sticking points these last few days in Vienna was solved — with Tehran allowing UN inspectors to visit virtually any site. But it may object to a particular visit. A Joint Commission — the P5+1 + Iran — will be able to override any objections with a simple majority vote. After that Iran has three days to comply — in case it loses the vote. There won’t be American inspectors — shades of the run-up towards the war on Iraq; only from countries with diplomatic relations with Iran.
So implementation of the deal will take at least the next five months. Sanctions will be lifted only by early 2016.
What’s certain is that Iran will become a magnet for foreign investment. Major western and Asian multinationals are already positioned to start cracking this practically virgin market with over 70 million people, including a very well educated middle class. There will be a boom in sectors such as consumer electronics, the auto industry and hospitality and leisure.
And then there’s, once again, oil. Iran has as much as a whopping 50 million barrels of oil stored at sea — and that’s about ready to hit the global market. The purchaser of choice will be, inevitably, China — as the West remains mired in recession. Iran’s first order of work is to regain lost market share to Persian Gulf producers. Yet the trend is for oil prices to go down – so Iran cannot count on much profit in the short to medium term.
Now for a real war on terror?
The conventional arms embargo on Iran essentially stays, for five years. That’s absurd, compared to Israel and the House of Saud arming themselves to their teeth.
Last May the US Congress approved a $1.9 billion arms sale to Israel. That includes 50 BLU-113 bunker-buster bombs — to do what? Bomb Natanz? — and 3,000 Hellfire missiles. As for Saudi Arabia, according to SIPRI, the House of Saud spent a whopping $80 billion on weapons last year; more than nuclear powers France or Britain. The House of Saud is waging an — illegal — war on Yemen.
Qatar is not far behind. It clinched an $11 billion deal to buy Apache helicopters and Javelin and Patriot air defense systems, and is bound to buy loads of F-15 fighters.
Trita Parsi, president of the National American-Iranian Council, went straight to the point; “Saudi Arabia spends 13 times more money on its defense than Iran does. But somehow Iran, and not Saudi Arabia, is seen by the US as the potential aggressor.”
So, whatever happens, expect tough days ahead. Two weeks ago, Foreign Minister Zarif told a small group of independent journalists in Vienna, including this correspondent, that the negotiations would be a success because the US and Iran had agreed on “no humiliation of one another.” He stressed he paid “a high domestic price for not blaming the Americans,” and he praised Kerry as “a reasonable man.” But he was wary of the US establishment, which to a great extent, according to his best information, was dead set against the lifting of sanctions.
Zarif also praised the Russian idea that after a deal, it will be time to form a real counter-terrorism coalition, featuring Americans, Iranians, Russians, Chinese and Europeans — even as Putin and Obama had agreed to work together on “regional issues.” And Iranian diplomacy was giving signs that the Obama administration had finally understood that the alternative to Assad in Syria was ISIS/ISIL/Daesh, not the “Free” Syrian Army.
That degree of collaboration, post-Wall of Mistrust, remains to be seen. Then it will be possible to clearly evaluate whether the Obama administration has made a major strategic decision, and whether “normalizing” its relation with Iran involves much more than meets the eye.
- China Stock Rout "Rocks" Property Market: "Massive" Cancellations Expected
To be sure, we’ve had our fair share of laughs at the expense of China’s newly-minted day traders.
Back in March, Bloomberg highlighted a study which suggested that some 31% of new investors in China’s equity markets had an elementary school education or less. Shortly thereafter, we began to look at data from the China Securities Depository and Clearing Co which showed that millions of new stock trading accounts were being created in China every single month. Once reports began to come in from the front lines of China’s inexorable equity rally, it became clear that (to say the least) not everyone pouring money into the SHCOMP and The Shenzhen was what you might call a “seasoned” investor.
From there, all it took was the suggestion from Bloomberg that in some cases, Chinese housewives had traded in the crochet kit for technical analysis and the race was on to see who could come up with the most entertaining characterization of China’s day trading hordes. Although the mainstream media has been careful not to be terribly explicit in their ridicule, the increasingly hilarious pictures of bemused Chinese grandmas staring at ticker tapes that have appeared atop WSJ and Reuters articles betray the fact that everyone, everywhere sees the humor in a multi-trillion dollar stock bubble driven by margin-trading hairdressers.
Admittedly, all of the above was even more amusing on days when Chinese stocks closed red, as it became quickly apparent that many Chinese investors might not have fully appreciated the fact that stocks can go down as well as up.
In the good old days of the China stock rally (so, around two months ago), down days were few and far between and the outright confusion that reigned in the wake of a rare close lower served as a much needed comic interlude for the slow motion train wreck unfolding in the Aegean and, on the weekends, at various Euro summits.
However, once the unwind began in China’s CNY1 trillion backdoor margin lending channels, we couldn’t help but feel slightly sorry for the millions of Chinese who quickly went from bewildered to dejected after watching their life savings evaporate over the course of a brutal three week sell-off that totaled more than 30% on some exchanges.
Due to significant retail participation and due to the fact that the equity mania had served as a distraction for a nation coping with decelerating economic growth and a bursting property bubble, some (and we were among the first) began to suggest that the broader economy, and indeed, social stability, may be at risk in China if stocks continued to fall.
The extent to which this suggestion represented a real concern (as opposed to the ravings of a tin foil hat fringe blog) was underscored by the extraordinary measures China adopted in a desperate attempt to stop the bleeding and later by several sellside strategists who began to warn about possible spillovers into the real economy.
Now, with Beijing still struggling to restore the stock bubble, the first signs of knock-on effects are beginning to emerge. Here’s Nikkei with more:
Turbulence on China’s equity market is starting to rock the country’s property market. Investors are quickly pulling their cash out of housing they purchased to cover losses incurred by stock investments. Some have begun offering discounts on property due to difficulties with finding buyers. Continued turmoil on the stock market looks as though it will have a heavy impact on the country’s real estate market.
China’s stock market rally also helped drive up sales of domestic homes. The Shanghai Composite Index surged 60% from its low of around 3,200 in early March, rising to 5,166 logged on June 12. China Securities Depository and Clearing said that the number of accounts opened to trade yuan-denominated A-shares reached 980,000 in May in Shenzhen, where property prices are climbing faster than other areas. The figure accounted for roughly 80% of the total 1170,000 accounts in Guangdong Province, where large numbers of such account holders reside.
Many newbie investors, who have just jumped into the stock market, likely gave a fresh impetus to the property market. China’s share price upswing prompted investors to reach out for new investments, including houses and other properties. A property analyst at major Chinese brokerage Guotai Junan Securities said that sales of luxury properties worth over 10 million yuan ($1.61 million) each for the first half of the year topped annual sales last year in Shanghai and Beijing.
After this, Chinese stocks began to crumble. In early July, the Shanghai Composite Index dropped more than 30%, after hitting a seven-year high in mid-June. Investors who suffered big losses on the stock market were forced to sell property and cancel real estate purchase agreements. The Hong Kong Economic Times said that consumers are increasingly asking real estate firms for grace periods on down payments for mortgage loans, as they run out of cash because of weak stocks.
Some canceled home purchase contracts, while others canceled mortgage loans, according to China’s largest property developer China Vanke, which has a strong foothold in Shenzhen. Local media reported that an official at China Vanke is concerned about massive numbers of cancellations in the future.
So no, the damage isn’t “contained” and indeed it’s somewhat ironic that the first place the contagion is showing up is in China’s property market. What’s particularly interesting here is that one argment for why the collapse of China’s equity bubble would not spill over into the real economy revolved around the fact that the majority of Chinese household wealth is concentrated in real estate. “Ultimately, we think the impact of the sell-off in Chinese equities on the real economy will be relatively limited. This is because equities are only 10% of household wealth (at peak; just over 5% at the turn of the year),” Credit Suisse noted last week.
If, however, what Nikkei says about the knock-on effect in property is true, it could put further pressure on an already fragile housing market. On that note, we’ll close with the following excerpt which is, ironically, from the same Credit Suisse note cited above.
House prices are now falling at a record annual rate – the first time they have fallen without it being policy induced. With housing accounting for just over half of total household assets, the negative wealth impact could be significant.
- Paul Craig Roberts: Greece's Lesson For Russia
Submitted by Paul Craig Roberts,
“Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far.” — International Monetary Fund
Greece’s lesson for Russia, and for China and Iran, is to avoid all financial relationships with the West. The West simply cannot be trusted. Washington is committed to economic and political hegemony over every other country and uses the Western financial system for asset freezes, confiscations, and sanctions. Countries that have independent foreign policies and also have assets in the West cannot expect Washington to respect their property rights or their ownership. Washington freezes or steals countries’ assets, or in the case of France imposes multi-billion dollar fines, in order to force compliance with Washington’s policies. Iran, for example, lost the use of $100 billion, approximately one-fourth of the Iranian GDP, for years simply because Iran insisted on its rights under the Non-Proliferation Treaty.
Russian journalists are asking me if Obama’s willingness to reach a deal with Iran means there is hope a deal can be reached over Ukraine. The answer is No. Moreover, as I will later explain, the deal with Iran doesn’t mean much as far as Washington is concerned.
Three days ago (July 14) a high ranking military officer, Gen. Paul Selva, the third in about as many days, told the US Senate that Russia is “an existential threat to this nation (the US).” Only a few days prior the Senate had heard the same thing from US Marine commander Joseph Dunford and from the Secretary of the Air Force. A few days before that, the Chairman of the US Joint Chiefs of Staff warned of a Russian “hybrid threat.”
Washington is invested heavily in using Ukraine against Russia. All the conflict there originates with Washington’s puppet government in Kiev. Russia is blamed for everything, including the destruction of the Malaysian airliner. Washington has used false charges to coerce the EU into sanctions against Russia that are not in the EU’s interest. As Washington has succeeded in coercing all of Europe to harm Europe’s political and economic relationships with Russia and to enter into a state of conflict with Russia, certainly Washington is not going to agree to an Ukrainian settlement. Even if Washington wanted to do so, as Washington’s entire position rests on nothing but propaganda, Washington would have to disavow itself in order to come to an agreement.
Despite everything, Russia’s president and foreign minister continue to speak of the US and Washington’s EU vassal states as “our partners.” Perhaps Putin and Lavrov are being sarcastic. The most certain thing of our time is that Washington and its vassals are not partners of Russia.
The Wolfowitz doctrine, the basis of US foreign and military policy, declares that the rise of Russia or any other country cannot be permitted, because the US is the Uni-power and cannot tolerate any constraint on its unilateral actions.
As long as this doctrine reigns in Washington, neither Russia, China, nor Iran, the nuclear agreement not withstanding, are safe. As long as Iran has an independent foreign policy, the nuclear agreement does not protect Iran, because any significant policy conflict with Washington can produce new justifications for sanctions.
With the nuclear agreement with Iran comes the release of Iran’s $100 billion in frozen Western balances. I heard yesterday a member of the Council for Foreign Relations say that Iran should invest its released $100 billion in US and Europe companies. If Iran does this, the Iranian government is setting itself up for further blackmail. Investing anywhere in the West means that Iran’s assets can be frozen or confiscated at any time.
If Obama were to dismiss Victoria Nuland, Susan Rice, and Samantha Power and replace these neoconservatives with sane diplomats, the outlook would improve. Then Russia, China, and Iran would have a better possibility of reaching accommodation with the US on terms other than vassalage.
Russia and China, having emerged from a poorly functioning communist economic system, naturally regard the West as a model. It seems China has fallen for Western capitalism head over heels. Russia perhaps less so, but the economists in these two countries are the same as the West’s neoliberal economists, which means that they are unwitting servants of Western financial imperialism. Thinking mistakenly that they are being true to economics, they are being true to Washington’s hegemony.
With the deregulation that began in the Clinton regime, Western capitalism has become socially dysfunctional. In the US and throughout the West capitalism no longer serves the people. Capitalism serves the owners and managers of capital and no one else.
This is why US income inequality is now as bad or worse than during the “robber baron” era of the 1920s. The 1930s regulation that made capitalism a functioning economic system has been repealed. Today in the Western world capitalism is a looting mechanism. Capitalism not only loots labor, capitalism loots entire countries, such as Greece which is being forced by the EU to sell of Greece’s national assets to foreign purchasers.
Before Putin and Lavrov again refer to their “American partners,” they should reflect on the EU’s lack of good will toward Greece. When a member of the EU itself is being looted and driven into the ground by its compatriots, how can Russia, China, and Iran expect better treatment? If the West has no good will toward Greece, where is the West’s good will toward Russia?
The Greek government was forced to capitulate to the EU, despite the support it received from the referendum, because the Greeks relied on the good will of their European partners and underestimated the mendacity of the One Percent. The Greek government did not expect the merciless attitude of its fellow EU member governments. The Greek government actually thought that its expert analysis of the Greek debt situation and economy would carry weight in the negotiations. This expectation left the Greek government without a backup plan. The Greek government gave no thought to how to go about leaving the euro and putting in place a monetary and banking system independent of the euro. The lack of preparation for exit left the government with no alternative to the EU’s demands.
The termination of Greece’s fiscal sovereignty is what is in store for Italy, Spain, and Portugal, and eventually for France and Germany. As Jean-Claude Trichet, the former head of the European Central Bank said, the sovereign debt crisis signaled that it is time to bring Europe beyond a “strict concept of nationhood.” The next step in the centralization of Europe is political centralization. The Greek debt crisis is being used to establish the principle that being a member of the EU means that the country has lost its sovereignty.
The notion, prevalent in the Western financial media, that a solution has been imposed on the Greeks is nonsense. Nothing has been solved. The conditions to which the Greek government submitted make the debt even less payable. In a short time the issue will again be before us. As John Maynard Keynes made clear in 1936 and as every economist knows, driving down consumer incomes by cutting pensions, employment, wages, and social services, reduces consumer and investment demand, and thereby GDP, and results in large budget deficits that have to be covered by borrowing. Selling pubic assets to foreigners transfers the revenue flows out of the Greek economy into foreign hands.
Unregulated naked capitalism, has proven in the 21st century to be unable to produce economic growth anywhere in the West. Consequently, median family incomes are declining. Governments cover up the decline by underestimating inflation and by not counting as unemployed discouraged workers who, unable to find jobs, have ceased looking. By not counting discouraged workers the US is able to report a 5.2 percent rate of unemployment. Including discouraged workers brings the unemployment rate to 23.1 percent. A 23 percent rate of unemployment has nothing in common with economic recovery.
Even the language used in the West is deceptive. The Greek “bailout” does not bail out Greece. The bailout bails out the holders of Greek debt. Many of these holders are not Greece’s original creditors. What the “bailout” does is to make the New York hedge funds’ bet on the Greek debt pay off for the hedge funds. The bailout money goes not to Greece but to those who speculated on the debt being paid. According to news reports, Quantitative Easing by the ECB has been used to purchase Greek debt from the troubled banks that made the loans, so the debt issue is no longer a creditor issue.
China seems unaware of the risk of investing in the US. China’s new rich are buying up residential communities in California, forgetting the experience of Japanese-Americans who were herded into detention camps during Washington’s war with Japan. Chinese companies are buying US companies and ore deposits in the US. These acquisitions make China susceptible to blackmail over foreign policy differences.
The “globalism” that is hyped in the West is inconsistent with Washington’s unilateralism. No country with assets inside the Western system can afford to have policy differences with Washington. The French bank paid the $9 billion fine for disobeying Washington’s dictate of its lending practices, because the alternative was the close down of its operations in the United States. The French government was unable to protect the French bank from being looted by Washington.
It is testimony to the insouciance of our time that the stark inconsistency of globalism with American unilateralism has passed unnoticed.
- Trumpism: The Ideology
Submitted by Jeffrey Tucker via Liberty.me,
It’s not too interesting to say that Donald Trump is a nationalist and aspiring despot who is manipulating bourgeois resentment, nativism, and ignorance to feed his power lust. It’s uninteresting because it is obviously true. It’s so true that stating it sounds more like an observation than a criticism.
I just heard Trump speak live. It was an awesome experience, like an interwar séance of once-powerful dictators who inspired multitudes, drove countries into the ground, and died grim deaths.
His speech at FreedomFest lasted a full hour, and I consider myself fortunate for having heard it. It was a magnificent exposure to an ideology that is very much present in American life, though hardly acknowledged. It lives mostly hidden in dark corners, and we don’t even have a name for it. You bump into it at neighborhood barbecues, at Thanksgiving dinner when Uncle Harry has the floor, at the hardware store when two old friends in line to checkout mutter about the state of the country.
The ideology is a 21st century version of right fascism — one of the most politically successful ideological strains of 20th century politics. Though hardly anyone talks about it today, we really should. It is still real. It exists. It is distinct. It is not going away. Trump has tapped into it, absorbing unto his own political ambitions every conceivable bourgeois resentment: race, class, sex, religion, economic. You would have to be hopelessly ignorant of modern history not to see the outlines and where they end up.
For now, Trump seems more like comedy than reality. I want to laugh about what he said, like reading a comic-book version of Franco, Mussolini, or Hitler. And truly I did laugh, as when he denounced the existence of tech support in India that serves American companies (“how can it be cheaper to call people there than here?” — as if he still thinks that long-distance charges apply).
Let’s hope this laughter doesn’t turn to tears.
As an aside, I mean no criticism of FreedomFest’s organizer Mark Skousen in allowing Trump to speak at this largely libertarian gathering. Mark invited every Republican candidate to address the 2,200-plus crowd. Only two accepted. Moreover, Mark is a very savvy businessman himself, and this conference operates on a for-profit basis. He does not have the luxury of giving the microphone to only people who pass the libertarian litmus test. His goal is to put on display the ideas that matter in our time and assess them by the standards of true liberty.
In my view, it was a brilliant decision to let him speak. Lovers of freedom need to confront the views of a man with views like this. What’s more, of all the speeches I heard at FreedomFest, I learned more from this one than any other. I heard, for the first time in my life, what a modern iteration of a consistently statist but non-leftist outlook on politics sounds and feels like in our own time. And I watched as most of the audience undulated between delight and disgust — with perhaps only 10% actually cheering his descent into vituperative anti-intellectualism. That was gratifying.
As of this writing, Trump is leading in the polls in the Republican field. He is hated by the media, which is a plus for the hoi polloi in the GOP. He says things he should not, which is also a plus for his supporters. He is brilliant at making belligerent noises rather than having worked out policy plans. He knows that real people don’t care about the details; they only want a strongman who shares their values. He makes fun of the intellectuals, of course, as all populists must do. Along with this penchant, Trump encourages a kind of nihilistic throwing out of rationality in favor of a trust in his own genius. And people respond, as we can see.
So, what does Trump actually believe? He does have a philosophy, though it takes a bit of insight and historical understanding to discern it. Of course race baiting is essential to the ideology, and there was plenty of that. When a Hispanic man asked a question, Trump interrupted him and asked if he had been sent by the Mexican government. He took it a step further, dividing blacks from Hispanics by inviting a black man to the microphone to tell how his own son was killed by an illegal immigrant.
Because Trump is the only one who speaks this way, he can count on support from the darkest elements of American life. He doesn’t need to actually advocate racial homogeneity, call for a whites-only sign to be hung at immigration control, or push for expulsion or extermination of undesirables. Because such views are verboten, he has the field alone, and he can count on the support of those who think that way by making the right noises.
Trump also tosses little bones to the Christian Right, enough to allow them to believe that he represents their interests. Yes, it’s implausible and hilarious. But the crowd who looks for this is easily won with winks and nudges, and those he did give. At the speech I heard, he railed against ISIS and its war against Christians, pointing out further than he is a Presbyterian and thus personally affected every time ISIS beheads a Christian. This entire section of his speech was structured to rally the nationalist Christian strain that was the bulwark of support for the last four Republican presidents.
But as much as racialist and religious resentment is part of his rhetorical apparatus, it is not his core. His core is about business, his own business and his acumen thereof. He is living proof that being a successful capitalist is no predictor of one’s appreciation for an actual free market (stealing not trading is more his style). It only implies a love of money and a longing for the power that comes with it. Trump has both.
What do capitalists on his level do? They beat the competition. What does he believe he should do as president? Beat the competition, which means other countries, which means wage a trade war. If you listen to him, you would suppose that the U.S. is in some sort of massive, epochal struggle for supremacy with China, India, Malaysia, and, pretty much everyone else in the world.
It takes a bit to figure out what the heck he could mean. He speaks of the United States as if it were one thing, one single firm. A business. “We” are in competition with “them,” as if the U.S. were IBM competing against Samsung, Apple, or Dell. “We” are not 300 million people pursuing unique dreams and ideas, with special tastes or interests, cooperating with people around the world to build prosperity. “We” are doing one thing, and that is being part of one business.
In effect, he believes that he is running to be the CEO of the country — not just of the government (as Ross Perot once believed) but of the entire country. In this capacity, he believes that he will make deals with other countries that cause the U.S. to come out on top, whatever that could mean. He conjures up visions of himself or one of his associates sitting across the table from some Indian or Chinese leader and making wild demands that they will buy such and such amount of product else “we” won’t buy their product.
Yes, it’s bizarre. As Nick Gillespie said, he has a tenuous grasp on reality. Trade theory from hundreds of years plays no role in his thinking at all. To him, America is a homogenous unit, no different from his own business enterprise. With his run for president, he is really making a takeover bid, not just for another company to own but for an entire country to manage from the top down, under his proven and brilliant record of business negotiation, acquisition, and management.
You see why the whole speech came across as bizarre? It was. And yet, maybe it was not. In the 18th century, there is a trade theory called mercantilism that posited something similar: ship the goods out and keep the money in. It builds up industrial cartels that live at the expense of the consumer. In the 19th century, this penchant for industrial protectionism and mercantilism became guild socialism, which mutated later into fascism and then into Nazism. You can read Mises to find out more on how this works.
What’s distinct about Trumpism, and the tradition of thought it represents, is that it is non-leftist in its cultural and political outlook and yet still totalitarian in the sense that it seeks total control of society and economy and places no limits on state power. The left has long waged war on bourgeois institutions like family, church, and property. In contrast, right fascism has made its peace with all three. It (very wisely) seeks political strategies that call on the organic matter of the social structure and inspire masses of people to rally around the nation as a personified ideal in history, under the leadership of a great and highly accomplished man.
Trump believes himself to be that man.
He sounds fresh, exciting, even thrilling, like a man with a plan and a complete disregard for the existing establishment and all its weakness and corruption. This is how strongmen take over countries. They say some true things, boldly, and conjure up visions of national greatness under their leadership. They’ve got the flags, the music, the hype, the hysteria, the resources, and they work to extract that thing in many people that seeks heroes and momentous struggles in which they can prove their greatness.
Think of Commodus (161-192 AD) in his war against the corrupt Roman senate. His ascension to power came with the promise of renewed Rome. What he brought was inflation, stagnation, and suffering. Historians have usually dated the fall of Rome from his leadership. Or, if you prefer pop culture, think of Bane, the would-be dictator of Gotham in Batman, who promises an end to democratic corruption, weakness, and loss of civic pride. He sought a revolution against the prevailing elites in order to gain total power unto himself.
These people are all the same. They are populists. Oh how they love the people, and how they hate the establishment. They defy all civic conventions. Their ideology is somewhat organic to the nation, not a wacky import like socialism. They promise greatness. They have an obsession with the problem of trade and mercantilist belligerence as the only solution. They have zero conception of the social order as a complex and extended ordering of individual plans, one that functions through freedom and individual rights.
This is a dark history and I seriously doubt that Trump himself is aware of it. Instead, he just makes it up as he goes along, speaking from his gut. This penchant has always served him well. It cannot serve a whole nation well. Indeed, the very prospect is terrifying, and not just for the immigrant groups and imports he has chosen to scapegoat for all the country’s problems. It’s a disaster in waiting for everyone.
- All Hail Our Banking Overlords!
Submitted by Chris Martenson via PeakProseprity.com,
You really have to be paying attention to see what’s truly going on these days. The keepers of the system, that is the banking elites, now openly control everything — though you'd never know that by listening to the media.
Consider this:
Eurozone backs €7bn bridging loan
Jul 16, 2105
Eurozone ministers have agreed to give Greece a €7bn (£5bn) bridging loan from an EU-wide fund to keep its finances afloat until a bailout is approved.
The loan is expected to be confirmed on Friday by all EU member states.
In another development, the European Central Bank (ECB) agreed to increase emergency funding to Greece for the first time since it was frozen in June.
The decisions were made after Greek MPs passed tough reforms as part of a eurozone bailout deal.
How generous of the finance ministers of all those EU member states to agree to a “bridge loan” that will help Greece "keep its finances afloat". This should provide the people of Greece with a bit of breathing room, right? Maybe access to their bank accounts (finally!), perhaps?
No, not at all. Here’s what the entirety of the “”loan”” will go towards instead:
The bridging loan means Greece will be able to repay debts to the ECB and IMF on Monday.
Ummmm…that “money” will not ever go anywhere near Greece.
This is all merely electronic window-dressing for entirely esoteric bookkeeping purposes. Servers will blink at one location in Europe as digital 1s and 0s are transmitted to another. The electronic balances at the ECB and the IMF will change, but not much else.
The people of Greece will see none of it. Nor will they see their bank accounts unfrozen.
This act of banker "largess" is, of course, of, by, and entirely for the bankers. It has nothing to do with Greece or its people, about whom the banker class cannot care less.
But, they hide this disdain under and increasingly thin and condescending veneer of graciousness. Take, for example, the recently-announced 'generosity' of the powers that be — that is, the banking powers that be — which will permit the long suffering depositors to…*cough*…deposit more money into the banks:
Greece: Banks Can Reopen … for Deposits
Jul 17, 2015
Greek banks will reopen Monday after a three-week closure, the country's deputy finance minister says, though withdrawal restrictions will stay in place. Bank customers "can deposit cash, they can transfer money from one account to the other," but they can't withdraw money except at ATMs, the official says, and a withdrawal limit of 60 euros ($67) a day will stay in place, he said, though Greek authorities are working on a plan to allow people to roll over access to their funds so that if they don't make it to a bank machine one day, they can take out 120 euros the next day.
Yeah, depositing more money into the Greek banking system is exactly what all 12 remaining Greek idiots are clamoring to do…everybody else just wants their money back, thank-you-very-much.
Obviously, the only rational response of anybody in Europe watching this charade of theft continue would be to sell gold, right? (which has happened vigorously ever since the Greek crisis began) Because, you know, nothing says “confidence” quite like selling your gold so you can then park that money in a bank that may not let you withdraw it again.
Of course, we here at Peak Prosperity hold to the view that everything, and we mean everything, in our ””markets”” is stage-managed. And that especially includes gold. The central banks are demanding and commanding complete fealty to their story line, no exceptions tolerated. We are at that all-or-nothing moment in history when everything either works out perfectly or it all falls apart.
Savers have to be punished so debtors can be saved.
Why? Because if debtors are rescued, that makes it possible for more debts to be issued in the future..
And why is that important? Because the banking system needs ever more loans in order to survive.
Why do we slavishly feed a banking system that is rapacious, insatiable and always threatening calamity whenever it doesn’t get exactly everything it wants, when it wants it? That is a question nobody in power is willing to address.
Why not? Because there's no good reason to do it — unless you're a bank, or one of the many proxy agents (like politicians) receiving kick-backs from the banks.
We have a banking system that feeds on the blood, sweat and tears of the public. But the public's collective output is no longer ‘enough’ to subsidize everything that central planners have promised. So with a stagnating/shrinking pie – surprise! – the group that writes the rules, the banks, has decided that they should be the ones to get as much of it as possible.
Naturally, this will not work for very long. History is replete with examples why it can’t. Just consider the root meaning of “bankrupt” which has an interesting history:
The word actually comes from Italian banca rotta, a broken bench (not a rotten one, as the false friend of Italian rotta might suggest — it’s from Latin rumpere, to break). The bench was a literal one, however: it was the usual Italian word for a money dealer’s table. In his dictionary, the great Dr Johnson retold the legend that when an Italian money trader became insolvent, his table was broken.
(Source)
To “break the banker’s table” means to smash the money lender’s physical place of business after they have taken or lost all of your wealth. It’s speaks of an act of anger by the betrayed. And that’s where the banking system finds itself again and again over time, for the exact same reasons all through history — today being no different in anything but scale and complexity.
Conclusion
You have to read past the headlines today because they quite often say exactly the opposite of what’s actually happening. Like today’s description spinning GE’s 2Q, $1.38 billion earnings loss as a 5% rise in profits.
The bankers and financiers are badly overplaying their hands, again, and people are starting to catch on to the scam.
Real wealth is tangible things produced with tangible effort. Loans made out of thin-air 'money' require no effort and are entirely ephemeral. But if those loans are used to acquire real ownership of real assets, then something has been exchanged for nothing and one party is getting screwed.
That’s what has just happened in Greece. And expect it to happen increasingly elsewhere, as Charles Hughes Smith and I recently discussed in this week's excellent Off The Cuff podcast.
If you had asked me ten years ago if there was any chance of Greece becoming a failed state within a decade, I would have said ‘No, no chance.’ But here we are. In ten years, I suspect, we’ll be marveling over all the other failed states as the rot proceeds from the outside in. Again, Charles does a wonderful job articulating why in his recent report More Sovereign Defaults Are Coming.
There’s simply too much debt and too little cheap oil for there to be any other trajectory to this story. Boneheadedly, our leadership is so out-of-touch that their best response to this set of predicaments is to sacrifice the populace of an entire developed nation (for generations to come) just to keep the status quo stumbling along for a bit longer.
We need to all prepare for the inevitability that, as the rot proceeds, the people of Greece will not be the only casualties of the banks' attempts at self-preservation. They'll try to throw all of us under the bus before taking any losses themselves.
- Peak "Reach For Yield"
By removing liquidity via massive purchases of high quality (and in some cases) low quality collateral, the impact on investors of central bank repression of interest rates around the world can be summed up in three simple words: “reach for yield.” These three ever-so-simple words provide blanket excuse for ‘investors’ to pile head long into far riskier investments than they ever would before and considerably lower levels of compensation than they would ever have accepted before… but hey, as long as the central bankers have got their backs, there will always be a greater fool? However, as BofA notes, the mania for “yield reaching” is showing signs of fatigue with the biggest cumulative outflows since 2008…
Note: the current outflows are considerably larger than those during the Taper Tantrum
Does this mean investors have entirely given up on yield and have moved on to the more speculative non-earnings producing, negative free-cash flowing, “stocks always go up, just look at China”, stocks of the new bubble? Or is derisking beginning as The Fed desperately rearranges deckchairs on the “but hiking rates is not tightening” titanic of cheap-buyback-sponsored equity exuberance?
Source: BofAML
- How Student Loans Create Demand For Useless Degrees
Submitted by Josh Grossman via The Mises Institute,
Last week, former Secretary of Education and US Senator Lamar Alexander wrote in the Wall Street Journal that a college degree is both affordable and an excellent investment. He repeated the usual talking point about how a college degree increases lifetime earnings by a million dollars, “on average.” That part about averages is perhaps the most important part, since all college degrees are certainly not created equal. In fact, once we start to look at the details, we find that a degree may not be the great deal many higher-education boosters seem to think it is.
In my home state of Minnesota, for example, the cost of obtaining a four-year degree at the University of Minnesota for a resident of Minnesota, North Dakota, South Dakota, Manitoba, or Wisconsin is $100,720 (including room and board and miscellaneous fees). For private schools in Minnesota such as St. Olaf, however, the situation is even worse. A four-year degree at this institution will cost $210,920.
This cost compares to an average starting salary for 2014 college graduates of $48,707. However, like GDP numbers this number is misleading because it is an average of all individuals who obtained a four-year degree in any academic field. Regarding the average student loan debt of an individual who graduated in 2013, about 70 percent of these graduates left college with an average student loan debt of $28,400. This entails the average student starting to pay back these loans six months after graduation or upon leaving school without a degree. The reality of this situation is that assuming a student loan interest rate of 6.8 percent and a ten-year repayment period, the average student will be paying $326.83 every month for 120 months or a cumulative total re-payment of $39,219.28. Depending upon a student’s job, this amount can be a substantial monthly financial burden for the average graduate.
All Degrees Are Not of Equal Value
Unfortunately, there is no price incentive for students to choose degrees that are most likely to enable them to pay back loans quickly or easily. In other words, these federal student loans are subsidizing a lack of discrimination in students’ major choice. A person majoring in communications can access the same loans as a student majoring in engineering. Both of these students would also pay the same interest rate, which would not occur in a free market.
In an unhampered market, majors that have a higher probability of default should be required to pay a higher interest rate on money borrowed than majors with a lower probability of default. In summary, it is not just the federal government’s subsidization of student loans that is increasing the cost of college, but the fact that demand for low-paying and high-default majors is increasing, because loans for these majors are supplied at the same price as a major providing high salaries to its possessor with a low probability of default.
And which programs are the most likely to pay off for the student? The top five highest paying bachelor’s degrees include: petroleum engineering, actuarial mathematics, nuclear engineering, chemical engineering and electronics and communications engineering, while the top five lowest paying bachelor’s degrees are: animal science, social work, child development and psychology, theological and ministerial studies, and human development, family studies, and related services. Petroleum engineering has an average starting salary of $93,500 while animal science has an average starting salary of $32,700. This breaks down for a monthly salary for the petroleum engineer of $7,761.67 versus a person working in animal science with a monthly salary of $2,725. Based on the average monthly payment mentioned above, this would equate to a burden of 4.2 percent of monthly income (petroleum engineer) versus a burden of 12 percent of monthly income (animal science). This debt burden is exacerbated by the fact that it is now nearly impossible to have student loan debts wiped away even if one declares bankruptcy.
Ignoring Careers That Don’t Require a Degree
Meanwhile, there are few government loan programs geared toward funding an education in the trades. And yet, for many prospective college students, the trades might be a much more lucrative option. Using the example of plumbing, the average plumber earns $53,820 per year with the employer paying the apprentice a wage and training.
Acknowledging the fact that this average salary is for master plumbers, it still equates to a $20,000 salary difference between it and someone with a four-year degree in animal science while having no student loans as a bonus. Outside of earning a four-year degree in science, technology, engineering, math or, accounting with an average starting salary of $53,300, nursing with an average starting salary of $53,624, or as a family practice doctor on the lower end of physician pay of $161,000, society might be better served if parents and educators would stop using the canard that a four-year degree is always worth the cost outside of a few majors mentioned above. Encouraging students to consider the trades and parents to give their children the money they would spend on a four-year college degree to put a down payment on a house might be a better use of finite economic resources. The alternative of forcing the proverbial square peg into a round hole will condemn another generation to student debt slavery forcing them to put off buying a home or getting married.
Loans Drive Overall Demand
The root of the problem is intervention by the federal government in providing student loans. Since 1965 when President Johnson signed the Higher Education Act tuition, room, and board has increased from $1,105 per year to $18,943 in 2014–2015. This is an increase of 1,714 percent in 50 years. In addition, the Higher Education Act of 1965 created loans which are made by private institutions yet guaranteed by the federal government and capped at 6.8 percent. In case of default on the loans, the federal government — that is, the taxpayers — pick up the tab in order for these lenders to recover 95 cents on every dollar lent. Loaning these funds at below market interest rates and with the federal government backing up these risky loans has led to massive malinvestment as the percentage of high-school graduates enrolled in some form of higher education has increased from 10 percent before World War II to 70 percent by the 1990s. Getting a four-year degree in nearly any academic field seemed to be the way in which to enter or remain in the middle class.
But just as with the housing bubble, keeping interest below market levels while increasing the money supply in terms of loans — while having the taxpayer on the hook for a majority of these same loans — leads to an avalanche of defaults and is a recipe for disaster.
- Putin Orders Formation Of New Military Reserve Force
Fifteen years after Vladimir Putin first walked into the Kremlin, Russia’s army is bigger, stronger, and better equipped than at any time since the end of the Cold War. Able to call on three quarters of a million frontline troops, The Telegraph reports, with more tanks than any other country on the planet, and the world’s third largest air force, Russia retains much of the brute force associated with a former superpower. But it has also rapidly modernised, spending millions on rearmament and retraining programmes aimed at professionalising the lumbering, conscript-reliant force it inherited from the Soviet Union. The latest effort, as Reuters reports, Putin has ordered the creation of a new reserve armed force as part of steps to improve training and military readiness at a time of international tensions with the West over Ukraine.
With an estimated 766,000 troops under arms and another 2.5 million in reserve, Russia’s armed forces have shrunk under Mr Putin to the fourth largest in the world, behind China (2.3 million), India (1.4 million) and the United States (1.3 million).
In the relatively low-tech, high fire-power weapons that have defined the Ukraine conflict, it remains unsurpassed, with more tanks, self propelled artillery, and multiple rocket launch systems than any other country on the planet.
However, Russia still lags far behind the United States in total power and many other Western countries in terms of technology, with much of its vast arsenal still made up of ageing Soviet-designed equipment.
And so, it appears "whatever it takes" is spreading to Russia…(as Reuters reports)
The new reserve force has been discussed for several years and was first ordered by Putin in 2012 shortly after his re-election as President. The latest decree was published late on Friday.
It will be distinct from Russia's existing military reserves because the part-time personnel will be paid a monthly sum and train regularly.
Russia already has several million military reservists consisting of ex-servicemen, but they do little training as there are restrictions on how often they can be called up.
Defence Ministry officials have previously said that the new reserve force was envisaged at around 5,000 men to begin with, a small figure in a country with around 750,000 frontline troops.
The creation of the new reserve force had been delayed by a lack of financing, Russian media reported. Putin's decree ordered the government to find financing for the new force from the existing defense ministry budget.
* * *
Last year Russia spent an estimated 3.247 trillion rubles (£42.6 billion) – equivalent to 4.5 per cent of GDP – on defence, according to the SIPRI, a Swedish think tank. That’s up from 3.6 per cent of GDP since Mr Putin came to power in 2000.
That SIPRI estimate is higher than Russia’s officially published 2014 defence budget of 2.49 trillion rubles – which still makes it the third largest spender in the world behind the United States and China.
- Was Greece Set Up To Fail?
Submitted by Raul Ilargi Meijer via The Automatic Earth blog,
An entire economy is being deliberately suffocated, and all in all it’s just total madness. Quiet madness, though (update: and then the riots broke out..).
Two things I’ve been repeatedly asked to convey to you are that:
1) you can’t trust any Greek poll or media, because the media are so skewed to one side of the political spectrum, and that side is not SYRIZA (can you imagine any other country where almost all the media are against the government, tell outright lies, use any trick in and outside the book, and the government still gets massive public support?!),
and:
2) Athens is the safest city on the planet. I can fully attest to that. Not one single moment of even a hint of a threat, and that in a city that feels very much under siege (don’t underestimate that). And people should come here, and thereby support the country’s economy. Don’t go to Spain or France this year, go to Greece. Europe is trying to blow this country up; don’t allow them to.
* * * *
Then: I was reminded of something a few days ago that has me thinking -all over- ever since. That is, to what extent has Greece simply been a set-up, and a lab rat, for years now? I’m not sure I can get to the bottom of this all in one go, but maybe I don’t have to either. Maybe the details will fill themselves in as we go along.
One Daniel Neun wrote on Twitter, in German, translation mine, that:
Greece’s 2009 deficit was retroactively manipulated upward through a collaboration of the EU, IMF, PASOK, Eurostat (EU statistics bureau) and Elstat (Greek statistics bureau). That is the only reason why interest rates on Greek sovereign bonds skyrocketed in the markets, which in turn made Greek debt levels skyrocket.
The political and media narrative has consistently been that Greece “unexpectedly” and “all of a sudden” in late 2009, when a new government came in, was “found out” to have much higher debt levels than “previously thought”. And then had to appeal for a massive bailout. Obviously, Neun’s version is quite different. His doesn’t look like just another wild assumption, since he names a few sources, among which this from Kathimerini dated January 22, 2013:
Greece’s Statistics Chief Faces Charges Over Claims Of Inflated 2009 Deficit Figure
The head of Greece’s statistics service, Andreas Georgiou, and two board members at the Hellenic Statistical Authority (ELSTAT) are to face felony charges regarding the alleged manipulation of the country’s deficit figure in 2009.
Financial prosecutors Spyros Mouzakitis and Grigoris Peponis have asked a special magistrate who deals with corruption issues to investigate whether claims that Georgiou, the head of the national accounts department Constantinos Morfetas and the head of statistical research, Aspasia Xenaki, were responsible for massaging the figures so that Greece’s deficit appeared larger than it actually was, triggering Athens’s appeal for a bailout.
The three face charges of dereliction of duty and making false statements. Ex-ELSTAT official Zoe Georganta caused a storm in 2011 when she accused Georgiou of pumping up Greece’s deficit to over 15% of GDP, which was more than three times higher than the government had forecast in 2009.
However, she told a panel of MPs last March that she knew of no organized plan behind this alleged manipulation of statistics, instead blaming the politicians that handled Greece’s passage to the EU-IMF bailout of “inexperience, inability or maybe some of them profited.” The former ELSTAT official claimed that the deficit for 2009 should have been 12.5% of GDP and could have easily been brought to below 10% with immediate measures.
As well as this from Greek Reporter dated June 18 2015:
The 2009 Deficit Was Artificially Inflated, Former ELSTAT Official Tells Greek Parliament
Greece’s deficit figures for 2009 and 2010 were deliberately and artificially inflated, and this was at least partly responsible for the imposition of bailouts and austerity programs on the country, a former vice president of the Hellenic Statistical Authority (ELSTAT), Nikos Logothetis, said.
Testifying before a Parliamentary Investigation Committee on examining and clarifying the conditions under which Greece entered its bailout programs and the accompanying Memorandums, Logothetis called ELSTAT president Andreas Georgiou a “Eurostat pawn” that had converted the statistics service into a “one-man show.” He also accused Georgiou of bending the rules and “using tricks” to bump up the deficit’s size.
“A lot of the criteria were violated in order to include public utilities in the deficits. The deficit was enlarged even more by the one-sided fiscal logic of ELSTAT president Andreas Georgiou. It should not have been above 10%. The ‘alchemy’ that was carried out demolished our credibility, drove spreads sky high and we were unable to borrow from the markets. The enlargement of the deficits legitimized the first Memorandum and justified the second for the implementation of odious measures,” Logothetis said.
Noting that this was the third time he was testifying, Logothetis pointed out that Georgiou’s practices had been questioned by himself and other ELSTAT board members (most prominently by Zoe Georganta) but Georgiou had chosen to silence them so that the deficit figure was released only with his own approval and that of Eurostat.
Logothetis claimed that Georgiou had avoided meeting with ELSTAT’s board, even after Logothetis resigned, because the board’s majority would have questioned his actions. He also insisted that “centers” outside of Greece had played a role and needed someone on the “inside,” while he suggested that “someone wanted to bring the IMF into Europe.”
The former ELSTAT official said he was led to this conclusion by “seeing spreads rise as a result of the statistical figures until we reached a real enlargement of the deficits, violating the until-then not violated Eurostat criteria.”
A view from the ground was provided earlier today by my friend Dimitri Galanis in Athens when I asked him about this:
Let me help you a bit: September 2008 Wall Street crashes. For a whole year the whole planet is furious against TBTF banks and filthy rich bank CEOs. A year later – 2009 – the Deus ex machina – Georges Papandreou, then the newly elected Greek PM, “discovers” all of a sudden that Greek debt was bigger than everybody “imagined”.
The EU is “surprised” – Oh nobody knew!!! [everybody knew] Et voila: The Wall Street crisis becomes the Greek and Eurozone crisis. IMF gets a footing in the eurozone. Wall Street, French and German banks get bailed out. Greece suffers – Eurozone on the brink of collapse.
Greece is the tree – the rest is the forest .
And then I saw a piece by former US Secretary of Labor Robert Reich yesterday:
How Goldman Sachs Profited From the Greek Debt Crisis
The Greek debt crisis offers another illustration of Wall Street’s powers of persuasion and predation, although the Street is missing from most accounts. The crisis was exacerbated years ago by a deal with Goldman Sachs, engineered by Goldman’s current CEO, Lloyd Blankfein. Blankfein and his Goldman team helped Greece hide the true extent of its debt, and in the process almost doubled it.
And just as with the American subprime crisis, and the current plight of many American cities, Wall Street’s predatory lending played an important although little-recognized role. In 2001, Greece was looking for ways to disguise its mounting financial troubles. The Maastricht Treaty required all eurozone member states to show improvement in their public finances, but Greece was heading in the wrong direction.
Then Goldman Sachs came to the rescue, arranging a secret loan of €2.8 billion for Greece, disguised as an off-the-books “cross-currency swap”—a complicated transaction in which Greece’s foreign-currency debt was converted into a domestic-currency obligation using a fictitious market exchange rate. As a result, about 2% of Greece’s debt magically disappeared from its national accounts.
For its services, Goldman received a whopping €600 million, according to Spyros Papanicolaou, who took over from Sardelis in 2005. That came to about 12% of Goldman’s revenue from its giant trading and principal-investments unit in 2001—which posted record sales that year. The unit was run by Blankfein.
Then the deal turned sour. After the 9/11 attacks, bond yields plunged, resulting in a big loss for Greece because of the formula Goldman had used to compute the country’s debt repayments under the swap. By 2005, Greece owed almost double what it had put into the deal, pushing its off-the-books debt from €2.8 billion to €5.1 billion.
In 2005, the deal was restructured and that €5.1 billion in debt locked in. Perhaps not incidentally, Mario Draghi, now head of the ECB and a major player in the current Greek drama, was then managing director of Goldman’s international division. Greece wasn’t the only sinner. Until 2008, EU accounting rules allowed member nations to manage their debt with so-called off-market rates in swaps, pushed by Goldman and other Wall Street banks.
In the late 1990s, JPMorgan enabled Italy to hide its debt by swapping currency at a favorable exchange rate, thereby committing Italy to future payments that didn’t appear on its national accounts as future liabilities. But Greece was in the worst shape, and Goldman was the biggest enabler.
Undoubtedly, Greece suffers from years of corruption and tax avoidance by its wealthy. But Goldman wasn’t an innocent bystander: It padded its profits by leveraging Greece to the hilt—along with much of the rest of the global economy. Other Wall Street banks did the same. When the bubble burst, all that leveraging pulled the world economy to its knees.
Even with the global economy reeling from Wall Street’s excesses, Goldman offered Greece another gimmick. In early November 2009, three months before the country’s debt crisis became global news, a Goldman team proposed a financial instrument that would push the debt from Greece’s healthcare system far into the future.
This time, though, Greece didn’t bite.
As we know, Wall Street got bailed out by American taxpayers. And in subsequent years, the banks became profitable again and repaid their bailout loans. Bank shares have gone through the roof. Goldman’s were trading at $53 a share in November 2008; they’re now worth over $200. Executives at Goldman and other Wall Street banks have enjoyed huge pay packages and promotions. Blankfein, now Goldman’s CEO, raked in $24 million last year alone.
Meanwhile, the people of Greece struggle to buy medicine and food.
Note: when Reich says that “..Goldman wasn’t an innocent bystander: It padded its profits by leveraging Greece to the hilt..”, he describes a tried and true Wall Street model. This is how investment firms like for instance Mitt Romney’s Bain Capital operate: take over a company, load it up with (leveraged) debt, strip its assets and then throw the debt-laden remaining skeleton back unto the public sphere. In this sense, the Troika and its Wall Street connections function as a kind of venture/vulture fund with regards to Greece. Nothing new, other than it’s never been perpetrated on a European Union country before.
So what do you think: was Greece set up to fail from at least 6 years ago, has it all been a coincidence, or did they maybe just get what they deserve?
Here’s a short timeline.
In October 2009, Papandreou becomes the new PM. Shortly thereafter, he “discovers” with the help of Elstat head Andreas Georgiou that the real Greek deficit is not the less than 5% the previous government had predicted, but more than 15%. Within months, salaries and pensions or cut or frozen and taxes are raised. That apparently doesn’t achieve the intended goals, so Papandreou asks for a bailout.
Within 10(!) days, ECB, EU and IMF (aka Troika) fork over €110 billion. The conditions the bailout comes with, cause the Greek economy to fall ever further. Moreover, everyone today can agree that no more than 10% of the €110 billion ever reaches Greece; the remainder goes to the banks that had lent it too much money to begin with.
The remaining investors -the big bailed out banks had fled by then- agree to a 50% haircut, with even more odious conditions for Greece. Papandreou wants a referendum over this and is unceremoniously removed. Technocrat Lucas Papademos is appointed his successor. As Athens literally burns in protest, a second bailout of €136 billion is pushed through. More and deeper austerity follows.
By now, a large segment of the population is unemployed, and pensions are a fraction of what they once were. In an economy that depends to a large extent on domestic consumption, there could hardly be a bigger disaster. Papademos must be replaced because he has no support left, and Samaras comes in.
He allegedly posts a budget surplus, but that is somewhat ironically only possible because the entire economy is no longer functioning. Greek debt-to-GDP rises fast. The Greek people this time revolt not by fighting in the streets, but by electing Syriza.
And that brings us back to January 25 2015. And eventually to Thursday, July 16 2015.
What have the bailouts achieved? Well, the Greek economy is doing worse than ever, and the people are poorer than ever. Both have a lot more bad ‘news’ to come. So says the latest bailout imposed on Tsipras at gunpoint.
To go back to 2009, if the Elstat people who testified -multiple times- before the Greek Parliament were right, there would have been either no need for a bailout, or perhaps a much smaller one. Which, crucially, would not have required IMF involvement.
It therefore doesn’t look at all unlikely that Greece was saddled with an artificially raised deficit, and that the intention behind that, all along, was to get the Troika ‘inside’ for the long run. So the country could be stripped of all its assets.
The bailouts needed to be as big as they were to 1) successfully make the international banks ‘whole’ that had lent as much as they had into the Greek economy, 2) get the IMF involved, 3) and absolve the notorious -and cooperative- domestic oligarchy from any pain. And make all the usual suspects a lot more money in the process.
The added benefit was that it was obvious from the start that the Greeks would never be able to pay the Troika back, and would be their debt slaves for as long as the latter wanted, giving up all their treasured possessions in the process.
Or, alternatively, it could all have been a terribly unfortunate coincidence. It would be a curious coincidence, though.
- Pension Shocker: Plans Face $2 Trillion Shortfall, Moody's Says
Last month, in “Cities, States Shun Moody’s For Blowing The Whistle On Pension Liabilities,” we highlighted a rift between Moody’s and some local governments over the return assumptions for public pension plans.
To recap, when it comes to underfunded pension liabilities, one major concern is that in a world characterized by ZIRP and NIRP, it’s not entirely clear that public pension funds are using realistic investment return assumptions. The lower the return assumption, the larger the unfunded liability. After 2008, Moody’s stopped relying on the investment return assumptions of cities and states opting instead to use its own models. Unsurprisingly, this led the ratings agency to adopt a much less favorable view of state and local government finances and as WSJ reported, rather than admit that their return assumptions are indeed unrealistic, local governments have opted to drop Moody’s instead.
The debate underscores a larger problem in America. Almost half of the states in the union are facing budget deficits.
Underfunded pension liabilities are one factor, but the reasons for the pervasive shortfall vary from plunging oil revenues to plain old fiscal mismanagement. The pension issue gained national attention after an Illinois Supreme Court decision threw the future of pension reform into question and effectively set a precedent for other states, sending state and local officials back to the drawing board in terms of figuring out how to plug budget gaps. One option is what we have called the “pension ponzi” which involves the issuance of pension obligation bonds. Here is all you need to know about that option:
‘Solving’ this problem by issuing bonds is an enticing option but at heart, it amounts to what one might call a “pension liability-bond arbitrage.” The idea is to borrow the money to plug the pension gap and invest it at a rate of return that’s higher than the coupon on the bonds, thus saving money over the long-haul. Of course, much like transferring a balance on a high interest credit card onto a new card with a teaser rate (or refinancing a high interest credit card via a P2P loan) this gimmick only works if you do not max out the original card again, because if you do, all you’ve done is doubled your debt burden. As it relates to pension liabilities, this means that what you absolutely cannot do is use the cash infusion as an excuse to get lax when it comes to pension funding because after all, that’s what caused the problem in the first place.
And here’s a look at how pervasive the problem has become:
Make no mistake, America’s pension problem isn’t likely to be resolved anytime soon and in fact, with risk-free rates likely to remain subdued even as equity returns face the possibility that the beginning of a Fed rate hike cycle could trigger a 1937-style equity meltdown (bad news for return assumptions), and with investors set to demand higher yields on muni issuance thanks to deteriorating fiscal circumstances, the financial screws may be set to tighten further on the country’s struggling state and local governments. Bloomberg has more:
The cost to American cities for their cash-strapped pension funds is starting to look a lot worse, and it’s not because the stock-market rally may be losing steam.
Houston was warned by Moody’s Investors Service this month that it may be downgraded because of mounting retirement bills, the latest municipality put on notice as the company ignores bookkeeping gimmicks that let cities mask the size of their debt for years. The approach foreshadows accounting rules for even top-rated issuers that are poised to cause pension shortfalls to swell as new financial reports are released.
“If you’re AAA or AA rated and you’ve got significant and visible unfunded pension obligations, you’ve only got one direction to go in terms of rating, and that’s potentially down,” said Jeff Lipton, head of municipal research in New York at Oppenheimer & Co. “It’s the presentation on the balance sheet that is now going to drive urgency.”
Cities that shortchanged pensions for years are under growing pressure to boost their contributions, even after windfalls from a stock market that’s tripled since early 2009. Janney Montgomery Scott has said growing retirement costs are “the largest cloud overhanging” the $3.6 trillion municipal-bond market, where investors are demanding higher yields from borrowers under the greatest strain.
That was on display this week for Chicago, whose credit rating was cut to junk by Moody’s in May because of a $20 billion pension shortfall. The city was forced to pay yields of almost 8 percent on taxable bonds maturing in 2042, about twice what some homeowners can get on a 30-year mortgage.
Estimates of the pension-fund deficits facing states and cities vary, depending on the assumptions used to calculate the cost of bills due over the next several decades. According to Federal Reserve figures, they have $1.4 trillion less than needed to cover promised benefits.
Officials have been able to lower the size of the liability by counting on investment earnings of more than 7 percent a year, even after they expect to run out of cash. New rules from the Governmental Accounting Standards Board require a lower rate to be used after retirement plans go broke. Many reported shortfalls will grow as a result.
Moody’s, which in 2013 began using a lower rate than governments do to calculate future liabilities, has estimated that the 25 largest U.S. public pensions alone have $2 trillion less than they need. Cincinnati and Minneapolis are among cities Moody’s has since downgraded.
The California Public Employees’ Retirement System, the largest U.S. pension, this week said it earned just 2.4 percent last fiscal year, one-third of the annual return it projects. The California State Teachers’ Retirement System, the second-biggest fund,gained 4.5 percent, compared with its 7.5 percent goal.
In short: America is facing a fiscal crisis at the state and local government level and it appears as though at least one ratings agency is no longer willing to suspend disbelief by allowing officials to utilize profoundly unrealistic return assumptions in the calculation of liabilities. This means downgrades and as for what comes next, we’ll leave you with a recap of Citi’s vicious “feedback loop”.
From Citi
How does a downgrade create a feedback loop?
Payment induced liquidity shock
For many issuers’ credit contracts, a drop to a speculative grade rating acts as a payments trigger. For instance, the issuer may have commercial paper programs and line of credit agreements as a part of its short term borrowing program and a rating downgrade could qualify as an event of default for these borrowing arrangements. This enables the banks to declare all outstanding obligations as immediately due and payable.
A rating downgrade could also force accelerated repayment schedules and penalty bank bond rates on swap contracts and variable-rate debt agreements.
Thus, as a result of the rating action, an issuer could face increased liquidity risk at an unfortunate time
when it is working to navigate its way out of a fiscal crisis.
Knock-on rating downgrade risk
In some instances, rating agencies may disagree on an issuer’s creditworthiness which could result in a split level rating for a prolonged period. But a drastic rating action by one main rating agency (either Moody’s or S&P) which knocks the issuer’s debt to below investment grade could force the other rating agencies to follow with a similar downgrade. While the other rating agencies might feel that underlying credit fundamentals of the issuer do not merit a sub-investment grade rating, their rating action could be dictated by negative implications due to the liquidity pressures posed by the first downgrade to junk status. Recently, S&P downgraded a credit as a result of Moody’s rating action that stated that its rating action reflected its view that the issuer’s efforts “are challenged by short-term interference” that prevents a solid and credible approach to resolving their fiscal problems.
Shrinking buyer base
Many investors have mandates to buy investment grade debt only and a fall to speculative grade status could cause existing investors to liquidate the holdings of the fallen credit and shrink the universe of buyers.
Rising issuance costs
In many cases the issuer may have been working diligently to reduce its exposure to bank credit risks in the event of a ratings deterioration (for e.g. shifting its variable-rate GOs and sales tax paper to a fixed rate by tapping its short-term paper program then converting it into long-term debt) but the unfortunate timing of the downgrade will make this task much more challenging as a shrunken buyer base for an entity’s debt, quite naturally, translates into a higher cost of debt.
A higher cost of debt exacerbates liquidity problems and thus the feedback loop could continue to gain traction.
- The Greatest Collapse In The History Of The VIX Index
Submitted by Christopher Cole via Artemis Capital Management,
The extraordinary market intervention by China in response to their declining market, coupled with further ‘kick the can down the road’ policies by the EU regarding Greece, resulted in the greatest collapse in the history of the VIX index (which is still ongoing as I write). Over the past five days and counting the VIX has fallen -40% from 19.97 to 12.11. To gain perspective on moves in volatility Artemis ranks consecutive drawups and drawdowns (peak-to-trough or trough-to-peak % moves by day) in the VIX index and models them as a power law distribution. While the concept may be obscure to grasp at first the ramifications of the analysis are enlightening.
What is a power-law distribution? The distributions of a wide variety of physical, biological, and human phenomena follow what is known as a power-law distribution. Examples include earthquakes, deaths in war and terrorism, populations of cities, solar flares, word frequencies in language, movie box office receipts… and financial asset price movements up and down over multiple days.
Supernormal Power-Law Violations: When you rank events from the above natural and human phenomena the vast majority of observations follow the power-law distribution perfectly- however the violations of the function are the most interesting. Power-law violations are true black swans or supernormal observations because their results contain a degree of reflexivity that outside the boundary of what would be expected from an exponential growth function. Examples of supernormal violations in power laws across other phenomena include death counts in WWII ranked among all wars, box office receipts of the movie Titanic, the 9.2 Magnitude 1960 Chilean Earthquake, the population of Tokyo, the 1987 Black Monday Crash, and the 9/11 terror attack in NYC.
For volatility we define a Supernormal Volatility Collapse (Drawdown) as a multi-day decrease in spot-VIX index that violates power law distribution and is indicative of self-reflexivity in markets and unknown unknown events. These occur 1 out of every 920 drawdowns or 0.1087% of the time. Supernormal VIX collapses show returns below an expected power law distribution line since the extreme speed of collapse meets the fact that volatility is bounded by zero.
The graph below shows data points representing the rankings of VIX peak-to-trough declines (y-axis = % drawdown in vol over consecutive days & x-axis = ranking ).
As with most natural events – the vast majority of VIX drawdowns neatly follow the power law distribution function represented by the white line. The supernormal vol drawdowns to the lower left of the graph represent the most extreme violations of that power law (black swans) whereby the speed of collapse meets price constriction of implies due to the zero bound of volatility. They are the 9.2 earthquakes, 9/11s, and Titanics of VIX drawdowns.
We would like to highlight:- The ongoing decline in the VIX starting last week (and still going) is the largest supernormal volatility collapse in VIX history
- 3 of the largest supernormal VIX collapses have occurred in the last year alone
- The top 7 ranked power law violations have ALL occurred during the regime of monetary easing between 2010 and today
In summary, over the past 2 years, we have been experiencing a quantifiable ‘outlier’ or ‘black swan’ decline in the VIX every 6 months as evaluated against history.
I can only point to government intervention as the core reason. I firmly believe that this moral hazard produces a hidden leverage and “shadow market gamma” that at some point will result in a sustained volatility outlier event in the opposite direction.
- Trouble Ahead? KKK & African American Group Plan Opposing Protests At South Carolina Capitol
We’ve written quite a bit about worsening race relations in America over the past several months. As Robert Putnam recently made clear with “Our Kids””, the real threat to the fabric of American society may be the growing class divide and indeed, the post-crisis monetary policies that have served to exacerbate the disparity between the rich and everyone else have a polarizing effect, as Main Street watches helplessly while the very same bankers who took taxpayer money in 2008 become billionaires on the back of the Fed’s printing press.
And while it might very well be that America’s future is defined more by class differences than by contentious race relations, there’s no question that multiple high profile cases of African American deaths at the hands of law enforcement have brought race relations back to the fore and the massacre at South Carolina’s Emanuel AME church didn’t help matters, nor did rumors about a subsequent string of “arsons” (some of the incidents were not proven to be related to hate crimes) at African American churches across the south.
The renewed debate about race in American society came to a head earlier this month when the Confederate flag was removed from the South Carolina State House.
Now, trouble may be brewing in South Carolina because as Reuters reports, the KKK and the Black Educators for Justice are planning simultaneous rallies outside the State House on Saturday. Here’s more:
A Ku Klux Klan chapter and an African-American group plan overlapping demonstrations on Saturday outside the South Carolina State House, where state officials removed the Confederate battle flag last week.
Governor Nikki Haley, who called for the flag’s removal from the State House grounds after the killing of nine African-Americans in a Charleston church last month, urged South Carolinians to steer clear of the Klan rally.
“Our family hopes the people of South Carolina will join us in staying away from the disruptive, hateful spectacle members of the Ku Klux Klan hope to create over the weekend and instead focus on what brings us together,” Haley said in a statement posted to her Facebook page.
The Charleston shooting rekindled a controversy that has long surrounding the Confederate flag. A website linked to suspected gunman Dylann Roof, a 21-year-old white man, contained a racist manifesto and showed him in photos posing with the flag.
Opponents see its display as a painful reminder of the South’s pro-slavery past, while supporters see it as an honorable emblem of Southern heritage.
The Loyal White Knights of the Ku Klux Klan, a Pelham, North Carolina-based chapter that bills itself as “the largest Klan in America,” expects about 200 people to attend its demonstration, planned from 3 p.m. to 5 p.m.
Calls to the chapter, one of numerous unconnected extremist groups in the United States that have adopted the Klan name, were not immediately returned.
A Jacksonville, Florida, group called Black Educators for Justice expects a crowd of about 300 for its rally, planned for noon to 4 p.m. The group is run by James Evans Muhammad, a former director of the New Black Panther Party.
The Black Educators group wants to highlight continuing racial inequality, which Muhammad says endures despite the Confederate flag’s removal.
And while it seems the groups are in agreement as to not “interfering” with one another, we have to believe (and this is a phrase we don’t often get to use outside of financial markets but probably applies here) that “this may not end well.”
- The Bankruptcy Of The Planet Accelerates – 24 Nations Are Currently Facing A Debt Crisis
Submitted by Michael Snyder via The Economic Collapse blog,
There has been so much attention on Greece in recent weeks, but the truth is that Greece represents only a very tiny fraction of an unprecedented global debt bomb which threatens to explode at any moment. As you are about to see, there are 24 nations that are currently facing a full-blown debt crisis, and there are 14 more that are rapidly heading toward one. Right now, the debt to GDP ratio for the entire planet is up to an all-time record high of 286 percent, and globally there is approximately 200 TRILLION dollars of debt on the books. That breaks down to about $28,000 of debt for every man, woman and child on the entire planet. And since close to half of the population of the world lives on less than 10 dollars a day, there is no way that all of this debt can ever be repaid. The only “solution” under our current system is to kick the can down the road for as long as we can until this colossal debt pyramid finally collapses in upon itself.
As we are seeing in Greece, you can eventually accumulate so much debt that there is literally no way out. The other European nations are attempting to find a way to give Greece a third bailout, but that is like paying one credit card with another credit card because virtually everyone in Europe is absolutely drowning in debt.
Even if some “permanent solution” could be crafted for Greece, that would only solve a very small fraction of the overall problem that we are facing. The nations of the world have never been in this much debt before, and it gets worse with each passing day.
According to a new report from the Jubilee Debt Campaign, there are currently 24 countries in the world that are facing a full-blown debt crisis…
- Armenia
- Belize
- Costa Rica
- Croatia
- Cyprus
- Dominican Republic
- El Salvador
- The Gambia
- Greece
- Grenada
- Ireland
- Jamaica
- Lebanon
- Macedonia
- Marshall Islands
- Montenegro
- Portugal
- Spain
- Sri Lanka
- St Vincent and the Grenadines
- Tunisia
- Ukraine
- Sudan
- Zimbabwe
And there are another 14 nations that are right on the verge of one…
- Bhutan
- Cape Verde
- Dominica
- Ethiopia
- Ghana
- Laos
- Mauritania
- Mongolia
- Mozambique
- Samoa
- Sao Tome e Principe
- Senegal
- Tanzania
- Uganda
So what should be done about this?
Should we have the “wealthy” countries bail all of them out?
Well, the truth is that the “wealthy” countries are some of the biggest debt offenders of all. Just consider the United States. Our national debt has more than doubled since 2007, and at this point it has gotten so large that it is mathematically impossible to pay it off.
Europe is in similar shape. Members of the eurozone are trying to cobble together a “bailout package” for Greece, but the truth is that most of them will soon need bailouts too…
All of those countries will come knocking asking for help at some point. The fact is that their Debt to GDP levels have soared since the EU nearly collapsed in 2012.
Spain’s Debt to GDP has risen from 69% to 98%. Italy’s Debt to GDP has risen from 116% to 132%. France’s has risen from 85% to 95%.
In addition to Spain, Italy and France, let us not forget Belgium (106 percent debt to GDP), Ireland (109 debt to GDP) and Portugal (130 debt to GDP).
Once all of these dominoes start falling, the consequences for our massively overleveraged global financial system will be absolutely catastrophic…
Spain has over $1.0 trillion in debt outstanding… and Italy has €2.6 trillion. These bonds are backstopping tens of trillions of Euros’ worth of derivatives trades. A haircut or debt forgiveness for them would trigger systemic failure in Europe.
EU banks as a whole are leveraged at 26-to-1. At these leverage levels, even a 4% drop in asset prices wipes out ALL of your capital. And any haircut of Greek, Spanish, Italian and French debt would be a lot more than 4%.
Things in Asia look quite ominous as well.
According to Bloomberg, debt levels in China have risen to levels never recorded before…
While China’s economic expansion beat analysts’ forecasts in the second quarter, the country’s debt levels increased at an even faster pace.
Outstanding loans for companies and households stood at a record 207 percent of gross domestic product at the end of June, up from 125 percent in 2008, data compiled by Bloomberg show.
And remember, that doesn’t even include government debt. When you throw all forms of debt into the mix, the overall debt to GDP number for China is rapidly approaching 300 percent.
In Japan, things are even worse. The government debt to GDP ratio in Japan is now up to an astounding 230 percent. That number has gotten so high that it is hard to believe that it could possibly be true. At some point an implosion is coming in Japan which is going to shock the world.
Of course the same thing could be said about the entire planet. Yes, national governments and central banks have been attempting to kick the can down the road for as long as possible, but everyone knows that this is not going to end well.
And when things do really start falling apart, it will be unlike anything that we have ever seen before. Just consider what Egon von Greyerz recently told King World News…
Eric, there are now more problem areas in the world, rather than stable situations. No major nation in the West can repay its debts. The same is true for Japan and most of the emerging markets. Europe is a failed experiment for socialism and deficit spending. China is a massive bubble, in terms of its stock markets, property markets and shadow banking system. Japan is also a basket case and the U.S. is the most indebted country in the world and has lived above its means for over 50 years.
So we will see twin $200 trillion debt and $1.5 quadrillion derivatives implosions. That will lead to the most historic wealth destruction ever in global stock, with bond and property markets declining at least 75 – 95 percent. World trade will also contract dramatically and we will see massive hardship across the globe.
So what do you think is coming, and how bad will things ultimately get once this global debt crisis finally spins totally out of control?
- Gold, Stocks, Oil… Choose One
Via ConvergEx's Nick Colas,
Would you rather have one “Share” of the S&P 500 at $2,124, or 41 barrels of crude oil, or 1.86 ounces of gold? Yes, they are all worth the same amount at the moment, but the price relationship between the three has shifted over the decades.
For example, the current ratio of 41.4 barrels of crude to one S&P 500 is 45% higher than the 30 year average of 28.5x. That means oil really should be at $75/barrel with the S&P 500 where it is. The short term (10 year) average is even lower – 17.7x – pointing to a “Fair Value” for oil at $120. Perhaps equity markets do have more room to run if this historic relationship is on hold for the moment, as slack global growth and shifting geopolitics keeps oil prices down and (hopefully) helps U.S. consumer confidence.
As for the stock/gold relationship, the current ratio of 1.86 ounces to 1 S&P share is pretty spot-on the 30 year average of 1.89. So why is gold breaking down even as stocks are melting up? Stocks are a proxy for confidence in everything from the financial system to human ingenuity’s ability to create a better world; gold’s +5,000 year record of value is essentially a reminder that nothing ever changes.
Warren Buffett hates gold as an investment, a fact that has perplexed me for years. Berkshire Hathaway’s own Borsheims jewelry store will sell you all the gold you want, provided you pay the premium over its intrinsic value to have it shaped into necklaces, bracelets, or rings. Somehow, silver is ok – Berkshire once owned 129 million ounces of the stuff back in the 1990s. Charlie Munger, Buffett’s partner of many years, famously told CNBC in 2012 “I think gold is a great thing to sew in to your garments if you’re a Jewish family in Vienna in 1939 but I don’t think civilized people buy gold”. Yep, that’s what he said…
The problem Buffett and Munger seem to have with gold is that it just sits there and looks pretty. Their model for investing is to buy businesses in whole or in part and essentially keep capital cycling through the global economic ecosystem. That’s essentially their version of a social contract – if you have more money than you need then you hand it back for others to use, hopefully for productive purposes. Fair enough – their balance sheets are much better than mine so it’s hard with their success using this paradigm.
The other side of the coin is that every single piece of gold ever minted by any government or made by private hands – anywhere and at any time – still has value. The modern financial system – banks, capital markets, the whole thing – have value in excess of gold when they do what they are supposed to do: channel human innovation and enable social progress. And when they fail in those goals, gold is the default investment until the next time around. Just consider that over the last 10 years – one very full cycle of economic expansion, severe contraction and then recovery – the performance of gold still far outstrips the S&P 500: 161% to 75%. Oh, and gold also beats the performance of Berkshire Hathaway (up 154% over the last 10 years), with a lot less volatility for most of that period.
Yet on a day when gold broke to a five year low while U.S. equity markets seem destined to make new all-time highs in short order, we need some more historical context on the relative value of each asset class to make a thoughtful case for what’s happening now. To do that, we have done a time series analysis back to 1970, dividing the value of the S&P 500 by the price of a troy ounce of gold. There are some handy graphs highlighting this calculus right after this note, but here are our key takeaways:
- Gold and stocks are fairly valued relative to each other right where they are. Over the last 30 years, the average ratio has been 1.89x, or that many troy ounces of gold for one S&P 500 “Share”. The current ratio is 1.86 (2124 divided by $1,144). The math back to 1970, before the U.S. shed the last vestiges of a gold standard, is 1.53x meaning that prices up to $1,388/oz are also “Fair value”.
- Gold goes through long waves of social favor/rejection, and it is better to view gold’s relationship to equity prices through that pendulum-mounted lens. Consider that the all-time low ratio was 0.17, back in the early 1980s, when investors clearly felt that the U.S. central banking system was broken and the domestic economy was stuck in a cycle of “Stagflation”. Yes, it took over 5 S&P 500’s to buy one ounce of gold. The relationship went through “Par” in the late 1980s – gold and S&P 500 at the same price – and hit a high of 5.5x during the dot com bubble of the late 1990s. It would be hard to find a time in modern economic history when there was more enthusiasm for the wonders of man’s creativity than Internet 1.0. Gold was something for a Gucci bangle or Rolex Submariner case, but that was it.
- You probably know the rest – gold and stocks revisited “Par” in January 2009 and stocks didn’t get the upper hand again until April 2013. Now the ratio is the aforementioned 1.86. From 1996 to 2007, the ratio never dipped below 2.0x, so that’s a proxy for where the relationship tends to go during periods of capital markets enthusiasm. And we clearly seem to be in such a phase.
- In the end, most investors own gold not strictly as an investment, but as a hedge. The math we’ve highlighted shows why. When humans get things wrong – central bankers, politicians, even overly enthusiastic equity investors – gold is a useful asset, uncorrelated to the rest.
We can also do this analysis for oil, which in many ways is a more “Useful” commodity than gold and looks very undervalued versus U.S. stocks. Again – graphs at the end of this note and summary below:
- The current ratio of oil prices to the S&P 500 is 41.4 (2124 divided by spot WTI at $51.31) and the 30 year average (using a blend of Brent, Dubai and WTI) is 28.5x. That makes the current price of oil deeply undervalued to the S&P 500. Crude really should trade at $75 if the historical average relationship held any sway. That is essentially 50% higher than current levels.
- Maybe the U.S. is less energy intensive now, so is the relationship is different? Nope – just the opposite actually. The 10 year average is 17.7x, so oil should be $120/barrel.
- The best thing you can say – and this is pretty good, actually – is that global geopolitics and oil supply fundamentals are conspiring to keep crude prices lower for longer than usual this late in an economic cycle. The math backs that up, and this should help U.S. stocks move higher from hopes that consumers will (one day) spend their savings at the pump.
The upshot of these two case studies is pretty clear: oil is cheap relative to stocks and the savvy investor should look at the beaten up energy sector for value plays. Oil doesn’t stay cheap forever – never has, any way. Gold is likely in for some more rough treatment, only because the pendulum of human confidence is still moving towards “Hope” and away from “Fear”. And that’s OK – history if full of such cycles. And gold has seen them all.
- Is This The Most Remote Object In The Solar System?
- Have Central Banks Brought Us Back to 2008… or 1929?
In the early 2000s, Alan Greenspan was worried about deflation. So he hired Ben Bernanke, the self-proclaimed expert on the Great Depression from Princeton. The idea was that with Bernanke as his right hand man, Greenspan could put off deflation from hitting the US. Indeed, one of Bernanke’s first speeches was titled “Deflation: Making Sure It Doesn't Happen Here"
The US did briefly experience a bout of deflation from late 2007 to early 2009. To combat this, Fed Chairman Ben Bernanke unleashed an unprecedented amount of Fed money. Remember, Bernanke claims to be an expert on the Great Depression, and his entire focus was to insure that the US didn’t repeat the era of the ‘30s again.
Current Fed Chair Janet Yellen is cut of the same cloth as Bernanke. And her efforts (along with Bernanke’s) aided and abetted by the most fiscally irresponsible Congress in history, have recreated an environment almost identical to that of the 1920s.
Let’s take a quick walk down history lane.
In the 1920s, most of Europe was bankrupt due to after effects of WWI. Germany in particular was completely insolvent due to the war and due to the war reparations foisted upon it by the Treaty of Versailles. Remember, at this time Germany was the second largest economy in the world (the US was the largest, then Germany, then the UK).
Germany attempted to deal with the economic implosion created by WWI by increasing social spending: social spending per resident grew from 20.5 Deutsche Marks in 1913 to 65 Deutsche Marks in 1929.
Since the country was broke, incomes and taxes remained low, forcing Germany to run massive deficits. As its debt loads swelled, the county cut interest rates and began to print money, hoping to inflate away its debs.
When the country lurched towards default, US and other banks loaned it money, doing anything they could to keep the country from defaulting on its debt. As a result of this and the US’s relative economic strength compared to most of Europe, capital flew from Europe to the US.
This created a MASSIVE stock market bubble, arguably the second largest in history. From its bottom in 1921 to its peak in 1929, stocks rose over 400%. Things were so out of control that the Fed actually raised interest rates hoping to curb speculation.
The bubble burst as all bubbles do and stocks lost 90% of their value in a mere two years.
Today, the environment is almost identical but for different reasons. The ECB first cut interest rates to negative in June 2014. Since that time capital has fled Europe and moved into the US because 1) interest rates here are still positive, albeit marginally, and 2) the US continues to be perceived as a safe-haven due to its allegedly strong economy.
This process has accelerated in 2015.
· Globally, there have been 20 interest rate cuts since the years started a mere two months ago.
· Interest rates are now at record lows in Australia, Canada, Switzerland, Russia and India.
· Many of these rates cuts have resulted in actual negative interest rates, particularly in Europe (Denmark, Sweden, and Switzerland).
· Both the ECB and the Bank of Japan are actively engaging in QE programs forcing rates even lower.
· All told, SEVEN of the 10 largest economies in the world are currently easing.
Because the US is neutral, money has been flowing into the country by the billions. A lot of it is moving into luxury real estate (particularly in LA and York), but a substantial amount has moved into stocks as well as the US Dollar.
As a result of this, the US stock market is trading at 1929-bubblesque valuations, with a CAPE of 27.34 (the 1929 CAPE was only slightly higher at 30. And when that bubble burst, stocks lost over 90% of their value in the span of 24 months.
Another Crash is coming… and smart investors would do well to prepare now before it hits.
If you've yet to take action to prepare for this, we offer a FREE investment report called the Financial Crisis "Round Two" Survival Guide that outlines simple, easy to follow strategies you can use to not only protect your portfolio from it, but actually produce profits.
We are making 1,000 copies available for FREE the general public.
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Best Regards
Phoenix Capital Research
- The Fed Is Either Too Late Or Too Early; But Certainly Not Just Right
Submitted by Roger Thomas via Valuewalk.com,
If market economists have the Fed right, in about 60 days from now Janet Yellen, chairwoman of the Federal Reserve, will announce the first Federal Reserve rate hike in about 9 years.
With the first rate hike pending, an obvious question is – Does the Fed have the timing right?
If you're looking at year-over-year growth in Retail Sales, Industrial Production, and Capacity Utilization, the answer is a clear no.
Here's a look.
Retail Sales vs Fed tightening cycles
The following graphic is a look at year-over-year growth in Retail Sales overlaid with the Federal Funds target interest rate.
Fascinatingly, all four of the previous four Fed tightening cycles occurred when Retail Sales were either accelerating or about flat.
This is interesting because Retail Sales in 2015 have been deteriorating all year. Overall, Retail Sales growth peaked in August 2014, and since then have consistently experienced a decline in year-over-year growth.
In the first tightening cycle shown, March 1988 to March 1989, Retail Sales floating about flat, neither decelerating or accelerating.
In the mid-90s (January 1995 to February 1995), Retail Sales were clearly accelerating.
In the late 1990s, Retail Sales were on a clear upward trend.
Lastly, in the most recent tightening cycle, from April 2004 to August 2006, Retail Sales were also clearly on an accelerating trajectory.
This goes to show that there's a first time for everything. Raising rates when Retail has been weakening for around a year.
Industrial Production
Here's a look at the Industrial Production picture.
Overall,the picture is pretty similar to the Retail Sales picture.
In three out of the four instances, the Fed raised rates when Industrial Production was either accelerating or at least not decelerating.
The sole exception to this observation was the 1988/1989 tightening cycle.
During this period, the Fed decided to raise rates even though Industrial Production was decelerating.
Unsurprisingly, Industrial Production continuously decelerated throughout the Fed's tightening cycle.
This downward is similar to what we might see for the remainder of 2015 and first half of 2016 if the Fed first starts raising rates in September 2015.
Interesting, Industrial Production growth is not far from going negative, so the Fed will more than likely impose a very short tightening cycle.
Capacity Utilization
Here's a look at the Capacity Utilization picture.
As with Industrial Production, Capacity Utilization was, in most cases, accelerating or at least not decelerating when the Fed decided to start raising rates.
The sole exception, as with Industrial Production, occurred in the late 1980s.
The most interesting observation from this graphic is that year-over-year growth in Industrial Production is negative.
It would be quite amazing for the Fed to raise rates when Capacity Utilization is lower than it was at this time last year.
Perhaps there's a first time for everything (i.e. raise rates before the economy deteriorates too much, because the Fed certainly can't raise rates).
Conclusion
Overall, if one considers Retail Sales, Industrial Production, and Capacity Utilization as reliable indicators on the state of the U.S. economy, then the Fed is either way too late or way too early for a rate hike. Ms. Yellen's Fed certainly does not have the time just right.
If the Fed does raise the Fed's target interest rate in September, it would be coming at a time when year-over-year growth in Retail Sales, Industrial Production, and Capacity Utilization are all decelerating.
Greenspan understood the first derivative, but apparently Ms. Yellen does not.
- UK Market Regulator Head Who Thought "All Bankers Were Evil" Let Go After "Making Too Many Enemies"
On the surface it may appear that the head of the FCA, the UK’s financial regulator, Martin Wheatly resigned voluntarily yesterday. The truth is that here only “quit” after being told by George Osborne that he would not renew his contract when it expires in March.
For those who are unfamiliar, Wheatley led the FCA from its inception in April 2013, and oversaw a regulator that extracted record penalties from the industry, teaming with US authorities in the Libor and foreign exchange benchmark-rigging scandals. He also targeted retail banks for mis-selling products to consumers and secured sweeping new powers, including oversight of payday lenders and antitrust tools. Granted, he was not able to send any prominent bankers to prison – the only person behind bars so far is the scapegoat for the HFT’s May 2010 flash crash, Nav Sarao – but his surprisingly dogged crackdown on manipulation was the main catalyst for the revelation of Liborgate (formerly known as a “conspiracy theory”) which then spread to FX, commodities (including gold) and Treasuries, and which most recently cost the jobs of Deutsche Bank’s co-CEO and led to several changes at the top of Barclays bank.
It also cost Wheatley his job.
According to the FT, citing government insiders, the message that his contract would expire was relayed to Mr Wheatley “relatively recently” and that the Financial Conduct Authority chief had decided that in such circumstances he did not want to serve out the remainder of his existing term. He will step down on September 12, with Tracey McDermott, the regulator’s head of supervision, taking over until a replacement is found.”
The move comes a month after Mr Osborne, the chancellor, unveiled a “new settlement” with the City of London — suggesting a shift from an era of tough regulation of the financial services sector.
The paradox: while Osborne’s official statement praised Mr Wheatley’s performance but talked about moving the FCA on to “the next stage. The government believes that a different leadership is required” to build on the FCA’s foundations, he said.
In other words, the chancellor got “the tap on the shoulder” and was advised by UK’s banks that they would much rather if there is only token regulation and the pretense of supervision instead of someone like Wheatley who keeps making banks pay massive fines every quarter to the point where one-time, non-recurring legal charges are both non-one time and recurring (even if it means nobody actually goes to prison).
Furthermore, the former head of Hong Kong’s Securities and Futures Commission did not always have the confidence of government officials, who have privately urged regulators to take a lighter approach as the economy improves and banker-bashing falls out of favour. Some industry executives, meanwhile, viewed him as remote and unhelpful and complained to senior Conservative politicians about his consumer-champion agenda.
But his biggest transgression: “one senior UK bank director said: “The problem with Martin was that he made so many enemies, partly for good reason because banks did rightly need firm treatment after the crisis. But he seemed to have a mindset that all bankers were evil.“
We wonder where he may have gotten that idea:
But most importantly, “he made many enemies“, enemies which just happen to be in control of the decision-making process by their puppets in UK government.
Which also means that the period of massive civil (if not criminal) penalty charges in the UK is now over and the time of banker prosecution, fake as it may have been, is officially over. It also means that it is once again open season for banks to manipulate and rig anything and everything that has a “market-set” price.
Then again, there may be more to Wheatley’s departure than meets the eye.
As one commentator notes, “Martin Wheatley achieved something unique: both bankers and victims of financial services misconduct hated him, and wanted him gone. The former grew tired of the procession of huge, seemingly random fines imposed on their blameless shareholders and the endless series of behavioural economics-based recommendations imposed by supervision teams. The latter berated him for refusing to hound the bad guys out of the industry and lock them up.
Both are right. Wheatley’s era will be judged as one in which there was a lack of discrimination and precision. Much easier to fine a bank than prosecute a rogue banker. Especially if some of the rogues are in very senior positions, and also have the ability to dole out obscenely well-paid sinecures to failed ex-regulators…
The need to track down and eliminate the bad apples while laying off the shareholders and let managers manage is the message that George Osborne and Mark Carney delivered, in no uncertain terms, at the Mansion House last month. Just days later, Wheatley made an ill-judged comment to a reporter about tracking down wrongdoers not being ‘in our charter’ (whatever that is). My guess is that this is what hammered the final nail into his professional coffin.
This does appear accurate: after all if Wheatley really did want to ferret out all corruption he should have started with the Bank of England itself, which as we reported before, was one of the key participants in the FX rigging scandal, and where after a few key personnel were let go, things are back to normal. Because the last thing one is allowed to do nowadays, is to suggest that central banks themselves are participating in the rigging of market products, be they FX or gold (which lately are synonymous according to the US OCC) and hint that the gross market manipulation taking place in China is really quite endemic and is merely an example of what central banks do the world over.
One can only hope that the assessment above is accurate and that Wheatley’s replacement will indeed crack down on actual banks instead of bank shareholders, who end up being the ones who pay the fines for banker transgression.
And just to make sure all the t‘s are crossed, the obligatory diplomatic statements that the departure is amicable and Wheatley remains respected, were a key part of the charade. Sure enough.
Mr Wheatley said: “I am incredibly proud of all we have achieved together in building the FCA over the past four years. I know that the organisation will build on that strong start and work so that the financial services industry continues to thrive.”
John Griffith-Jones, chairman of the FCA, said: “Martin has done an outstanding job as chief executive setting up and leading the FCA over the past four years. We owe him a lot and I and my board would like to thank him for his great efforts in setting up the organisation and for the contribution he has made to putting conduct so firmly at the top of the financial services agenda.”
Because no matter what the real reason behind Wheatley’s departure, whatever bankers want…
And speaking of which, if only the US SEC had as its “leader” not a person whose entire legal career was spent defending Wall Street and is now forced to recuse herself from virtually every enforcement action, then just maybe the US retail investor would still be willing to participate in the rigged casino, and allow banks and hedge funds to offload their record risk holdings to the “dumb money” which is increasingly looking like the smartest money of all.
- Bonds Are Back: "There Is Too Much Complacency"
Via Scotiabank's Guy Haselmann,
FOMC
For many, there is typically a large divide between what they believe the FOMC should do, and what it will actually do. There are those who believe the Fed should not hike until next year or later: they include Charles Evans, Narayana Kocherlakota, Jeffrey Gundlach and the IMF. Others believe the FOMC should have hiked already and should begin ASAP (even at the July meeting next week): those in this camp include, Esther George, Loretta Mester, Jeffrey Lacker and me.
- Neither outcome will likely happen, despite reasonable and easily understandable arguments for either delaying or advancing lift-off.
- Somehow the FOMC has veered back to its ‘hated’ calendar guidance, signifying the September meeting as most probable for lift-off.
It seems to me that the delay camp has too much faith in models. Inflation and economic slack and few other aspects that constitute the basis of their position, may not be as fully understood as they claim. Globalization, technological advances, and the drift in the US economy from a goods-producing to a services economy, has weakened economic forecasting accuracy and understanding.
Nonetheless, this camp wants to wait for certainty (that the Fed’s full-employment and inflation mandates are achieved) before hiking. They have little concern that official rates have been at the ‘emergency level’ of zero for six years; well past emergency conditions. They believe that overshooting is preferable to undershooting targets, because of asymmetry, i.e., it has the ability to hike rates, but does not have the ability to ease from zero (further QE is likely a political non-starter).
The delay camp also does not believe (rightly or wrongly) that there are any current (meaningful) risks to financial stability. Rather, this camp seems excessively more worried about having to reverse course after hiking.
I have outlined numerous reasons for over a year why the Fed should hike rates ASAP (including moral hazard, record levels of corporate issuance, impact on pensions and insurance companies, investor herd-trading, inequality, renewed sub-prime lending, and low-quality securitization) so I will not get into detail here.
Yellen said that the choice is hiking ‘sooner and slower’ or hiking ‘later and more aggressively’. Hiking sooner is more consistent with her preference and message of a gradual path toward ‘normalization’. She also said that a hike would indicate confidence in economic momentum; so wouldn’t an early hike rid markets of the uncertainty around the timing of the first hike as well as allow for a longer (i.e., more gradual) period before the second hike?
Bottom line.
The FOMC should stop dangling a rate hike over markets with its informationally-challenged term ‘data dependency’. Currently, financial conditions are ideal and economic conditions are plodding along with progress. Market interest rates are low. Spreads are tight. Equities are at, or near, all-time highs. The dollar index (DXY), while higher than last year, is 4% lower than where it was during the March meeting. China and Greece (and other geo-political flash points) are far from solved, but at the moment, there is relative calm.
Financial Markets
During the last week of April, I recommended being cautious on Treasuries (German Bunds were a catalyst). However, in May, after a steep selloff, I recommended re-establishing tactical longs in the backend (10’s and longer) in front of 2.40% yield on the 10-year. While chopping around ever since, the support levels of 2.40% 10’s and 3.25% 30’s, appears to have held well. I now recommend adding to those backend positions.
Investors are too myopically focused on expectations of a steep rise in bond yields and on using central bank stimulus to pile back into riskier assets. There is too much complacency. I believe the upside potential for Treasuries prices for the balance of the year is once again being greatly underestimated.
The long end should continue to perform well under various scenarios. If the Fed hikes in September or earlier, the back end should perform well. If the Fed breaks its implicit promise to hike rates in September, its credibility would be damaged: unless of course, it was due to a significant deterioration in the economic or political landscape. Either outcome would likely benefit long Treasury security prices.
I expect USD strength and commodity weakness to continue as well. Weakness in the commodity complex is probably a sign of deep and on-going trouble in China. I expect: EUR to test parity, $/yen 130, $/Cad 1.35, AUD .6500, WTI oil $42. I also expect the US 10yr and US 30yr yields to dip again this year below 2.00% and 2.75%, respectively. Periphery EU spreads should continue to be sold versus Bunds and UST.
“Easy money is not costless” – Anonymous
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