- Schäuble Warns of “Sudden” Greek Default
Wolf Richter www.wolfstreet.com www.amazon.com/author/wolfrichter
The governments of Greece – new and old – screwed up. Other debt-sinner countries are able to borrow at near-zero or negative interest rates, simply taking money from investors with a promise to return it on a given day in the future if investors give it new money to do so. These investors, it must be said, had their brains washed by the ECB and other central banks in order to allow this to happen. But the governments of Greece somehow missed that gravy train.
Now, no one wants to lend Greece money at negative interest rates, least of all the Greeks themselves, who know their governments better than anyone else on the planet and have less trust in it than anyone else on the planet: they’re yanking their euros out of their banks even as the ECB is propping them up with fresh euros that ultimately belong to taxpayers elsewhere.
This weekend, representatives of the “institutions” – the unmentionable “Troika” – are trying the hash out a reform package with the new team from Greece that does not include Finance Minister Yanis Varoufakis, who’d been shoved aside. On Monday, the finance ministers of the Eurogroup will meet in Brussels.
Without an agreement on the implementation of the reforms, Greece won’t get the outstanding relief funds of €7.2 billion. And then what? The government has practically no funds left. Time is running out. Monday is it. The Big Day. Again.
“I don’t see that everything will be solved by then,” German Finance Minister Wolfgang Schäuble said in an interview in the Sunday edition of the Frankfurter Allgemeine Zeitung, one of Germany’s largest papers, throwing cold water on any hopes. He doubted that the Greek government even knew what exactly was going on in its finances.
“Such processes also have irrational elements,” Schäuble warned. “Experiences elsewhere in the world have shown that a country can suddenly slide into insolvency.”
On the principle that a country is slowly zigzagging down that path paved with lots of good intentions, false hopes, and lofty promises and, BAM, suddenly, it’s over. So maybe Monday? Or next month? He refused to nail down a specific point in time.
When asked if the German government has made preparations for such an eventuality, he said:
“There are issues that a prudent politician must not answer. Otherwise there will be misunderstandings. Jean Claude Juncker [President of the European Commission and former President of the Eurogroup] once said that sometimes you must play fast and loose with the truth. For me, these things are more complicated. Therefore, I rather say nothing at all.”
That’s a resounding “yes.” Germany is prepared. The financial markets have no doubts and refuse to get panicky. The German government is going to handle this just fine, they’re saying.
But in August 2013, during the run-up to the general elections in the fall, when the cost of the Greek bailouts to German taxpayers was one of the themes, Schäuble had this to say, thus playing fast and loose with the truth:
“One thing is certain: there won’t be a second debt cut for Athens.”
The first one having been the 70% haircut imposed “voluntarily” on private-sector bondholders in 2012. The second one would hit public institutions, such as the ECB and the bailout funds, and ultimately taxpayers in Germany and other countries.
The “one thing” that was certain in 2013 before the election is now out the window. A Greek default would almost certainly entail some kind of debt relief for Greece, hence a haircut for taxpayers in other countries. They just haven’t been told yet.
But Germany would “do everything to keep Greece under responsible conditions in the Eurozone,” he said. “It must not fall apart because of us.” On this issue, he and Chancellor Angela Merkel are in complete agreement, he said.
There have long been voices that confirmed that if Greece defaults, there could be a haircut for public bondholders in some form (swapping existing debt for zero-interest debt with a 1,000-year maturity?) while Greece remains in the Eurozone. That appears to be the direction the German government is heading.
And Schäuble defended his best buddy Varoufakis. Few people have managed to rise to such media adulation and then plunge from it as quickly as Varoufakis. Whatever he was trying to do, it didn’t work. Forget game theory. “We both are finance ministers and bear responsibility, so we work well together,” Schäuble said. “First, the media make Varoufakis into a superstar, now they’re writing him off. The one is as wrong as the other.”
With this immaculately-timed interview, the German government acknowledged that it’s ready for Greece’s insolvency and default, whenever it may come, including Monday, after having denied it for years, and that it would continue working with Greece to keep the Eurozone together. What’s sacred for the Merkel government is the Eurozone, not its taxpayers. They already got shafted.
But here is the thing: the Greeks could solve the crisis on their own, if they wanted to. Or do they know something that others don’t? Read… If Greeks Did This, the Terrible Crisis Would Be Over
- Isolated? China & Russia Celebrate Victory Day Together, Obama Absent
Submitted by Mike Krieger via Liberty Blitzkrieg blog,
BEIJING — When a Chinese honor guard joins a military parade in Russia’s capital this weekend, watched by China’s President Xi Jinping, it will mark more than just a symbolic recognition of the two countries’ contributions to the Allied victory in 1945.
China’s participation also reflects an upgrade of its military ties with Russia, including joint naval exercises and a revival of arms purchases, that could complicate U.S.-led efforts to counter both nations’ expanding military activities, analysts and diplomats say.
They’ve basically come to a consensus that despite their differences over some national interests, they really face the same common enemy,” said Gilbert Rozman, an expert on China-Russia relations at Princeton University.
– From the Wall Street Journal article: China Parades Closer Ties in Moscow
One of the key themes here has been the carelessness and ineptitude of those in charge of crafting U.S. foreign policy. I’m not naive, and I fully understand that the world is a dangerous place. Just as I believe individuals should have the right to defend themselves and their families with the right to bear arms, I also understand the importance of strong national defense.
The problem with current U.S. foreign policy is that it is not defensive in nature. Rather, all indications are that the U.S. government is acting offensively; primarily driven by ego and the will to dominate. Much of the world has come to see the U.S. not as a powerful partner, but as a narcissistic master. What American leadership fails to understand, is that by taking such a posture it is simply making others overseas feel paranoid and threatened, thus drawing them closer to each other and farther from the U.S.
The examples of U.S. foreign policy disaster since 9/11 are many, and I have listed several of them at the end of the post. However, the one I want to highlight today is the ongoing slow motion train wreck with regard to Russia.
As readers will be well aware, the U.S government has been attempting to apply severe pressure on the Russian economy in an attempt to weaken Vladimir Putin’s position at home, and ultimately topple his government. It is now clear that this strategy has completely failed. To make matters worse, the “strategy” has merely solidified the view amongst emerging powers of the need for a counter to U.S. aggression. Nowhere can this be seen more clearly than with the increasingly close relationship between Russia and China.
To summarize, not only did the U.S. foreign policy clowns’ strategy fail, it has actually served to weaken the American position considerably by bringing potentially dangerous geopolitical rivals closer together.
We learn of the following from the Wall Street Journal:
BEIJING — When a Chinese honor guard joins a military parade in Russia’s capital this weekend, watched by China’s President Xi Jinping, it will mark more than just a symbolic recognition of the two countries’ contributions to the Allied victory in 1945.
China’s participation also reflects an upgrade of its military ties with Russia, including joint naval exercises and a revival of arms purchases, that could complicate U.S.-led efforts to counter both nations’ expanding military activities, analysts and diplomats say.
The 102 Chinese troops who will join the Victory Day parade in Moscow on Saturday were seen during a rehearsal this week marching through streets near Red Square singing the Russian wartime ballad “Katyusha”, according to video footage posted online.
The only other foreign countries with troops in the parade are India, Mongolia, Serbia and six former Soviet states.
Yeah, just Russia, China and India. No big deal. Without France, they’re nobody.
Three Chinese navy ships also made a rare foray into the Black Sea on their way to join commemorations in Russia’s southern port of Novorossiysk on Saturday.
The Chinese ships—two missile destroyers and a supply vessel — will then take part in joint exercises with the Russian navy in the Mediterranean Sea for the first time, according to Chinese and Russian authorities.
Both sides say the drills aren’t directed at other countries, but the timing, after Russia’s 2014 annexation of Crimea, and the location, on NATO’s southern flank, have compounded Western concerns about an emerging Moscow-Beijing axis.
Gotta love that, “compounded Western concerns about an emerging Moscow-Beijing axis.” An axis that is happening precisely due to the aggressive and inept U.S. foreign policy to begin with.
On Wednesday, Russia’s government unveiled a draft cybersecurity deal with China under which both countries agree not to conduct cyberattacks against each other and to counteract technology that might disrupt their internal politics.
Mr. Xi also appears to share a personal affinity with Russian President Vladimir Putin who is seen by many in China as a strong, patriotic leader.
Last year, Moscow and Beijing staged joint naval exercises for the first time in the East China Sea, where China is embroiled in a territorial dispute with Japan. In September, Mr. Putin and some of his troops will join a military parade in China to mark the anniversary of Japan’s defeat in 1945.
The Pentagon says China is also now pursuing a new joint design and production program with Russia for diesel-electric submarines, which could be used to try to prevent U.S. ships from intervening in a conflict in Asia.
“They’ve basically come to a consensus that despite their differences over some national interests, they really face the same common enemy,” said Gilbert Rozman, an expert on China-Russia relations at Princeton University.
“I think they’re both sending a message that their relationship is stronger than outsiders generally expect and if others put pressure on either in their own arenas, the two will stand together.”
You can thank the idiotic neocons in both the Republican and Democratic parties for this outcome.
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Furthermore, here is how Chinese media portrays Obama's absence…
Chinese media: Obama prefers going to play golf rather than joining #RussiaVictoryDayParade. Xi is more responsible! pic.twitter.com/EVSAgqJUTE
— George Chen (@george_chen) May 9, 2015
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But lest we forget…
- Hundreds Leave "Boss-less" Zappos As "Get-Paid-To-Quit" Scheme Backfires
Many workers dream of one day being their own boss. At online clothing retailer Zappos — an independent subsidiary of Amazon — employees can realize that dream via the company’s “Holacratic” corporate culture. Holacracy is, in the words of CEO Tony Hsieh, “a system that removes traditional managerial hierarchies allowing employees to self-organize to complete work in a way that increases productivity, fosters innovation and empowers anyone in the company with the ability to make decisions that push the company forward.” So essentially, it’s a boss-less structure aimed at driving productivity and innovation by allowing employees to take ownership of their respective goals and responsibilities.
On the surface, one might imagine that everyday employees would be thrilled to work in an environment free from overbearing supervisors (that class of non-farm laborer who, in America, is enjoying record wage growth even as those they manage have seen their pay stagnate) harboring false notions of superiority. This is probably why Hsieh felt comfortable distributing a memo which criticized the company’s lack of progress in shifting to a completely Holacratic structure, to Zappos’ 1,500 employees.
In the memo, Hsieh essentially gives employees a deadline for full implementation before reminding them that they are free to take “the offer”, a reference to Zappos’ practice of offering to pay employees to quit. The rationale behind the practice is to ensure that everyone who works at Zappos truly wants to be there. Historically, only around 1-3% of employees accept the pay-to-quit proposition and as such, it likely came as quite a surprise to Hsieh when more than 200 people chose to take the money and run rather than work in an environment with no managers. Here’s WSJ:
About 14%, or 210, of the company’s roughly 1,500 employees have decided to leave the firm, according to Zappos. The exodus comes amid the company’s transition to an unusual management structure called Holacracy, in which employees essentially manage themselves, without traditional bosses or job titles.
The company has acknowledged that the transition to this new form of self-management has been a difficult one. In March, Mr. Hsieh sent a 4,700-word memo to staff stating that Zappos, an independent subsidiary of Amazon.com Inc., was taking too much time switching to this new management structure. He offered all employees at least three months’ severance if they decided by April 30 that working in Holacracy was not for them.
In its training for new hires, Zappos promises a month’s pay to anyone who decides the company’s playful culture, in which employees have dressed up in animal costumes during the firm’s all-staff meeting, isn’t for them.
Here are excerpts from Hsieh’s memo:
We’ve been operating partially under Holacracy and partially under the legacy management hierarchy in parallel for over a year now. Having one foot in one world while having the other foot in the other world has slowed down our transformation towards self-management and self-organization. While we’ve made decent progress on understanding the workings of the system of Holacracy and capturing work/accountabilities in Glass Frog, we haven’t made fast enough progress towards self-management, self-organization, and more efficient structures to run our business. (Holacracy is just one of many tools that can help move us towards self-management and self-organization, but simply abiding by the rules of Holacracy does not equal self-management or self-organization.)
After many conversations and a lot of feedback about where we are today versus our desired state of self-organization, self-management, increased autonomy, and increased efficiency, we are going to take a “rip the bandaid” approach to accelerate progress towards becoming a Teal organization (as described in the book Reinventing Organizations)…
Teal organizations attempt to minimize service provider groups and lean more towards creating self-organizing and self-managing business-centric groups instead. As of 4/30/15, in order to eliminate the legacy management hierarchy, there will be effectively be no more people managers…
Self-management and self-organization is not for everyone, and not everyone will want to move forward in the direction of the Best Customers Strategy and the strategy statements that were recently rolled out. As such, there will be a special version of “the offer” to everyone who reads Reinventing Organizations and/or meets some other criteria (outlined towards the end of this email).
We’re sure there are lessons in here somewhere both about workers’ desire for guidance and structure and about whether it’s a good idea to force people into choosing between a seemingly unpopular ultimatum and free money, but we’ll leave you with the following gem from the Zappos employee who we cannot say is “in charge” of the transition to Holacracy because to say that would be to violate Holacratic principles, so we’ll just say he’s ‘interested’ in facilitating the transition:
“Whatever the number of people who took the offer was the right number.”
It’s hard to argue with that.
- Transformer Explosion At The Indian Point Nuclear Facility Near New York Is 'Contained'
The words "explosion", "New York", "black smoke", and "nuclear" strike fear into the heart of most people but according to Entergy – who runs Indian Point, "the nuclear facility has been safely shutdown following a transformer failure." Reports of a loud blast at the nuclear facility just 38 miles north of New York, with dense black smoke rising from Unit 3 are no concern and represent "no danger to public health and safety." The plant, which dates back to 1962 (although the currently used reactors were installed later in the 70s) had just been brought back online on Friday, after being shut down for a steam leak repair.
State police at entrance of #indianpoint. OEM says fire was a transformer, not in plant, and is contained. #abc7ny pic.twitter.com/N9EcGg8OUI
— Renee Stoll (@ReneeStollABC7) May 9, 2015
Indian is just 38 miles north of New York City, and as RT reports, produces some 25 percent of New York City’s and Westchester’s electricity. The combined power generated by the two units amounts to over 2000 megawatts. The facility employs some 1,600 people.
The plant has been a subject of controversy due to its proximity to NYC. Several environmental groups have been calling for Indian Point’s permanent shutdown for years. It also has a history of transformer accidents and various leaks, including a 2012 explosion in the main transformer that spilled oil into the river and caused Entergy to pay a fine of a $1.2 million.
Witnesses posted alarming images of smoke billowing from the plant on social media, saying it followed a large blast and fire. “It was a huge black ball of smoke and alarms went off immediately,” tweeted Gustavus Gricius, a witness near the scene.
The plant’s Unit 2 reactor has continued operating and the fire was put out by the automatic sprinkler system and on-site personnel, Entergy Corp spokesman Jerry Nappi told Reuters. No people were reported injured.
The facility's operator tweeted…
Indian Point safely shut down following transformer failure outside of nuclear side of plant; No danger to public health and safety.
— Indian Point Energy (@Indian_Point) May 9, 2015
NOW: @NYGovCuomo is at the @Indian_Point plant to assess the situation which is 30 miles due west of Connecticut. pic.twitter.com/gJSkR2SUrQ
— John Bell (@NewsBell) May 10, 2015
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One wonders what the rate for a good Geiger counter is in NYC these days?
* * *
Just coincidence?
- 2031ET *EDF'S FRENCH BUGEY 2 REACTOR HAS UNPLANNED HALT: RTE
- A Multinational Trojan Horse: The Trans-Pacific Partnership
Submitted by Dave Pruett via Like The Dew blog,
“The accumulation of all powers, legislative, executive, and judiciary, in the same hands, … may justly be pronounced the very definition of tyranny.” – James Madison in The Federalist Papers.
You don’t have to know much about the “trade” deal called the Trans-Pacific Partnership (TPP) to be more than a little suspicious.
First, there are the very peculiar bedfellows. Supporting the TPP are President Obama and most Congressional Republicans, the same Republicans who’ve vehemently opposed his every initiative for the past six and one-half years.
Against the TPP are most (but not all) Congressional Democrats, Ford Motor Company, virtually all trade unions and environmental groups, watchdog groups such as Public Citizen, and usual Obama allies such as Massachusetts Senator Elizabeth Warren and Ohio Senator Sherrod Brown, who, in a testy open letter to the President on April 25, called for greater transparency on the TPP.
Furthermore, when asked to lend his support for so-called “Fast Track” authority for the TPP, Obama water-carrier and former Senate Majority Leader Harry Reid chafed, “So the answer is not only no, but hell no.”
Also opposed: liberal icon Noam Chomsky, Democratic presidential hopeful Bernie Sanders, Republican hopeful Mike Huckabee, many Tea-Party groups, and conservative Republican editorialist and former presidential candidate Patrick Buchanan. Conspicuous by silence: Hillary Rodham Clinton.
What’s going on here? Why the strange alliances?
Peel back the layers of the TPP and you’ll find what some believe to be a “corporate Trojan horse.” Disguised as “free trade,” the TPP’s provisions and tactics undermine Constitutional safeguards and national sovereignty. But there’s also a silver lining. The TPP exposes who, in the marbled halls of political power, is working for whom. It forces politicians to put their cards on the table, and by their hands you will know them.
In a recent interview, Chomsky called each word false in the euphemism “free trade agreement.” There’s nothing “free” about it. With nearly 30 chapters, only a half-dozen or so about international commerce, it’s not really primarily about “trade.” And, having been conducted in secret, shielded from the watchful eyes of the public and their congressional representatives, it’s hardly a broad “agreement.”
Every citizen has an obligation to find out what’s in this “deal.” That’s difficult, because the Obama administration has decided to treat TPP documents as classified. Indeed, we know the outlines of the TPP only because of leaks.
For a quick primer on what is known, start with former Labor Secretary Robert Reich’s two-minute video. Follow with Pat Buchanan’s op-ed “Obama’s Republican Collaborators.” And finish with Amy Goodman’s 13-minute interview on Democracy Now! with Public Citizen’s Lori Wallach.
If you still haven’t made up your mind, read the chilling “The Trans-Pacific Partnership and the Death of the Republic” by Ellen Brown of the Public Banking Institute. Is it all hyperbole, or could things be as ominous as they seem?
The TPP, which involves 12 nations and 40% of the earth’s trade, has been called “NAFTA on steroids.” (NAFTA, recall, was the North Atlantic Free Trade Agreement of 1993 negotiated during the Clinton Presidency). Every such agreement has been sold to the public by the promise that free trade floats all boats. What’s the reality? According to Buchanan, “… almost all [the big trade agreements] have led to soaring trade deficits and jobs lost to the nations with whom we signed the agreements.” Over the past four decades of free trade, America, cites Buchanan, has lost 55,000 factories and 5-6 million manufacturing jobs, all while racking up $11 trillion dollars in trade deficits.
So, who, if anyone, benefits by so-called “free trade?” Only the multinational corporations set “free” to scour the earth for the hottest sweatshops and the cheapest labor. Free trade is a global race to the bottom.
Given the dismal track record of such deals, one would expect future agreements to be negotiated in the light of day by representatives of all stakeholders. So, who’s at the table crafting the TPP?
“The Administration’s 28 trade advisory committees on different aspects of the TPP have a combined 566 members, and 480 of those members, or 85%, are senior corporate executives or industry lobbyists,” the Warren-Brown letter asserts. “Many of the advisory committees — including those on chemicals and pharmaceuticals, textiles and clothing, and services and finance — are made up entirely of industry representatives.” Absent from that table are all congressional representatives.
In April, the Obama administration began the process of petitioning Congress for “Fast Track” authority on the TPP. Some believe that Fast Track (which originated with Richard Nixon) is executive usurpation of Article I, Section 8 of the Constitution: “The Congress shall have the power… to regulate commerce with foreign nations.” An end run around Congress, Fast Track minimizes oversight and public debate. It cedes negotiating authority to the executive branch and then binds Congress to an up or down vote, severely constrained by time and without adequate discussion or filibuster.
Where are the hair-on-fire Republicans incensed over the imperial presidency of Barack Obama? Firmly in Obama’s camp! The self-proclaimed party of the Constitution, the family, and God seems only too happy to sell out all three to its prime constituencies: Wall Street and K-Street. Buchanan admits the painful truth: “Fast Track is the GOP payoff to its bundlers and big donors.”
The most troubling aspect of the TPP, asserts Ellen Brown, is the Investor-State Dispute Settlement (ISDS) provision, which “first appeared in a bilateral trade agreement in 1959.” Brown continues:
According to The Economist, ISDS gives foreign firms a special right to apply to a secretive tribunal of highly paid corporate lawyers for compensation whenever the government passes a law … that [negatively impacts] corporate profits — such things as discouraging smoking, protecting the environment or preventing nuclear catastrophe.
Imagine a scenario in which the U.S., coming to its senses about climate change, imposes a revenue-neutral carbon fee on fossil energy. According to provisions of the TPP, a fossil-fuel company in a signatory nation could then sue the U.S. for lost profits, real or imagined.
The threat is not idle. In 2012, the U.S.’s Occidental Petroleum received an ISDS settlement of $2.3 billion from the government of Ecuador because of that country’s apparently legal termination of an oil-concession contract. Currently, the Swedish nuclear-power utility Vattenfall is suing the German government for $4.7 billion in compensation, following Germany’s phase-out of nuclear plants in the wake of Japan’s Fukushima disaster.
The ISDS provisions of the TPP are insidious: the means by which signatory nations voluntarily surrender national sovereignty to the authority of corporate tribunals, without appeal, and apparently without exit provisions. No wonder the negotiations are secret.
Packaged as a gift to the American people that will renew industry and make us more competitive, the Trans-Pacific Partnership is a Trojan horse. It’s a coup by multinational corporations who want global subservience to their agenda. Buyer beware. Citizens beware.
- Two Years Later, The VaR Shock Is Back
In “Bursting Bund Bubble: 2 Charts And Some Lessons From History,” we recapped the sell-off in German government bonds, touching on the severity of the yield spike (with emphasis on Thursday’s intraday move above 77bps), the breakdown in the historical relationship between Bunds and Treasurys/Gilts, and parallels between the rout and the 2003 sell-off in JGBs. On the latter issue, we presented the following chart from Barclays which shows the degree to which this most recent incarnation of government bond carnage mirrors the 2003 manifestation.
While various exogenous factors have likely contributed to the big Bund battering — including profit-taking, the frontrunning of positive EGB supply in May, and short calls from several bond market heavyweights — it’s worth noting that at the heart of the carnage are two embedded self-fulfilling feedback loops which, together with decreasing liquidity, have made for a rather precarious situation.
The first loop is related to the structure of PSPP (i.e. no purchases below the depo rate) and has been described by Goldman as follows:
As the decline in yields that has followed the liquidity injections has made its way to intermediate maturities, the market has extrapolated that the Bundesbank would have to purchase a larger share of longer maturity bonds to fill its quota. This is a self-reinforcing expectations loop, where lower yields beget lower yields. Given its nature, the loop can also switch direction. As yields rise, more bonds become eligible for central bank purchases, and the price action goes into reverse.
The second self-feeding dynamic is something we’ve discussed at length before, most notably in 2013 when volatility-induced selling — reminiscent of the 2003 JGB experience — hit the Japanese bond market again, prompting us to ask the following rhetorical question:
What happens to JGB holdings as the benchmark Japanese government bond continues trading with the volatility of a 1999 pennystock, and as more and more VaR stops are hit, forcing even more holders to dump the paper out of purely technical considerations?
The answer was this: A 100bp interest rate shock in the JGB yield curve, would cause a loss of ¥10tr for Japan’s banks.
What we described is known as a VaR shock and simply refers to what happens when a spike in volatility forces hedge funds, dealers, banks, and anyone who marks to market to quickly unwind positions as their value-at-risk exceeds pre-specified limits.
Predictably, VaR shocks offer yet another example of QE’s unintended consequences. As central bank asset purchases depress volatility, VaR sensitive investors can take larger positions — that is, when it’s volatility times position size you’re concerned about, falling volatility means you can increase the size of your position. Of course the same central bank asset purchases that suppress volatility sow the seeds for sudden spikes by sucking liquidity from the market. This means that once someone sells, things can get very ugly, very quickly.
Here’s more from JPM on the similarities between the Bund sell-off and the JGB rout that unfolded two years ago:
The sharp rise in bond volatility over the past week or so is reminiscent of the VaR shocks of October 2014 in US rates and April 2013 in Japanese rates. The common feature of these rate volatility episodes was that there was no clear fundamental trigger. Instead, positions and flows experienced a sharp swing making these VaR episodes appearing more technical and unpredictable in nature. In October 2014, a violent capitulation on short positions at the front-end of the US curve had caused a collapse in UST yields. In April 2013, profittaking in long duration exposures post BoJ’s QE announcement caused a sharp rise in JGB yields that started reversing two months after.
What is causing VaR shocks and why are they happening often? We argued before that one of the unintended consequences of QE is a higher frequency of volatility episodes or VaR shocks: investors who target a stable Value-at-Risk, which is the size of their positions times volatility, tend to take larger positions as volatility collapses. The same investors are forced to cut their positions when hit by a shock, triggering self- reinforcing volatility-induced selling. This, we note, is how QE increases the likelihood of VaR shocks.
The proliferation of VaR sensitive investors, such as hedge funds, mutual fund managers, risk parity funds, dealers and banks raise the sensitivity of bond markets to self- reinforcing volatility-induced selling. These investors set limits against potential losses in their trading operations by calculating Value-at-Risk metrics. Value-at-Risk (VaR) is a statistical measure that investors use to quantify the expected loss, over a specified horizon and at a certain confidence level, in normal markets. Historical return distributions and historical market volatility measures are often used in VaR calculations given the difficulty in forecasting volatility. This in turn induces investors to raise the size of their trading positions in a low volatility environment, making them vulnerable to a subsequent volatility shock. When the volatility shock arrives, VaR sensitive investors cut their duration positions as the Value-at-Risk exceeded their limits and stop losses are triggered. This volatility induced position cutting becomes self- reinforcing until yields reach a level that induces the participation of VaR-insensitive investors, such as pension funds, insurance companies or households.
The VaR shock in the JGB market in April 2013 contained most of the above characteristics. By looking at quarterly Flow of Funds data from the BoJ, it was Japanese banks, Broker/Dealers and foreign investors who sold JGBs at the time. And it was VaR insensitive investors, such as Pension Funds and Insurance Companies and Households (via investment trusts) who absorbed that selling along with the BoJ.
And as for just how illiquid the Bund market (where Mario Draghi sees no signs of PSPP-induced trouble) has become…
The 30-year Bund futures contract in particular has been at the core of the latest VaR shock as it was the one experiencing the highest volatility. Figure 1 shows a price to volume based indicator of volatility for the first 30y Bund futures contract [and] shows how big the deterioration in 30y Bund futures market breadth has been over the past week since April 29th. A stabilization in this, or similar volatility indicators, is perhaps needed to make us confident that this latest VaR shock is behind us.
But it is not only market breadth which deteriorated sharply over the past week or so. Another important dimension of market liquidity, market depth, i.e. the ability to execute a large trade without moving markets too much has also seen a decline. This is shown in Figure 2 where we proxy market depth by the 5-day average of the tightest three bids and asks each day, measured in number of Bund futures contracts. What is also striking in Figure 2 is how big the deterioration in the market depth of the 30y Bund futures contract has been during 2014 before even the ECB started its QE purchases. For example, our market depth proxy of Figure 2 suggests that one could have traded around 100 contracts without moving markets too much at the beginning of 2014 but this number has fallen to below 20 this week. One of the reasons for this deterioration is perhaps the almost secular contraction in the German repo market by 30% over the past five years. This contraction in German repo markets started five years ago as shown in Table 1 and continued up until the most recent data in 2014. It intensified during the euro debt crisis as flight to quality made investors unwilling to depart from their “precious” German collateral. The net withdrawal of Bund collateral as a result of ECB’s QE and lower issuance by the German government makes it likely that the German repo market contraction will continue if not intensify this year hampering market trading liquidity further.
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Between a hopelessly illiquid market, deeply negative German supply in June and July, a central bank determined to prove it has not lost control in spite of all evidence to the contrary, and all of the dynamics discussed above, it’s safe to say the fireworks aren’t over yet.
- Russell Napier Explains What's In Store For Gold If Cash Is Outlawed
By Russell Napier of the Electronic Research Interchange
Why we didn’t have negative nominal yields in the Depression and the end of QE
Oh the time will come up
When the winds will stop
And the breeze will cease to be breathin’,
Like the stillness in the wind
’Fore the hurricane begins —
The hour when the ship comes in.And the words that are used
For to get the ship confused
Will not be understood as they’re spoken,
For the chains of the sea
Will have busted in the night
And will be buried at the bottom of the ocean.– When The Ship Comes In (Bob Dylan 1963)
The Napier Euro High Yield Capital Guarantee Fund (discussed in the November 12th edition of The Solid Ground) is almost ready for launch. It offers a unique combination of attributes to investors. It has significantly better risk/reward characteristics than both deposits and government debt securities. In short, it is a room full of Euro banknotes.
The launch of the fund will clearly mark the limits to monetary policy and thus the end to QE in Europe. The fund’s many attractive features include:
- a small negative yield (my fee), but it yields more than Euro bank deposits and most Euro denominated government debt securities.
- the assets are a liability of the central bank and not the commercial banks. While bank deposits, above the level guaranteed by governments, can be bailed-in and frozen during any bank reconstruction, the banknotes nominal value is assured by the central bank. The fund thus offers significant capital protection and enhanced liquidity to any bank deposit.
- unlike longer-dated debt securities of the government, the banknote will not suffer a loss in value should fears of inflation rear their ugly head. While the markets will begin to price future inflation into longer-dated fixed interest securities, the banknote holder suffers no loss at such apprehension. The fund would seek to move from banknotes should recorded inflation appear, as this would impact the real value of investments. The nominal value of the fund cannot decline if inflation expectations rise, ensuring significant protection compared to government debt securities.
- banknotes could be bid up, relative to deposits, as the authorities seek to restrict access. Last week Schweizer Radio und Fernsehen reported that a Swiss bank had refused to transform the deposits of a Swiss pension fund into banknotes and that the Swiss National Bank confirmed that they were against the hoarding of banknotes to avoid negative deposit rates. The ECB is just as likely to be against such bank runs as the SNB. Any move to restrict access to central bank liabilities (banknotes) and enforce the holding of commercial bank liabilities (bank deposits) is likely to lead to a premium of one over the other. Given the capital risk and lower yield on bank money, Gresham’s Law is likely to see banknotes becoming a store of value, while people seek to use the inferior bank deposit as a means of transaction. Banknotes traded at premiums to bank deposits, albeit in closed banks, in the US in the 1930s. A premium for banknotes would provide a rising nominal value for the fund.
- the fund would hold only Euro notes with a serial number beginning with X, the X denoting that these notes have been printed by Germany. Such notes could also be bid up relative to deposits and even other notes, should investors fear the demise of the Euro and the re-birth of the DM or a northern European ‘NEuro’. Should this occur, the nominal value of the fund would once more rise.
- a banknote owner will be able to shift capital to any jurisdiction where the Euro remains fungible. Restrictions on banknote withdrawals and transfers of deposits were imposed in Cyprus, as part of the plan to prevent the funding base of the Cypriot banks moving to other banks in the European Union. The ability to shift capital across borders, should such movement be outlawed, would likely lead to a premium developing for banknotes. Should this occur, the nominal value of the fund would, yet again, rise.
- notes would be held in denominations of 50 Euros. The authorities are already minded to ban the Euro 500 note (known by some as the ‘Bin Laden’ because it is known to exist but is rarely seen). It is rarely seen because the ‘Bin Laden’ is prized by criminals and those seeking to avoid taxation, meaning it’s increasingly likely to be recalled and abolished. Any ban on large denomination notes to combat illegal activity is unlikely, however, to affect the 50 Euro note given its key role in everyday transactions in Europe. Those bent on illegal activity may just have to get themselves bigger suitcases to stash their smaller denomination notes. A premium may develop for such notes, and such suitcases, and should this occur the nominal value of the fund would, you’ve guessed it, rise.
The fund produces an enhanced yield over bank deposits and most government debt securities, and cannot be subject to a decline in nominal value unlike bank deposits or government debt securities. In some fairly extreme cases it may even produce a capital gain relative to most money (bank deposits). The only likelihood of loss is in the case of an instant and material rise in inflation that would undermine the real value of the fund. However, unless such inflation developed virtually overnight the fund could be liquidated, without capital loss unlike government securities subjected to an inflationary shock.
The inflation protection offered by banknotes is thus significant given the current yield on government bonds. While government bond prices may rise somewhat further in a deflation, the banknote arbitrage opportunity suggests that the upside for government bond prices in a deflation is very limited. Government debt securities did not have negative nominal yields in the Great Depression despite gross deflation so why should they they have them now? Thus, those speculating on government bonds to see negative nominal yields go ever lower may not get the capital gains they think are coming their way. Banknotes may even perform as well in a deflation as government debt securities and offer much better protection should an inflationary future appear more likely.
Given this combination of risk characteristics, why would you want to own a government bond or a bank deposit when the Napier Euro High Yield Capital Guarantee Fund is available? (Before I am inundated with e-mails looking for a prospectus, I should point out that I am independent financial consultant and, am not regulated to look after client monies. Also, I don’t have a basement or a machine gun.)
The attraction of a banknote fund arises due to an arbitrage which creates a limit to monetary policy. It is that limit which contains the key information about financial market reactions for investors. QE cannot force the price of government debt securities much higher and yields much lower, as increasingly banknotes and even bank deposits become attractive to investors compared to government debt. A limit to QE is a big story.
Such an arbitrage opportunity would limit the profits one makes in such bonds during a deflation and both notes and deposits offer major protection from capital losses should there be a major change in inflationary expectations. This would be a world of deflation where the scale of negative nominal rates would have a floor. Indeed, bond yields could overshoot into negative territory and then rise into a deflation as the limits to negative nominal yields became increasingly clear. Thus the recent rise in the yields of Euroland government securities may not be a signal of inflation at all, but rather a realization that we have reached the arbitrage limits of how far yields can fall.
A world of less growth and deflation, but one where interest rates are clearly stuck in nominal terms, is a very dangerous world for equity investors with surprisingly few gains for bond investors.
Historically the shift from deposits to banknotes was associated with the fear of commercial bank insolvency or illiquidity. That was called a bank run. Today a bank run is the natural consequence of forcing too much central bank liquidity (bank reserves) onto a system which simply does not want them. A banker does not want to accept this short-term funding if he cannot lend the proceeds at a profit.
The only way for the banking system in aggregate to repel such funding is to offer interest rates on deposits (bank liabilities) which force investors into banknotes (someone else’s liability). Tighter regulation and collapsing long-term interest rates mean that profits from lending for Euroland bankers are increasingly illusory. Banks are keen to repel deposits given the lack of opportunity to use them. If QE reduces the banks’ ability to lend money and also creates an arbitrage from bank deposits into banknotes, will it reflate the economy?
If you think the answer is ‘no’ then European QE will have to stop with fairly negative consequences for the equity market and positive implications for the Euro exchange rate. Evidence of selling of government debt securities with negative yields is thus not necessarily a sign of inflation. A move to bank deposits or banknotes from government debt securities can instead indicate that the limits for QE have been reached.
The more investors focus on the limits to the scale of negative nominal rates, the more they focus on the failure of QE or on Ken Rogoff’s paper on killing cash: “Costs and benefits to phasing out paper currency By Kenneth Rogoff, Harvard University.”
While he doesn’t quite label banknotes a ‘barbarous relic’, he comes pretty close. The direction of travel in seeking to ban the use of cash is the same as those who railed against gold as a form of money. Once gold was considered too hard a money for society but now paper may be too hard for us to bear. It seems we need the digital money of deposits that shrink when subjected by central bankers to the hot light of negative nominal interest rates!
If banknotes are outlawed you will be forced to hold money that is a liability of a commercial bank (deposits) and refused access to money that is the liability of the central bank (bank notes). You will be forced to accept the risk of losses on a bank failure and banned from an instrument which promises no adjustment in nominal value. Any such ban would have to be a decision of government and not of the central bank. This means we’ll all have plenty of warning that it is on its way! We will be forced by law to liquidate the Napier Euro High Yield Capital Guarantee Fund and return capital or watch the fund’s value fall to zero as it holds something which has been stripped of legal tender status.
Euroland is not the only place where the limits to monetary policy are becoming more apparent. In the JPMorgan Chase annual report President and CEO Jamie Dimon warned that banks are having to turn away even USD deposits. This analyst has now spoken with three investment managers who have been asked to close their deposit accounts with JPM. At this stage other bankers still offer positive nominal yields on bank deposits, but how long will that last as orphaned deposits roam the streets of Manhattan, like Oliver Twist, in search of somewhere they can call home? These orphaned deposits will put downward pressure on interest rates for large-scale depositors and eventually, even in the US, the much reviled greenback may be seen as a store of value relative to bank deposits or Treasuries.
So, should we reach the limits to monetary policy, what’s in store for that ‘barbarous relic’ sometimes known as gold? It would be a period of rapidly rising real interest rates, as a floor on negative nominal interest rates had been set in a period of accelerating deflation. This should be bad for gold. As The Solid Ground has argued before, the de-leveraging which always comes with deflation and falling cashflows would be very positive for the USD. This would also be bad for gold.
However, in such a world, zero-yielding gold would be a high-yielding instrument. If the authorities ever sought to restrict access to banknotes, then gold would suddenly find itself enfranchised as money for the first time in many decades. So, given the scale of these competing forces, it is just too early to say what might happen to the gold price, but the allure of gold will grow the more it becomes clear that central bank fiat has failed and the age of government fiat is dawning.
The time is ever nearer when the price of gold will rise in an era of deflation. In due course, though no time soon, the full force of government fiat will engineer a reflation, albeit one replete with the misallocations of savings and capital so beloved by the bureaucrat. Then the PhD standard, in which the value of money is linked only to the words of the over-educated, will have ended. The gold price will rise even further, ‘And the words that are used for to get the ship confused will not be understood as they’re spoken, for the chains of the sea will have busted in the night’. And that’s ‘The hour when the ship comes in.’
- Putin Celebrates 70th Anniversary Of Victory Over Hitler, Warns Of Dangers From Unipolar World
Below is the transcript of the speech given by Vladimir Putin at the military parade on Red Square in Moscow to mark the 70th anniversary of Russia’s victory in the 1941–1945 “Great Patriotic War.”
* * *
Via the Kremlin:
Fellow citizens of Russia,
Dear veterans,
Distinguished guests,
Comrade soldiers and seamen, sergeants and sergeant majors, midshipmen and warrant officers,
Comrade officers, generals and admirals,
I congratulate you all on the 70th Anniversary of Victory in the Great Patriotic War!
Today, when we mark this sacred anniversary, we once again appreciate the enormous scale of Victory over Nazism. We are proud that it was our fathers and grandfathers who succeeded in prevailing over, smashing and destroying that dark force.
Hitler’s reckless adventure became a tough lesson for the entire world community. At that time, in the 1930s, the enlightened Europe failed to see the deadly threat in the Nazi ideology.
Today, seventy years later, the history calls again to our wisdom and vigilance. We must not forget that the ideas of racial supremacy and exclusiveness had provoked the bloodiest war ever. The war affected almost 80 percent of the world population. Many European nations were enslaved and occupied.
The Soviet Union bore the brunt of the enemy’s attacks. The elite Nazi forces were brought to bear on it. All their military power was concentrated against it. And all major decisive battles of World War II, in terms of military power and equipment involved, had been waged there.
And it is no surprise that it was the Red Army that, by taking Berlin in a crushing attack, hit the final blow to Hitler’s Germany finishing the war.
Our entire multi-ethnic nation rose to fight for our Motherland’s freedom. Everyone bore the severe burden of the war. Together, our people made an immortal exploit to save the country. They predetermined the outcome of World War II. They liberated European nations from the Nazis.
Veterans of the Great Patriotic War, wherever they live today, should know that here, in Russia, we highly value their fortitude, courage and dedication to frontline brotherhood.
Dear friends,
The Great Victory will always remain a heroic pinnacle in the history of our country. But we also pay tribute to our allies in the anti-Hitler coalition.
We are grateful to the peoples of Great Britain, France and the United States of America for their contribution to the Victory. We are thankful to the anti-fascists of various countries who selflessly fought the enemy as guerrillas and members of the underground resistance, including in Germany itself.
We remember the historical meeting on the Elbe, and the trust and unity that became our common legacy and an example of unification of peoples – for the sake of peace and stability.
It is precisely these values that became the foundation of the post-war world order. The United Nations came into existence. And the system of the modern international law has emerged.
These institutions have proved in practice their effectiveness in resolving disputes and conflicts.
However, in the last decades, the basic principles of international cooperation have come to be increasingly ignored. These are the principles that have been hard won by mankind as a result of the ordeal of the war.
We saw attempts to establish a unipolar world. We see the strong-arm block thinking gaining momentum. All that undermines sustainable global development.
The creation of a system of equal security for all states should become our common task. Such system should be an adequate match to modern threats, and it should rest on a regional and global non-block basis. Only then will we be able to ensure peace and tranquillity on the planet.
Dear friends,
We welcome today all our foreign guests while expressing a particular gratitude to the representatives of the countries that fought against Nazism and Japanese militarism.
Besides the Russian servicemen, parade units of ten other states will march through the Red Square as well. These include soldiers from Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan and Tajikistan. Their forefathers fought shoulder to shoulder both at the front and in the rear.
These also include servicemen from China, which, just like the Soviet Union, lost many millions of people in this war. China was also the main front in the fight against militarism in Asia.
Indian soldiers fought courageously against the Nazis as well.
Serbian troops also offered strong and relentless resistance to the fascists.
Throughout the war our country received strong support from Mongolia.
These parade ranks include grandsons and great-grandsons of the war generation. The Victory Day is our common holiday. The Great Patriotic War was in fact the battle for the future of the entire humanity.
Our fathers and grandfathers lived through unbearable sufferings, hardships and losses. They worked till exhaustion, at the limit of human capacity. They fought even unto death. They proved the example of honour and true patriotism.
We pay tribute to all those who fought to the bitter for every street, every house and every frontier of our Motherland. We bow to those who perished in severe battles near Moscow and Stalingrad, at the Kursk Bulge and on the Dnieper.
We bow to those who died from famine and cold in the unconquered Leningrad, to those who were tortured to death in concentration camps, in captivity and under occupation.
We bow in loving memory of sons, daughters, fathers, mothers, grandfathers, husbands, wives, brothers, sisters, comrades-in-arms, relatives and friends – all those who never came back from war, all those who are no longer with us.
A minute of silence is announced.
Minute of silence.
Dear veterans,
You are the main heroes of the Great Victory Day. Your feat predestined peace and decent life for many generations. It made it possible for them to create and move forward fearlessly.
And today your children, grandchildren and great-grandchildren live up to the highest standards that you set. They work for the sake of their country’s present and future. They serve their Fatherland with devotion. They respond to complex challenges of the time with honour. They guarantee the successful development, might and prosperity of our Motherland, our Russia!
Long live the victorious people!
Happy holiday!
Congratulations on the Victory Day!
- The Charts That Matter – Everything's Relative
"It's all relative," as Einstein likely said once, and the following 18 charts from Investir.ch's Loic Schmid highlight a few clear divergences – Overweight cash as "the end is near" for US equities, buy dips on weakness in EU debt and gold, position for increasing vol…
Bonds…
World Stocks…
Sector Bets…
Individual Stocks…
Buy Vol…
Monetary Policy…
- The "Wrong" Reason Why Bernanke Is Making Bank
Via ConvergEx's Nicholas Colas,
Recent press accounts report that former Federal Reserve Chairman Ben Bernanke gets seven figures from money management firms, presumably to consult on all things economic. Fair enough – markets set prices for everything, even former Fed Chairs. But what do these firms get for their money? Today we review what the former Fed head has been writing in his blog for the Brookings Institution. In his 10 posts so far (plus a guest spot from Larry Summers), Bernanke actually breaks little new ground. He expresses confidence in the Fed’s current low rate policies, professes some confusion about why long rates remain so low, and spends little time on the Fed’s role as regulator. Taken as a whole, his writing very much reflects the academic underpinnings of a “Much lower for longer” Fed Funds policy. So why is he worth $1 million and more to money managers? Likely because they want to ascertain what he doesn’t know more than what he does.
In thinking about the news that former Federal Reserve Chairman Ben Bernanke now gets millions of dollars for consulting to the money management industry, I can’t help but think of the old Saturday Night Live character of Chico Escuela. Played by Garrett Morris, Chico was an affable Dominican baseball player whose typical response to any question posed by the press was a sincerely grateful “Baseball been very very good to me”. The study of economics, like baseball, has lots of statistics and featured events that seem to move at a snail’s pace to the uninitiated. And, certainly, economics has been very very good to Ben Bernanke.
But what do these titans of our industry get for their money? It is certainly a feather in the cap of any portfolio manager to tell his or her clients that they are getting the very best thoughts from a former Fed Chair. He no doubt makes a splash at client events as well and can likely fill in a lot of the microscopic blanks that policy wonks wonder about daily. As a marketing expense, therefore, private access to Dr. Bernanke is no doubt worth its weight in gold. Or $1 million in fiat currency, apparently, if the gold standard isn’t your thing.
To get a sense of what – and how – Dr. Bernanke thinks, however, you don’t need to plunk down a 5 inch Halliburton aluminum briefcase jammed with Benjamins, for Ben Bernanke has a blog. It is hosted on the Brookings Institution website, where he is a Distinguished Fellow in Residence with the Economic Studies Program. The former Fed Chair has already posted 10 original pieces plus a guest entry from Larry Summers. It may not be the same as sitting down with him in a private conference room, but let’s not forget that Bernanke has been either an academic or public servant his entire life. The chances that what he writes publicly and what he says privately differ in any material respect are remote indeed. He likely wouldn’t know how to do it if he tried.
The topic for Bernanke’s inaugural post was “Why are interest rates so low?” It is a prosaic topic, but it does offer the change to hear his most fundamental thoughts on the issue. They are:“Low interest rates are not an aberration, but part of a long term trend.” He assigns inflationary expectations partial credit for the decline since the late 1970s. To the degree that we’ve reached the zero lower bound for short-term rates, it is not just a function of the Financial Crisis but also a persistent secular trend to lower inflation. What will reverse this +30 year trend? Dr. Bernanke is somewhat mum on that point.
He believes that the “person on the street” holds the Federal Reserve responsible for the current low level of interest rates. That’s an odd characterization, if only because it seems unlikely that the average citizen knows very much about the Federal Reserve. Above that, if you look at Google Correlate for online searches that occur in tandem with queries for “Federal Reserve” you’ll see concurrent online interest in “T Bills” and “Treasury bill” and “Treasury bill rates”. What you don’t see: “Mortgage rates” or “Refi rates”. To the degree people understand the role of the Federal Reserve, they do actually link it to the level of short-term interest rates, not the long end of the curve.
We bring this up because you have to ask why Dr. Bernanke is so publicly visible in his post-government life. I don’t think it is his personal legacy that he worries most about; rather, it is defending the societal value of an independent central bank led primarily by academically trained economists. After the Federal Reserve’s unprecedented interventions since 2007, he feels the need to explain both what the institution did and why it acts the way it does now.
Notably absent from Dr. Bernanke’s maiden effort was any discussion of quantitative easing. Yes, $3 trillion of capital on the Fed’s balance sheet and nary a word as to why or wherefore. The topic does arise in later posts, but you’d think a program of its size would engender more commentary.
As for the balance of his writing, Dr. Bernanke seems to have three critical points that reappear with regularity:
He feels that governments are not doing enough to spur economic growth, relying too much on central banks to help domestic economies. One blog entry calls out Germany by name, with recommendations for more fiscal spending on infrastructure to spur imports. Germany’s trade surplus creates structural imbalances within the Eurozone, threatening its long run stability, according to Dr. Bernanke. No doubt he also has in the back of his mind the challenges the Federal Reserve faced during the aftermath of the Financial Crisis, when fiscal austerity was a headwind to economic growth.
In his comments to an International Monetary Fund conference, included in his blog, Dr. Bernanke argued that the Federal Reserve might consider maintaining a larger balance sheet than before the Financial Crisis. His argument was essentially that it offers a more nuanced set of monetary policy options. The subtext, however, is that central banks need more firepower to help manage the economy. Given his worries over the actions of elected officials during times of economic turmoil, it’s not hard to see why.
Dr. Bernanke considers the possibility that the U.S. economy is in a period of low growth “Secular stagnation”, but ultimately dismisses the notion. To his thinking, the current slow growth in the U.S. is temporary, unemployment is declining, and inflationary expectations are within normal bounds. The only guest post so far on Bernanke’s blog is from Larry Summers, who worries that for the last 20 years or so we’ve only had healthy economic growth alongside financial and residential real estate bubbles. Bottom line: Dr. Bernanke doesn’t think things are different from prior cycles in enough ways to merit changing cyclically-minded monetary policy.
Regulation and monetary policy are very different mandates, and the Federal Reserve needs to address them separately. One central criticism of the Federal Reserve since the Financial Crisis has been its pre-2007 oversight of the U.S. banking system. Fair enough, even if the there is enough blame to go around among other regulatory bodies. Dr. Bernanke feels that the Federal Reserve should essentially firewall that issue away from monetary policy. To the degree speculative bubbles occur due to lax lending standards, regulation can address that. Monetary policy shouldn’t be used to deflate financial asset prices. The subtext here: strictly regulating systematically important financial institutions is necessary to maintaining optimal monetary policy.
You might be thinking that much of this is familiar ground, so why would financial firms pay so much for Dr. Bernanke’s thoughts? Aside from the marketing benefits we noted, there is one good reason. You really want to know what Dr. Bernanke doesn’t know and/or about what issues he is mistaken. As one simple example, what if the U.S. only grows at 1-2% this year and employment gains are limited to 150,000 jobs/month? That would fly in the face of his rejection of “Secular stagnation”, a dismissal that the current Federal Reserve seems to share. Since he mentioned quantitative easing so infrequently in his writing, does he think a “QE4” would not be useful?
In essence, you’d want to know what Dr. Bernanke would think if he were wrong or ill-informed about some important economic issue. That is something money managers understand in a way that academics and policymakers do not, for being wrong – and knowing what to do next – is a critical skill in the professional. Getting the most information from Dr. Bernanke, either in a one-on-one or just reading his work online, boils down to just two questions: “What doesn’t he know” and “What is he sure of that is actually wrong?"
- Hillary 2016 (Summed Up In 1 Cartoon)
- Police Abduct 10 Children From A Family In Kentucky Because Of Their "Off The Grid" Lifestyle
Submitted by Michael Snyder via The End of The American Dream blog,
If the government does not like the way that you are raising your kids, they will come in and grab them at any time without giving any warning whatsoever. Of course this is completely and totally unlawful, but it has been happening all over America. The most recent example of this that has made national headlines is particularly egregious. Joe and Nicole Naugler of Breckinridge County, Kentucky just had their 10 children brutally ripped away from them just because the government does not approve of how they are living their lives and how they are educating their young ones.
Let’s be very clear about this – Joe and Nicole had done nothing to violate the law whatsoever. All of their kids were happy, healthy and very intelligent. But because the control freaks running things in Kentucky got wind of their “off the grid lifestyle”, they have now had all of their children unlawfully abducted from them.
A lot of readers also lead “off the grid” lifestyles similar to what the Nauglers had been enjoying. The Nauglers own 26 acres in a remote area of Breckinridge County, and their family has been described as “extremely happy”. But despite never giving them a single warning or a single indication that anything was ever wrong, Kentucky police raided their home on May 6th. The following is how the raid was described on a website dedicated to this case…
On May 6th, 2015, Breckinridge Co. Sheriff’s officers came to their home, acting on an anonymous tip, and entered their property and home without a warrant and without probable cause. Nicole was at home with the two oldest children, while Joe was away with the others. When the officers left the home, they attempted to block the access road to the family property. Nicole and the two boys got in their car to leave the family property. The got only a short way down the road before the officers pulled Nicole over.
During this stop, sheriffs deputies took their two oldest boys from Nicole’s custody, providing her no justification or documentation to support their action. Nicole was able to contact Joe briefly by telephone, but only for a short period of time, because she needed to use her phone to record the events.
At that point, Nicole had been taken into custody for disorderly conduct (for not passively allowing the Sheriff to take her boys) and resisting arrest. Even though she is 5 months pregnant, she was slammed belly first into the cop car and bruised and scraped on both arms.
And people wonder why there is such an uproar about police brutality in this country…
How in the world can a police officer ever justify treating a pregnant woman like that? The police officer that treated Nicole like that should immediately resign. Talk about an utter disgrace. You do not ever treat a pregnant woman like that.
But this is America, where we are turning a little bit more into Nazi Germany every single day.
You can listen to audio of Nicole’s shocking arrest right here.
When Joe arrived on the scene, the police continued to act like Gestapo thugs…
Joe was able to arrange transportation to meet his wife where the stop had taken place. Joe attempted to get out of the car to speak with the officers and his wife, and to recover the vehicle Nicole had been driving. The Sheriff, with his hand on his sidearm, ordered Joe back into the car. Joe complied with that request. The sheriff informed Joe that he had every intention of making this as difficult as possible for them and that their car would be impounded, despite the fact that Joe was there onsite to recover it.
A friend, who had driven Joe to the location, got out of the car to speak with the Sheriff. She was able to convince the Sheriff to let Joe recover the vehicle. Joe also recovered Nicole’s cell phone, which had been recording audio the entire time.
The Sheriff ordered Joe to turn the remaining eight children over to Breckinridge County Sheriff’s deputies by 10:00 a.m., and threatened him with felony charges if he does not comply.
Joe did comply with the Sheriff’s order, and now their kids have been scattered by CPS among families in four separate counties…
As of now, officials have placed the children with four families in four different counties, and as of Friday morning, the parents had not spoken with them. The four families are families that CPS chose – families the Nauglers don’t know.
Shame on you Kentucky. You are supposed to be better than this.
One of the most disturbing elements of this entire incident is that Child Protective Services never visited the Nauglers a single time and never gave them any indication that anything was wrong. The following comes from Off The Grid News…
Child Protective Services never visited the home, said Ellsworth, who believes the arrests took place because of the parents’ choice of “unschooling” for their children, and because of their simple way of life that some would call backwards. The family’s Facebook page calls it a “back to basics life.” They have a garden and raise animals. Deputies apparently were concerned about whether the children’s needs were being met, but friends say they personally have no concerns — and that the children are blessed to have Joe and Nicole as their parents.
How would you like it if government thugs raided your home and took your children away because they considered your lifestyle to be “backwards”?
What in the world is happening to this country?
Like I said earlier, what happened to the Nauglers is not an isolated incident. These kinds of things are happening all over the nation. For example, just consider the abuse that one homeschooling family received in New Jersey…
Meanwhile, in New Jersey, a WND report highlights how parents were interrogated by a CPS caseworker who questioned Christopher Zimmer and his wife Nicole, “on everything from their son’s homeschool education to questions about vaccines and guns in the house.”
Michelle Marchese aggressively demanded to enter the property after asserting Christopher Zimmer Jr. was not getting a “proper education.” Police subsequently arrived and allowed Marchese to enter the home before conducting a warrantless search.
The Zimmers are now suing the CPS for $60 million in a case before the U.S. District Court in Trenton.
I very much hope that the Zimmers win that case and collect a huge monetary award.
All over the nation, CPS officials are running around acting like little dictators and trampling the law. They need the courts to send them a clear message that this is a nation where the rule of law still applies.
If we do not stand with families like the Nauglers, control freak bureaucrats will continue to harass families that have chosen to live a “basic” lifestyle all over the nation. So let’s stand with them and make this case viral all over the Internet.
And Kentucky, get your act together and send those kids back home. You are supposed to be so much better than this.
- Record Numbers Of Americans Renounce US Citizenship
It seems like it was only yesterday when we wrote that a record number of Americans have renounced their citizenship by expatriating and handing over their US passports one last time. Well, make that recorder after Thursday’s release by the IRS of its latest “taxpatriot list” – a quarterly report that is published in the Federal Register and list the names of every person who renounced thier U.S. citizenship during the previous quarter.
The original idea for publishing these names was that it would become a list of shame, with some government tax lawyers unofficially labeling it the “name and shame” list. But judging by the soaring numbers of people who clearly don’t mind putting their name on paper just to get rid of their US passport, it didn’t quite work out that way. In fact to many people being added to the “taxpatriot list” has become a badge of honor.
How many? According to the IRS, in the first quarter of 2015 a record 1,335 Americans renounced their citizenship, 26% more than in the previous quarter, and 18% more than the previous all time high quarter which was in Q2 of 2013.
If one anualizes the Q1 number, the number of 2015 expatriates is set to hit roughly 5,340, or a 56% increase to what was already the record expatriation year of 2014, in which 3415 Americans punched a hole through their passport.
Some thoughts from Bloomberg on this “highly distressing” trend:
“The cost of compliance with the complex tax treatment of non-resident U.S. citizens and the potential penalties I face for incorrect filings and for holding non-U.S. securities forces me to consider whether it would be more advantageous to give up my U.S. citizenship,” Stephanos Orestis, a U.S. citizen living in Oslo, wrote in a March 23 letter to the Senate Finance Committee. “The thought of doing so is highly distressing for me since I am a born and bred American with a love for my country.”
London Mayor Boris Johnson, who had a tax dispute with the IRS, said earlier this year that he would give up the U.S. citizenship he received because he was born in New York. His name isn’t on the IRS list. Eduardo Saverin, a Brazilian-born co-founder of Facebook Inc., gave up his U.S. citizenship in 2012
In any event, whether for tax purposes, because they are tired of living in an Orwellian dystopia (recall that last week a Federal appeals court found the NSA’s decade-long pervasive spying on US citizens was illegal, a move which will result in absolutely no change in America’s police status), or for any other reason, a record number of former Americans have had enough and just said no to their US citizenship. A trend, which as can be easily seen below, is far from over.
As to whether the following latest IRS expat list is one of shaming, or naming 1335 taxpatriots, we leave it up to readers to decide.
- Wall Street Is One Sick Puppy
Submitted by David Stockman via Contra Corner blog,
The robo-traders – both the silicon and carbon based varieties – were raging again yesterday in celebration of a “goldilocks” jobs report. That is, the headline number for April was purportedly strong enough to sustain the “all is awesome” meme, while the sharp downward revision for March to only 85,000 new jobs will allegedly enable the Fed to kick-the-can yet again – this time until its September meeting. As one Cool-Aid drinker put it,
“Probably best scenario in which the market was hoping for growth but not (so strong) that the Fed needs to hike in June,” said Ryan Larson, head of U.S. equity management at RBC Global Asset Management (U.S.).
Yesterday’s knee jerk rip, of course, is the fifth one of roughly this magnitude since February 20th, but its all been for naught. The headline based rips have not been able to levitate the S&P 500 for nearly three months now.
In fact, however, the incoming data since February 20 has been uniformly bad. The chop depicted in the graph, therefore, only underscores that the market is desperately churning as it attempts to sustain an irrationally exuberant high. Indeed, today’s jobs data was not bullish in the slightest once you get below the headline. Specifically, the number of full-time jobs dropped by 252,000 in April—–hardly an endorsement of the awesomeness theme.
True enough, the monthly number for this important metric bounces around considerably. Yet that’s exactly why the algo fevers stirred by the incoming data headlines are just one more piece of evidence that the stock market is completely broken. What counts is not the headline, but the trend; and when it comes to full time jobs there are still 1.1 million fewer now than at the pre-crisis peak in Q4 2007.
Needless to say, a net shrinkage of full-time job after seven and one-half years is not exactly something that merits a 20.5X multiple on the S&P 500 or 75X on the Russell 2000. That’s the case especially when that same flat lining jobs trend has been underway for nearly a decade and one-half. To wit, since April 2000 the BLS’ full time job count has grown at only 0.35% annually.
Now how in the world do you capitalize earnings at a rate which implies gangbusters growth of output and profits as far as the eye can see, when the US economy is self-evidently trapped in a deep rut that represents a drastic downshift from all prior history? Thus, compared to the 0.35% rate since the turn of the century, full-time employment grew by 1.8% per annum during the prior 15 years.
When a trend rate downshifts by 80%, you just aren’t in Kansas any more—even if Keynesian economists and MSM financial journalists don’t know it. On that score, MarketWatch’s headline says it all:
“Jobs growth is ‘back on track,’ economists say after payrolls report”
The problem is that they blithely assume its the same old, same old cyclical track diagramed in the Keynesian textbooks of yesteryear. Well, let’s see. Between 1985 and 2000, the adult civilian population (16 years +) grew by 34 million and the number of full time jobs increased by 26 million or by fully 76% of the population gain.
By contrast, during the fifteen years since the turn of the century, the adult population grew from 212 million to 250 million, but the number of full time jobs rose by only 6.2 million. In short, the nation gained 38 million more adult consumers, but only 15% of them have been employed as full-time producers. And that dismal trend is guaranteed to get worse because its baked into the demographic cake. That is, today’s 45 million retirees will become 75 million less than two decades down the road.
In welfare state America its virtually certain that through one artifice or another taxes will go up and the national debt burden will rise to crushing heights in order to keep the baby boomers’ entitlements funded. While Keynesians and Wall Street stock peddlers are clueless about the implications of this – it actually doesn’t take too much common sense to get the drift. Namely, under a long-term path of fewer producers, higher taxes and more public debt, the prospects for rejuvenating the previous historically average rates of real output growth are somewhere between slim and none – to say nothing of the super-normal rates implied by the markets’ current bullish enthusiasm.
As we explained a few days ago, the growth rate of the US economy is in a profound downward trajectory. Based on even the deficient national income and products accounts (NIPA), the growth of real final sales has dropped from 3.6% per annum during the golden era of 1953-1971 to only half that level or 1.8% since the year 2000, and to only 1.1% since the pre-crisis peak in late 2007.
So absent the Fed massive money printing campaigns since 2000 and the resulting drastic falsification of financial prices, cap rates or PE multiples would be going down, not stretching into the nosebleed section of recorded history. But in a central bank driven casino, there is no honest price discovery or discounting of the forward prospects for business growth and profits. The only thing that is actually “priced-in” is the expected short-term actions by the FOMC—–where today the consensus quickly concluded that the dreaded day in which carry trade gamblers would be required to pony-up the onerous sum of 25 bps for their chips would be deferred until September.
The level of simple-minded complacency that the Fed’s suffocating dominance of Wall Street has generated was well expressed by Diane Swonk, one of the CNBC economist cheerleaders:
“The porridge is still too cool from my perspective and certainly from the Fed’s perspective and that’s why you are not going to see a June rate hike,” she said on CNBC’s “Squawk on the Street.”
Call this the poison of Keynesian incrementalism. Monetary central planning channels the narrative emanating from Wall Street into a constrictive one headline/one month at a time framework that is utterly devoid of context and history. Accordingly, today’s “goldilocks” chatter is no different than that of 2007 or 1999. It implied that the business cycle would never end, and that none of the self-evident structural and short-term headwinds, as readily evident today as they were at the two previous cyclical inflection points, even exist.
Stated differently, the Cool Aid drinkers who rationalize the markets liquidity-driven bubbles, are about the closest thing we have in this day and age to children dressed in adult garments. They appear to naively believe that the party will never end and that the Fed somehow has finally gotten it right and has extinguished the business cycle once and for all.
In fact, the current business cycle is getting long in the tooth and the Fed has crab-walked itself onto the far end of a limb. At 70 months of age, the current recovery is already well beyond the 60-month average of the nine previous business cycles since 1950.
Moreover, even the 60-month average is flattered by the extended cycles of the 1980s and 1990s. But these were one-time runs that reflected a domestic credit boom that can’t be replicated in an era of peak debt; and a global growth boom fueled by money-printing EM central banks which was the exact macroeconomic opposite of the current deflationary global environment. Accordingly, the odds that these extended cycleses can be duplicated are laughably low—-nay, non-existent.
Length of Recoveries – Click to enlarge
Even apart from the structural headwinds, there is the simple matter of short-term mechanics. Owing to the bullish feasting on stock option winnings that is now rampant in the C-suites, corporate business has been building inventories at a ferocious rate during the last two years, culminating in the record $122 billion gain in Q1——an aberration that will surely reverse and cause a liquidation of reported GDP in the quarters just ahead.
Indeed, based on the Atlanta’s Fed’s deadly accurate Nowcast projection, it is likely that economic growth will record something close to a “stall speed” rate of growth at under 1% during the first half. And even that assumes no sudden, sharp liquidation of bulging inventories that already reflect the highest ratio against business sales since October 2008.
So the weakest recovery in modern times is on the verge of stalling out at a point in the business cycle when it is already long-in-the-tooth on a calendar basis. That hardly merits record valuation multiples, but then Wall Street is not capitalizing the future; its simply frolicking on the Chuck Prince dance floor under the false impression that the music will never stop.
As evident as that is at the macro-level, it is even more dramatically apparent in the surreal world of momo stocks. In the bottled air category, Tesla ended the week with about $30 billion of market cap, and up 5% for the week and nearly 30% since its last earnings report.
And, no, it did not surprise to the upside—-notwithstanding the usual “ex-items” gamesmanship:
The company lost 36 cents a share in the first quarter, less than the 49-cent loss estimated by analysts. Tesla shares rose 2.8 percent to close at $236.80, the highest in more than five months.
In fact, Tesla’s Q1 net of negative $154 million and ($1.22) per share was its worst on record—–a record that comprises an unmitigated flow of losses since it began filing with the SEC in 2007. Of course, that’s GAAP accounting income—-apparently a matter of no import whatsoever when Wall Street’s equivalent of the “vision thing” is at issue.
But here is the real thing. In a world saturated with excess automotive capacity and dominated by some of the most formidable engineering, manufacturing and marketing organizations on the planet—Toyota, BMW and Ford, to name just three—–there is no way that an amateurish circus barker like Elon Musk will ever make a profit selling electric vanity cars to the 1%.
In any event, what was relevant about this week’s (un)earnings release was that Tesla burned $570 million of cash in the just completed quarter alone. And needless to say, that’s exactly par for the course—–after it reported free cash flow of negative $450 million in Q4 and negative $330 million in the quarter before that. In fact, during the 21 quarters since 2010, when Goldman flogged its IPO, Tesla has reported negative free cash flow of $2.7 billion (i.e. cash from operations less CapEx and investments).
That number is not at all accidental. During the same period Tesla has raised $2.8 billion in the public debt and equity markets, net of its $465 million “early” repayment of its government loan.
In short, Tesla is a cash burn baby. Like much else on the leading edge of the Fed’s third and greatest bubble of this century, it is providing absolutely nothing that the market is willing to pay for—–and that is even after giving effect to more than $1 billion of green energy credits that have been booked by both the company and its affluent customers.
You might describe Tesla as $30 billion of capitalized hopium, but that would be too generous. In an honest free market, Tesla would have long ago been carted off to the chapter 11 junk shredder.
It lives for another day, however, because the sick puppy known as Wall Street has not yet stopped yipping.
- Why There Is No Treasury Liquidity In One Chart
It was back in 2012 that Zero Hedge first warned about a topic that now has not only the buyside, but also prominent pundits, regulators and – ironically – even the Federal Reserve scrambling: the collapse of Treasury liquidity, manifested in the multiple-sigma, i.e. “flash crash (or smash)” moves in the Japanese JGB, the US Treasury and most recently the German Bund markets.
What we said, and what it has taken the mainstream some 3 years to figure out, is that the primary culprit for the collapse in sovereign bond market liquidity are the central banks themselves, first the Fed, then the BOJ, and now, the ECB. Because as we noted in September 2012, “here is a snapshot of the Fed’s nominal holdings by CUSIP spread by maturity. Some may be surprised that the Fed already owns 70%, or the maximum allowed without the Fed destroying all liquidity in a given CUSIP, in various issues, primarily in the 7-10 year window.”
Before:
… and After (as of 2012):
Unfortunately, while the Fed’s holdings expressed in 10 Year duration terms have so far peaked at around 35% of total, a level which many expected wouldn’t be dire enough to lead to the evaporation of bond market depth also known as liquidity, what happened since then is that coupled with the surge of HFTs in bond market trading which contrary to popular opinion not only doesn’t provide, but soaks up liquidity, as can be seen on the Nanex chart below…
OK Class, repeat after me: “Volume is NOT Liquidity”.
This charts shows how they are related: pic.twitter.com/3wNWPeBIvJ— Eric Scott Hunsader (@nanexllc) May 9, 2015
… the 30% 10 Year duration threshold which had previously been greenlighted by the TBAC, ended up being far too high and as a result events such as the October 15 flash smash, and the May 2015 Bund flash crash, have become a normal and regular feature of the fragmented, central bank-manipulated and HFT-dominated markets.
So in case any readers have missed our constant coverage over the past 6 years, predicting accurately not only the breaking of markets due to the advent of HFTs, but the soaking up of all market liquidity by the Fed which in its increasingly more desperate attempts to reflate assets to record levels (remember when years ago it was blashpemy to suggest that the Federal Reserve is pushing the market higher – good times) has broken the markets even further and in fact made selling virtually impossible, thus trapping all those who have put their funds into the so called market, here is the chart showing how much bond market “depth” there is, or rather isn’t, as a result of 6 years of Fed central planning.
The data comes courtesy of Stone McCarthy:
The amount of ten-year equivalents held by the Fed decreased to $1.835 trillion from $1.849 trillion in the prior week, which reduces the amount available to the private sector to $3.944 trillion from $3.919 trillion in the prior week. There were $5.778 trillion ten-year equivalents outstanding, up from $5.768 trillion in the prior week.
After the Treasury issuance, maturing securities, rising interest rates, and Fed operations during the week, the Fed owned about 32.05% of the total outstanding ten year equivalents. This is above the 32.03% from the prior week, and the percentage of ten-year equivalents available to the private sector decreased to 67.95% from 67.97% in the prior week.
And here is a visual representation showing how much of the entire bond market expressed in 10 Year equivalents is now held by the Federal Reserve: a chart regular Zero Hedge users have seen consistently over the past 3 years.
The chart above also explains why absent a massive debt-funded government spending campaign, the Fed will be unable to launch QE4, for the simple reason that QE, which is nothing more than the Fed’s deficit-funding coupled with a boosting of asset prices via the outside money reserve channel, would promptly soak up all the remaining bond market depth, and even as the S&P hit all time highs, it would lead the government bond market to terminal instability.
Which is why, paradoxically, for the status quo to persist, either the government will have to lower taxes which would require far greater debt issuance by the Treasury, and thus provide far more dry powder for the Fed to monetize, or the US will finally have to launch that deficit ballooning war it has been itching so hard to start since 2013.
That, or the Fed may finally realize that by reflating asset prices it does nothing to boost the actual economy as the S&P has and always will refuse to trickle down to the middle class, and the Fed will finally engage in what has been the endgame from day one: paradropping bricks of cash all over the continental US in the last ditch desperate effort to reflate a debt-load which has now pushed not only the US but the world into secular stagnation.
- Free Trade Benefits Vs. Fears Of Foreign Goods
Submitted by Richrd Ebeling via Epic Times blog,
Japanese Prime Minister Shinzo Abe spoke before a joint session of the U.S. Congress on April 29, 2015 and offered his “eternal condolences to the souls of all American people that were lost during World War II,” but never directly said that he was sorry for Imperial Japan’s sneak attack on Pearl Harbor on December 7, 1941.
The real purpose for his visit to Washington, D.C. and his address before Congress was to push for Congressional approval of the Trans-Pacific Partnership (TPP) between the U.S., Japan and 10 other nations (Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam).
Meant to extend and widen trade and related commercial relationships between the participating countries, it is also been presented as a way for the U.S. to maintain his economic and political power in East Asia in the face of the rising influence of China in that part of the world.
TPP is a “Managed Trade” Agreement – Not Free Trade
With negotiations among the twelve governments going on “behind closed doors,” proponents and critics have offered alternative accounts of what is being negotiated and whose benefit will be served in the final agreement.
What should be most clear is that the Trans-Pacific Partnership is not a free trade agreement. Parts of it may, no doubt, lower some trade barriers, thus making easier the production, sale and purchase of a wider variety of imports and exports. However, TPP, like all other trade agreements in the post-World War II era is a managed trade agreement.
That is, governments of the respective participating nations negotiate on the terms, limits and particular conditions under which goods and services will be produced and then bought and sold in each other’s countries. The Japanese government, for instance, is determined to maintain a degree of trade protectionism for the benefit of Japan’s rice producers, who are fearful of open competition from their American rivals.
The U.S. government is under pressure from the American auto industry, for example, to continue limiting greater competition from the Japanese automobile industry. American labor unions want to restrict the importing of goods produced at lower labor costs abroad than U.S. manufactured goods, because American consumers might prefer to buy the lower priced foreign products and thus risking the loss of some of their union members’ jobs.
Free Trade Can be Simple and Unilateral
A real free trade agreement, on the other hand, can be a very simple matter. Congress would pass and the President then sign a short piece of legislation stating something to the affect:
“The United States government herewith eliminates all existing barriers, restrictions, and prohibitions on the free and unrestricted importing and exporting, buying and selling of all goods and services between the United States and any and all nations in the world. The U.S. government declares that all forms of peaceful and non-fraudulent trade, commerce and exchange is the private matter of the individual citizens of the United States and any and all others situated in another country. This law takes affect immediately upon passage.”
Indeed, the United States does not even need the mutual agreement of any other nation to implement free trade. The U.S., with just such a piece of legislation, can establish free trade unilaterally; even if other nations kept some or all of their own trade-restricting barriers in place, America would still be better off.
Let us remember why people trade with one another. Each of us has limited skills, abilities and resources. And there is only so much time in a day to do all the things we might wish to do to produce the goods and services we desire to have.
Division of Labor and Gains from Trade
Furthermore, some of us are better at doing some things than others. The noted Scottish economist, Adam Smith (1723-1790), in fact, began his famous book on The Wealth of Nations (1776) with explaining the benefits from a division of labor. In a small group of tribesmen, one of them sees that a fellow tribe member is better at making a bow and arrows than himself, and in less time than when he employs his own labor to make such a weapon for hunting.
On the other hand, he is quite talented and efficient at tanning animal hides, and offers to trade such a tanned animal hide (that can serve as the covering of a small tent, for instance) in exchange for a set of bow and arrows from the other tribesman who is not very adept at such tanning activities.
Others may offer the bow and arrows “expert” some product that they are relatively good at producing – one who may be good at producing primitive hatchets or knives, another who has superior cooking skills, etc. – in trade for one of his weapons.
Over time, Adam Smith argued, each would find that they could improve the quantities and the qualities of the goods that could be in their possession if instead of trying to self-sufficiently manufacture these things on their own, they were to specialize in what they could do better than their fellow tribesmen and trade their specialized good for the similarly specialized products of their neighbors.
Through a division of labor, productivity is increased far above what individual men in economic isolation can ever hope to attain. It also acts as a stimulus for industry, since now the variety and quality of goods than can be obtained through the exchange of specialized productions work as incentives for each to increase his own output of tradable wares as the means of acquiring what others may have for sale.
And the more extensive the market becomes on which goods can be sold, the greater now the potential benefits from a more intensive development of the division of labor.
People Trade, Not Governments – For the Benefit of Imports
From these insights, economists like Adam Smith and who came after him demonstrated that trade among nations is mutually beneficial, and in no way harmful to any nation’s “interest.” Why? Because “nations” do not trade, individuals do. And no individual enters into and participates in any exchange unless at the time of the transaction they view themselves being made better off from what they receive in a trade than what they have to give up to get it.
Furthermore, the advantage from all forms of trade, whether between two immediate neighbors, or between people living in two different states such as California and Ohio, or between those residing and working in two different countries separated by thousands of miles, comes not from the ability to “export” but from the opportunity to “import.”
Though I certainly enjoy my job as a professor of economics in an institution of higher learning, the reason I work is to earn a salary that then enables me to buy all the various goods and services that I wish to use and consume. In other words, I “export” my teaching services to others who are willing to pay me for services rendered so I can have the financial wherewithal to “import” all the other goods I wish to buy.
Exports are only the means through which people in one nation can acquire from those in other nations the products that they cannot produce at home, or cannot produce at a cost less than the prices at which others offer them in another country. Trade among nations offers the consumers of each participating country more goods, and different and less expensive goods than if the demanders of those desired commodities were limited to the production possibilities in their own land.
The final demonstration of the mutual benefit from trade among nations came with the development of the theory of comparative advantage by economists inspired by Adam Smith. That trade is beneficial is seen clearly enough if each nation can produce some product that its trading partners cannot produce at all, or if each nation can produce some product at a lower cost that none of their trading partners can match.
Trading Benefits Among the More and the Less Productive
But what was now shown was that trade was mutually beneficial even if one of these nations was absolutely more cost-efficient in producing every product in comparison to its potential trading partners.
Suppose I hire a housekeeper to clean my cloths and cook by food even if I can do both of these tasks better and in less time than they can, but if by paying them to do so, they free my time to do things in the market place that generates a higher income that may more than compensates for what I pay them.
For instance, suppose that I could do these two activities for myself in four hours of time each day, while the professional housekeeper will take six hours to complete these same tasks and for which they will charge me $10 an hour for a total cost of $60.
But suppose that by freeing me from four hours of household chores, I can produce and sell a product or offer some labor service, myself, which would earn me the equivalent of an income of $25 per hour, or a total of $100. By hiring the housekeeper, I net an extra $40 ($100 earned minus $60 paid to the housekeeper), that otherwise would not be available to me to buy things I might desire.
If I value more highly what that extra $40 of net income will enable to be buy more than staying home and making a tastier meal for myself and folding my cleaned clothes a little neater, then I will hire the less efficient housekeeper to free up my time so I can do those things for which the market places a higher value than the housekeeper’s abilities.
Specializing at What You are Relatively Most Productive
The same logic explains the trade among nations.
Suppose that the people in the nation of Superioristan can produce a yard of cloth in four hours and can harvest a bushel of wheat in one hour, while the people in the nation of Inferioristan take, respectively, twelve and two hours to perform the same two tasks.
Clearly Superioristan is a lower-cost producer than Inferioristan in both cloth and wheat production. Superioristan is three times more productive at cloth manufacturing (four hours instead of twelve) and twice as productive at wheat harvesting (one hour instead of two).
But it is equally as clear that Superioristan is comparatively more cost-efficient in cloth manufacturing. That is, if the people of Superioristan forego the manufacture of one yard of cloth (four hours of work) they can harvest four bushels of wheat (each harvested bushel taking one hour) with the time that has been freed up. But when the people of Inferioristan forego the manufacture of a yard of cloth (twelve hours of work) they can harvest six bushels of wheat (each harvested bushel taking two hours).
If Superioristan and Inferioristan were to trade cloth for wheat at a price ratio of, say, one yard of cloth for five bushels of wheat, the people of both nations would be better off, with Superioristan specializing in cloth manufacturing and Inferioristan in wheat harvesting.
Superioristan would now receive five bushels of wheat for a yard of cloth in trade, rather than the four bushels if it harvested at home all the wheat consumed. And Inferioristan would receive a yard of cloth for only giving up in trade five bushels of wheat, rather than the six bushels if it manufactured at home all the cloth needed and used.
The people of every nation can find a place at the table of global trade, even if they are less productive and efficient than many or all their trading partners, by producing something for which they have a comparative advantage that enables some one or more of their trading partners to specialize in those activities for which they are most productive.
The Errors in Various Trade Fallacies
Let us briefly review some of the objections sometimes raised against freedom of trade.
1. Unfair Trading Practices. Many other nations directly or indirectly subsidize the exports of some of their producers to the United States at prices below their actual costs of production. To the extent that this is actually done, this means that American consumers are given a bargain.
Suppose that a product that would, otherwise have cost $10 to buy now can be purchased from the subsidized foreign supplier for $6. Americans now have the desired commodity for $6 instead of $10, plus have the $4 difference left in their pocket to spend on something they otherwise would not have been able to afford. American standards of living are increased due to the foreign export subsidy.
Who should view themselves as having been taken advantage of? Surely, it should be the citizens in the foreign exporting nation, who have been forced to pay higher taxes to cover the cost of the subsidy given to a privileged producer in their own country. They have been taxed so American consumers may purchase something below market-based costs to the benefit of a special interest in their own land.
2. Foreign-Made Goods Cause Jobs Losses at Home. Whether subsidized or not, the charge is often made that foreign imports result in lost business and jobs for Americans. It is true that American firms that cannot successfully compete against their foreign competitors may lose business and may even in some cases go out of business.
But foreign exporters do not give us their goods for free. They desire to earn revenues and income for the same reason that we do, to have the financial wherewithal to buy other goods we desire to buy as income-earning consumers.
Thus, the dollars earned by foreign exporters are spent in one way or another on American goods and services that these foreign dollar-earners find attractive and desirable to buy. Thus, part of the business and jobs “lost” due to foreign competition are made up in the American the export trades as the means for supplying the goods that serve as the ultimate payment for the goods imported.
At the same time, the dollars saved on purchasing less expensive foreign imports, leaves dollars in the pockets of American consumers that enables them to demand other goods here at home that they previously could not afford. This, in turn, creates part of the alternative business and employment that may have been lost as a result of those foreign imports.
What changes is the composition of the types of products produced in America and the types and location of some of the jobs performed by American workers. But as long as markets in America are relatively competitive and adaptive to change, there need be no net loss of jobs. There is always work to be done as long as people have unsatisfied wants. And in this way, there is work for all who are willing to work at market-determined prices and wages, and with higher standards of living due to more and better goods at lower costs.
3. Foreign Trade Barriers to American Goods. Suppose America unilaterally, lowers its trade barriers but the governments of other countries now selling more exports to the Unite States keep their trade barriers in place, not allowing their own citizens to import more American goods?
Then the dollars earned by the foreign exporters either will be sold on the foreign exchange market to those interested and willing to buy American-made goods, or dollars earned from selling goods in the U.S. will remain in America and used for either direct or indirect investments in the American economy. If the latter, this increases the pool of savings and investable resources to finance capital formation in the United States, therefore assisting in enhancing America’s future productive capabilities in the global market.
Suppose that the dollars earned by the foreign exporters were to be “hoarded” in that foreign nation, neither spent on American goods nor saved and invested in the American economy. To the extent this was to be done, the foreign exporters and their governments are giving Americans an implicit “interest-free loan.”
That is, they have given us their goods and not demanded any goods as payment for them. In other words, it is as if they have given us their goods “on credit” and indefinitely delayed when they insist upon being paid back in the form of the goods they could demand from us by offering to trade their earned dollars for actual goods and services on the American market.
For as long as, hypothetically, those dollars were to be hoarded in those foreign countries the resources and labor that would have had to be, otherwise, devoted to manufacture the exports to pay from what we had imported are freed up to be used to make other goods that Americans would like to have.
4. Trade Makes Our Rivals Stronger, and Can Lead to Conflict and Possible War. The greater and more intensive our trading relationships with other nations, the more interdependent we become with them. That very interdependency can serve to reduce the likelihood of war by increasing the its cost.
I sometimes explain to my students, imagine it is the year 2030. China has grown in economic and military power, and the Chinese and American governments have gotten into a political conflict with both sides rattling their sabers and threatening war.
In Beijing, a young man knocks on the door of one of the top Chinese generals and enters his office. The young man says: “Pop, what are you doing? Are you going to ‘nuke’ San Francisco? Don’t you know I’m heavily invested in Silicon Valley, and your daughter-in-law and grandchildren are vacationing at our new condo near Fisherman’s Wharf looking out over the Golden Gate Bridge?”
Countries have and no doubt will continue to go to war for various reasons. And trade does not guarantee that it does not happen. But strong and deeply interconnected trade relations raise the costs of conflict. You rarely improve your own economic wellbeing by killing your customers and destroying your own resource supplies and capital investments.
Long ago, the famous Scottish philosopher, historian and economist, David Hume (1711-1776) explained the benefits from international trade and division of labor. In a well-known essay of his, “Of the Jealousy of Trade” (1758), Hume pointed that international trade offers opportunities to discover and learn about new technologies, new methods of production and new varieties of products that otherwise might never be known and taken advantage of if nations attempted to economically close themselves off from commercial interaction with their neighbors.
He argued that if a domestic industry found it difficult to meet the competition of their foreign rivals, “they ought to blame their own idleness, or bad government, not the industry of their neighbor.”
The fear of lost business and jobs from foreign trade, Hume said, was misplaced. “If the spirit of industry be preserved, [production] may easily be diverted from one branch to another” if markets are kept open, competitive and not hampered by the heavy hand of government regulation, control and burdensome taxes.
All who participate gain from international trade, and all are made poorer to the extent that governments interfere or prohibit the freedom of trade among the peoples of the world.
To slightly paraphrase from the closing paragraph of this essay of Hume’s, “I shall therefore venture to acknowledge that, not only as a man (benevolently wishing the best for all of mankind), but as an American citizen (desiring the prosperity of my own country), I pray for the flourishing commerce of Germany, Japan, Great Britain, France, and even China, Russia and Iran themselves. I am certain, that America, and all those nations, would flourish more, did their governments and political leaders adopt such enlarged and benevolent free trade sentiments towards each other.”
- Central Banking and the Greatest Con Job in the History of Finance
One of the greatest con jobs in history was convincing ordinary people that Central Bankers care about the “economy” or Main Street.
Aside from the complete lack of relevance that Main Street has for Central Bankers from a professional perspective (more on this in a moment), when do you think was the last time that Janet Yellen or her ilk spent an evening with non-banker/financial types? Years ago? Decades ago?
Yellen lives in a super-affluent, gated part of Washington DC. And even within that subset of the US population she lives in a higher echelon: her entourage of security annoys her wealthy neighbors… though I suspect part of the annoyance stems from jealousy.
Regard professional significance… why would Janet Yellen care about ordinary people? They’re just data points in her financial models. Ordinary people didn’t place her at the Fed (the big banks did). And they didn’t place her as Fed Chair (the financial/ political elite did… with the express intent of gaining future favors).
Think of it this way… imagine there was a super cartel of English Professors who controlled what words you or I could use in daily conversation. These individuals literally could change the structure of the human language if they wanted… removing words or adding words at random.
Now imagine that they randomly pick out a low level English Professor who they elevate to being the face of their organization. Do you think this professor would give a damn about how her decisions/ words affected speech? She literally was made one of the most powerful people in the world by this cartel.
This is case worldwide. Most Central Bankers came up from the Too Big To Fails or Primary Dealers (or they are academics like Yellen or Banenke who get their first taste of the “real world” when they’re literally running the financial system).
Literally their entire personal net worth… their professional clout… and their sense of accomplishment was derived from working at these organizations.
And somehow they’re supposed to give a hoot about Joe the Plumber or Bob the Boilermaker? They don’t even deal with those people face to face when they have a problem with their homes. “Hello this is Mario Draghi… the man who controls the currency in your economy… could you please come fix the sink?”
This is why Yellen, Draghi and the like can say with a straight face that maintaining ZIRP or NIRP benefits the economy. It’s why they can spent trillions to bail out/prop up banks without batting an eyelid. It’s why no one who committed fraud went to jail. It’s why lying and cheating in the financial system is allowed… even applauded… because the ones lying and cheating are the same people who picked out/ promoted the regulators.
And this is why we’re heading for another Crisis… one that will be even bigger than 2008. The fraud that caused 2008 was not solved. Instead it was allowed to spread into the public sector. Today most Central Banks are sporting leverage ratios that would put Lehman Brothers (pre-crisis) to shame.
So the next time something breaks in the financial system… it won’t be just individual banks going belly up. It will be entire countries. What’s happened in Cyprus and Greece is coming to your neighborhood… wherever you are.
If you’ve yet to take action to prepare for the second round of the financial crisis, we offer a FREE investment report Financial Crisis "Round Two" Survival Guide that outlines easy, simple to follow strategies you can use to not only protect your portfolio from a market downturn, but actually produce profits.
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Best Regards
Phoenix Capital Research
- Caught On Tape: Stunned Reporter Grills State Department Why Hillary's Breaches Won't Be Investigated
In the past several weeks, not a day has passed without a new scandal surfacing revealing Clinton’s lack of judgment whether it involves her abuse of email protocol, or some previously undisclosed financial relation between either Hillary Clinton or the Clinton foundation and an outside donor. The most egregious revelation took place a few days ago when it emerged that the Democratic presidential candidate had breached her agreement with the White House to name all foundation donors during her tenure as secretary of state.
Specifically, as Reuters reported, Clinton had promised the federal government that the Clinton Foundation and its associated charities would name all donors annually while she was the nation’s top diplomat. “She also promised that the charities would let the State Department’s ethics office review beforehand any proposed new foreign governments donations.”
In March, the charities confirmed to Reuters for the first time that they had not complied with those pledges for most of Clinton’s four years at the State Department.
The implication is that foreigners banned from donating to U.S. political campaigns could and likely did curry favor with her by giving to the charity that bears her name. The charities accepted new donations from at least six foreign governments while Clinton was secretary of state: Switzerland, Papua New Guinea, Swaziland, Rwanda, Sweden and Algeria. And, of course, Ukraine.
The charities never told the State Department about the new and increased donations. In two instances, the charities said this was the result of “oversights”; for the other six, they said those donations were exceptions to the agreement for various reasons.
The charities also stopped publishing full donor lists from 2010 onwards; the annually updated list omitted donors to the foundation’s flagship health initiative.
But the most shocking development took place yesterday when the US State Department, via spokesman Jeff Rathke, told reporters that while it “regrets” that it did not get to review the new foreign government funding, it does not plan to look into the matter further, spokesman Jeff Rathke said on Thursday.
“The State Department has not and does not intend to initiate a formal review or to make a retroactive judgment about items that were not submitted during Secretary Clinton’s tenure,” Rathke told reporters.
And while the objective, unbiased media would have been up in arms had this gross abuse of government privileges and clear pandering to foreign interests occurred under a Republican candidate, there has been barely a peep from said media as far as Hillary’s involvement is concerned.
One person, however, did speak up: that was AP’s Matt Lee who asked why the State Department wouldn’t investigate further to determine if the tens of millions of dollars in donations had influenced her, and thus the US State Department’s, decisions in the 2011-2013 period.
Rathke’s response: there is no evidence that these donations to the Clinton charities had any effect on Clinton’s decisions. “We’re not going to make a retroactive review on these cases and we will not make a retroactive judgment,” he said.
Of course, the circular logic involved is so twisted even hardened, conflicted government apparatchiks would not fail to recognize that there is no way to make a determination if said previously undisclosed donations had influenced her decisions without a further inquiry, an inquiry the State Department refuses to make because it assumes that it would find nothing.
Lee quickly noted this told Rathke that “the reason you are not aware of anything is because the building is refusing to go back and look at it to see if there is anything that might raise a flag.”
What followed was 6 minutes of squirming that would make even the most hard-core Clinton supporter blush red with embarrassment at the farce and the corruption evident at every single level of government, especially when certain pre-approved (by Wall Street) candidates are involved.
The full exchange below.
- Solving California's Drought: From Iceberg-Towing To Bumper Stickers
Having faced up to the dreadful reality of a dust-bowl-esque California, and following Governor Jerry Brown's mandatory water restrictions, The LA Times reports a growing list of 'plans' to solve the state's water shortage is growing. From innovations to insanity – from iceberg-towing to biodegradable towels and from 'water pipelines' to bumper stickers – officials have cataloged more than 170 messages containing suggestions and received untold more in emails, phone calls and public meetings.
With the drought threatening every aspect of Californians' lives — how long they stay in the shower and what food they eat — it's not surprising that so many have opinions on how to handle the problem. In a sense, The LA Times reports, people are responding to a rallying cry from Brown, who has repeatedly cited the state's history on the cutting edge of new technology and saying the dry spell "will stimulate incredible innovation."
But this is not the first time this has happened as a flood of drought-busting proposals is nothing new for California, where dry periods are a recurring phenomenon.
During a parched spell in 1976 and 1977, the state opened a Resources Evaluation Office, which responded to 4,400 letters, telegrams and postcards offering ideas. Many people wanted to complain about neighbors wasting water, according to a 1978 state report.
"Writers promised to end the drought for a price, usually to be paid in advance," the report said. "A few writers stated that it rained wherever they went for their vacations and offered to vacation in California if the state would pay their bills."
The report said hundreds of people suggested importing snow from the East Coast. The state actually calculated what it would take to use snow to make up the deficit in water supply: Every train tank car in the country would have needed to make 500 trips, for a total cost of $437 billion.
And now in 2015, the pitches run the gamut.
Would the state like to invest in biodegradable towels that don't need to be washed with water? What about covering reservoirs to prevent evaporation? Why aren't more desalination plants being built?
One person suggested a water pipeline from Alaska, an idea also offered by William Shatner. The "Star Trek" actor's proposal was more modest, reaching only to Seattle.
The suggestions are recorded and categorized, such as "water supply — solar water purifier" or "conservation idea(s) — leak detection technology." Some are forwarded to the state water board for review.
"There could be good ideas here," said Nancy Vogel, a spokeswoman for the California Natural Resources Agency. "We don't want to miss out."
Almost none of the pitches have been successful, officials said. The state isn't in the business of investing in towels, and experts say a Shatner-esque pipeline isn't feasible. One of the more popular suggestions, desalination of ocean water, is already being pursued in San Diego, although it has not been embraced as a silver bullet because of concerns about cost and environmental effects.
The "cheapest, smartest, fastest" way to address the drought is for Californians to use less water, Felicia Marcus, chairwoman of the state water board, has said.
Still, Dave Todd, who works on drought issues at the Department of Water Resources, said the state is keeping an open-door policy for new ideas. For example, when someone reached out to discuss irrigation technology, Todd put him in touch with a laboratory at Cal State Fresno.
"They're being good citizens in trying times," Todd said. "We don't want to discourage people from thinking outside the box."
Some go way outside the box. Todd said one man sketched out a plan for changing the weather by aiming abandoned airplane engines at the sky.
It wasn't clear exactly how that would work, Todd said. "His physics were obviously way beyond mine."
Some ideas are more grandiose. "Is there someone with whom I can speak about a project that will be approximately the scope of the Central Water Project, and perhaps save civilization?" David Newell, a 79-year-old retired engineer who lives in Sacramento County, wrote in November. He also conceded, "I sound nuts."
The suggestion involved "the direct air capture of CO2 utilizing endorheic basin alkaline deposits" (essentially, pulling pollutants out of the sky in areas with high concentrations of certain minerals).
Other ideas are modest. Ethan Rotman, who runs an education program for the California Department of Fish and Wildlife, suggested bumper stickers, to be placed on unwashed cars, "transforming them from being a visual blight to hero status."
His email last June received a form letter in response, as most of the senders do.
"It seemed like a brilliant idea to me," said Rotman, 55, of Marin County. "Maybe my marketing was wrong. Maybe it wasn't a brilliant idea. I don't know."
What about iceberg towing?
As for iceberg towing, the email last month came from Allen Fuhs, who is retired from teaching at the Naval Postgraduate School in Monterey.
In an interview, Fuhs suggested testing the concept with a demonstration tow that would bring an iceberg from Alaska to the Bay Area.
Asked if he had heard from state officials, Fuhs, 87, said no. But "I'd sure love to have an opportunity to make a presentation."
"Well, it's entertaining," said Nancy Vogel, a spokeswoman for the California Natural Resources Agency.
The problem remains
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