May 13

Today’s News May 13, 2015

  • Europe Preparing Greek Bankruptcy Loan "In Event Of Grexit"

    Earlier today, we learned that, contrary to what Greek government officials had been implying for the better part of a week, Athens did not have enough money to make a €750 million payment to the IMF on Tuesday. Instead, Greece borrowed most of the money (€650 million according to unnamed officials) from its IMF SDR reserves. This money must be paid back within 30 days. This effectively means that the IMF paid itself and it sets up a hilariously absurd scenario wherein assuming Greece manages to convince creditors to disburse a €7.2 billion tranche of aid later this month, the IMF will send money to Greece, who will send it right back to the IMF to replenish an IMF fund, which was drawn down by the IMF to pay itself back for money it loaned to Greece a long time ago. Put simply: Greece has taken circular funding schemes to a whole new level.

    Meanwhile, the IMF is understandably fed up and according to El Mundo, the Fund will not participate in a new program for the Greeks, something which German FinMin Wolfgang Schaeuble indicated may be a dealbreaker when it comes to structuring another bailout for Athens. 

    The takeaway: it’s likely over. Greece lacks the cash to keep up the facade and the IMF lacks the political will to perpetuate the farce any further. This suggests that both Greece and the creditors formerly known as the “Troika” will need to resort to Plan B. There’s a problem with that however — namely that EU officials have gone out of their way to make it clear that there is no Plan B, because to admit that such a plan existed would be to admit that the euro is in fact dissoluble after all, something which is taboo in polite discussions among European politicians. Here is but one example, via Reuters:

    A top EU official urged Athens and its creditors to make progress in their talks on a cash-for-reform deal on Monday, warning there was no “Plan B” in the event of a Greek default.

     

    “What we now need is real progress,” Frans Timmermans, first vice president of the European Commission, told German newspaper Welt am Sonntag.

     

    When asked whether there was a “Plan B” for the case of Athens defaulting, Timmermans replied: “No, there is no ‘Plan B’ for Greece.”

    That’s from Saturday. Here we are just three days later and as it turns out, Plan B does indeed exist and it is essentially a farewell package to the Greeks. here’s Bloomberg with more:

    Euro-area governments are considering putting together an aid package for Greece to cushion the country’s economy if it was forced out of the euro, according to two people familiar with the discussions.

     

    The Greek government doesn’t expect to need that help. Prime Minister Alexis Tsipras says he’s not considering leaving the currency bloc and is focused on getting the aid he needs to avoid a default.

    Even so, European officials are considering mechanisms to ring fence Greece both politically and economically in the event of a euro breakup, in order to shield the rest of the currency bloc from the fallout, one of the people said.

     

    “There is always a plan B,” Filippo Taddei, an economic adviser to Italian Prime Minister Matteo Renzi, said in an interview in Rome on Tuesday, without referring to the aid package specifically. “But you have to ask yourself who has the ability to step in, in that event. And I think if you start making up a list you realize very quickly that that list is very short.”

     

    While euro-area finance ministers welcomed the progress Greece has made toward qualifying for more financial aid at a meeting in Brussels on Monday, policy makers are still concerned Tsipras may not be prepared to swallow the concessions necessary for a disbursement.

    So on Saturday Plan B was unthinkable but on Tuesday there’s “always a Plan B,” which reminds us of the time when Mario Draghi told Zero Hedge that there’s no such thing as Plan B when it comes to insolvent periphery debtor nations getting cut off from ELA and crashing out of the currency bloc. As a reminder, here is what Draghi said: “If the Euro breaks down, and if a country leaves the Euro, it’s not like a sliding door. It’s a very important thing. It’s a project in the European Union. That’s why you have a very hard time asking people like me “what would happened if. No Plan B.”

    Call it plan “B” or plan “C” or plan “contain this trainwreck so redenomination risk doesn’t start creeping into the minds of Spanish and Italian depositors“, but what it amounts to is a DIP loan and the very fact that it’s being mentioned in the media likely means the plan has been hatched. The only remaining question is what the EU’s farewell package to the Greeks will look like. 



  • "Disastrous Mess" Amtrak Train Derails In Philadelphia (5 Dead, 6 Critical, 50 Injured) – Live Feed

    UPDATE: (via AP)

    An Amtrak train headed to New York City derailed and tipped over in Philadelphia on Tuesday night, mangling the front of it, killing at least five people and injuring several more. Some passengers climbed out of windows to get away.

     

    Mayor Michael Nutter, who confirmed the deaths, said the scene was horrific.

     

    "It is an absolute disastrous mess," he said. "I've never seen anything like this in my life."

    *  *  *

    Shortly after 920pmET, NBC Philadelphia reports an Amtrak train bound for New York from Washington D.C. derailed with approximately 240 people on board. Officials say 8 to 10 cars left the tracks and there are at least 50 injured. Given the images below, somehow there are no fatalities.

    Searching for injured right after crash…

    Inside the train right after the accident…

     

    My train crashed

    A video posted by Yameen Allworld "Holladay" (@yameenallworld) on

    May 12, 2015 at 6:35pm PDT

     

    Live Feed:

     

    As NBC Philadelphia reports,

    NBC10's Keith Jones arrived at the scene shortly after 10 p.m. and said the injured passengers he saw had minor injuries.

     

    Janelle Richards, a producer for NBC Nightly News, was a passenger on the train. According to Richards, the train was supposed to arrive in New York at 10:30 p.m. Around 9:20 p.m. Richards heard a loud crash and people flew up in the air.

     

    Richards says there was a lot of "jerking back and forth" and "a lot of smoke." Richards also says she saw injured passengers who were bleeding.

     

    Patrick Murphy, a former congressman from Pennsylvania's 8th District and Iraq War veteran was also on the train. Murphy says he was in the cafe car when the train "crashed."

     

    "It wobbled at first and then went off the tracks," Murphy said. "There were some pretty banged-up people. One guy next to me was passed out. We kicked out the window in the top of the train car and helped get everyone out."

     

    Murphy says a few of the victims were injured to the point where they couldn't move and one person needed a stretcher. He also says paramedics arrived within eight to nine minutes.

    *  *  *

    *  *  *

    An Associated Press manager who was on the Amtrak train that derailed in Philadelphia says he was watching Netflix when the train started to decelerate, like someone had slammed the brake.

     

    Paul Cheung says everything started to shake and people's stuff started flying everywhere.

     

    He says it all happened "in a flash second."

     

    Cheung says another passenger urged them to escape from the back of his car, which he did.

     

    He saw passengers trying to escape through the windows of cars tipped on their side.

     

    He says the front of the train was mangled. He described it "like a pile metal."

     

    ***



  • America's Achilles' Heel

    Submitted by Dmitry Orlov via Club Orlov blog,

    Last Saturday, a massive Victory Parade was held in Moscow commemorating the 70-year anniversary of the surrender of Nazi Germany to the Red Army and the erection of the Soviet flag atop the Reichstag in Berlin. There were a few unusual aspects to this parade, which I would like to point out, because they conflict with the western official propaganda narrative.

    First, it wasn't just Russian troops that marched in the parade: the troops of 10 other nations took part in it, including the Chinese honor guard and a contingent of Grenadiers from India. Dignitaries from these nations were present in the stands, and the Chinese President Xi Jinping and his wife were seated next to President Vladimir Putin, who, in his speech at the start of the parade, warned against attempts to create a unipolar world—sharp words aimed squarely at the United States and its western allies.

    Second, a look at the military hardware that rolled through Red Square or flew over it would indicate that, short of an outright nuclear mutual self-annihilation, there isn't much that the US military could throw at Russia that Russia couldn't neutralize.

    It would appear that American attempts to isolate Russia have resulted in the exact opposite: if 10 nations, among them the world's largest economy, comprising some 3 billion people, are willing to set aside their differences and stand shoulder to shoulder with the Russians to counter American attempts at global dominance, then clearly the American plan isn't going to work at all. Western media focused on the fact that western leaders declined to attend the celebration, either in a fit of pique or because so ordered by the Obama administration, but this only highlights their combined irrelevance, be it in defeating Hitler, or in commemorating his defeat 70 years later. Nevertheless, in his speech Putin specifically thanked the French, the British and the Americans for their contribution to the war effort. I am sorry that he left out the Belgians, who had been so helpful at Dunkirk.

    One small detail about the parade is nevertheless stunning: Defense Minister Sergei Shoigu, a Tuvan Buddhist and one of the most respected Russian leaders, who presided over the Emergencies Ministry prior to becoming the Defense Minister, did something none of his predecessors ever did: at the beginning of the ceremony, he made the sign of the cross, in the Russian Orthodox manner. This simple gesture transformed the parade from a display of military pomp to a sacred ritual. Then followed the slow march with two flags side by side: the Russian flag, and the Soviet flag that flew on top of the Reichstag in Berlin on Victory Day 70 years ago. The march was accompanied by a popular World War II song? Its title? “The Sacred War.” The message is clear: the Russian military, and the Russian people, have put themselves in God's hands, to do God's work, to once again sacrifice themselves to save the world from the ravages of an evil empire.

    If you try to dismiss any of this as Russian state propaganda, then here is something else you should be aware of. Did you hear of the spontaneously organized procession in which, after the official parade, half a million people marched through Moscow with portraits of their relatives who died in World War II? The event was called “The Eternal Regiment” (??????????? ????). Similar processions took place in many cities throughout Russia, and the total number of participants is estimated at around 4 million. Western press either panned it or billed it as an attempt by Putin to whip up anti-western sentiment. Now that sort of “press coverage,” my fellow space travelers, is pure propaganda! No, it was an enthusiastic, spontaneous outpouring of genuine public sentiment. If you think about it just a tiny bit, nothing on this scale could be contrived artificially, and the thought that millions of people would prostitute their dead for propaganda purposes is, frankly, both cynical and insulting.

    * * *

    Instead of collapsing quietly, the US has decided to pick a fight with Russia. It appears to have already lost the fight, but a question remains: How many more countries will the US manage to destroy before the reality of its inevitable defeat and disintegration finally catches up with it?

    As Putin said last summer when speaking at the Seliger youth forum, “I get the feeling that no matter what the Americans touch, they end up with Libya or Iraq.” Indeed, the Americans have been on a tear, destroying one country after another. Iraq has been dismembered, Libya is a no-go zone, Syria is a humanitarian disaster, Egypt is a military dictatorship executing a program of mass imprisonment. The latest fiasco is Yemen, where the pro-American government was recently overthrown, and the American nationals who found themselves trapped there had to wait for the Russians and the Chinese to extract them and send them home. But it was the previous American foreign policy fiasco, in the Ukraine, which prompted the Russians, along with the Chinese, to signal that the US has taken a step too far, and that all further steps will result in automatic escalation.

    The Russian plan, along with China, India, and much of the rest of the world, is to prepare for war with the US, but to do everything possible to avoid it. Time is on their side, because with each passing day they become stronger while America grows weaker. But while this process runs its course, America might “touch” a few more countries, turning them into a Libya or an Iraq. Is Greece next on the list? What about throwing under the bus the Baltic states (Estonia, Latvia, Lithuania), which are now NATO members (i.e., sacrificial lambs)? Estonia is a short drive from Russia's second-largest city, St. Petersburg, it has a large Russian population, it has a majority-Russian capital city, and it has a rabidly anti-Russian government. Of those four facts, just one is incongruous. Is it being set up to self-destruct? Some Central Asian republics, in Russia's ticklish underbelly, might be ripe for being “touched” too.

    There is no question that the Americans will continue to try to create mischief around the world, “touching” vulnerable, exploitable countries, for as long as they can. But there is another question that deserves to be asked: Do the Americans “touch” themselves? Because if they do, then the next candidate for extreme makeover into a bombed-out wasteland might be the United States itself. Let's consider this option.

    As the events in Ferguson, and more recently in Baltimore, have indicated, the tensions between African-Americans and the police have escalated to a point where explosions become likely. The American “war on drugs” has been essentially a war on young black (and Latino) men; about a third of young blacks are behind bars. They also run a high risk of being shot by the police. To be fair, the police also run a high risk of getting shot by young black males, causing them to be jumpy and to overreact. Given the gradually collapsing economy—close to 100 million working-age Americans are unemployed (“outside the labor force,” if you wish to split hairs)—it would seem that for an ever-increasing chunk of the population cooperating with the authorities is no longer a useful strategy: you get locked up or killed anyway, but you get none of the temporary benefits that come from ignoring the law.

    There is an interesting asymmetry in the American media's ability to block out information about civil unrest and insurgency: if it is happening overseas, then news of it can be carefully calibrated or suppressed outright. (Did American television tell you about the recent resumption of shelling of civilian districts by the Ukrainian military? Of course not!) This is possible because Americans are notoriously narcissistic and largely indifferent to the rest of the world, of which most of them know little, and what they think they know is often wrong. But if the unrest is within the US itself, then the various media outlets find themselves competing against each other in who can sensationalize it better, in order to get more viewership, and more advertising revenue. The mainstream media in the US is tightly controlled by a handful of large conglomerates, making it one big monopoly on information, but at the level of selling advertising market principles still prevail.

    Thus there is the potential for a positive feedback loop: more civil unrest generates more sensationalized news coverage, which in turn amplifies the civil unrest, which further sensationalizes the news coverage. And there is a second positive feedback loop as well: the more civil unrest there is, the more the police overreact in trying to control the situation, thereby generating more rage, amplifying the civil unrest. These two positive feedback loops can continue to run out of control for a while, but the end result, in all such recent incidents, is the same: the introduction of National Guard troops and the imposition of curfew and martial law.

    The swift introduction of the military might seem a bit odd, considering that most police departments, even small-town ones, have been heavily militarized in recent years, and even the security people at some school districts now have military vehicles and machine guns. But the progression is a natural one. On the one hand, when people who habitually resort to brute force find that it isn't working, they naturally assume that this is because they aren't using enough of it. On the other hand, if the criminal justice system is already a travesty and a shambles, then why not just cut through the red tape and impose martial law?

    There is an awful lot of weapons of all sorts in the US already, and more will come in all the time as the US is forced to close overseas military bases due to lack of funds. And they will probably get used, for the same reason and in the same fashion that red bricks came to be used in Boston. You see, plenty of red bricks kept coming into Boston aboard British ships, where they were used as ballast for the return trip. This created the impetus to do something with them. But putting up brick buildings is a difficult, demanding process, especially if laborers are always drunk. And so the solution was to use the bricks to pave sidewalks—something one can do on one's hands and knees. Similarly with the military hardware sloshing back into the US from abroad. It will be used, because it's there; and it will be used in the stupidest way possible: shooting at one's own people.

    But bad things happen to militaries when they are ordered to shoot at their own people. It is one thing to shoot at “towel-heads” in a far-away land; it is quite another to be ordered shoot at somebody who could be your own brother down the street from where you grew up. Such orders result in fragging (shooting your own officers), in refusal to follow orders, and in attempts to stand up for the other side.

    And that's where things get interesting. Because, you see, if you shoot at, imprison, and otherwise abuse a defenseless civilian population long enough, what you get in response is an armed insurgency. The place insurgencies are easiest to organize is in prison. For instance, ISIS, or the Islamic Caliphate, was masterminded by people who had previously worked for Saddam Hussein, while they were imprisoned by the Americans. They took this opportunity to work out an efficient organizational structure and, upon release, found each other and got down to work. Having a third of young American blacks locked up gives them all the opportunity they need to organize an effective insurgency.

    To be effective, an insurgency needs lots of weapons. Here, again, there is a procedure for acquiring military technology that has become almost routine. What weapons are being used by ISIS? Why, of course, American ones, which the Americans provided to the regime in Baghdad, and which ISIS took as trophies when the Iraqi army refused to fight and ran away. And what weapons are being used by the Houthi rebels in Yemen? Why, of course, the American ones, which the Americans provided to the now overthrown pro-American regime there. And what are some of the weapons being used by the Syrian regime of Bashar Assad? Why, of course, American ones, sold to them by the Ukrainian government, which got them from the Americans. There is a pattern here: it seems that whenever Americans arm, train and equip an army, that army stands a really big chance of simply melting away, with the weapons falling into the hands of those who want to use them against American interests. It is hard to see why this same pattern wouldn't hold once the US places much of itself under military occupation.

    And that's where things get really interesting: a well-armed, well-organized insurgency composed of thoroughly radicalized, outraged people who have absolutely nothing to lose and are fighting for their home turf and their families squaring off against a demoralized, defeated US military that has just failed spectacularly in every country it “touched.”

    They say that “You can't fight city hall.” But what if you have a tank battalion that can control four intersections all around city hall, turrets pointed in all directions, firing at anything that moves? And what if you have enough infantry to go around and ring the doorbells of all the key city hall bureaucrats? Wouldn't that change one's odds of victory in fighting city hall?

    The US might get to “touch” a few more countries before this scenario unfolds, but it seems likely that (excepting the possibility of all-out war) eventually America will “touch” itself, and then all those countries whose troops marched through Red Square last Saturday won't have America to kick around any more.



  • Chinese Stocks Overtake US As Most Actively Traded Futures Contract In The World

    Having lost its mantle as largest economy in the world to China… and world’s biggest oil importer (again to China), ‘exceptional’ USA appears to have just lost its Number 1 status in financial market depth to China also…

     

    China’s Financial Futures Exchange CSI-300 futures contract has now traded more on average than the massively liquid S&P 500 e-mini contract for the last month…

     

    Of course, with millions of new retail trading accounts every week in China, we suspect this ‘false dawn’ of activity will not be quite as exuberant as we have seen for 6 months.

     

    Charts: Bloomberg



  • More Spending Is Not The Answer To A Slow Economy

    Submitted by Dr. Richard Ebeling via The Cobden Centre blog,

    Old fallacies never seem to die, they just fad away to reemerge once again later on. One such fallacy is that if there is significant unemployment and slow economic growth it must be due to not enough consumers’ spending in the economy, what Keynesian economists call a “failure of aggregate demand.”

    This fallacy has been voiced, once more, in a recent interview with Joseph Stiglitz, professor of economics at Columbia University and the 2001 recipient of the Nobel Prize in Economics.

    In an interview that appears in the British “Globe and Mail” on May 8, 2015, Stiglitz blames the sluggish economic growth in the U.S. and around the world, with accompanying unemployment, on weak market demand due to income inequality.

    “You are not going to have robust growth without adequate demand,” says Stiglitz. “The people at the top who have seen big income gains are saving large portions of their income, on average 35 percent. Those at the very top are not spending their money. People at the bottom, on the other hand, have no choice. To just get by, they have to spend all their income.”

    Stiglitz goes on to say, “The contention that people at the top are the job creators and, if you tax them at higher rates, they won’t create jobs is nonsense. The fact is there is talented entrepreneurs at all levels of the U.S. economy. Whenever there is demand, jobs get created and entrepreneurship flourishes. Our big corporations are sitting on upwards of $2-trillion. The reason they are not investing it is there’s no demand for their goods.”

    Stiglitz argues that what is needed is to “get the economy growing by more equitably sharing income gains and investing in our future.”

    Taxing or Deficit Spending Do Not Create Jobs

    First, if the government attempts to “stimulate” the economy through more of its own spending, the question has to be asked: From where will come the financial means for the government to increase its expenditures?

    If the government taxes the citizenry to finance its increased spending, then every dollar more that the government spends by necessity reduces taxpayers’ spending by an equivalent amount. The net change in overall or total spending in the economy would be zero.

    If the government runs a budget deficit, it must borrow the dollars it wishes to spend above what it takes in, in taxes. Every dollar borrowed by the government in the loan and financial markets is one dollar less of people’s savings available for someone in the private sector to borrow for some investment or consumer purchase. Again, the net change in overall or total spending in the economy would be zero.

    If it is argued that the government need not siphon away a dollar from a private-sector borrower because it can offer a higher rate of interest to attract more savings, the net result will still tend to be the same. Why?

    If income earners decide to save more due to an attractively higher rate of interest the government offers to pay for some of those borrowed dollars, it means that that saver is spending fewer dollars, himself, on consumption or some other spending.

    In addition, pushing up market interest rates to attract savers to lend to the government also raises the cost of borrowing for private businesses. The higher the rates of interest the more likely that some businessmen “at the margin” will find that the cost of borrowing is now greater than the anticipated rate of profit from investing a borrowed sum.

    Economists call this the “crowding-out effect.” Part of the cost of funding the government’s budget deficit comes from a reduction in private sector borrowing and spending due to the higher interest costs. Thus, again, the net effect on total spending in the economy tends towards zero.

    Save or Invest cartoon

    Good Ideas Need Savings and Investment

    Joseph Stiglitz is certainly correct that there are potentially talented entrepreneurs in all walks of life and levels of income in the United States and around the world. But having a good idea and even willingness to take a chance and start or expand an enterprise is not enough.

    In most instances, you need capital to begin and operate a business over a period of time before you have anything ready to sell. You need sufficient funds to cover some of the losses that often will occur before you find a niche and attract enough consumer interest and demand to defray the costs of doing business.

    In other words, there first has to be the savings that facilitates the time-consuming production that will eventually generate the product or services that can earn consumer dollars at some point in the future.

    The Simple Logic of Saving, Investing and Capital Formation

    Let take a simple example first. Imagine Robinson Crusoe alone on his island. If he is to escape from extremely primitive conditions of existence of mere “survival” by picking berries and attempting to catch fish in a stream with his bare hands, Crusoe must invest in the manufacture of “capital,” – tools – to assist in improving and increasing the productivity derivable from his human labor.

    But to do so Crusoe must “save,” that is, he must out of his daily efforts to have enough for survival set aside a sufficient amount of berries and fish as a “store” of goods to live off to free up his time and resources that would otherwise go into immediate production for his present consumption.

    He uses that freed up time and resources to, perhaps, make a bow and arrows, or a canoe and fishing net, so that after the requisite “period of investment” during which he has lived off his “savings,” he will have the capital goods – the tools of production – that will then assist him increasing the quantities, varieties and qualities of the consumption goods that previously were beyond his bare labor’s potential to obtain.

    In this way, he has employed himself in making capital goods with his store of saved consumption goods to live off so his own labor can be diverted from more immediate berry picking and fishing with his bare hands.

    Production Time Results in More Desired Goods

    The manufacture of those capital goods and their use over a period of time once in existence must logically and temporally precede the greater availability of consumer goods that that capital’s existence now makes possible. In other words, besides the time taken to making the canoe and net, he must now paddle out into the waters off his island to first catch that larger harvest of fish that his capital goods enables him to have before he can have that increased and more varied fish supply to eat as part of his dinner.

    At the same time, using his bow and arrows for hunting and utilizing his net for fishing will result in “wear and tear.” That is, capital – tools and equipment – get used up in their use, and Crusoe will have to devote part of his labors and time to maintenance and repair if his ability to hunt and fish is not to be diminished.

    Furthermore, if he is to increase his supply of desired consumer goods even more from their existing availabilities and amounts he must again divert an increased amount of his labor time and resource use to “investing” in more and/or better capital goods above that required to maintain his existing capital.

    Thus, the more he invests in making the capital equipment that increases his capacity to produce greater quantities, varieties and qualities of the finished goods he would like to use and consume, the more resources, time, and labor effort he has to equivalently devote to maintaining his enlarged stock of capital to sustain whatever the standard of living he has been able to establish for himself through savings and investment.

    In the Market, Prices Guide Production for Consumption and Investment

    Of course, in “modern society” the process is more complex than presented when using Robinson Crusoe as a first approximation. In our world, today, this all works in a competitive market system of independent private entrepreneurs who employ and directing the men and material they hire, rent or buy in the arena of exchange.

    In this market setting entrepreneurial decision-makers are guided by the system of market prices that reflect the types and amounts of goods that consumers desire, and on the basis of which entrepreneurs hope to make their profits. Changes in consumer demands are expressed in changes in the relative prices for the various goods offered on the market, and these prices then direct entrepreneurs to shift the types and amounts of goods they decide to produce.

    This also applies to changes people make concerning consumption and savings, that is, their demand for consumer goods in the present versus consumer goods in the future for which they put their savings aside.

    In a properly functioning free market, competitive economy, a decision to consume less and save more may reduce the current demand for some consumer goods. But the greater savings reemerges as spending on investment activities and other types of borrowing when the increased savings results in lower rates of interest to attract willing borrowers in the financial markets where that greater savings has been deposited.

    But why would investors borrow this greater savings, even at lower rates of interest, if the current demand for goods on the market has not increased or maybe even gone down?

    Fire as the Next Big Investment

    Saving “Today” Means a Desire to Demand More “Tomorrow”

    This was explained by the famous Austrian economist, Eugen von Böhm-Bawerk (1851-1914) near the beginning the twentieth century.

    “The man who saves curtails his demand for present goods but by no means his desire for pleasure-affording goods generally . . .

     

    “The person who saves is not willing to hand over his savings without return, but requires that they be given back at some future time, usually indeed with interest, either to himself or his heirs.

     

    “Through savings not a single particle of the demand for goods is extinguished outright . . . the demand for goods, the wish for means of enjoyment is, under whatever circumstances men are found, insatiable. A person may have enough or even too much of a particular kind of goods at a particular time, but not of goods in general nor for all time. The doctrine applies particularly to savings.

     

    “For the principle motive of those who save is precisely to provide for their own futures or for the futures of their heirs. This means nothing else than that they wish to secure and make certain their command over the means to the satisfaction of their future needs, that is, over consumption goods in a future time. In other words, those who save curtail their demand for consumption goods in the present merely to increase proportionally their demand for consumption goods in the future.”

    But even if there is a potential future demand for consumer goods, how shall entrepreneurs know what type of capital investments to undertake and what types of greater quantities of goods to offer in preparation for that higher future demand?

    Böhm-Bawerk ‘s reply was to point out that production is always forward-looking, a process of applying productive means today with a plan to have finished consumer goods for sale tomorrow. The very purpose of entrepreneurial competitiveness is to constantly test the market, so as to better anticipate and correct for existing and changing patterns of consumer demand.

    Competition is the market method through which supplies are brought into balance with consumer demands. And if errors are made, the resulting losses or less than the anticipated profits act as the stimuli for appropriate adjustments in production and reallocations of labor and resources among alternative lines of production.

    When left to itself, Böhm-Bawerk argued, the market successfully assures that demands are tending to equal supply, and that the time horizons of investments match the available savings needed to maintain the society’s existing and expanding structure of capital in the long run.

    Wages are Paid Out of Savings, Not Current Consumer Demand

    Böhm-Bawerk explained that all production takes time, and invariably through a series of steps or “stages of production” that finally leads to a finished consumer good available for sale and use. He emphasized that the very nature of the time structure of production means that the goods available for consumption today are goods the production of which extends backwards in time over many production periods of the past, over months or years.

    And the production processes being begun “today” and which will continue over the time periods of many “tomorrows” will only be completed and ready in the form of finished consumer goods at some point in the future.

    The finished consumer goods bought today do not represent a “demand for labor” today. The entrepreneurs demanded that labor in the various stages of production at different times in the past while the consumer goods being purchased today were in the process of being produced.

    And the labor being demanded “today” in the various stages of production, each stage of which represents a future product at a different degree of completion and that will be, respectively, ready for sale as a consumer good at different time periods of the future, is a demand by entrepreneurs looking to future sales, not current period consumer demand for “commodities.”

    But this “demand for labor” by entrepreneurs through these future-oriented stages of production is entirely dependent upon the extend to which incomes and revenues earned in the present and future periods (and the resources they represent) are partly saved and not consumed.

    It is this savings of resources not being utilized for more immediate consumption purposes, that “frees” part of the productive capacity of the society to be diverted to the making and maintaining of capital and providing the means to pay wages to workers who will be hired and employed in the respective processes of production for long periods of time before those specific goods in the manufacture of which they are participating will be offered for sale and generating a revenue in the future.

    Thus, it is savings that represents the greater part of the “demand for labor” in the production processes of the market and not the current period’s demand for consumer goods.

    Don’t Tax Away the Wealth that Provides the Savings for Production

    Keynesian economists like Joseph Stiglitz miss all of this in their simplified and, in fact, simplistic view of the world that all that is needed is more government spending and greater “aggregate demand” to create more employment today.

    When the “rich” are saving rather than consuming they are, in fact, supplying part of the financial wherewithal (and the real resources their savings represents) to maintain and expand the capital supply and to provide the means to pay workers and other resource suppliers incomes over the periods of production that everyday culminates in the availability of the goods and services (and the standard of living) we take for granted.

    Under Stiglitz’s own argument, low or lower-income individuals in society use more of their incomes for consumption and less for savings. By using various government fiscal and other policies to transfer wealth and income from those in society who are greater savers to those who are greater consumers, the net effect over time can be to reduce capital formation and productive investment looking to the future.

    It is savings that supports investment, enables capital formation, and creates and sustains jobs. Faster growth and more jobs depend upon savings and market-oriented investment, not the level or amount of current consumption spending.

    Heaven - No Govn't and No Taxes Cartoon

    Taxes and Regulations Reduce the Ability and Incentives to Invest

    But what about Stiglitz’s statement that American “big corporations are sitting on upwards of $2-trillion.” What he failed to mention is that over half of that money is parked overseas where American firms have earned those sums from foreign investments and sales of goods. Why haven’t those dollars come home?

    The Financial Times reported on May 10, 2015, “The growing cash piles underline the reluctance of boardrooms to repatriate money held abroad even as they tap debt markets to fund record spending on dividends, buybacks and acquisitions.”

    U.S. businesses are double taxed if they bring those dollars back to the U.S.. The foreign government in whose country they earned those profits has already taxed them on their net revenues. If they bring any or all of those dollars back to the United States, Uncle Sam will tax them again on their foreign gains, a practice that few other government follow around the world.

    But what about the profits made a home? Why aren’t more of those profits plowed back into productive activities and forward-looking investments? Partly this is due to what economic historian, Robert Higgs, has called “regime uncertainty,” that is, the uncertainties concerning the future direction of government policies that makes investment decisions more risky than it otherwise has to be.

    This includes the uncertainty surrounding what to expect in terms of government regulations, controls, commands and restrictions in an environment in which the U.S. Federal code of regulations on business activity numbers over 175,000 pages. The enforcement of these regulations is widely open to the discretion and decisions of thousands of government bureaucrats, with often total unpredictability of where and when the regulators will appear and what they will demand or accuse an enterprise of having violated.

    Matching the hindrances of the interventionist state is the manipulations of money and interest rates by central banks everywhere, which distorts markets, misdirects capital and labor use resulting in unsustainable booms and inescapable downturns that bring about wrongly invested capital and misallocated labor. This “wrong twists” to the market takes time to overcome and correct.

    It is government impediments to open, competitive markets – whether in America or in other parts of the world – that are the causes to behind slow growth and sluggish job creation, not “the rich” and their savings.



  • Shale "Revolver Raids" To Resume In October When "Rubber Meets The Road" For HY Energy

    Now that the defaults and bankruptcies have begun, and now that David Einhorn has jumped on the bandwagon (coining a new word in the process), it’s time for banks to start taking a hard look at just how bad the fallout will be once hedges start rolling off and more weak hands are shaken out of the HY oil & gas space. 

    As we discussed at the beginning of last month, the “revolver raids” have already begun for some heavily indebted US shale companies who were set to see their credit lines cut after banks performed their bi-annual review in April, which is based on where crude has traded over the preceding 12 months. Those credit lines will be assessed again in October and according to a UBS survey of the banks who have helped finance the oil & gas industry, the outlook is not good, with nearly two-thirds of respondents indicating that loan quality is likely to deteriorate. No one said they expected conditions to improve and more than 80% of banks reported tightening credit lines to oil & gas companies.

    For its part, UBS believes the “rubber will meet the road” for the HY energy in H2 as energy prices likely will not be high enough to support “lower quality” players. 

    Via UBS:

    HY Energy Spreads have continued to tighten over the last few weeks, with overall energy sector spreads now trading at 611bps, E&P spreads at 688bps, and servicers at 682bps, versus the HY Index at 477bps. This compares with 661bp, 765bp, and 731bp respectively as of 4/22. The outlook from lenders is likely painting a more realistic picture on the state of conditions. As part of the Q1 2015 Fed Senior Loan Officer Survey, special questions were asked to banks who provide financing to firms involved in the oil and natural gas sectors. Specifically, banks were asked to project their outlook for delinquencies and charge-offs assuming both 1) economic activity moves in line with consensus and 2) energy prices evolve as priced via the futures curve. Despite Q1 economic forecasts being optimistic and Q1 commodity prices having stabilized, 60% of banks expected loan quality to deteriorate, while the remainder expected loan quality to remain stable. Virtually no banks expected an improvement in loan quality…

     


    We believe the rubber will hit the road later this year for HY Energy. The recent rally in oil prices is insufficient for lower-quality energy firms who have most of 2016 production unhedged. Not to be forgotten for many E&Ps, natural gas prices are still struggling, and haven’t enjoyed the same bounce as oil prices YTD (Figure 3). Banks may not have cut reserve bank lending facilities aggressively yet, but the October review may be less forgiving with this backdrop. 

     

    In addition, the current spot price of WTI ($59) is well above the UBS 2015 YE forecast of $51, based on demand/supply fundamentals. 

    UBS also discusses one of our favorite topics: the idea that access to capital markets — thanks largely to the Fed-induced quest for yield and concomitant ultra-low borrowing costs — have allowed otherwise insolvent producers to keep right on drilling, contributing to oversupply and, ironically to their own demise.

    Energy has been an outperformer in 2015 and open capital markets are to thank. Oil & Gas Issuance in HY Energy has been $17.5bn YTD, or 12.4% of total issuance. This is below the average 15-16% of the prior four years, but much of this year’s drop occurred in January, while issuance for the rest of 2015 has been closer to historical averages of prior years. Our equity colleagues have also cited $`11bn of E&P equity issuance YTD as of April 27th, and that channel remains open.

    Unfettered market access only serves to delay the inevitable, as proven this week when American Eagle Energy — who pulled a Movie Gallery in early March after failing to make even a single coupon payment —became the fourth casualty of the oil downturn, after filing for Chapter 11 on Monday. As we said last month, expect many more to come as the countdown to the day of reckoning for the US shale sector has just about run out.



  • Political Accountability from a Perspective of an Investor

    By Chris at www.CapitalistExploits.at

    There is a great deal of chatter about the recently concluded British elections in which a posh sounding man with eyes suspiciously close together just trumped another man who obviously economically illiterate is missing a chin. During this particular circus show it’s not a leader people were picking but rather choosing which gang led by these two clowns will run the place.

    It’s deeply troubling to think that the fate of Englishmen is being decided by a band of thieves whose IQ is decidedly smaller than their waistbands. And before I get hate-mail from either side let me say categorically that I consider that statement true irrespective of which of the current buffoons took the reigning spot.

    Dumb and Dumber

    It got me to thinking about running a more equitable, transparent and consequence driven election process. In order to do so I’m going to take some lessons learned in venture capital and see what a new and wonderful world we could all create if we could apply them to politics.

    Think about this: what if voting for candidates and political parties was more like voting for a company to prosper?

    If your candidate and party got in then your life should be better for it, much in the same way when we vote for a company by investing into it. If said company subsequently does well then our lives are enriched by our investment into that company.

    It can all be very simple, unlike this obscure nonsense we have right now.

    In venture capital, as investors we’re often taking positions in very early stage companies where risks to our capital are high. We know that statistically some of these companies won’t make it out alive – such is the nature of the business.

    Since things don’t always work out as we would wish we must act to protect ourselves and our capital. One way of doing this is via anti dilution clauses. One in particular that is commonly used by VCs is called a liquidation preference.

    I think this description is a good one:

    A term used in venture capital contracts to specify which investors get paid first and how much they get paid in the event of a liquidation event such as the sale of the company.

     

    Liquidation preference helps protect venture capitalists from losing money by making sure they get their initial investments back before other parties. If the company is sold at a profit, liquidation preference can also help them be first in line to claim part of the profits. Venture capitalists are usually repaid before holders of common stock and before the company’s original owners and employees.

    Entrepreneurs find it easier to raise money if they are prepared to provide assurances that will go a long way to covering investors potential losses. Eliminating downside for investors while allowing them participation in the upside is a smart thing to do.

    Essentially, investors have the right to get paid first, ahead of founders, and management, and even ahead of preference shareholders. For example, if a company sells for a price lower than the price the investor paid, then the proceeds of the sale on a 1x liquidation preference will go towards those investors until they’re made whole.

    Now, let’s imagine what this would look like in the political circus of elections.

    Voters (shareholders/investors) would vote (invest) for their party (company) and if that party wins then it’s game on.

    The end of any political term in office is deemed to be the liquidation event. In other words at this point the score card is read. All the promises that have been made need to be kept. If at the end of the term they have not kept up to their promises then voters (shareholders) get to keep all of their taxes paid (investments made) and are made whole on their “investments”.

    I’ll go one step further and say that if there exists a shortfall (and looking at the last few 100 years I think it’s safe to say there would be some enormous shortfalls ) that such shortfall is made up by the individuals in the party, all jointly and severally liable. Sounds fair to me!

    I’ll be happy to draft all the agreements for this new system and I won’t charge a dime for it. Consider it humanitarian work.

    – Chris

     

    “There’s another way we’re getting behind business – by sorting out the banks. Taxpayers bailed you out. Now it’s time for you to repay the favor and start lending to Britain’s small businesses.” – David Cameron



  • "More Probable Than Not"

    Submitted by Ben Hunt via Salient Partners' Epsilon Theory blog,

    The only thing that I ask from this group today and the American people is to judge me from this day forward. That’s all I can ask for.
    – Alex Rodriguez press conference, February 17, 2009, regarding his steroid use from 2001 – 2003.

    I’m ready to put this chapter behind me and play some ball.
    – Alex Rodriguez “apology” letter, February 17, 2015, regarding his steroid use from 2010 – 2012.

    Brady:

    I would never do something that was outside of the rules of play.  I would never have someone do something that I thought was outside of the rules.

    Reporter:

    So you never knowingly played with a football that was under 12.5 pounds?

    Brady:

    No.

    – Tom Brady press conference, January 22, 2015

    Now, we all know that air pressure is a function of the atmospheric conditions. If there is activity in the ball relative to the rubbing process I think that explains why when we gave them to the official and the officials put them at let’s say 12.5 … once the ball reached its equilibrium state it’s probably closer to 11.5.
    – noted physicist and football coach Bill Belichick, January 24, 2015.

    That is an allegation [FOMC quashing their own General Counsel’s investigation of leaks] that I don’t believe has any basis in fact. I’m not going to go into any detail but I don’t know where that piece of information could possibly have come from.
    – Janet Yellen press conference, March 18, 2015.

    The Board’s Inspector General and the Department of Justice are in the midst of an investigation into this matter [FOMC leaks to journalists and market consultants]. We are cooperating fully with them and look forward to the results of their investigation. … I had one meeting with Ms. Regina Schleiger of Medley Global Advisors during the period covered by the staff review. As Vice Chair of the Board, I met with Ms. Schleiger on June 11, 2012, to hear her perspectives on international developments.
    – Janet Yellen letter to Rep. Jeb Hensarling, May 4, 2015.

    Mr. Bernanke said that he was sensitive to the public’s anxieties about the “revolving door” between Wall Street and Washington and chose to go to Citadel, in part, because “it is not regulated by the Federal Reserve and I won’t be doing any lobbying of any sort.” He added that he had been recruited by banks but declined their offers. “I wanted to avoid the appearance of a conflict of interest,” he said. “I ruled out any firm that was regulated by the Federal Reserve.”
    – New York Times, April 16, 2015.

    Senator:

    Fletcher, there's an old saying to the victors belong the spoils.

    Fletcher:

    There's another old saying, Senator.  Don't piss down my back and tell me it's raining.

    – "The Outlaw Josey Wales" (1976)

    My father was a doctor who spent his entire career in a small hospital built by the Tennessee Coal and Iron company in Fairfield, Alabama. He was an ER doc way before emergency medicine was its own thing, which meant that he saw a wide gamut of cases, from knife fights to car wrecks to heart attacks. But it also meant that he saw a lot of ordinary colds and various infectious diseases, as the emergency clinic then – as now – was the only on-demand medical facility available for people who couldn’t afford or didn’t have access to private physician practices. Now one of my father’s great joys in life was watching sports on our grainy black and white TV, miraculously upgraded to a grainy color TV when I was 12. I’m sure he spent hundreds, if not thousands, of happy hours watching sports. Unless, of course, the hapless TV commentator made the mistake of excusing the absence of, say, Larry Bird from a Celtics game by saying that Bird “had a touch of the flu” and so was too sick to play, which was guaranteed to send my father into a 10-minute tirade.
     
    “A touch of the flu? A touch of the flu? You mean he has contracted the influenza virus? Are you out of your mind? Do you have any idea what it means to have the flu? Do you have any idea how sick you are if you have the flu? People DIE from the flu, you moron! What does that even mean … a touch of the flu? Is Larry Bird in the hospital? Because if he has influenza, you sure better get him to the hospital! I hope you’ve got a saline IV hooked up to Larry Bird’s arm right now! No, he’s not in the hospital. Do you know why? Because he has a COLD. That’s right, you idiot, he has a COLD! Not the flu!”
     
    Honest to god, this would go on for quite a while. Somehow it never got old to my father to rail at what he perceived as the mendacity – to use a good Tennessee Williams word – of a TV commentator elevating Larry Bird’s status from an ordinary human wrestling with a common cold to a heroic struggle with influenza. Even today, 30 years later, I can’t help but laugh at these memories of my father whenever I read or hear about a player out for the game because of “flu-like symptoms.”
     
    I’ve inherited a lot of my father’s traits, and one of them is his intolerance for this mendacity of language, this intentional failure to call things by their proper names, this linguistic exercise in self-puffery and cover-up. Unfortunately for me and anyone else who shares this peculiar sensitivity, mendacity of language has never been more rampant in all of our social worlds, from sports to politics to markets. 
     
    With the advent of always-on mass media that projects the illusion of a one-to-one personal connection with cartoons like “Tom Brady” and “Jim Cramer” – corporate entities that are connected with but distinct from human beings like Tom Brady and Jim Cramer – language intentionally designed to influence rather than inform is now ubiquitous in the business of sports and politics and markets Why? Because it works. It delays sanctions until after you play in the Super Bowl, until after you sign a quarter of a billion dollar contract. It deflects attention until after your term in office is over, until after you cash in with a book deal and hedge fund consultancy.
     
    To use the ponderous, legally parsed language of the NFL’s Wells Report on “deflate-gate”, language which I think wonderfully encapsulates the pinched spirit of our age, here are four things that I believe are “more probable than not”:
    1) Alex Rodriguez has routinely used steroids and PED’s of various stripes since he was a sophomore in high school.
     
    2) Tom Brady has routinely bribed equipment managers with autographed jerseys and new shoes in order to receive footballs deflated well below what he knew was the legal limit.
     
    3) Janet Yellen has routinely leaked market-moving information to favored private sector conduits, and has also sought to quash internal investigations of same.
     
    4) Ben Bernanke is for sale to the highest bidder.
    But here’s the thing. I’m not that worked up about ANY of these issues. Yes, A-Rod has been juicing for 25 years, and Tom Terrific breaks the rules he thinks he can get away with breaking. Okay. Them and about 5,000 other professional athletes. Janet Yellen, the prime author of Fed “communication policy” (the intentional use of words to influence market expectations), leaks her viewpoint as part of that communication policy and then tries to kill an internal investigation. Okay. Her and every other senior politician and bureaucrat in the history of human civilization. As for Bernanke … a former President of the United States and the leading candidate to be the next President of the United States have personally received more than $100 million in “donations” from mega-corporations and foreign governments, and I’m supposed to be outraged about Ben Bernanke cashing a big check from Ken Griffin?
     
    What I AM worked up about, though, is the mendacity … the utter lack of character and authenticity … on full display in ALL of these cases. All of these cases and so many, many more. 
     
    You want to go work for Citadel? Fine, go work for Citadel. But OWN IT. Don’t insult my … I’m not even going to say intelligence, because it’s not an assault on intelligence we’re talking about here … don’t insult my 50 years of life as a reasonably self-aware human being by claiming that you’re taking the high road here by working for Citadel instead of, say, JP Morgan. I mean, the notion that access to the Fed’s regulatory authority over big banks is somehow the defining characteristic of why Ben Bernanke is a sought-after commodity, or that any public outrage here is clearly misplaced because, after all, he won’t be a – gasp! – bank lobbyist, per se … it’s all just horrifically insulting to anyone with the common sense to know that the sky is blue, that 2 + 2 = 4, and that you don’t meaningfully change the air pressure in footballs by rubbing them vigorously. It’s mendacity and inauthenticity in the first degree.
     
    You want to embark on a conscious policy of manipulating market expectations (yes, manipulating is a strong word, but it’s exactly accurate) by planting a carefully constructed Narrative with journalists like Jon Hilsenrath at the Wall Street Journal and consultants like Regina Schleiger at Medley, journalists and consultants who you know will be influential precisely because they are trumpeting their exclusive access to you? Fine. I totally get it. Once you’ve hit zero on short rates and pushed your balance sheet up over $4 trillion in LSAP’s, jawboning is the only bullet you’ve got left in the gun. But OWN IT. Don’t tell me that you’re meeting with Regina Schleiger at Medley because you want to hear HER perspectives on monetary policy! I’m sure that Ms. Schleiger is a very smart person. I’m sure that she is an insightful observer of the international economic scene. But – and I’m trying to say this in the kindest possible way – there’s not 1 in 100,000 investors who even knows who Ms. Schleiger is, and fewer still who would be willing to pay money or time to hear her personal opinion about the proper course of monetary policy. The exception, we are told, is the Chair of the Federal Reserve, in many respects the most powerful person on the planet … she, of course, is terribly keen to hear Ms. Schleiger’s views on international economics. 
     
    And yes, I know that Fed governors have these consultant meetings all the time. I know that their guests do most of the talking. But I also know, because I’ve done it, that professional investors and allocators are willing to pay tens of thousands of dollars to consultants like Medley, solely to glean a scrap of insight as to what the Fed is thinking, solely to be a willing host of the Narrative virus that the Fed is trying to spread. More to the point, Janet Yellen knows it, too, which is why she has these meetings. The act itself is not a horrible thing … not for A-Rod, not for Brady, not for Yellen, and not for Bernanke. It’s not a crime, or at least not a crime that will shame your children or your fan base. Certainly it’s a difficult and unpleasant thing when you’re revealed, because now you’ve got to deal with the Roger Goodell’s and the Bud Selig’s and the Jeb Hensarling’s and the Elizabeth Warren’s of the world – petty tyrants, all – but you knew there was this chance when you made the decision to break the rules, (or the “rules” in Bernanke’s and 2009 A-Rod’s case). But don’t turn a difficult situation into a personal capitulation to mendacity. Far better to own it.  
     
    Believe it or not, I’m not just venting my spleen at the outrageous displays of mendacity that assault us at every turn. I think that there’s an enormous political opportunity today (and I mean political in the broadest sense of the word, a sense that clearly includes the Fed, and arguably includes the NFL and MLB) to embrace authenticity, even if you are authentically an unlikable or – to use the insult du jour – a “polarizing” person. Not only am I convinced that we are each more likely to be successful in our chosen field when acting authentically (don’t you think that if Tiger Woods had embraced his authentically heel-ish nature in 2009, grown a goatee and moved to a casino suite in Vegas, that he’d still be winning majors today?), but also specifically within the chosen field of politics I think there is such a hunger for authenticity that ANY display of honest conviction when confronted with adversity, even if the adversity is well-deserved for breaking a rule, quickly becomes an enormous asset. Maybe this will turn out to be a more interesting election in 2016 than we think. Then again, with the vast campaign coffers already accumulated by Clinton™ and Bush™, two profoundly inauthentic corporate entities, maybe not.   
     
    Sigh. I know I’m not going to change anything by writing about this stuff, any more than my father was going to change a sports commentator’s patter by yelling at the TV. Like my father, though, I just can’t help myself. It’s never easy to be authentic. It’s never easy to call things by their proper names. It’s never easy to own it. But here in the Golden Age of the Central Banker, it’s never been more important. Or more politically savvy.

     



  • US May Use Military To Confront China In South China Sea Islands Dispute

    Just days after Japanese PM Shinzo Abe leaves Washington (having stepped up his nation's military assertiveness), The Wall Street Journal reports that the US Secretary of Defense has asked staff for military options in the South China Sea (as we have detailed China's land reclamation efforts):

    *U.S. MAY USE MILITARY TO CONFRONT CHINA IN SPRATLY ISLANDS DISPUTE: WSJ

    Having ironically commented on China's "bullying," it appears Nobel-Peace-Prize winner President Obama is preparing for an even bigger objective, amid China's rising threat to USD dominance (with Yuan liberalization and AIIB success).

     

    As The Wall Street Journal reports, the U.S. military is considering using aircraft and Navy ships to directly contest Chinese territorial claims to a chain of rapidly expanding artificial islands, U.S. officials said, in a move that would raise the stakes in a regional showdown over who controls disputed waters in the South China Sea.

    Defense Secretary Ash Carter has asked his staff to look at options that include flying Navy surveillance aircraft over the islands and sending U.S. naval ships to well within 12 nautical miles of reefs that have been built up and claimed by the Chinese in an area known as the Spratly Islands.

     

    Such moves, if approved by the White House, would send a message to Beijing that the U.S. won’t accede to Chinese territorial claims to the man-made islands in what the U.S. considers to be international waters and airspace.

    The proposal under consideration would be to send Navy ships and aircraft to within 12 nautical miles of only those built-up sites that the U.S. doesn’t legally consider to be islands, officials say.

    Under the U.N. Convention on the Law of the Sea, reclaimed features aren’t entitled to territorial waters if the original features are not islands recognized under the agreement, U.S. officials say. Under that interpretation, the U.S. believes it doesn’t need to honor the 12-mile zone around the built-up reefs that weren’t considered to be islands before construction there began.

     

    Several U.S. allies in the region have been privately urging the White House to do more to challenge Chinese behavior, warning Washington that U.S. inaction in the South China Sea risked inadvertently reinforcing Beijing’s territorial claims, U.S. officials said. Some allies in the region have, in contrast, expressed concern to Washington that a change in the U.S.’s approach could inadvertently draw them into a conflict.

     

    “It’s important that everyone in the region have a clear understanding of exactly what China is doing,” a U.S. official said. “We’ve got to get eyes on.” The U.S. has been using satellites to monitor building at the islands.

     

    In recent months, the White House has sought to increase pressure on Beijing to halt construction on the islands through diplomatic channels, as well as by calling out the Chinese publicly in recent press briefings and government reports.

    And it appears the US military has been testing the waters so to speak…

    U.S. military aircraft have repeatedly approached the 12-nautical-mile zone declared by China around the built up reefs. But to avoid an escalation, the planes haven’t penetrate the zone. A senior military official said the flights “have kept a distance from the islands and remained near the 12-mile mark.”

     

    U.S. planes have flown close to the islands where the building has been taking place, prompting Chinese military officers to radio the approaching U.S. aircraft to notify the pilots that they are nearing Chinese sovereign territory. In response, U.S. pilots have told the Chinese that they are flying through international airspace.

     

    The USS Fort Worth, a combat ship, has been operating in recent days in waters near the Spratlys. “We’re just not going within the 12 miles—yet,” a senior U.S. official said.

    Finally, it is worth noting that…

    The military proposals haven’t been formally presented to the White House, which would have to sign off on any change in the U.S. posture. The White House declined to comment on the deliberations.

     

    Officials said the issue is a complicated one because at least some of the areas where the Chinese have been doing construction are, in eyes of the U.S. government, legitimate islands, which would be entitled to a 12-nautical-mile zone.

    *  *  *

    As a reminder, China has been busy…

    Now, a series of satellite images have confirmed the construction of a 10,000 foot runway on the reef, which would appear to suggest that China may be planning on landing military aircraft such as fighter jets on the reclaimed islands. Here, in glorious HD, are the visuals accompanied by descriptions via the Asia Maritime Transparency Initiative:

     
     

    Satellite photography has identified three cement plants operating on the island.

     
     

    China has already constructed in excess of 60 semi-permanent or permanent buildings.

     
     

    At least 20 structures are visible on the southern side of the island (ZH: including a helipad).

     
     

    China is building an airstrip on the island. The airstrip is likely large enough to land nearly any Chinese aircraft.

     
     

    Images taken on April 11 show the runway more than one-third complete.

     
     

    Beijing is also installing port facilities which may be capable of docking military tankers.

    Full interactive report available here from the AMTI

     

    Here’s more color from NY Times on what this may mean from a military and geopolitical perspective:

     
     

    The runway, which is expected to be about 10,000 feet long — enough to accommodate fighter jets and surveillance aircraft — is a game changer in the competition between the United States and China in the South China Sea, said Peter Dutton, professor of strategic studies at the Naval War College in Rhode Island.

     

    “This is a major strategic event,” Mr. Dutton said. “In order to have sea control, you need to have air control…”

     

    In time, Mr. Dutton said, China is likely to install radar and missiles that could intimidate countries like the Philippines, an American ally, and Vietnam, which also have claims to the Spratlys, as they resupply modest military garrisons in the area.

     

    More broadly, he said, China’s ability to use Fiery Cross Reef as a landing strip for fighter and surveillance aircraft will vastly expand its zone of competition with the United States in the South China Sea…

     

    “We absolutely think it is for military aircraft, but of course an airstrip is an airstrip — anything can land on it if it’s long enough,” said James Hardy, Asia-Pacific editor for Jane’s Defense Weekly…

     

    “The main question is, what else would land there?” he said. “Unless they are planning to turn these into resorts — which seems unlikely, not least given the statement from the Foreign Ministry last week — then military aircraft are the only things that would need to land there.”

    And a bit more from Reuters: 

     
     

    Senator John McCain, chairman of the U.S. Senate Armed Services Committee, called the Chinese moves "aggressive" and said they showed the need for the Obama administration to act on plans to move more military resources into the economically important Asian region and boost cooperation with Asian countries worried by China.

     

    McCain referred to a U.S. intelligence assessment from February that China's military modernization was designed to counteract U.S. strength and said Washington had a lot of work ahead to maintain its military advantage in the Asia-Pacific.

     

    "When any nation fills in 600 acres of land and builds runways and most likely is putting in other kinds of military capabilities in what is international waters, it is clearly a threat to where the world's economy is going, has gone, and will remain for the foreseeable future," he told a public briefing in Congress.

     

    A spokesperson for the U.S. State Department said the scale of China’s land reclamation and construction was fueling concerns within the region that China intends to militarize its outposts and stressed the importance of freedom of navigation.

     

    "The United States has a strong interest in preservation of peace and security in the SouthChina Sea. We do not believe that large-scale land reclamation with the intent to militarize outposts on disputed land features is consistent with the region’s desire for peace and stability."

    *  *  *

    This comes at an interesting time for relations between Beijing and Washington. China’s recent move to evacuate foreign nationals from the embattled Yemeni port city of Aden marked the first time the rising superpower has participated in an international rescue effort. During the same week, state television indicated the country would begin its first patrol by nuclear submarine later this year.

    Meanwhile, the China-led Asian Infrastructure Investment Bank marks a coup in the post-war economic era, as the multilateral institution will seek to plug holes left by the US-dominated IMF and the Japan-influenced ADB, while simultaneously positioning the yuan to play a more prominent role in what is quickly becoming a new economic world order characterized by the ascendancy of the renminbi and the decline of traditional systems that have supported dollar hegemony such as petrocurrency mercantilism. While it’s unclear exactly how ambitious Beijing hopes to be in terms of turning the Spratlys into a military outpost, China’s bold development efforts underscore the degree to which the country isn’t timid when it comes to advancing its interests in the face of Western admonition.



  • NY Governor Probes Nuclear Plant 'Incident' As Oil Spills Into Hudson River

    Having explained to the general public that there was nothing to be concerned about, when an exploding transformer shut down at least one unit of the Indian River nuclear power plant, noting “no danger to public safety,” it appears the situation is not as ‘contained’ as officials hoped. As Sputnik News reports, thousands of gallons of oil that leaked into the Hudson River after the explosion has formed a gigantic oil sheen on the waterway. NY Governor Andrew Cuomo has demanded a probe into the incident, adding that Entergy and contractors will clean up the spill.

    • *CUOMO: PROBE ON WEEKEND INCIDENT AT INDIAN POINT PLANT ONGOING
    • *CUOMO SAYS OIL DISCHARGE RESULT OF FIRE IN A TRANSFORMER
    • *CUOMO: N.Y. WORKING WITH U.S. COAST GUARD TO MONITOR SITUATION
    • *CUOMO: NY, U.S. EVALUATING ENVIRONMENTAL DAMAGE TO HUDSON RIVER

    As Sputnik News reports,

    The oil made its way into the river following an explosion, fire, and leak that occurred Saturday at the Indian Point nuclear facility in Buchanan, about 40 miles north of Midtown Manhattan.

     

    According to the US Nuclear Regulatory Commission (NRC), oil leaked into the facility’s discharge drains during the fire, then into the river.

     

     

    However, “there is no doubt that oil was discharged into the Hudson River,” New York Governor Andrew Cuomo said at Indian Point on Sunday. “We have booms in the water now around the discharged pipe to collect any oil that may be in the river.”

     

    The fire did not cause the release of any radiation and did not pose a threat to workers or the public, according to a statement by Entergy Corp, the owner of the nuclear power plant.

     

    The Journal News cited a state official as saying the oil leak “left a sheen of 75-by-100 feet just south of the two reactors, and is likely expanding.”

     

    There is also a “notable odor” in the vicinity of the power plant, according to a boat crew for the watchdog group Riverkeeper, which patrolled the Hudson off Indian Point after the transformer fire.

    *  *  *

    According to the Journal News, US Rep. Nita Lowey of New York said the NRC should not renew Indian Point’s license for their reactors, a matter the federal body is currently considering.

    “This latest episode proves that Indian Point remains a serious threat to public health and safety,” Lowey said in a statement. “We are extremely fortunate that a catastrophic scenario did not unfold, and I urge officials to conduct a swift and thorough investigation.”

     



  • OBaMa'S NeVeRENDiNG SToRY…



  • Continued Weak Consumer Spending "Puzzles" BofA

    BofAML’s Michelle Meyer is “puzzled” at why the US consumer is not the spendaholic her textbooks said they should be by now…

    A setback after the bounce in March

    Based on BAC internal data, which tracks spending on credit and debit cards, consumer spending slowed in April. Retail sales ex-autos declined 0.1% mom seasonally adjusted after climbing 0.8% in March. It is prudent to smooth through the last three months, which reveals an average monthly gain of 0.3%. 

    Given the great deal of noise in the data, it is helpful to examine spending trends by sector.

     

    Department store sales were the weakest, maintaining the post-recession trend of contraction. The housing-related sectors were also sluggish, with a decline in spending on home improvements and home goods. There seemed to be a weaker trend to the former, but the drop in home goods looked like a reversal from recent strength. On the other end, there was a notable gain in spending at electronic stores, which we think may have partly owed to the launch of the Apple iWatch. As we show in Chart 2, prior releases of Apple products caused notable spikes in spending, which the seasonal adjustment process did not capture.

     

    The gain this time was modest relative to previous iPad and iPhone releases. This is likely because much of the sales were on pre-order, which means that actual sales will happen with a lag.

    We are left puzzled by the weak April consumer spending data – we expected the consumer to be a tailwind for growth in this year, offsetting the drag from weaker investment and manufacturing. Even accounting for the softer jobs data in the past two months, the labor market added an average of 255,000 jobs a month over the past six months. Consumers have benefited from lower gasoline prices and confidence has picked up.

    If consumer spending does not accelerate, we will have to question our forecast for GDP growth to accelerate back above 3.0% in the second half of the year. 

    *  *  *

    It appears we are going to need a new excuse…



  • How Much Longer Can The Oil Age Last?

    Submitted by Gaurav Angihotri via OilPrice.com,

    History has been so fascinated with oil and its price movements that it is indeed hard to imagine our future without oil. Over the last few months, we have witnessed how oil prices have fluctuated from a 6 year low level of $42.98 per barrel in March 2015 to the current levels of $60 per barrel. It is interesting to note that, in spite of the biggest oil cartel in the world deciding to stick to its high production levels, the oil prices have increased mainly due to falling US crude inventories and strong demand. However, the current upward rally might be short lived and there may yet be another drop in the international oil price when Iran eventually starts pumping its oil into the market at full capacity, potentially creating another supply glut. In these endless price rallies, it is important to take a holistic view of the global energy industry and question which way it is heading. Are the dynamics of global energy changing with current improvements in renewable energy sources and affordable new storage technologies? Can the oil age end in the near future? Will we ever stop feverishly analyzing the rise and fall of oil prices? Or, will oil remain irreplaceable in our life time?

    Are Renewables ready to take over?

    With little or no pollution, renewables like solar, wind and biofuels are viewed by many as a means to curtail the rising greenhouse emissions and replace oil as a sustainable alternative. There is little doubt as to why China, US, Japan, UK and Germany, some of the world’s biggest energy gluttons have invested heavily in renewables. 

    EIAENergyConsumption

    Image Source: EIA

    However, according to a study conducted by Frankfurt School-UNEP Collaborating Centre for Climate & Sustainable Energy Finance, the United Nations Environment Program (UNEP) and Bloomberg New Energy Finance, the total global investments in renewables fell by 14% to $214 billion in 2013. One of the major reasons of this fall was the backing out of some big oil firms such as BP, Chevron and Conoco Phillips. These companies significantly reduced their investments in renewables and decided to focus on their ‘core’ business; that is, oil and gas. As per Lysle Brinker, an oil and gas equity analyst at IHS "It's not their (Big oil majors) strong suit to be spending a lot of money and time on renewables when they are definitely challenged in their core industry."

    GlobalNewInvestmentInRenewables

    However, if we take the example of the solar industry, where the cost of an average photo voltaic panel is declining at a rate of more than 10% per annum we see that, in spite of reduced global investments, renewables still hold a lot of promise. Some of the major integrated oil and gas companies such as Shell, Total and Statoil have actually been slowly and steadily increasing their renewable related investments. Shell is investing big time in biofuels, while Total, with its stake in Sunpower, is investing substantially in the solar sector while Statoil is placing its bets on wind energy. This shows that renewables are a phenomenon that many believe can give oil a run for its money.

    Is Saudi Arabia sensing an end of oil age?

    “No one can set the price of oil – It is up to Allah”, this is what Saudi Arabia’s oil minister Ali Al Naimi had to say while speaking to CNBC recently. OPEC, which holds around 40 % of the world’s crude output, is showing no signs of reducing its production levels, even if Iran starts pumping more oil after sanctions are lifted should the international nuclear deal with P 5+ 1 counties prove successful. Many see this move by OPEC as a means to protect its market share and drive US shale players out of business. But is the decision of OPEC (especially Saudi Arabia) part of a much bigger game? The Saudis, who lead OPEC, would obviously be very interested in delaying ‘Peak Oil Demand’ after which global demand for oil would start declining steadily, along with Saudi oil revenues.

    According to Bank of America and Merrill Lynch commodity researchers, if crude prices stay in the range of $50 – $70, peak oil demand would be pushed beyond 2030. This delay in peak oil demand would definitely hurt renewables and anyone who is investing in them. As per Alex Thursby, Chief Executive at the National Bank of Abu Dhabi, “Renewable energy technologies are far further advanced than many may believe: solar photovoltaic (PV) and on-shore wind have a track record of successful deployment, and costs have fallen dramatically in the past few years. In many parts of the world, indeed, they are now competitive with hydrocarbon energy sources. Already, more than half of the investment in new electricity generation worldwide is in renewables. Potentially, the gains to be made from focusing on energy efficiency are as great as the benefits of increasing generation. Together, these help us to reframe how we think about the prospects for energy in the region.”

    Yes, OPEC has sensed the end of its glory days. And it is obvious that Saudi Arabia, with 85% of its export revenues coming from petroleum exports does not want the oil age to end anytime soon.

    What can we expect?

    If we look at China, the second biggest global consumer of oil, we find that its oil consumption rate constitutes about one third the world’s total consumption rates and shows no signs of slowing. In fact, EIA even predicts steady growth of China’s oil production reaching 4.6 million barrels per day in 2020 and 5.6 million barrels per day in 2040.

    ChinaOilProductionAndConsumption

    China has also invested heavily in building its strategic petroleum reserves and plans to expand them to 500 million barrels by 2020.

    Now take India, a country that is considered by many as the next solar investment hotspot. India has been investing heavily in building its own strategic petroleum reserves and its public sector undertaking, Oil and Natural Gas Corporation Limited (ONGC) is planning to invest about $62 billion on its discoveries in Krishna Godavari Basin block KG-D5.

    These are two of the world’s fastest growing economies that are investing heavily in renewables but also safeguarding their oil and gas aspirations. Moreover, when we analyze past oil price trends, we find that volatility related to geopolitical equations, speculations, wars, economic sanctions and climate change have always kept the global energy markets guessing about the future. The world is still myopic when it comes to energy. Yes, it wants to embrace renewables but not at the cost of oil. Whatever happens to oil prices in the coming years, one thing is certain: that the age of oil isn’t ending anytime soon, at least not in the next 30 years.



  • Dilbert On College Graduate Career Options

    More tips for the most-indebted graduate class ever...

     

     

    *  *  *

    Dear Class of 2015, 

    Because we recognize your plight, allow us to provide you with a bit of friendly advice as it realtes to your student loans. Once you are uncerimoniously thrown from your dorm into the less-than robust US jobs market, you will likely discover that contrary to what you were told in your economics courses, the US economy is but a shadow of its former self.

    Because you probably didn't study to become a petroleum engineer, you will likely find your student debt burden to be quite onerous. The key to having it discharged is to make just enough money to stay clear of bankruptcy, but not enough to really survive above the poverty line. This is because it's hard to have student debt discharged in the event you go completely broke.

    However, if your discretionary income is so small as to render you incapable of making payments, the government will start you on a program whereby a monthly payment of zero dollars counts towards the 300 "payments" you need to make to have your debt forgiven. Toe this line carefully (i.e. don't slip up and start making too much discretionary income) and the entirety of your student debt will be forgiven in 25 short years without your ever having to pay a dime.

    You're welcome,

    Zero Hedge



  • Goldman Fears Crude Oil's Self-Defeating Rally

    Market rebalancing derailed by price rally…

    The oil market rebalancing has started: weak prices in 1Q15 pushed producers to cut capex while supporting demand. This led to a recovery in prices further fueled by relief that US crude stocks would not breach capacity, strong demand and rising Middle East tensions. The rise in prices was further supported by oil screening as cheap relative to E&P equities, drawing cross-asset investors into buying crude.

     

     

    But, as Goldman Sachs details below, while the rally in oil prices has closed the valuation gap to equities, these trade on historically high multiples and oil itself is now trading at a premium to its own still weak fundamentals in our view.

     

    Goldman therefore views this rally as derailing this rebalancing and setting the stage for sequentially weaker prices, especially with oil speculative length as long as when oil traded at $100/bbl.

     

     

    ..given still weak current and forward fundamentals

    First, while US crude builds turn to draws, it is total petroleum stocks that matter, as rising product stocks will depress refining margins and weigh on crude prices.

     

    Second, our updated supply and demand balance points to an only gradual decline in elevated inventories in 2016 as production growth from low-cost producers such as Saudi, Iraq and Russia help offset strong demand growth and declining non-OPEC ex. US production. Further, we don’t see the US rig curtailment as large enough yet to put production on a persistent downward trend with risk to our flat Iranian production path skewed to the upside.

     

    Third, we believe that WTI oil prices settling above $60/bbl will eventually lead US producers to ramp up activity, draw down a large well backlog and hedge, given improved returns with costs down by c.20%.

    Fourth, the broader imbalance of too much capital looking for opportunities in the energy space remains intact

    The imbalance of too much capital looking for opportunities in the energy space remains intact. For example, the combined dry powder for M&A from the three US oil majors and of North America natural resources private equity funds currently stands at $150 billion, above our analysts forecast capex for the US E&P sector in 2015.

     

     

    While ultimately, the long-run asset value of shale oil reserves bodes well for their ability to attract capital, capital investments are now part of the adjustment process given the collapsed time lag shale has created between when capital is spent and when production rises. With credit and equity access not currently part of the adjustment process, the market has one lever left to balance itself: cash flow through oil prices. This large availability of low-cost external capital therefore exacerbates the need for sustained low prices in our view to keep US producing assets from quickly being redeployed in a lower cost environment.

      Sequential price decline still required

      As a result, while low prices precipitated the market rebalancing, we view the recent rally as premature with crude oil prices expensive relative to current and forecast fundamentals. Ultimately, with evidence at hand that US producers responded aggressively to low prices, the burden of proof has shifted to how they will respond to the recent recovery and whether low-cost producers can sustainably deliver higher production.

       

      This may as a result delay the sequential decline in prices until this fall, especially as we approach a period of seasonally stronger summer demand.

       

      Calling the timing for prices to sequentially decline is challenging in the short run as we approach a period of seasonally stronger summer demand and China SPR fill. Nonetheless, we expect evidence of this fundamental weakness and expected US producer reaction to gradually materialize in the US weekly rig count, hedging flows, weakening refinery margins and monthly OPEC production and rig count growth.

      *  *  *

      Source: Goldman Sachs



    • A Tale Of Two Graphs – Why Bubble Finance Will Fail

      Submitted by David Stockman via Contra Corner blog,

      On Friday the BLS reported, among other things, that full-time employment in April had dropped by 252,000 from the prior month and that the weekly earnings of production workers had risen by the grand sum of 67 cents (0.1%) before inflation and taxes.  But why should still another confirmation that the main street job market is dead in the water stop the robo-traders from another romp higher?

      In fact, this incongruous spectacle of dead wages and soaring financial assets has been going on for several decades now——a transparently obvious trend obfuscated by the unrelenting recency bias of the MSM and the authorized Wall Street/Washington narrative. So let Friday’s incongruous stock market rip serve as a portal into the ugly interior history of how central bank bubble finance has fostered an existential crisis in what remains of American capitalism.

      On the main street side, this isn’t a matter of sluggish recovery from a mysterious financial crisis that arrived, apparently, on a comet from deep space in September 2008. Alas, for three decades running now, the constant dollar weekly wages of full-time workers have been flat as a pancake.

      And let’s be clear. We are not talking here about after school jobs held by quasi-perpetual students, the meager pay of moonlighting moms or the episodic work gigs of society’s tens of million of loosely attached drifters.

      To be sure, the ranks of these marginal job holders have become immense according to the Social Security Administration’s most recent authoritative data—– and it is “authoritative” compared to most of Washington’s statistical mill flotsam because its based on the payroll records of millions of employers who generally do not withhold taxes from ghosts. To wit, there were about 50 million low wage job holders (under $15k/year) who as a group earned an average gross pay of just $6,000 in 2013. So unless there is wholesale violation of the minimum wage laws, upwards of one-third of the US labor force of 155 million is working about 15 hours per week at the lowest lawful pay rate per hour.

      Call that a giant social problem. In truth, however, its not the half of the real crisis. The latter is shown in the graph below, which is for “full-time” workers defined by the BLS as being on the job at least 35 hours per week.

      Thirty years after it was ostensibly “Morning in America”, full-time wage workers have gained only 0.1% per annum in their weekly pay envelope. That’s a rounding error—even if you believe that the BLS’ statistical shenanigans have actually captured cumulative inflation since 1986. In the real world, of course, actual inflation is much higher—-so real wages have self-evidently been sinking for 30 years.

      1986-2015 CAGR……..0.1%

      Nor does this stagnant trend in real wage rates  tell the entire story. The Friday “jobs” report also showed that the share of the prime work age population holding any kind of job—–even a few hours per week “coding” or delivering pizzas—–is now down by fully 10 percentage points from the level it gained after women had fully entered the labor force in the 1990s.

      Employment-16-54-051115 

      Needless to say, even as the main street economy of work and production has been going nowhere, the financial system has erupted skyward. During the last 35 years according to the Fed’s flow-of-funds calculations, the sum of credit market debt outstanding plus the market value of equities has soared from $6 trillion to $95 trillion or by 15X. By contrast, since 1981 the nominal GDP has risen by only 5X.

      This is “financialization” in its full brobdingnagian glory.  A financial sphere which had occupied 212% of GDP in 1981 now weighs in at 537%.  And, no, the starting figure does not represent some temporarily aberrant low bequeathed by the hapless Jimmy Carter; the 1981 ratio was actually the historic norm. During the halcyon times of 1955, for instance, the sum of credit market debt and equity market value actually posted slightly lower at 197% of GDP.

      Total Marketable Securities and GDP - Click to enlarge

      Total Marketable Securities and GDP – Click to enlarge

      So the elephant in the room is the nearly $90 trillion of gain in financial market value during the last 35 years. In a word, it represents a heaping pile of inflation——both the traditional CPI kind and the new style financial inflation inaugurated by the Greenspan Fed, as well.

      Stated in constant 2015 dollars, real GDP was $7.2 trillion in 1981, meaning that it has grown by about 2.5X over the last three and one-half decades to $17.7 trillion at present. All the rest of the 15X gain in financial market value since then is not reflective of capitalism, or human greed or even “deregulation” at work. This is the baleful handiwork of a rogue central bank.

      Total Marketable Securities % of GDP - Click to enlarge

      Total Marketable Securities % of GDP – Click to enlarge

      How did this massive inflation of the financial sphere happen? In a word, financial repression and the doctrine of wealth effects.

      Since the time of Greenspan’s abject panic in the wake of Black Monday in October 1987, the Fed has chronically pegged the money market rate below market clearing levels, thereby fueling an embedded carry trade that has mushroomed relentlessly. And this isn’t just about the record $485 billion of margin debt outstanding or even the several trillions of repo trades that are captured by current reporting systems.

      No, the entire financial system is infected by the endemic carry trades which result from falsification of the money market by the Fed. There are hundreds of trillion of futures, options and OTC “bespoke” contracts outstanding, for example, but they are inherently and systematically mispriced owing to the pegging of money market rates at zero percent for the last 7 years and at a fixed, below-market rate for the past 30 years. The economic evil is as much in the pegging as in the zero bound level because it is the powerhouse peg of the fed that reduces the risk of carrying financial assets with cheap short-term borrowings.

      And the wealth effects doctrine only compounds the deformation. That is, it reduces the price risk of carrying financial assets with high levels of repo or options leverage because of the Fed’s “put” under the market. The latter, of course, is an anomalous artifact of bubble finance which is believed by nearly 100% of the gamblers but denied by virtually all of the money printers.

      But the proof is in the pudding. Downside hedges (i.e. puts on the S&P 500 in their most basic form) are dirt cheap owing to the willingness of market makers to collect nickels on downside insurance, knowing that the Fed is pledged to keep the steamroller of 10-20% market breaks at bay. Indeed, the S&P 500 path shown below could not happen in a free market—–even one with far more healthy fundamentals that the floundering recovery of the past six years.

      In short, in an honest free market gamblers would have to pay more for their carry funding; face much greater uncertainty as to its price and availability; and dissipate for more of their winnings hedging their portfolios than is required under the current central bank driven regime of bubble finance. The contra factual thus presents itself. Namely, would the value of corporate equity have soared from $1.3 trillion to $36.5 trillion or by 28X since 1981 in an honest free market?

      Next, throw into the mix the Fed’s severe interest rate repression in the bond market and you get more financial inflation. When debt is priced drastically below its economic cost and receives a deep tax subsidy to boot, a variation of the supply side theorem manifests itself. Namely, when the cost of servicing debt capital is made artificially low, you get a lot more of it—–from the public and private sectors alike. As to the former, the present day proclivity of politicians to kick-the-fiscal-can is a direct consequence of financial repression.

      With respect to the latter, consider the explosion of corporate bond issuance, which in 1981 amounted to just $550 billion of outstandings or a mere 17% of GDP. Today that figure is $11.6 trillion or 20X larger and amounts to 65% of GDP. Yet, self-evidently, that explosion of new borrowings did not go into the acquisition of productive assets. If it had, real GDP would have grown a lot more rapidly than the 2.7% rate recorded for the 33 years ending in December 2014—-and by the mere 1.1% recorded during the sub-period since Q4 2007.

      Instead, the debt was overwhelmingly used for financial engineering—-or what is ultimately a Ponzi scheme by which new corporate borrowings are used to shrink the outstanding float of stock via LBOs, stock buybacks and cash M&A deals. Consequently, carry trade gamblers are enabled to bid up the shrunken supply of secondary market equities to ever higher levels.

      Not surprisingly, therefore, the US corporate sector’s market capitalization has exploded from $2 trillion in 1981 to $48 trillion at present. That’s right. The nominal value of corporate debt at par plus equity at market has risen by 24X, and most of that gain has occurred since the inauguration of monetary central planning under Greenspan in October 1987.

      Total Corporate Securities and GDP - Click to enlarge

      Total Corporate Securities and GDP – Click to enlarge

      The above graph surely hints at the dangerous instability fostered by bubble finance. And it is not by happenstance that the Greenspan Fed essentially threw in the towel when it authorized so-called “sweep accounts” on bank deposits in the early 1990s—-a maneuver that essentially eliminated reserve requirements on traditional checking account money. Not only does this mean that required reserves in the banking system now amount to a laughably microscopic 0.4% of deposits, but the whole apparatus is irrelevant anyway because banks are now only a minor source of new credit in the bubble finance system.

      What central bank bubble finance has actually unleashed is a self-fueling form of asset-based credit creation. The options, futures and currency markets, for example, are based on what amounts to loans which are collateralized by small fractions (1-10%) of the underlying’s current market value. As valuations rise ever higher, collateral values follow and implicit leverage grows. It is a financial beanstalk.

      At the end of the day, the collateral based finance embedded in the current $95 trillion level of US credit and equity outstanding is far more dangerous than the old fashioned fractional reserve lending of the pre-1990 banking system. At least under the old regime, bank regulators and central bankers like Volcker were steeped in the tradition of safe and sound commercial banking.

      By contrast, the post-Greenspan central bankers have opened a Pandora’s Box of market based hypothecated-finance, and they do not have a clue about the enormous resulting bubble they have unleashed. Nor do they understand that this $95 trillion monster is a voracious rent-seeking vampire squid that makes Goldman Sachs look little a piker. That is, the relentless trading, churning and synthesizing of assets and derivatives within the giant bloated system of finance has almost nothing to do with raising or allocating capital for productive use.

      Instead, this giant $95 trillion pool is where honest savings from the household and business sectors go to be scalped, appropriated and stolen by the hedge funds, dealers, financial engineers and gamblers which populate the casino. And it is the excess girth of it that does the damage, magnifying the rent extraction and dead-weight economic costs by orders of magnitude.

      Stated differently, had the US economy not been “financialized” over the past 35 years and if the historic 200% ratio of credit market debt and corporate equity at market value still prevailed today, the size of the financial system would be $35 trillion, not $95 trillion. On a playing field $60 trillion smaller would there not be far fewer fast money sharks churning, scalping and strip-mining the secondary markets in stocks, bonds, loans and their derivatives?

      But here’s the thing. Maybe 100,000 people “live large” off today’s $95 trillion casino. By contrast, according to the Social Security Administration’s wage records, there were 100 million workers who held any kind of paying job during 2013, who earned a collective total of just $1.65 trillion that year. That amounts to the incredibly small sum of just $16,500 per average worker——and not for a small slice of the labor force but fully two-thirds of all Americans with a job. 

      In short, full-time wage workers have been on a treadmill for decades; average pay for the overwhelming share of jobs celebrated by the talking heads on payroll Friday is pitifully low; and the denizens of the Eccles Building keep their heavy foot on the monetary accelerator as they witlessly inflate a $95 trillion financial bubble—-a true financial vampire squid that they stubbornly deny even exists.

      I have called this a tale of two graphs. But what it really describes is a clear and present danger to American capitalism fostered by an unelected monetary politburo in thrall to its own lust for power and mesmerized by its own doctrinaire group think. The tragedy is that nothing can stop them except the thundering crash of the gargantuan bubble they have single handedly enabled.



    • The Potatoes Of Wrath: Kerry Caption Contest

      John Kerry came, read Putin a long list of grievances that the US has with Russia’s ongoing opposition to everything Obama does around the globe and prevents him from setting a unipolar global agenda, and left, but not before he handed the Russian a basket full of potatoes.

      Perhaps next time ketchup will be more appropriate? Or maybe a carrot?

      Source



    • The Face Of Baltimore You Won't See In The News

      We suspect there will be less rioting and looting after this horrifying clip of a group of Baltimore teens kicking and brutally attacking a Maryland man after he tried to break up a fight…

       

       

      Warning: scenes are graphic…

      As WBALTV reports,

      Richard Fletcher was beaten by a gang after asking two girls to stop fighting on his truck in Dundalk, Maryland.

       

      Man, 61, left with horrific injuries and facing $400,000 medical bills after near fatal attack by pack of FIFTY teens, including girls, when he tried to break up a fight

       

      A 17-year-old boy has been charged as an adult for his role in beating a 61-year-old alongside a group of approximately 50 other teens in Baltimore, Maryland, on April 22.

       

      Richard Fletcher was brutally beaten by the teens after he went outside to ask two girls who were fighting on top of his truck to move along and continue their dispute elsewhere.

       

      The mob of teens began to hit and kick Fletcher until he fell to the ground, but the attack didn't end.

       

      After the beating last month, Fletcher was left with broken eye sockets, a broken nose, broken ribs and a brain bleed, according to CBS Baltimore.

       

      He also needed a blood transfusion.

       

      Police have made two arrests in the case and are hoping to bring all of the teens, who are believed to be students at Baltimore Community High School, that participated in the beating to justice.

       

      Antoine Lawson has already been charged with attempted murder and a 15-year-old girl was charged with assault.

      Joe Lamb, who owns a business nearby, saw the attack and said he wasn't all that surprised with what happened based on how the neighborhood has been, WBAL reported.

      He said: 'It has gotten out of hand now, gone too far. 'The kids walk on top of cars, kick dogs, let dogs out, throw trash, steal milk from school and throw it at houses, threaten neighbors with bodily harm.'

      *  *  *



    • NBC Confirms Obama Lied About Bin Laden Raid

      Submitted by Mac Slavo via SHTFPLan.com

      Pulitzer Prize winning investigative journalist Samuel Hersh claimed yesterday that the Obama administration lied to the American people about certain aspects aspects of the 2011 raid that killed Osama Bin Laden. According to Hersh, the United States did not act alone when Navy SEALs were sent to capture or kill the world’s most wanted terrorist. The real story, according to the report, is that members of Pakistani intelligence services were privy to the raid months before it happened and that it was a “walk-in” Pakistani intelligence officer who gave up the location of Bin Laden rather than a CIA operation that tracked him down by following various couriers. Further, it has been claimed that Bin Laden was not buried at sea the way the Obama administration said, but rather, his limbs were simply thrown from the helicopter after the mission (suggesting that some portion of his body, perhaps his head, were retained for posterity’s sake).

      It’s  a markedly different story than the one President Obama told on the night he announced Bin Laden’s death. In that nationally televised speech the President took credit for ordering the raid and made it clear it was a unilateral action involving only American assets.

      The Obama administration has spent the last 24 hours working to discredit the story. Pentagon spokesman Col. Steve Warren said the report from Hersh was “largely a fabrication” with “too many inaccuracies.” The White House says the Hersh’s investigation is riddled with inaccuracies.

      But according to NBC News, which has reportedly been conducting their own investigation for the last several years, Hersh’s claims aren’t that inaccurate after all.

      Two intelligence sources tell NBC News that the year before the U.S. raid that killed Osama bin Laden, a “walk in” asset from Pakistani intelligence told the CIA where the most wanted man in the world was hiding – and these two sources plus a third say that the Pakistani government knew where bin Laden was hiding all along.

       

      The U.S. government has always characterized the heroic raid by Seal Team Six that killed bin Laden as a unilateral U.S. operation, and has maintained that the CIA found him by tracking couriers to his walled complex in Abbottabad, Pakistan.

       

      The new revelations do not necessarily cast doubt on the overall narrative that the White House began circulating within hours of the May 2011 operation. The official story about how bin Laden was found was constructed in a way that protected the identity and existence of the asset, who also knew who inside the Pakistani government was aware of the Pakistani intelligence agency’s operation to hide bin Laden, according to a special operations officer with prior knowledge of the bin Laden mission. The official story focused on a long hunt for bin Laden’s presumed courier, Ahmed al-Kuwaiti.

       

      …

       

      The NBC News sources who confirm that a Pakistani intelligence official became a “walk in” asset include the special operations officer and a CIA officer who had served in Pakistan. These two sources and a third source, a very senior former U.S. intelligence official, also say that elements of the ISI were aware of bin Laden’s presence in Abbottabad. The former official was emphatic about the ISI’s awareness, saying twice, “They knew.”

      Source: NBC News

      Video Report:

       

      The one thing that President Obama could hail as a success during his tenure as President has now been exposed as an outright lie.

      It looks like all those ‘conspiracy nuts’ who took issue with the “official” story following the President’s original announcement of bin Laden’s death were not so crazy after all. There’s a reason millions of Americans have lost trust in their government, and especially with the sitting President of the United States. It’s because we have been consistently lied to about anything and everything of any significance.

      What else are they lying about?

      Fast and Furious gun running? Economic recovery? Official unemployment numbers? Jade Helm military exercises? The Ukraine conflict? Or, what about the deaths of SEAL team members that were supposedly involved with Bin Laden raid?

      Flashback: Representative Joe Wilson breaks State of the Union Decorum when he shouts “You Lie” during President Obama’s speech.

      How right he was…



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