tag:blogger.com,1999:blog-8533960527900905822024-03-07T20:56:02.035-08:00Blog AGCAnonymoushttp://www.blogger.com/profile/14547106675749492684noreply@blogger.comBlogger50125tag:blogger.com,1999:blog-853396052790090582.post-67565893186424415442015-01-20T02:44:00.000-08:002017-01-02T01:40:55.862-08:00Is the TransPacific Partnership Being Brought Back From the Dead?<span style="font-family: Arial, Helvetica, sans-serif;">With a new Republican Congress, and Obama himself a Republican who occasionally wears Democratic clothing, the Administration is making noise that the TransPacific Partnership and its ugly sister, the Transatlantic Trade and Investment Partnership, are moving forward in a serious way. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">But the Administration tried that sort of messaging last year to keep up a sense of inevitability about these regulation-gutting, mislabeleed trade deals, when reality was very different. Democrats, joined by a not-trivial block of Republicans, revolted due to the unheard levels of secrecy being maintained around the deal (for instance, the Administration refused to provide current versions of draft language) as well as, for many of them, what they had inferred about the content. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Needless to say, the Republican majorities may well change that dynamic. But what about the considerable opposition for the TransPacific Partnership’s hoped-for foreign signatories, particularly Japan? You’d think the negotiations were full steam ahead based on a Japan Times article last week, <a href="http://www.japantimes.co.jp/news/2015/01/17/business/economy-business/japan-u-s-target-reaching-broad-tpp-agreement-at-march-meet/#.VLypm2Cxrgm" rel="nofollow" target="_blank">Japan, U.S. target reaching broad TPP agreement at March meet</a>. Key sections:</span><br /><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Japan and the United States have agreed that 12 countries discussing a Trans-Pacific Partnership free trade deal should hold a ministerial meeting in the first half of March to reach a broad agreement, informed sources said on Friday… </span></blockquote><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Japanese and U.S. officials signaled that the two sides narrowed gaps over auto trade, during the latest Tokyo session. Deputy chief TPP negotiator Hiroshi Oe said he strongly feels that the United States is serious about concluding talks successfully. </span></blockquote><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">But Japan and the United States remain apart over farm trade. Elsewhere in the broader TPP talks, the United States and emerging market economies such as Malaysia are in dispute over intellectual property protection.</span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Yves here. If you read the text closely, there is less here than meets the eye. The two sides have agreed to talk again. And Oe’s remark is wonderfully ambiguous. It’s only about US eagerness, not about where the Japanese are.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">We decided to check in with NC’s man in Tokyo, Clive. His report:</span><br /><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">There’s been some on-and-off speculation in the Japanese press about what U.S. lawmakers in the post-midterms Congress could or couldn’t do, might or mightn’t do, how it does change the prospects for TransPacific Partnership, how it leaves things much as they were… and so on. As you’d expect with speculation on that subject, you never get any definitive conclusions. But once in a while you get pieces like the Japan Times’ one rehashing the “U.S. really wants to conclude a deal very soon” line – but without saying why the long-standing areas of disagreement might magically be resolved.</span> </blockquote><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">And for each vaguely encouraging article which is in the JP media, you get several ones like this <a href="http://mainichi.jp/select/news/20150117k0000m020109000c.html" rel="nofollow" target="_blank">from last Friday’s Mainichi newspaper</a> which is representative of a now increasingly downbeat set of reports appearing. The headline reads “TPP: For an Agreement, the US is ‘Really Serious’… Furthermore Japan Shares a Sense of Impending Crisis” which sets the negative tone for what is drawn out in the remainder. The feature goes on to explain that the well understood areas of disagreement between the U.S. and Japan in the TPP negotiations such as agriculture remain unresolved and quotes Japanese negotiators again trotting out the familiar phrases saying that “more serious problems remain, there is still considerable [negotiating] work to do”. </span></blockquote><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Once you go outside of Japan’s MSM (where verifiable facts get, um, a bit thinner on the ground – but of course that can often be where the real stories can be found!) the TPP negotiations are being reported as being in an even more dire impasse. The Iza news blog – amongst many others – had <a href="http://www.iza.ne.jp/kiji/politics/news/141223/plt14122311480004-n3.html" rel="nofollow" target="_blank">this from late December last year</a> which is credited to the Sankei newspaper (a reasonably respectable outlet) which then dropped the story and is no longer listed in its online archive, but it was still carried extensively in the news aggregator sites. The article says that Japan’s chief negotiator Amari reportedly shouted at USTR Froman “Japan isn’t a vassal state of the U.S.!” (which I’d also translate as “Japan isn’t a U.S. colony”) with the December TPP negotiation meeting turning into a right old slanging match – real handbags at dawn stuff. Some very unkind things were apparently said about Froman and his “negotiating” “skills”. </span></blockquote><blockquote> <br /><span style="font-family: Arial, Helvetica, sans-serif;">I’d say that the Japan Times story is more an attempt by official channels (either in the U.S. or Japan – or perhaps both) at damage limitation to counter the increasingly dire stories leaking out about the level that the TransPacific Partnership negotiations have sunk to than anything to be taken too seriously. </span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Even though the degree to which Froman has overplayed his hand is turning out to be a huge benefit to US citizens, relying on his continued ineptitude is still taking a risk. When you have time, please call or write your Representative and Senators and tell them how you and people you know are clued into how terrible the TransPacific Partnership is. Remind them it will be used to weaken banking regulations and you don’t want them to be approving pro-bailout policies by supporting the TTP and the TTIP. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><a href="http://www.nakedcapitalism.com/2015/01/transpacific-partnership-brought-back-dead.html"><span style="font-family: Arial, Helvetica, sans-serif;">Source</span></a>Anonymoushttp://www.blogger.com/profile/14547106675749492684noreply@blogger.com0tag:blogger.com,1999:blog-853396052790090582.post-55492220618593519842015-01-19T03:26:00.000-08:002017-01-02T01:40:55.852-08:00ECB Stimulation: The Trap Closes<em><span style="font-family: Arial, Helvetica, sans-serif;">European Economy ... No More Excuses for Draghi ... For months, European Central Bank President Mario Draghi has hinted that he's ready to announce a full-blown program of quantitative easing. [Now] the EU Court of Justice's advocate general cleared away a possible legal obstacle. With prices in the euro area now falling, any further delay would be inexcusable. The euro zone has gone from bad to worse, and it is dragging the world economy down with it. The World Bank just slashed its 2015 growth forecast for the euro area to 1.1 percent, down from June's estimate of 1.8 percent. The forecast for global growth was cut to 3 percent from 3.4 percent. Europe's economies desperately need an injection of demand, and the ECB can deliver that with QE. – Bloomberg</span></em><br /><em><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></em><span style="font-family: Arial, Helvetica, sans-serif;"><strong>Dominant Social Theme: </strong>Only the European Central Bank can save us now.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><strong>Free Market Analysis: </strong>So now it begins. Last week the EU Court of Justice advocate general ruled that the central bank could purchase sovereign debt.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">One by one, the hurdles are toppling and the reality of ECB market purchases grows closer. Of course, last year the German constitutional court ruled – understandably – that such purchases are NOT constitutional. This is setting up a significantly adversarial environment and one wonders how it will end.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">According to Bloomberg editors who penned the above editorial, the "end" should come quickly with Draghi implementing a quasi-QE as fast as possible. There is apparently no time to waste.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;">Here's more:</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><em><span style="font-family: Arial, Helvetica, sans-serif;">Legal finding said that ECB purchases of <a href="http://www.thedailybell.com/definitions/params/id/2409/">sovereign debt</a> are permissible. It referred to an existing ECB program called Outright Monetary Transactions -- which isn't quite QE but which does involve purchases of government bonds. The court won't rule for another four to six months, but it's likely to follow the advocate general's guidance. That's good enough for Draghi to act now.</span></em><br /><em><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></em><em><span style="font-family: Arial, Helvetica, sans-serif;">Many in Europe, especially in Germany, remain opposed. They see QE as a ruse by which the richer members of the currency bloc will end up paying for the fiscal misadventures of their neighbors. They point out that Europe's single-currency treaty forbids "monetary financing of the member states." Hans-Werner Sinn, head of Germany's highly regarded Ifo economic institute, this week accused the ECB of scaremongering about deflation to justify bailing out the weaker economies.</span></em><br /><em><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></em><em><span style="font-family: Arial, Helvetica, sans-serif;">These reservations are understandable, but when the treaty was drawn up, nobody envisioned a recession as severe as the one Europe now finds itself trapped in. This is an economic emergency, and exceptional measures are needed. The U.S. <a href="http://www.thedailybell.com/definitions/params/id/1855/">Federal Reserve</a> has shown that QE can provide needed monetary stimulus when interest rates cannot be cut any further. No plausible alternative presents itself.</span></em><br /><em><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></em><em><span style="font-family: Arial, Helvetica, sans-serif;">The new legal finding isn't as permissive as it should have been. It opposes bond buying in the so-called primary market, restricting the program to secondary-market purchases of existing securities. That's a pity, because it narrows the ECB's options. The finding, again needlessly, warns about price distortions resulting from the ECB's holding on to bonds until they mature. But its main point -- that monetary policy should be for the ECB rather than the courts to design -- is wise.</span></em><br /><em><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></em><span style="font-family: Arial, Helvetica, sans-serif;">Above, we read what we have already explained numerous times: That emergency situations inevitably expand government power. In the West, the constant expansion of government power has been achieved by creating environments that are essentially unbalanced and will fall into crisis sooner or later.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Here's Mario Prodi explaining the plan to Euronews back in 2012.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><em><span style="font-family: Arial, Helvetica, sans-serif;">Prodi: "Well, the difficult moments were predictable. When we created the euro, my objection, as an economist (and I talked about it with Kohl and with all the heads of government) was: how can we have a common currency without shared financial, economical and political pillars? The wise answer was: for the moment we've made this leap forward. The rest will follow ... Then instead came the Europe of fear: fear of China, fear of immigrants, fear of globalisation. So it was clear that this crisis would arrive. But the euro is so important, it's so convenient for everyone — especially Germany — that I've no doubt that the euro won't just survive, but it will be one of the landmarks for the world economy." – Euronews</span></em><br /><em><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></em><span style="font-family: Arial, Helvetica, sans-serif;"><a href="http://www.thedailybell.com/news-analysis/3629/EUs-Prodi-Admits-Leaders-Knew-Euro-Would-Cause-Ruin-but-Hoped-Political-Union-Would-Follow/">EU's Prodi Admits Leaders Knew Euro Would Cause Ruin but Hoped Political Union Would Follow</a> \</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Prodi says that once a common currency was installed, "the rest will follow." And he follows up by saying, "It was clear this crisis would arrive."</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Now we have Bloomberg triggering the very events that Prodi anticipated. "This is an economic emergency and exceptional measures are needed," write the Bloomberg editors.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">And then there is this statement, above: "When the treaty was drawn up, nobody envisioned a recession as severe as the one Europe now finds itself trapped in." These editors obviously don't read Euronews. Prodi says bluntly three years ago, "It was clear that this crisis would arrive."</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">This is the kind of <a href="http://www.thedailybell.com/definitions/params/id/28330/">directed history</a> that we often write about. But rarely do we have the chance to compare mainstream rhetoric as the media seeks to implement yet more economic globalism.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Internationalism advances regularly. But the power to interfere directly with markets throughout the EU is a really big step forward.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Throughout most of the 20th century, the idea that European countries would not have their own currencies would have been considered absurd. And the idea that a single <a href="http://www.thedailybell.com/definitions/params/id/2958/">central bank</a> would have the ability to further distort markets and interest rates by buying and selling fixed income instruments would have been seen as questionable if not more so.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Yet that is what is happening. Bloomberg writes, "There's a risk that, despite this green light, the ECB will still act too cautiously ... The next ECB meeting is on Jan. 22. Markets expect Draghi to act. Anything short of an open-ended commitment to buy government debt in impressive quantities will disappoint investors and worsen the euro area's plight."</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Who are these investors? Central banks have been doing a terrible job in stimulating economies since the Crisis of 2008. Why would investors believe that doing more of the same will create the prosperity that has so far eluded bank strategists?</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">This presents us with an ideal <a href="http://www.thedailybell.com/definitions/params/id/28547/">VESTS</a> paradigm to consider. On the one hand we have elitist institutions promoting economic solutions that further concentrate financial power and have proven dysfunctional in the past. On the other hand, we have investors involved in a variety of instruments, commodities and physical holdings who will have to evaluate the success of elite formulations.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Those with interests in Europe or around the world will watch this latest stimulation closely, recalling that even failure will likely be treated as a success. There will be ramifications no matter what occurs.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><strong style="float: left;"><span style="font-family: Arial, Helvetica, sans-serif;">Conclusion: </span></strong><br /><span style="font-family: Arial, Helvetica, sans-serif;">It is an open question as to whether established interests will be able to maintain these programs and the rhetoric surrounding them. If control slips unexpectedly away, the results could be powerful and chaotic indeed.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><a href="http://www.thedailybell.com/news-analysis/36008/ECB-Stimulation-The-Trap-Closes/"><span style="font-family: Arial, Helvetica, sans-serif;">Source</span></a>Anonymoushttp://www.blogger.com/profile/14547106675749492684noreply@blogger.com0tag:blogger.com,1999:blog-853396052790090582.post-43720049349144886362015-01-16T01:35:00.000-08:002017-01-02T01:40:55.842-08:00Why Our Central Planners Are Breeding Failure<span style="font-family: Arial, Helvetica, sans-serif;">Success, we’re constantly told, breeds success. And success breeds stability. The way to avoid failure is to copy successful people and strategies. The way to continue succeeding is to do more of what has been successful.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">This line of thinking is so intuitively compelling that we wonder what other basis for success can there be other than 'success'?</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">As counter-intuitive as it may sound, success rather reliably leads to failure and destabilization. Instead, it’s the close study of failure and the role of luck that leads to success.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><strong><span style="font-family: Arial, Helvetica, sans-serif;">In the macro-economic arena, I think it highly likely that the monetary and fiscal policies of the past six years that are conventionally viewed as successful will lead to spectacular political and financial failures in 2015 and 2016.</span></strong><br /><strong><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></strong><strong><span style="font-family: Arial, Helvetica, sans-serif;">How can success breed failure? It turns out there are a number of dynamics at work.</span></strong><br /><h2><u><span style="font-family: Arial, Helvetica, sans-serif;">Survivorship Bias</span></u></h2><span style="font-family: Arial, Helvetica, sans-serif;">Survivorship Bias is the natural tendency to look at the survivors for the keys to success rather than to examine those who didn’t survive, many of which disappear without a trace. If 100 restaurants are founded and five of the new eateries achieve rip-roaring success, business schools usually study the decisions and strategies of the five survivors, not the 95 failures which closed their doors and left no trail of decisions and strategies to study.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">As David McRaney observes in his excellent account of <a href="http://youarenotsosmart.com/2013/05/23/survivorship-bias/" target="_blank"><em>survivorship bias</em></a>,<a href="http://youarenotsosmart.com/2013/05/23/survivorship-bias/"> </a>by focusing solely on survivors rather than those who failed, the causes of failure become invisible. And if the causes of failure are invisible, the critical factors that determine success also become invisible.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Even worse, we draw faulty conclusions from the decisions of the survivors, as we naturally assume their decisions led to success, when the success might have been the result of luck or a confluence of factors that cannot be reasonably duplicated.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">We are often reassured by the financially successful that perseverance and the willingness to accept risk are the key factors in success. But as McRaney explains, this is the equivalent of asking the one actor from a rural state who achieved Hollywood stardom for the key factors of his success, on the assumption that anyone else following the same path will reach stardom.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">But magazines never track down the 100 other aspiring actors from the same region who went to Hollywood and persevered and took risks but who failed to become stars. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Examining the few hundred miners who succeeded in finding enough gold in the Klondike in 1898 and returning with enough of their newfound wealth to make a difference in their life prospects while ignoring the experiences and decisions of the 100,000 who set off for the gold fields and the 30,000 who reached the Klondike but who returned home penniless (if they survived the harsh conditions) will yield a variety of false conclusions, for luck is never introduced as the deciding factor.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">The narrative that success breeds success has no role for luck, which is by definition semi-random and therefore uncorrelated to the stratagems of the survivors. Here is McRaney’s summary of the role of luck:</span><br /><blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><span style="font-family: Arial, Helvetica, sans-serif;"><em>In short, the advice business is a monopoly run by survivors. As the psychologist Daniel Kahneman writes in his book </em>Thinking Fast and Slow<em>, “A stupid decision that works out well becomes a brilliant decision in hindsight.” The things a great company like Microsoft or Google or Apple did right are like the (World War II) planes with bullet holes in the wings. The companies that burned all the way to the ground after taking massive damage fade from memory. Before you emulate the history of a famous company, Kahneman says, you should imagine going back in time when that company was just getting by and ask yourself if the outcome of its decisions were in any way predictable. If not, you are probably seeing patterns in hindsight where there was only chaos in the moment. He sums it up like so, “If you group successes together and look for what makes them similar, the only real answer will be luck.”</em></span></blockquote><h2><u><span style="font-family: Arial, Helvetica, sans-serif;">Drawing Over-Arching Conclusions from Single Examples</span></u></h2><span style="font-family: Arial, Helvetica, sans-serif;">A similar form of bias appears when commentators attribute China’s great developmental success to its command economy, or Silicon Valley’s enduring role as a center of innovation to America’s military-industrial-academic-research complex and the U.S. culture’s broad acceptance of risk-taking.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Who can say with certainty that another model of development might have duplicated China’s growth record but avoided the endemic corruption, environmental destruction and widening wealth inequality that are the negative consequences of the command-economy model? No one can say, as there are no other Chinas to refer to for comparison.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">If duplicating Silicon Valley were just a matter of government support of research and close ties between corporations and universities, there would be dozens of Silicon Valley rivals, as billions of dollars have been expended globally to duplicate the Silicon Valley model. But Silicon Valley remains in a class of its own. Clearly, Northern California’s engine of innovation cannot be distilled down to a simplistic model that can be duplicated by policies and investment.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">The conventional conclusion that the major central banks—the Federal Reserve, the Bank of Japan, the European Central Bank and the Bank of China—succeeded in saving the global economy from depression in 2008-09 is another example of drawing over-arching conclusions about success from single examples.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Since each nation/region is unique, any claim that the policies of any one central bank can be applied to other nations/regions with equivalent success is a highly questionable assumption. Since there is only one European Union, Japan, China and U.S.A., there are no opportunities to test the assumption that the central bank recipe used in 2008-09 can be applied with equal success in future financial crises in these very different economies.</span><br /><h2><u><span style="font-family: Arial, Helvetica, sans-serif;">Previous Policies Have Changed Conditions</span></u></h2><span style="font-family: Arial, Helvetica, sans-serif;">One reason we cannot draw over-arching conclusions about the drastic monetary policies enacted in 2008-09 is that those policies have changed the financial-political landscape. As a result, what worked in 2008-09 may not succeed in the next financial crisis because those policies only worked in the specific set of conditions of that crisis. If the conditions have changed, then the strategies that were 'successful' in the previous set of conditions will not yield the same outcome.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">For example, central banks lowered interest rates to near-zero in 2008-09 to spark borrowing and refinancing of existing debt. Now that rates are still near-zero, this policy and outcome cannot be duplicated. Lessons drawn from successes that cannot be repeated are suspect.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Previously successful policies may fail in the next crisis due to <em>diminishing returns</em>: for example, policies that extend credit to marginal borrowers to bring demand forward (i.e. subprime auto loans) eventually reach all but the riskiest borrowers. Extending those policies essentially guarantees rising defaults as people with no business borrowing money are given credit to maintain consumption.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">As defaults soar, lenders record losses and sales decline, as consumption was already brought forward.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Due to diminishing returns, a policy that was successful at first fails when extended.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;">In effect, successful policies may be time-stamped; not only do they only work in specific circumstances, they only work for a limited length of time in those specific conditions. Beyond those conditions and timeline, the supposed factors of success no longer work.</span><br /><h2><u><span style="font-family: Arial, Helvetica, sans-serif;">Are the Outcomes of Monetary Policies Truly Predictable?</span></u></h2><span style="font-family: Arial, Helvetica, sans-serif;">As noted above, any policy identified as the difference between success and failure must pass a basic test: <em>When the policy is applied, is the outcome predictable?</em> For example, if central banks inject liquidity and buy assets (quantitative easing) in the next financial crisis, will those policies duplicate the results seen in 2008-14?</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">The current set of fiscal and monetary policies pursued by central banks and states are all based on lessons drawn from the Great Depression of the 1930s. The successful (if slow and uneven) “recovery” since the 2008-09 global financial meltdown is being touted as evidence that the key determinants of success drawn from the Great Depression are still valid: the Keynesian (or neo-Keynesian) policies of massive deficit spending by central states and extreme monetary easing policies by central banks.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Are the present-day conditions identical to those of the Great Depression? If not, then how can anyone conclude that the lessons drawn from that era will be valid in an entirely different set of conditions?</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">We need only consider Japan’s remarkably unsuccessful 25-year pursuit of these policies to wonder if the outcomes of these sacrosanct monetary and fiscal policies are truly predictable, or whether the key determinants of macro-economic success and failure have yet to be identified.</span><br /><h2><u><span style="font-family: Arial, Helvetica, sans-serif;">The Seeds of Failure Are Sown in the Initial Flush of Success</span></u></h2><span style="font-family: Arial, Helvetica, sans-serif;">Even more troubling is the possibility that<strong> these monetary policies have sown the seeds of systemic failure in their pursuit of the extremes that yielded the initial flush of success. </strong></span><br /><strong><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></strong><span style="font-family: Arial, Helvetica, sans-serif;">That this initial success might be brief and transitory rather than enduring is rarely considered. If this is the case—and the slowing global “recovery” suggests this is indeed so—then the success of these extreme policies is illusory, and the truly key determinants of success and failure remain elusive.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><em><span style="font-family: Arial, Helvetica, sans-serif;">In <a href="http://www.peakprosperity.com/insider/91254/6-reasons-next-economic-rescue-will-fail" target="_blank">Part 2: The 6 Reasons The Next Economic Rescue Will Fail</a>, we examine why the current unstable "recovery" must topple despite the central planners' best efforts to sustain it. They simply don't have an accurate awareness of the true situation, nor have the right tools and skills to address it -- and so, in their ignorance and fear, are pulling levers that are inconsequential (at best) or will hasten the destabilization of the system.</span></em><br /><em><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></em><a href="http://www.zerohedge.com/news/2015-01-15/why-our-central-planners-are-breeding-failure"><span style="font-family: Arial, Helvetica, sans-serif;">Source</span></a>Anonymoushttp://www.blogger.com/profile/14547106675749492684noreply@blogger.com0tag:blogger.com,1999:blog-853396052790090582.post-41698477787289847772015-01-15T03:56:00.000-08:002017-01-02T01:40:55.835-08:00This Is Exactly How Markets Behave Right Before They Crash<span style="font-family: Arial, Helvetica, sans-serif;"><a href="http://theeconomiccollapseblog.com/archives/exactly-markets-behave-right-crash/roller-coaster-photo-by-neukoln" rel="attachment wp-att-8219"></a>When the stock market starts to behave like a roller coaster, that is a sign that a major move to the downside is right around the corner. As I have stated <a href="http://theeconomiccollapseblog.com/archives/10-key-events-preceded-last-financial-crisis-happening-right-now" title="repeatedly">repeatedly</a>, when the market is very calm it tends to go up. But when the waters start getting really choppy, that is a clear indication that stocks are about to plummet. In early 2015, volatility has returned to Wall Street in a big way. At one point on Tuesday, the Dow was up more than 300 points. But then the bottom dropped out. From the peak on Tuesday, the Dow plunged nearly 700 points in less than 30 hours before recovering more than 100 points at the end of the day. The Dow has now experienced the longest losing streak that we have seen in 3 months, but that is not that big of a deal. Of much greater concern is the huge price swings that we have been seeing. Remember, the three largest single day stock market increases in history were right in the middle of the financial crisis of 2008. So if stocks go up 400 points tomorrow that is NOT a good sign. What we really need is a string of days when stocks move less than 100 points in either direction. If stocks keep making dramatic moves up and dramatic moves down, history tells us that it is only a matter of time before they collapse. Any student of stock market history knows that what we are witnessing right now is exactly how markets behave right before they crash.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Examine the chart below very carefully. It is a chart of the CBOE Volatility Index from 2006 to 2008. As you can see, volatility was very low as stocks soared during 2006. Then things started to get a bit choppy in 2007, and investors should have recognized this as a warning sign. Finally, you can see that the VIX absolutely skyrocketed during the financial crisis of 2008…</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><div class="separator" style="clear: both; text-align: center;"><a href="http://theeconomiccollapseblog.com/archives/exactly-markets-behave-right-crash/vix-2006-to-2008" rel="attachment wp-att-8218" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: Arial, Helvetica, sans-serif;"><img alt="VIX 2006 to 2008" class="aligncenter size-large wp-image-8218" height="282" src="http://theeconomiccollapseblog.com/wp-content/uploads/2015/01/VIX-2006-to-2008-425x282.png" width="425" /></span></a></div><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Looking back, it seems so obvious.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">So why aren’t more people alarmed this time around?</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">As <a href="http://money.cnn.com/2015/01/14/investing/stocks-market-volatility/index.html?iid=HP_LN" target="_blank" title="CNN">CNN</a> is reporting, the VIX is up <strong>almost 20 percent</strong> so far in 2015…</span><br /><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Volatility has returned with a vengeance this January. The Dow has been moving up or down by at least 100 points nearly every day this year. </span></blockquote><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">CNNMoney’s <a href="http://money.cnn.com/data/fear-and-greed/?iid=EL" target="_blank" title="Fear &amp; Greed Index">Fear & Greed Index</a> is showing signs of Extreme Fear again. And a volatility gauge known as the VIX, which is one of the components in our index, is up nearly 20% so far this year.</span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Meanwhile, there are lots of other signs of trouble on the horizon as well.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">For example, the price of copper got absolutely hammered on Wednesday. As I write this, it has fallen more than 5 percent and it has not been this low in more than five years.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">In financial circles, it is referred to as “Dr. Copper” because it is such a valuable indicator regarding where the global economy is heading next.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">For example, in 2008 the price of copper was close to $4.00 before plummeting to below $1.50 by the end of that year as the global financial system fell apart.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Now the price of copper is plunging again, and many analysts <a href="http://money.cnn.com/2015/01/14/news/economy/economy-red-flags/index.html" target="_blank" title="are becoming extremely concerned">are becoming extremely concerned</a>…</span><br /><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">One growing global worry is the steep decline in copper, which is used in many products and is often viewed as good gauge on how China is doing. The price of copper hit its lowest price since 2009 on Wednesday at $2.46. Copper is down nearly 7% this week alone.</span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Meanwhile, the recession (some call it a depression) in Europe continues to get even worse, and the euro continues to plunge.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">On Wednesday, the euro declined to the lowest level that we have seen in nine years, and Goldman Sachs is now saying that the euro and the U.S. dollar could be at parity <a href="http://money.cnn.com/2015/01/13/investing/dollar-euro-exchange-rate-currencies/index.html?iid=HP_River" target="_blank" title="by the end of next year">by the end of next year</a>.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">That is amazing considering the fact that it took $1.60 to get one euro back in July 2008.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Personally, I am fully convinced that Goldman Sachs is right on this one. I believe that the euro is going to all-time lows that we have never seen before, and this is going to create massive problems for the eurozone.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">With all of these signs of trouble out there, the smart money is rapidly pulling their money out of stocks and putting it into government bonds. This usually happens when a crisis is looming. It is called a “flight to safety”, and it pushes government bond yields down.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">On Wednesday, the yield on 10 year U.S. Treasuries fell beneath the important 1.8 percent barrier. We will probably see it go even lower in the months ahead.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">As the rest of the world economy crumbles, the remainder of the globe is looking to America to be the rock in the storm. For example, the following quote that I found today comes from <a href="http://www.dailymail.co.uk/news/article-2910234/Global-stockmarkets-tumble-value-euro-drops-1999-launch-level.html" target="_blank" title="a British news source">a British news source</a>…</span><br /><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">‘<strong>The global economy is running on a single engine… the American one</strong>,’ the World Bank’s chief economist, Kaushik Basu, said. ‘This does not make for a rosy outlook for the world.’</span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Well, they may not want to rely on us too much, because there are plenty of signs that our economy is slowing down too. For example, we learned today that December retail sales were down 0.9% from a year ago, and this is being called “<a href="http://www.cnbc.com/id/102337191" target="_blank" title="an unmitigated disaster">an unmitigated disaster</a>“. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Americans were supposed to be taking the money that they were saving on gasoline and spending it, but that apparently is not happening.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Back on October 29th, I wrote an article entitled “<a href="http://theeconomiccollapseblog.com/archives/from-this-day-forward-we-will-watch-how-the-stock-market-performs-without-the-feds-monetary-heroin" title="From This Day Forward, We Will Watch How The Stock Market Performs Without The Fed’s Monetary Heroin">From This Day Forward, We Will Watch How The Stock Market Performs Without The Fed’s Monetary Heroin</a>“. In that article, I warned that the end of quantitative easing could have dire consequences for the financial system as bubbles created by the Fed began to burst.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">And that is precisely what is happening. In fact, many analysts are now pinpointing the end of QE as the exact moment when our current troubles began. For instance, check out this excerpt from a CNBC article <a href="http://www.cnbc.com/id/102337679" target="_blank" title="that was published on Wednesday">that was published on Wednesday</a>…</span><br /><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">“<strong>Stuff happens when QE ends</strong>,” said Peter Boockvar, chief market analyst at The Lindsey Group. “<strong>It’s no coincidence that the market started going into a higher volatility mode, it’s no coincidence that the decline in commodity prices accelerated, it’s no coincidence that the yield curve started flattening when QE ended</strong>.” </span></blockquote><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Indeed, the increase in volatility and its effect on prices across the capital market spectrum <strong>was closely tied</strong> to the Fed ending the third round of QE in October.</span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">We are moving into a time of great danger for Wall Street and for the global economy as a whole.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">If we continue to see a tremendous amount of volatility, history tells us that it is only a matter of time before the markets implode.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Hopefully <a href="http://theeconomiccollapseblog.com/archives/89-tips-will-help-prepare-coming-economic-depression" title="you will be ready">you will be ready</a> when that happens.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><a href="http://theeconomiccollapseblog.com/archives/exactly-markets-behave-right-crash"><span style="font-family: Arial, Helvetica, sans-serif;">Source</span></a>Anonymoushttp://www.blogger.com/profile/14547106675749492684noreply@blogger.com0tag:blogger.com,1999:blog-853396052790090582.post-4335051625713326472015-01-14T02:20:00.000-08:002017-01-02T01:40:55.837-08:00Senator Warren and America Win in a Skirmish in a Long Struggle Against Wall Street’s Coup<span style="font-family: Arial, Helvetica, sans-serif;">There is an excellent indicator that Senator Warren’s successful effort to block the appointment of Antonio Weiss, an Obama Wall Street bundler, to a senior Treasury position while merely a skirmish was an important accomplishment. The financial media that pander most slavishly to the Wall Street and the City of London’s CEOs is enraged at Warren’s success. The <a href="http://uk.businessinsider.com/elizabeth-warren-wins-the-treasury-loses-2015-1?r=US" rel="nofollow" target="_blank">headline</a> in the UK’s <em>Business Insider</em> reveals their angst “Elizabeth Warren Wins, The Treasury Loses.” The article doesn’t try very hard to support that headline with facts because there is no real case to support the claim.</span><br /><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">A number of former Treasury officials thought Warren was way out of line, and that <a href="http://www.bloomberg.com/news/2014-12-12/past-treasury-officials-counter-nominee-weiss-s-critics.html" rel="nofollow" target="_blank">Weiss’ experience was perfect for the position he was being nominated for.</a> </span></blockquote><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">The White House stood by its nominee throughout, stating last month, “This is somebody who has very good knowledge of the way that the financial markets work, and that is critically important.” </span></blockquote><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">No argument on that here.</span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Let’s begin with logic. There’s no logical way to declare that “Treasury lost” without knowing who else is willing to take the position of Under Secretary for Domestic Finance. No one thinks President Obama selected Weiss on the merits. He was selected because he bundled Wall Street campaign contributions for Obama’s campaigns. Treasury does not “win” when we appoint such people – Wall Street wins. We have no way of knowing whether Obama will select someone for the position who is better or worse than Weiss. The Undersecretary position is prestigious enough that we know that Obama has the ability to appoint hundreds of people who would like to take the position and are better qualified than Weiss. As a matter of logic, therefore, the authors could not support their claim.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">The authors also don’t seem to have felt they could even try to make a case for their claim. They simply quote authority rather than reasoning. Their effort unintentionally made Warren’s opponents look bad. Consider the extraordinary arrogance of the statement “A number of former Treasury officials thought Warren was way out of line.” A U.S. Senator who is a member of Treasury’s oversight committee is completely “in line” to oppose nominees. Warren obviously did not oppose Weiss for partisan reasons. She opposed him on the merits. Weiss does not have a strong background for the skill sets required for the Undersecretary position. Again, no one can claim with a straight face that Obama selected Weiss on the merits. Of course, the same thing was true of many of the Treasury officials who think it is “way out of line” for Senators not to rubberstamp political reward-style appointments of Wall Street bundlers.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">The best that the White House could come up with was that Weiss “has very good knowledge of the way that the financial markets work.” That description fits about one million Americans.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><strong><span style="font-family: Arial, Helvetica, sans-serif;">Conclusion</span></strong><br /><strong><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></strong><span style="font-family: Arial, Helvetica, sans-serif;">Warren has given Obama a golden opportunity – a “do over.” Obama can appoint someone who has a “very good knowledge of the way that the financial markets work” – <strong>and a passion for changing how they work in order to end the Wall Street culture of corruption</strong> and create radically improved markets based on integrity and service to investors with radically reduced profits. Obama could pick someone good for America, not “Treasury” and its Wall Street overseers. It is “critically important” that the financial markets be restored to a condition in which they aid Main Street and small investors rather than acting as parasites and predators.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">At this juncture, the White House is signaling its continued opposition to serious reform.</span><br /><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">“‘We continue to believe that Mr. Weiss is an extremely well-qualified individual, who is committed to the policy goals of this Administration and firmly supports the Administration’s policies on fostering economic growth and supporting our middle class. We are pleased that he has accepted the role of counselor to the Treasury secretary.’”</span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">The administration continues its policy of never missing an opportunity to miss an opportunity to openly side with the American people (all of them, not simply “our middle class”) and demand the end of the corrupt culture of Wall Street. Warren has given Obama a priceless opportunity for a “do over.” No one expects Obama to do the right thing on the appointment, but Warren is doing the right thing by giving Obama a new the chance to do the right thing.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><a href="http://www.nakedcapitalism.com/2015/01/62621.html"><span style="font-family: Arial, Helvetica, sans-serif;">Source</span></a>Anonymoushttp://www.blogger.com/profile/14547106675749492684noreply@blogger.com0tag:blogger.com,1999:blog-853396052790090582.post-43588863720042867062015-01-13T03:26:00.000-08:002017-01-02T01:40:55.839-08:00The Central Banks Still Appear To Be In Control (Or So They Think)<span style="font-family: Arial, Helvetica, sans-serif;"><strong>2015 has started much as 2014 left off </strong>which should come as no surprise as markets care little for arbitrary changes in dates after all; so no predictions! Oil is one of many unknown variables including the fate of Greece the strength of the dollar the flight of Abe's third arrow relations with Russia and the greater Chinese slow down. Then of course we have elections in the UK which will be interesting in the debate but almost certainly inconclusive in the outcome. It has been suggested a coalition government might be formed between Labour, the Scottish Nationals and UKIP; if so I'll be catching the first flight to somewhere a long way off.<br /><br /><strong>The central banks still appear to be in control; well they seem to think so.</strong> Now he is no longer in that particular club Alan Greenspan thinks things look a bit "risky". Well risk is what investing is all about after all, but what is this elusive "particle" orbiting our portfolios?<br /><br /><strong>Some would have you believe that it's all about volatility.</strong> If it goes up and down a lot the ride will be bumpy but you stand to make a lot more money than in something that gives you a smoother ride. <strong><span style="text-decoration: underline;">Looking back over the last 30 years or so that smooth ride would have been government bonds and for most of that period returns would have been better than equities. </span></strong>So a low risk portfolio should be stuffed full of them right? Yes indeed if your risk model looks purely at long term historical data and ignores where we are in the journey.<br /><br /><strong>But markets have an enormous propensity to make us look like fools. </strong>This time last year the predictors were saying, to a man, that sovereign debt was hugely expensive and due a very significant correction as rates were bound to rise weren't they? If there is one data series that is consistently called incorrectly this is it - perhaps a reason why the largest component of the derivatives mountain is in interest rate futures!<br /><br /><em>So in the UK a gilt tracker would have made you nearly 15% against a pretty much flat equity market and the 10 year gilt now resides at a scanty yield of 1.6%. Over in Europe the 10'year Bund is at 0.4% and everything under 5 years duration pays a negative yield. Yes investors are willing to pay a premium just to get their money back!</em><br /><br />As the chart of the 10 year Treasury yield shows, we have come a long way in the interest rate journey and whilst further gains are possible can yields go much lower. If we are going Japanese, and the Germans already are, then of course they can. Ten years ago, having 50% in investment grade bonds in a portfolio for a cautious investor would have been eminently sensible especially with one’s attention in the rear view mirror, but today?<br /><br /><strong>The major unintended consequence of government and central bank intervention since Volcker's stand against inflation has been to generate its nemesis; deflation.</strong> With interest rates near zero in the major economies, there is nowhere for rates intervention to go to provide a stimulus. Strangely the answer must be higher interest rates. <strong>We will then see some "creative destruction" which is what the financial system needs to reset and start a proper economic cycle</strong>, but with the investment banks, who stand to lose the most, controlling the strings (just how do you think the US Budget bill got changed to allow banks’ derivative positions to be included in subsidiaries covered by FDIC insurance? ie the taxpayer covers their losses) we need stronger hands at the tiller than a coalition of "politicians" or a lame duck president. <strong>We need somebody with balls and I don’t mean the second fiddle in the Ed Miller band... any volunteers?</strong></span><br /><strong><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></strong><a href="http://www.zerohedge.com/news/2015-01-12/central-banks-still-appear-be-control-or-so-they-think"><span style="font-family: Arial, Helvetica, sans-serif;">Source</span></a>Anonymoushttp://www.blogger.com/profile/14547106675749492684noreply@blogger.com0tag:blogger.com,1999:blog-853396052790090582.post-29927255058186229082015-01-12T03:25:00.000-08:002017-01-02T01:40:55.827-08:00Citi, Goldman, ICAP And Others Prepare For Grexit... Again<span style="font-family: Arial, Helvetica, sans-serif;">Every couple of years the same identical European drill repeats itself: 1) Greece makes loud noises as it approaches an election, 2) Europe says it couldn't care what the outcome is and that Greece <em>should </em>stay in the Euro but if it exits <em>it won't be a disaster</em>, 3) the ECB reminds everyone of the lie that it is <a href="http://www.zerohedge.com/news/2014-05-15/when-head-european-central-bank-lies-zero-hedge-record-presenting-europes-plan-z">not preparing for Plan B </a>(it is) despite holding on to over €100 billion in "credibility-crushing" Greek bonds, 4) panicking Greek banks say the deposit outflow situation is completely under control (adding that "<a href="http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_11/01/2015_546108">The Bank of Greece along with the European Central Bank are monitoring closely the developments and intervene whenever this is necessary</a>," which is code word for far more familiar, five-letter word), and meanwhile 5) all non-Greek banks quietly start preparing for the worst case scenario.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">So far this time around, we had everything but step <em><strong> "5"</strong></em>. We do now. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">According <a href="http://www.wsj.com/articles/banks-ready-contingency-plans-in-case-of-greek-eurozone-exit-1420975504?autologin=y&cb=logged0.7994115486744605">to the WSJ</a>, "banks and other financial institutions in Europe are stress-testing their internal systems and dusting off two-year-old contingency plans for the possibility Greece could leave the region’s monetary union after a key election later this month. <strong>Among the firms running through drills are Citigroup Inc., Goldman Sachs Group Inc. and brokerage ICAP PLC, according to people familiar with the matter."</strong></span><br /><strong><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></strong><span style="font-family: Arial, Helvetica, sans-serif;">And soon enough Bloomberg, because who can possibly forget the mysterious appearance of the "<a href="http://www.zerohedge.com/news/whats-wrong-picture-0">XGD Crncy" in June of 2012</a>, only to disappear moments later after a few hurried phone calls from Frankfurt...</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">But back to the banks: "<strong><em>The firms’ plans include detailed checks on counterparties that could be significantly affected by a Greek exit, looking at credit exposures and testing how they would provide cross-border funding to local operations</em></strong>." </span><br /><blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><span style="font-family: Arial, Helvetica, sans-serif;">Some firms are also preparing for the impact on payment systems and conducting trial runs of currency-trading platforms to see how they would cope with adding a new Greek currency or dealing with potential capital controls. </span><br /><br /><span style="font-family: Arial, Helvetica, sans-serif;">The moves come as Greek leftist opposition party Syriza continues to lead in recent public opinion polls ahead of national elections on Jan. 25. The ruling coalition government has framed the election as a de facto poll on whether the country stays in the eurozone, saying Syriza’s antiausterity policies would force a break with eurozone partners. Syriza, though, hasn’t campaigned on an exit and most Greek voters want to stay in the monetary union, according to recent polls.</span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Summarizing Europe's only strategy for the past 5 years is Frederic Ponzo, managing partner at consultancy Grey Spark: "<em>Hope for the best, plan for the worst.</em>" </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">At some European banks, that currently means dusting off plans drawn up a couple of years ago, when a eurozone breakup was a hot topic. In 2011 and 2012, banks, brokers and companies with significant exposure to Greek assets put in place contingency plans to minimize the fallout from a breakup.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Which is smart, <em>because absolutely nothing has changed in Europe</em> where not even "Mr. ECB Chairman got to work" but merely verbally hypnotized the bond vigilantes into a state of paralysis, and as a result, nothing at all has been fixed, aside from the idiotic low yields on European bonds all of which have been bought to ridiculous levels on what is now a 3 years frontrunning of an ECB action that has been three years in the coming, and which many say will <em><strong>never </strong></em>actually arrive: the outright - and <a href="http://www.zerohedge.com/news/and-here-what-draghi-can-do-his-own-words">illegal according to Article 123 </a>- monetization of European sovereign debt across the board.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">It goes without saying that should the worst case scenario take place, the immediate question is who is next, and will the "XIL" be the next ticker everyone eagerly awaits:</span><br /><blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><span style="font-family: Arial, Helvetica, sans-serif;">The head of currencies trading at a large European bank said that reintroducing the Greek drachma to its trading system wouldn’t be too difficult, but dealing with a larger breakup would be more challenging. </span><br /><br /><span style="font-family: Arial, Helvetica, sans-serif;"><strong>“Italy could follow Greece’s steps if the exit will prove successful in providing some relief to the country’s economic crisis,” </strong>he said.</span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Italy... <strong>or Spain</strong>. Earlier today we got news that Spain's own equivalent of Syriza is surging in the polls and has left the ruling socialist party in the dust: "A poll published on Sunday showed that leftist up start Podemos was again in the lead to winSpain's next general election, which could result in the formation of party pacts, or even the country's first coalition government."</span><br /><blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><span style="font-family: Arial, Helvetica, sans-serif;">The Metroscopia poll of 1000 people, published in the left-leaning newspaper El Pais, showed one-year-old Podemos (We Can) would take 28.2 percent of the vote, up from 25 percent in December when it fell back to second place behind the Socialists. Podemos stood at 10.7 percent of the vote when it was first included last August.</span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">So assuming Europe survives the Greek election in 2 weeks it has a Spanish redux to look forward to in less than 12 months:</span><br /><blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><span style="font-family: Arial, Helvetica, sans-serif;">Spain has a general election due by the end of the year and a regional and municipal election expected in May. <strong>Most of those who told Metroscopia they would vote for Podemos said they believed Spain needed to get rid of its two-party system</strong>.</span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">If only Americans shared the same sentiment. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">And yet while democracy has always been the Achilles heel in Europe's artificial political and monetary construct which works in an ideal world dominated by technocrats, it is not even the Greek, or Spanish, elections that may be the biggest risk. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">As <a href="http://www.reuters.com/article/2015/01/11/us-global-economy-weekahead-idUSKBN0KK05I20150111">Reuters also reminds </a>us, a "<a href="http://www.reuters.com/article/2015/01/11/us-global-economy-weekahead-idUSKBN0KK05I20150111">landmark" legal opinion </a>this week will remind the European Central Bank as soon as Wednesday of the limits it faces as it advances towards money printing. <strong>With expectations high that the ECB is on the verge of buying government bonds with new money to shore up the economy, an influential adviser to Europe's top court will give his view on Jan. 14 about an earlier unused bond-buying scheme</strong>. </span><br /><blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><span style="font-family: Arial, Helvetica, sans-serif;">"It is the latest chapter in a long-running and increasingly bitter dispute about quantitative easing (QE) between the ECB and Germany, the largest member of the 19-country bloc, that is likely to limit the size or scope of such a program.<strong> As the debate continues, the euro zone economy is all but grinding to a halt. Germany is expected to announce modest growth on Jan. 15 for last year</strong>."</span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Here is how SocGen summarizes the threats from just the European Court of Justice decision this week, and its potential downstream affects:</span><br /><blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><span style="font-family: Arial, Helvetica, sans-serif;">“Whatever it takes”. This was the promise made by ECB President Draghi on 26 July 2012 and cemented by the OMT on 6 September 2012. Since then, market participants have placed their faith in this promise. On 12 September 2012, the German Federal Constitutional Court (GFCC) announced it would examine whether the OMT is an ultra vires act stretching beyond the limits established by the German Act approving the ESM (link to decision here). </span><br /><br /><span style="font-family: Arial, Helvetica, sans-serif;"><strong>A still lengthy process ahead, but the GFCC will have the final say: </strong>Fast forward to 7 February 2014 when the GFCC delivered its decision on the OMT (link here), referring the case to the European Court of Justice (ECJ) for a preliminary ruling (for more on the process click here), but maintaining that in case of an ultra vires act, the GFCC is competent to rule on the constitutionality of the OMT. The next key date is 14 January, when Advocate General Cruz Villalón delivers his opinion in the case (link to ECJ proceedings here). A final ruling from the ECJ will follow only months later, and the Advocate General’s opinion does not have to be followed. Only then will the GFCC give its final ruling and it may, by then, well be 2016. </span><br /><br /><span style="font-family: Arial, Helvetica, sans-serif;"><strong>If the OMT is not adapted, the GFCC is very likely to reject it: </strong>The GFCC decision already concluded that the OMT in its current form exceeds the ECB’s mandate, by encroaching upon the responsibility of the Member States for economic policy, and by being incompatible with the prohibition of monetary financing. The GFCC also suggested a possible interpretation in conformity with Union Law. In essence, it identifies three points to address. </span><br /><br /><div style="padding-left: 30px;"><span style="font-family: Arial, Helvetica, sans-serif;"><strong>1. Introduce a maximum limit on OMT purchases: </strong>In presenting OMT, the ECB declared it “unlimited”. In statements submitted to the GFCC, however, the ECB noted that given that OMT can only buy debt with a maturity of up to 3 years, this de facto sets a maximum of €524bn (for Italy, Spain, Portugal and Ireland). The GFCC is nonetheless concerned that this “implicit” limitation could easily be circumvented by increased sovereign issuance on shorter maturities.<strong> </strong></span></div><div style="padding-left: 30px;"><br /></div><div style="padding-left: 30px;"><span style="font-family: Arial, Helvetica, sans-serif;"><strong>SG view: </strong>Introducing an explicit limit on the potential size of OMT is likely to address GFCC concerns on “unlimited”. A limit of €500bn is, in our opinion, unlikely to trigger significant market concerns as this would still leave the OMT well armed to offer targeted support to a member states under an eventual ESM program.<strong> </strong></span></div><div style="padding-left: 30px;"><br /></div><div style="padding-left: 30px;"><span style="font-family: Arial, Helvetica, sans-serif;"><strong>2. Set a locking period around issuance: </strong>The GFCC flagged the potentially blurred line between purchases in primary and secondary markets. The former is prohibited under the Treaty while the latter is allowed. In its statements, the ECB noted that a locking period will be determined in a guideline, but not published.<strong> </strong></span></div><div style="padding-left: 30px;"><br /></div><div style="padding-left: 30px;"><span style="font-family: Arial, Helvetica, sans-serif;"><strong>SG view: </strong>A clear commitment to a locking period should suffice on this point.<strong> </strong></span></div><div style="padding-left: 30px;"><br /></div><div style="padding-left: 30px;"><span style="font-family: Arial, Helvetica, sans-serif;"><strong>3. Limit pari passu: </strong>A key strength of OMT is the promise to be pari passu with private investors in the event of a debt restructuring. In its statements to the GFCC, the ECB claimed that liability risk to national budgets is minimised by sufficient risk prevention, but added that should losses nonetheless occur they could be carried forward and balanced with revenues in the following years. The Bundesbank in its statements disagreed, noting every loss that it incurs burdens the German federal budget. The GFCC support this view highlighting that “the possibility of a debt cut must be excluded”. </span></div><div style="padding-left: 30px;"><br /></div><div style="padding-left: 30px;"><span style="font-family: Arial, Helvetica, sans-serif;"><strong>SG view: </strong>To our minds, the pari passu status of the OMT is unlikely to survive the various court proceedings, marking a blow to Draghi’s “whatever it takes” promise and increasing loss-given-default for private investors. Note, that the decision by the GFCC on the ESM excludes the possibility of the ESM assuming OMT credit risk as this would de facto leverage the mechanism. To change this, the ESM Treaty would need to be renegotiated, with all the complications that this would entail. </span></div><br /><span style="font-family: Arial, Helvetica, sans-serif;">Somewhat surprisingly, the GFCC decision had essentially no market impact when it was released back in February. Market faith in euro area government’s efforts to deliver growth and sustainable public finances offers one possible explanation. Given significant fears on sustained lowflation, we believe that more recently it is the promise of a large sovereign QE program that offers support to market confidence.</span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">None of the above is even remotely influenced by the subsequent Greek elections and the ECB's potential QE announcement on January 22 (which SocGen summarizes as follows: "<strong>QE unlikely to be both large scale and pari passu"</strong>). </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">For simplicity's sake, here is the full calendar of risk events in just the next 2 weeks, any single one of which has the potential to send the market soaring... or crashing.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><a href="http://www.zerohedge.com/news/2015-01-11/citi-goldman-icap-and-others-preparing-grexit-again"><span style="font-family: Arial, Helvetica, sans-serif;">Source</span></a>Anonymoushttp://www.blogger.com/profile/14547106675749492684noreply@blogger.com0tag:blogger.com,1999:blog-853396052790090582.post-56916373796647698262015-01-09T00:49:00.000-08:002017-01-02T01:40:55.856-08:00The CBO’s Bad Math: Putting $7 Trillion of Notional Value of Derivatives in Taxpayer-Backstopped Depositaries Will Cost Zero<span style="font-family: Arial, Helvetica, sans-serif;">So why did Elizabeth Warren lose her battle last month to stop banks from continuing to park $7 trillion notional value of risky derivatives like the credit defaults swaps in taxpayer-backstopped depositaries?</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">One of the less well-recognized reasons is that the CBO’s dubious analysis said it would not cost taxpayers a dime.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">The Congressional Budget Office forecasts have enormous clout on the Hill. Yet <a href="http://www.nakedcapitalism.com/2012/11/fed-budgetary-experts-demolish-cbo-health-cost-model-the-lynchpin-of-budget-hysteria.html">as we’ve written</a>, one of its most influential analyses, that of projected Medicare cost increases, was so rancid that two fiscal budgeting experts from the Fed roused themselves to write a lengthy academic paper demolishing it. That CBO work was so problematic on so many fronts, including that it violated CBO policies for the preparation of long-term forecasts in multiple ways, that it raises questions as to the intellectual honesty of the exercise.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">In the case of the so-called swaps pushout rule analysis, the CBO came to a similarly dubious conclusion. We’ve embedded a report from the House Committee on Financial Services, which includes the CBO’s budget estimate on pages 5-6. The key bit is that “any impact on the cash flows of the Federal Reserve or the FDIC over the next 10 years would not be significant.” In budgetary terms, that is tantamount to saying it will have no cost. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">This is absurd on multiple levels. There is an obvious subsidy to the banks here, otherwise Jamie Dimon would not have been lobbying personally to get the bill passed. FDIC insurance is widely acknowledged by banking experts to be underpriced, so increasing the risk held in depositaries, particularly of positions can and do go boom, makes the odds of going though the FDIC’s kitty even greater. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">The CBO attributes no value to the de facto guarantee of these positions, despite the glaring contrary evidence of the $750 billion TARP in 2008 and a bailout of S&Ls in the early 1990s. Do they really have such a good crystal ball that their forecast period will manage to miss entirely one of our periodic banking system implosions? Trust me, if we have a meltdown, these positions will add to the cost. And with the Fed unlikely to be able to end ZIRP any time soon, it have less ability to use monetary tricks to levitate asset prices and thus reduce the fiscal costs of any salvage operation.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">A post earlier this week by Occupy Wall Street’s Alternative Banking Group reminds us of <a href="http://www.huffingtonpost.com/the-alternative-banking-group-of-ows/the-ghosts-of-bailouts-pa_b_6378170.html" rel="nofollow" target="_blank">how the last bank bailouts similarly undervalued the guarantees</a>:</span><br /><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">…even if we accepted the Treasury’s accounting and treated it like just another private trader, its returns are abysmal…it can’t properly count how much aid it gave — and continues to give — these businesses. Beyond the $426 billion of actual capital acquisitions the Treasury made, it provided guarantees and other support to these industries that experts have valued at more like $9 trillion. Calculate the $15 billion profit the Treasury is now bragging about using a $9 trillion base as the money that was put at risk and you start calculating minuscule returns like the 0.1 percent you’d see in a Chase money market. </span></blockquote><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">The fact that the Treasury did not have to make good on its promises to cover trillions of dollars of potential losses the financial industry had recklessly exposed itself to doesn’t mean the government did not give something of huge value. The mere fact of the government stepping in as a guarantor of things like toxic mortgage-backed securities kept the bank shareholders from being wiped out. This happened a lot as part of the bailout. But on Wall Street you can be sure to get paid for taking risks, regardless of whether the bad stuff you are insuring against happens. The Treasury, on the other hand, got paid basically nothing by putting all that taxpayer money on the line.</span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Let us not forget that Treasury <a href="http://www.nakedcapitalism.com/2012/09/andrew-ross-sorkins-bad-math-on-aig.html">conveniently omits</a> a $35 billion of what Andrew Ross Sorkin called a “a tax benefit, er, gift, from the United States government.” So even on the raw numbers the “TARP made a profit” is questionable. And that’s before you get to three card monte, that the massive, ongoing subsidy to the banks via QE and ZIRP that goosed asset prices was essential to the Treasury being able to exit the TARP at all. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">As derivatives expert Satyajit Das observed drily by e-mail:</span><br /><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">The cost-benefit rationale is fascinating. I am impressed that people have determined enacting this legislation could affect direct spending and revenues; albeit not significantly. I would have thought not having to potentially bail out a depositary institution would have been a positive to public finances, not a negative. Clearly, I have been misinformed about how cost benefit analysis is done.</span> </blockquote><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">It is an Alice in Wonderland view of markets.</span></blockquote><a href="http://www.nakedcapitalism.com/2015/01/cbos-bad-math-putting-7-trillion-notional-value-derivatives-taxpayer-backstopped-depositaries-will-cost-zero.html"><span style="font-family: Arial, Helvetica, sans-serif;">Source </span></a><br /><blockquote></blockquote>Anonymoushttp://www.blogger.com/profile/14547106675749492684noreply@blogger.com0tag:blogger.com,1999:blog-853396052790090582.post-3952380683437815672015-01-08T03:02:00.000-08:002017-01-02T01:40:55.833-08:00Fed Holds Fire on Disinflation Threat<div class="separator" style="clear: both; text-align: center;"></div><div style="margin-left: 1em; margin-right: 1em;"><span style="font-family: Arial, Helvetica, sans-serif;">The US Federal Reserve released its minutes from the December FOMC meeting just a few hours ago AEDST time (available <a href="http://www.federalreserve.gov/monetarypolicy/fomcminutes20141217.htm" rel="nofollow" target="_blank">here</a>). The reaction on the markets has been mixed, whereas the pundits are chewing at the bit for signs of where the Fed shall strike next, with any rate rises put off until at least April.</span></div><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Adam Button at <a href="http://www.forexlive.com/blog/2015/01/07/the-fed-puts-its-trust-in-models-and-surveys-not-markets/" rel="nofollow" target="_blank">ForexLive</a> has the sceptical take on inflation:</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><div class="separator" style="clear: both; text-align: center;"><a href="http://www.nakedcapitalism.com/wp-content/uploads/2015/01/U-Mich-vs-reality.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img alt="U-Mich-vs-reality" border="0" class="aligncenter size-full wp-image-62399" height="217" src="http://www.nakedcapitalism.com/wp-content/uploads/2015/01/U-Mich-vs-reality.png" style="text-align: center;" width="400" /></a></div><span style="font-family: Arial, Helvetica, sans-serif;"></span><br /><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">The FOMC minutes show a total disregard for the signals markets are sending about disinflation. Five year breakeven rates are plunging, implying that 1.09% average inflation over that period. </span></blockquote><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">The Fed discussed this problem of signaling rate hikes while the market signals disinflation in the Dec 16-17 FOMC minutes and had this to say. </span></blockquote><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Instead of listening to the market. The Fed decided to listen to its models — the same kinds of models that assumed house price declines wouldn’t happen or be limited. On top of that, Yellen specifically mentioned the University of Michigan survey on inflation expectations, which has overestimated inflation by 200 basis points for the past three years.</span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">This hearing disorder probably has grown out of an optimism condition, with most members dismissing any external risks, e.g deflation in Europe or fallout from the oil price collapse, with most betting on the ECB and others “doing something”, although some saw downside risks if “foreign policy responses were insufficient”.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">The question of rate rises by the Fed is being pushed out further and further, with the key point raised but not yet widely analysed is the lack of any acceleration in wages, although the huge relief from oil halving is sure to have an impact on disposable income. Wages have finally recovered from the GFC low:</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><div class="separator" style="clear: both; text-align: center;"><a href="http://www.nakedcapitalism.com/wp-content/uploads/2015/01/united-states-wages.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img alt="united-states-wages" border="0" class="aligncenter size-full wp-image-62400" height="182" src="http://www.nakedcapitalism.com/wp-content/uploads/2015/01/united-states-wages.png" width="400" /></a></div><span style="font-family: Arial, Helvetica, sans-serif;"></span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Whether this filters through to inflation is hard to gauge, which is stubbornly staying at or below 2% with core inflation slipping.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">I would suggest unless this changes – and forward looking breakevens and the yield curve indicate no such change for a long time – rate rises will be off the table for a long, long time.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><a href="http://www.nakedcapitalism.com/2015/01/fed-holds-fire-disinflation-threat.html">Source</a></span><br /><div style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><div class="separator" style="clear: both; text-align: center;"></div><div style="margin-left: 1em; margin-right: 1em; text-align: left;"><br /></div>Anonymoushttp://www.blogger.com/profile/14547106675749492684noreply@blogger.com0tag:blogger.com,1999:blog-853396052790090582.post-83860881023389496612015-01-07T02:09:00.000-08:002017-01-02T01:40:55.870-08:00Despite Current Glut, Oil Producers Continue Game of Chicken<span style="font-family: Arial, Helvetica, sans-serif;">When the world gives you too much oil, drill for more.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">That seems to be the motto of some of the most prolific oil producers today. Iraq, Russia, Latin America, West Africa, the United States, Canada – all may increase production this year, and by more than just balancing out the reduced production in war-torn Libya. On top of this, expect even more oil on the market if Iran comes to terms with the West over its nuclear program and is freed of the constraints of sanctions.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">That’s the <a href="http://www.bloomberg.com/news/2015-01-05/morgan-stanley-sees-more-problems-for-oil-market-on-new-supply.html" rel="nofollow" target="_blank">conclusion of Adam Longson</a>, an oil analyst at Morgan Stanley writing in an e-mailed report on Jan. 5.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">All this new oil is flooding a market already awash because OPEC has refused to cut its production cap below 30 million barrels a day – and is even exceeding that level – and the United States is pumping oil, mostly from shale, faster than it has in 30 years. This has caused the average price of oil to plunge more than 50 percent, from about $115 in June 2014 to just over $50 today.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">This is creating an unmitigated bear market for oil, according to Morgan Stanley. “With the global oil market just passing peak runs and Libyan supply already at low levels, it’s hard to see much improvement in oil fundamentals near term,” <a href="http://www.bloomberg.com/news/2015-01-05/morgan-stanley-sees-more-problems-for-oil-market-on-new-supply.html" rel="nofollow" target="_blank">its report said</a>. “A number of worrying signs have already emerged, lifting the probability of our ‘bear’ case.”</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">One more sign is that <a href="http://www.wsj.com/articles/oil-prices-fall-to-new-lows-on-supply-glut-1420455248" rel="nofollow" target="_blank">Iraq’s production is at its highest level in more than three decades</a>, now that Baghdad has finally reached agreement with Kurdistan to allow it to export oil through Turkey. And just before the New Year there were reports that Russian oil output has hit post-Soviet records without any sign of abating.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">“We already have an ample supply of oil, and on top of that we see this increase from Iraq and Russia,” Michael Hewson, analyst at CMC Markets, a British financial derivatives dealer, <a href="http://www.wsj.com/articles/oil-prices-fall-to-new-lows-on-supply-glut-1420455248" rel="nofollow" target="_blank">told The Wall Street Journal</a>. “The momentum clearly continues to be bearish for oil.”</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">But wait, there’s more, according to the Morgan Stanley analysis. It says to expect increased production at several oil fields in Brazil, Canada, the United States and in West Africa. And, </span><br /><span style="font-family: Arial, Helvetica, sans-serif;">according to Hewson, there’s no sign of increased demand, according to reports of anemic economies in China and Europe.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">And then there’s the environment. The governments of many countries – including the world’s two hungriest fossil fuel consumers, China and the United States – are striving to meet various targets for lower greenhouse gas emissions. This new green approach is responsible for “anemic global growth” in demand for oil and an “upsurge in competing supply,” said David Hufton, the CEO of the broker PVM.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">“[It] is very plain for all to see that oil supply growth exceeds oil demand growth and from an oil producer point of view, this imbalance has to be rectified,” <a href="http://www.ft.com/intl/cms/s/0/7138ecb2-94b9-11e4-b32c-00144feabdc0.html" rel="nofollow" target="_blank">Hufton told the Financial Times</a>.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Carsten Fritsch, a senior oil and commodities analyst at Commerzbank in Frankfurt, agreed. “The easiest path for oil is down,” <a href="http://www.reuters.com/article/2015/01/05/us-markets-oil-idUSKBN0KE06V20150105" rel="nofollow" target="_blank">he told Reuters</a>. “Almost all market news and the fundamental backdrop are negative, and it is difficult to see much upside at the moment.”</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><a href="http://www.nakedcapitalism.com/2015/01/despite-current-glut-oil-producers-continue-game-chicken.html"><span style="font-family: Arial, Helvetica, sans-serif;">Source</span></a>Anonymoushttp://www.blogger.com/profile/14547106675749492684noreply@blogger.com0tag:blogger.com,1999:blog-853396052790090582.post-39066190698197698712015-01-06T02:17:00.000-08:002017-01-02T01:40:55.831-08:00Stock Exchange Head: Fix Capitalism by Changing the Way Companies Are Funded<em><span style="font-family: Arial, Helvetica, sans-serif;">How can we make capitalism more popular? Individual investors should have access to tech start-up IPOs, giving the public a stake in capitalism, says Xavier Rolet, the chief executive of the London Stock Exchange ... Capitalism has taken a pummeling over the last few years. From the global credit crunch to the banking failures, the mis-selling of payment protection insurance (PPI) and beyond, popular faith in capitalism has been deeply shaken. – UK Telegraph</span></em><br /><em><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></em><span style="font-family: Arial, Helvetica, sans-serif;"><strong>Dominant Social Theme: </strong>Capitalism is misunderstood. If we tinker with it, people may "get it."</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><strong>Free-Market Analysis:</strong> The best way to make sure capitalism becomes more popular is to give people the opportunity to take a bigger stake in it.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">That's the argument of the head of the London Stock Exchange, Xavier Rolet. He's not only convinced of capitalism's benefits; he also believes that capitalism can lift people out of poverty in a short period of time.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Here's more:</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><em><span style="font-family: Arial, Helvetica, sans-serif;">Few would argue that any other form of economic stewardship has ever created wealth and prosperity on a comparable scale: just ask any of the 400m Chinese people lifted out of poverty in the last decade.</span></em><br /><em><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></em><em><span style="font-family: Arial, Helvetica, sans-serif;">What irks us about <a href="http://www.thedailybell.com/definitions/params/id/1903/">capitalism</a> is not wealth creation but the brutality of its "boom-bust" cycles and the concentration of wealth "at the top". Can a more popular capitalism soften these sharp edges?</span></em><br /><em><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></em><em><span style="font-family: Arial, Helvetica, sans-serif;">We do not seem to have learnt much from the past few hundred years of capitalist history. Every major crisis has had the same root cause: our inability to monitor, manage and control leverage in the banking industry.</span></em><br /><em><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></em><em><span style="font-family: Arial, Helvetica, sans-serif;">At times, taxpayers have been asked to rescue some of these financial institutions, but many would be surprised to learn that most European countries continue to subsidise leverage in the financial sector through the deductibility of interest.</span></em><br /><em><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></em><em><span style="font-family: Arial, Helvetica, sans-serif;">Certainly debt has an important role to play as an accelerator of GDP growth.</span></em><br /><em><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></em><em><span style="font-family: Arial, Helvetica, sans-serif;">But imagine a fiscal regime where deductibility of interest would cease above a certain maximum leverage ratio. Would banking institutions ever again leverage up as much as some did in 2008, so that a swing of just a few percentage points in the value of banks' balance sheets would completely wipe out their equity? It seems unlikely.</span></em><br /><em><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></em><em><span style="font-family: Arial, Helvetica, sans-serif;">We need to move away from seeing bank lending as a panacea. Banks have been dealt an impossible hand – they face enormous pressure to increase lending but also tough and increasingly complex new rules on regulatory capital and leverage ratios.</span></em><br /><em><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></em><span style="font-family: Arial, Helvetica, sans-serif;">The author is certainly correct that banks have an "impossible hand" to play. But isn't that the result of regulatory pressure and <a href="http://www.thedailybell.com/definitions/params/id/2958/">central bank</a> asset inflation? The first constrains banks from implementing a variety of defensive strategies and the second whipsaws banks with surges of inflationary depressions.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">For Rolet, this cyclical destruction is apparently not inevitable. He goes on to suggest an alternative form of industrial funding based on initial equity participation, as follows:</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><em><span style="font-family: Arial, Helvetica, sans-serif;">If we are to reconcile citizens with capitalism, we must offer them a stake, facilitating individual investor access to this new wave of world-class UK tech start-ups. We should look to reinstate the retail tranche for IPOs, which contributed to the success of the privatisations of the Eighties. Abolished in the Nineties, it should be redesigned to give entrepreneurs the option to earmark a percentage of their IPOs for the investing public.</span></em><br /><em><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></em><span style="font-family: Arial, Helvetica, sans-serif;">The problem with this suggestion, from our point of view, is that central bank money surges are immutable. They wax and wane as steadily as the tide and are not subject to moderation based on structural changes affecting transactions.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Rolet is like a medical technician, suggesting ways a patient's pulmonary system can be revived after a heart attack. But the underlying problem, the one that caused the initial embolism, remains unaddressed.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">His "solution" doesn't deal with capitalism's unspoken flaws: monopoly money printing and corporate personhood. And thus his admiration for capitalism as a free-market phenomenon ought to be tempered, too. (Apparently, it's not.)</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Capitalism as it operates in the 21st century is bound by critical court decisions that affect economies around the world. Each economy that partakes of modern capitalism also accepts its artificial constraints – restrictions enforced by the state itself involving its fundamental corporate and banking pillars.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Rolet writes:</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><em><span style="font-family: Arial, Helvetica, sans-serif;">We must rediscover a form of popular capitalism that works for us all, rather than a gilded fraction of society. One that is built upon competitive but ethical practices, innovation, entrepreneurship and the notion that risk-taking and success are good things.</span></em><br /><em><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></em><span style="font-family: Arial, Helvetica, sans-serif;">This is an optimistic comment, indeed. Merely legalizing an additional funding source is surely not going to make the fundamental change that Rolet seeks. So long as central banks have monopoly money powers to generate unnecessary surges of money, so long as multinational corporations grow unrestrained thanks to the corporate personhood that shields executive from personality culpability, capitalism's boom-bust paradigm will remain unchecked.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Rolet concludes:</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><em><span style="font-family: Arial, Helvetica, sans-serif;">Distributing risk capital directly at the bottom of the entrepreneurial ladder rather than debt from the top via a handful of lenders will create a more sharing capitalism, with the corollary benefits of a less debt-dependent, less bankruptcy-prone and less fragile economic cycle.</span></em><br /><em><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></em><span style="font-family: Arial, Helvetica, sans-serif;">This is simply incorrect. It cannot be correct. So long as interest rates are held artificially low, boom-bust cycles will continue to plague capitalism. As no one really knows the "natural rate" of an economy's operation, it is very difficult for bankers to set interest rates at a "proper" level. They don't have the forward-looking tools to do it.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">This combined with newer methods of monetary stimulation such as quantitative easing virtually guarantee that economies will be regularly over-stimulated via rates set toward the zero-bound.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><strong style="float: left;"><span style="font-family: Arial, Helvetica, sans-serif;">Conclusion: </span></strong><br /><span style="font-family: Arial, Helvetica, sans-serif;">Rolet's points would make more sense if he addressed the reality of capitalism's monopoly structure and dirigisme before suggesting solutions to address a "free-market" that does not exist.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><a href="http://www.thedailybell.com/news-analysis/35972/Stock-Exchange-Head-Fix-Capitalism-by-Changing-the-Way-Companies-Are-Funded/"><span style="font-family: Arial, Helvetica, sans-serif;">Source</span></a>Anonymoushttp://www.blogger.com/profile/14547106675749492684noreply@blogger.com0tag:blogger.com,1999:blog-853396052790090582.post-80399414565027648282015-01-05T02:31:00.000-08:002017-01-02T01:40:55.869-08:0011 Predictions Of Economic Disaster In 2015 From Top Experts All Over The Globe<span style="font-family: Arial, Helvetica, sans-serif;"><a href="http://theeconomiccollapseblog.com/archives/11-predictions-economic-disaster-2015-top-experts-globe/2015-public-domain" rel="attachment wp-att-8172"></a>Will 2015 be a year of financial crashes, economic chaos and the start of the next great worldwide depression? Over the past couple of years, we have all watched as global financial bubbles have gotten larger and larger. Despite predictions that they could burst at any time, they have just continued to expand. But just like we witnessed in 2001 and 2008, all financial bubbles come to an end at some point, and when they do implode the pain can be extreme. Personally, I am entirely convinced that the financial markets are more primed for a financial collapse now than they have been at any other time since the last crisis happened nearly seven years ago. And I am certainly not alone. At this point, the warning cries have become a deafening roar as a whole host of prominent voices have stepped forward to sound the alarm. The following are 11 predictions of economic disaster in 2015 from top experts all over the globe…</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><strong>#1</strong> <a href="http://kingworldnews.com/fleckenstein-warns-2015-year-fantasy-dies/" target="_blank" title="Bill Fleckenstein">Bill Fleckenstein</a>: “They are trying to make the stock market go up and drag the economy along with it. It’s not going to work. There’s going to be a big accident. When people realize that it’s all a charade, the dollar will tank, the stock market will tank, and hopefully bond markets will tank. Gold will rally in that period of time because it’s done what it’s done because people have assumed complete infallibility on the part of the central bankers.”</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><strong>#2</strong> <a href="http://www.telegraph.co.uk/finance/economics/11322623/Ten-warning-signs-of-a-market-crash-in-2015.html" target="_blank" title="John Ficenec">John Ficenec</a>: “In the US, Professor Robert Shiller’s cyclically adjusted price earnings ratio – or Shiller CAPE – for the S&P 500 is currently at 27.2, some 64pc above the historic average of 16.6. On only three occasions since 1882 has it been higher – in 1929, 2000 and 2007.”</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><strong>#3</strong> <a href="http://www.telegraph.co.uk/finance/economics/11312671/The-year-of-dollar-danger-for-the-world.html" target="_blank" title="Ambrose Evans-Pritchard">Ambrose Evans-Pritchard</a>, one of the most respected economic journalists on the entire planet: </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">“The eurozone will be in deflation by February, forlornly trying to ignite its damp wood by rubbing stones. Real interest rates will ratchet higher. The debt load will continue to rise at a faster pace than nominal GDP across Club Med. The region will sink deeper into a compound interest trap.”</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><strong>#4</strong> <a href="http://www.bloomberg.com/news/2014-11-10/predictors-of-29-crash-see-65-chance-of-2015-recession.html" target="_blank" title="The Jerome Levy Forecasting Center">The Jerome Levy Forecasting Center</a>, which correctly predicted the bursting of the subprime mortgage bubble in 2007: “Clearly the direction of most of the recent global economic news suggests movement toward a 2015 downturn.”</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><strong>#5</strong> <a href="http://kingworldnews.com/paul-craig-roberts-stunning-2015-predictions-time-west-can-collapse/" target="_blank" title="Paul Craig Roberts">Paul Craig Roberts</a>: “At any time the Western house of cards could collapse. It (the financial system) is a house of cards. There are no economic fundamentals that support stock prices — the Dow Jones. There are no economic fundamentals that support the strong dollar…”</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><strong>#6</strong> <a href="http://www.businessinsider.com/david-tice-is-bearish-2014-12" target="_blank" title="David Tice">David Tice</a>: “I have the same kind of feel in ’98 and ’99; also ’05 and ’06. This is going to end badly. I have every confidence in the world.”</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><strong>#7</strong> <a href="http://www.bloomberg.com/news/2014-12-29/u-s-bond-sentiment-is-worst-since-disastrous-09-as-fed-shifts.html" target="_blank" title="Liz Capo McCormick and Susanne Walker">Liz Capo McCormick and Susanne Walker</a>: “Get ready for a disastrous year for U.S. government bonds. That’s the message forecasters on Wall Street are sending.”</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><strong>#8</strong> <a href="http://www.zerohedge.com/news/2014-12-29/9-trillion-us-dollar-carry-trade-blew-oil-russia-and-brazil%E2%80%A6-whats-next" target="_blank" title="Phoenix Capital Research">Phoenix Capital Research</a>: “Just about everything will be hit as well. Most of the ‘recovery’ of the last five years has been fueled by cheap borrowed Dollars. Now that the US Dollar has broken out of a multi-year range, you’re going to see more and more ‘risk assets’ (read: projects or investments fueled by borrowed Dollars) blow up. Oil is just the beginning, not a standalone story.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">If things really pick up steam, there’s over $9 TRILLION worth of potential explosions waiting in the wings. Imagine if the entire economies of both Germany and Japan exploded and you’ve got a decent idea of the size of the potential impact on the financial system.”</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><strong>#9</strong> <a href="http://usawatchdog.com/oil-derivatives-explode-in-early-2015-rob-kirby/" target="_blank" title="Rob Kirby">Rob Kirby</a>: “What this breakdown in the crude oil price is going to spawn another financial crisis. It will be tied to the junk debt that has been issued to finance the shale oil plays in North America. It is reported to be in the area of half a trillion dollars worth of junk debt that is held largely on the books of large financial institutions in the western world. When these bonds start to fail, they will jeopardize the future of these financial institutions. I do believe that will be the signal for the Fed to come riding to the rescue with QE4. I also think QE4 is likely going to be accompanied by bank bail-ins because we all know all western world countries have adopted bail-in legislation in their most recent budgets. The financial elites are engineering the excuse for their next round of money printing . . . and they will be confiscating money out of savings accounts and pension accounts. That’s what I think is coming in the very near future.”</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><strong>#10</strong> <a href="http://www.shtfplan.com/headline-news/chain-reaction-of-problems-coming-in-2015-collapse-will-be-on-a-scale-that-is-many-magnitudes-greater-than-2008_12292014" target="_blank" title="John Ing">John Ing</a>: “The 2008 collapse was just a dress rehearsal compared to what the world is going to face this time around. This time we have governments which are even more highly leveraged than the private sector was.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">So this time the collapse will be on a scale that is many magnitudes greater than what the world witnessed in 2008.”</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><strong>#11</strong> <a href="http://kingworldnews.com/gerald-celente-will-trigger-panic-wall-street-around-world-2015/" target="_blank" title="Gerald Celente">Gerald Celente</a>: “What does the word confidence mean? Break it down. In this case confidence = con men and con game. That’s all it is. So people will lose confidence in the con men because they have already shown their cards. It’s a Ponzi scheme. So the con game is running out and they don’t have any more cards to play.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">What are they going to do? They can’t raise interest rates. We saw what happened in the beginning of December when the equity markets started to unravel. So it will be a loss of confidence in the con game and the con game is soon coming to an end. That is when you are going to see panic on Wall Street and around the world.”</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">If you have been following <a href="http://theeconomiccollapseblog.com/" title="my website">my website</a>, you know that I have been pointing to 2015 for quite some time now.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">For example, in my article entitled “<a href="http://theeconomiccollapseblog.com/archives/the-seven-year-cycle-of-economic-crashes-that-everyone-is-talking-about" title="The Seven Year Cycle Of Economic Crashes That Everyone Is Talking About">The Seven Year Cycle Of Economic Crashes That Everyone Is Talking About</a>“, I discussed the pattern of financial crashes that we have witnessed every seven years that goes all the way back to the Great Depression. The last two major stock market crashes began in 2001 and 2008, and now here we are seven years later.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Will the same pattern hold up once again?</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">In addition, there are many other economic cycles that seem to indicate that we are due for a major economic downturn. I discussed quite a few of these theories in my article entitled “<a href="http://theeconomiccollapseblog.com/archives/if-economic-cycle-theorists-are-correct-2015-to-2020-will-be-pure-hell-for-the-united-states" title="If Economic Cycle Theorists Are Correct, 2015 To 2020 Will Be Pure Hell For The United States">If Economic Cycle Theorists Are Correct, 2015 To 2020 Will Be Pure Hell For The United States</a>“.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">But just like in 2000 and 2007, there are a whole host of doubters that are fully convinced that the party can continue indefinitely. Even though our economic fundamentals continue to get worse, our debt levels continue to grow and every objective measurement shows that Wall Street is more reckless and more vulnerable to collapse than ever before, they mock the idea that a financial collapse is imminent.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">So let’s see what happens in 2015.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">I have a feeling that it is going to be an extremely “interesting” year.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><a href="http://theeconomiccollapseblog.com/archives/11-predictions-economic-disaster-2015-top-experts-globe"><span style="font-family: Arial, Helvetica, sans-serif;">Source</span></a>Anonymoushttp://www.blogger.com/profile/14547106675749492684noreply@blogger.com0tag:blogger.com,1999:blog-853396052790090582.post-59287682146181652222015-01-02T04:08:00.000-08:002017-01-02T01:40:55.860-08:00When BTFD Fails: Hedge Funds Say "Enough Is Enough", Start Covering Bullish Crude Bets<span style="font-family: Arial, Helvetica, sans-serif;">Having been trained well to BTFD in any and everything, after weeks of picking bottoms, clutching falling knives, and being run over, <a href="http://www.bloomberg.com/news/2014-12-31/hedge-funds-surrender-to-oil-rout-as-bullish-bets-drop.html">Bloomberg reports</a> hedge funds finally pulled back from bets on higher oil prices - <strong>reducing their net-long position in WTI crude for the first time in four weeks</strong>, cutting their holdings by 5% in the week ended Dec. 23. <strong><em>“Traders just said enough is enough,” </em></strong>Phil Flynn, a senior market analyst at the Price Futures Group in Chicago, said by phone. <em>"They were tired of trying to guess the bottom of the market and missing. <strong>We don’t have a bottom yet and there’s still a ways to go</strong>."</em></span><br /><br /><span style="font-family: Arial, Helvetica, sans-serif;"><a href="http://www.bloomberg.com/news/2014-12-31/hedge-funds-surrender-to-oil-rout-as-bullish-bets-drop.html"><em>As Bloomberg reports</em></a>,</span><br /><blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><span style="font-family: Arial, Helvetica, sans-serif;"><strong>Speculators reduced their net-long position in West Texas Intermediate crude for the first time in four weeks, cutting their holdings by 5 percent</strong> in the week ended Dec. 23, Commodity Futures Trading Commission data showed yesterday. <strong><span style="text-decoration: underline;">Long wagers dropped the most since August.</span></strong> </span><br /><br /><span style="font-family: Arial, Helvetica, sans-serif;"><strong>“Traders just said enough is enough,”</strong> Phil Flynn, a senior market analyst at the Price Futures Group in Chicago, said by phone. <strong>“They were tired of trying to guess the bottom of the market and missing. We don’t have a bottom yet and there’s still a ways to go.’”</strong></span><br /><br /><span style="font-family: Arial, Helvetica, sans-serif;">The net-long position in WTI dropped by 10,784 contracts to 206,939 in the week ended Dec. 23, the report showed. <strong>Long positions fell 5.1 percent while shorts decreased 5.6 percent.</strong></span><br /><br /><span style="font-family: Arial, Helvetica, sans-serif;">The report was delayed because of the Christmas holiday last week.</span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">It looks like there is a lot more pain to unwind yet...</span><br /><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/01/20150101_oil1.jpg"><span style="font-family: Arial, Helvetica, sans-serif;"><img height="296" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/01/20150101_oil1_0.jpg" width="600" /></span></a><br /><br /><span style="font-family: Arial, Helvetica, sans-serif;">As we've seen before...</span><br /><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/01/20150101_oil2.jpg"><span style="font-family: Arial, Helvetica, sans-serif;"><img height="297" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/01/20150101_oil2_0.jpg" width="600" /></span></a><br /><br /><a href="http://www.zerohedge.com/news/2015-01-01/when-btfd-fails-hedge-funds-say-enough-enough-start-covering-bullish-crude-bets"><span style="font-family: Arial, Helvetica, sans-serif;">Source</span></a>Anonymoushttp://www.blogger.com/profile/14547106675749492684noreply@blogger.com0tag:blogger.com,1999:blog-853396052790090582.post-50796275238999113402014-12-31T23:41:00.000-08:002017-01-02T01:40:55.850-08:00Who Is Behind The Oil War, And How Low Will The Price Of Crude Go In 2015?<span style="font-family: Arial, Helvetica, sans-serif;"><a href="http://theeconomiccollapseblog.com/archives/behind-oil-war-low-will-price-crude-go-2015/war-peace-sign-public-domain-2" rel="attachment wp-att-8167"></a>Who is to blame for the staggering collapse of the price of oil? Is it the Saudis? Is it the United States? Are Saudi Arabia and the U.S. government working together to hurt Russia? And if this oil war continues, how far will the price of oil end up falling in 2015? As you will see below, some analysts believe that it could ultimately go below 20 dollars a barrel. If we see anything even close to that, the U.S. economy could lose millions of good paying jobs, billions of dollars of energy bonds could default and we could see <a href="http://theeconomiccollapseblog.com/archives/plummeting-oil-prices-destroy-banks-holding-trillions-commodity-derivatives" title="trillions of dollars of derivatives">trillions of dollars of derivatives</a> related to the energy industry implode. The global financial system is already extremely vulnerable, and purposely causing the price of oil to crash is one of the most deflationary things that you could possibly do. Whoever is behind this oil war is playing with fire, and by the end of this coming year the entire planet could be dealing with the consequences.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Ever since the price of oil started falling, people have been pointing fingers at the Saudis. And without a doubt, the Saudis have manipulated the price of oil before in order to achieve geopolitical goals. The following is an excerpt from a recent article <a href="http://oilprice.com/Energy/Oil-Prices/Did-The-Saudis-And-The-US-Collude-In-Dropping-Oil-Prices.html" target="_blank" title="by Andrew Topf">by Andrew Topf</a>…</span><br /><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">We don’t have to look too far back in history to see Saudi Arabia, the world’s largest oil exporter and producer, using the oil price to achieve its foreign policy objectives. In 1973, Egyptian President Anwar Sadat convinced Saudi King Faisal to cut production and raise prices, then to go as far as embargoing oil exports, all with the goal of punishing the United States for supporting Israel against the Arab states. It worked. The “oil price shock” quadrupled prices. </span></blockquote><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">It happened again in 1986, when Saudi Arabia-led OPEC allowed prices to drop precipitously, and then in 1990, when the Saudis sent prices plummeting as a way of taking out Russia, which was seen as a threat to their oil supremacy. In 1998, they succeeded. When the oil price was halved from $25 to $12, Russia defaulted on its debt.</span> </blockquote><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">The Saudis and other OPEC members have, of course, used the oil price for the obverse effect, that is, suppressing production to keep prices artificially high and member states swimming in “petrodollars”. In 2008, oil peaked at $147 a barrel. </span></blockquote><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Turning to the current price drop, the Saudis and OPEC have a vested interest in taking out higher-cost competitors, such as US shale oil producers, who will certainly be hurt by the lower price. Even before the price drop, the Saudis were selling their oil to China at a discount. OPEC’s refusal on Nov. 27 to cut production seemed like the baldest evidence yet that the oil price drop was really an oil price war between Saudi Arabia and the US.</span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">If the Saudis wanted to stabilize the price of oil, they could do that immediately by announcing a production cutback.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">The fact that they have chosen not to do this says volumes.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">In addition to wanting to harm U.S. shale producers, some believe that the Saudis are determined to crush Iran. This next excerpt comes from a recent <a href="http://www.dailymail.co.uk/news/article-2884454/How-oil-s-world-s-potent-weapon-Forget-nuclear-arms-U-S-Saudis-oil-price-crash-topple-regimes-Russia-Iran-sabotage-Scot-Nationalists.html" target="_blank" title="Daily Mail article">Daily Mail article</a>…</span><br /><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Above all, Saudi Arabia and its Gulf allies see Iran — a bitter religious and political opponent — as their main regional adversary. </span></blockquote><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">They know that Iran, dominated by the Shia Muslim sect, supports a resentful underclass of more than a million under-privileged and angry Shia people living in the gulf peninsula — a potential uprising waiting to happen against the Saudi regime. </span></blockquote><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">The Saudis, who are overwhelmingly Sunni Muslims, also loathe the way Iran supports President Assad’s regime in Syria — with which the Iranians have a religious affiliation. They also know that Iran, its economy plagued by corruption and crippled by Western sanctions, desperately needs the oil price to rise. And they have no intention of helping out. </span></blockquote><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">The fact is that the Saudis remain in a strong position because oil is cheap to produce there, and the country has such vast reserves. It can withstand a year — or three — of low oil prices.</span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">There are others out there that are fully convinced that the Saudis and the U.S. are actually colluding to drive down the price of oil, and that their real goal is to destroy Russia.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">In fact, Venezuela’s President Nicolas Maduro openly promoted this theory during a recent speech <a href="http://www.reuters.com/article/2014/12/30/us-venezuela-oil-idUSKBN0K802020141230" target="_blank" title="on Venezuelan national television">on Venezuelan national television</a>…</span><br /><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">“Did you know there’s an oil war? And the war has an objective: to destroy Russia,” he said in a speech to state businessmen carried live on state TV. </span></blockquote><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">“It’s a strategically planned war … also aimed at Venezuela, to try and destroy our revolution and cause an economic collapse,” he added, accusing the United States of trying to flood the market with shale oil. </span></blockquote><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Venezuela and Russia, which both have fractious ties with Washington, are widely considered the nations hardest hit by the global oil price fall.</span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">And as I discussed <a href="http://endoftheamericandream.com/archives/this-is-how-much-russians-hate-america" target="_blank" title="just the other day">just the other day</a>, Russian President Vladimir Putin seems to agree with this theory…</span><br /><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">“We all see the lowering of oil prices. There’s lots of talk about what’s causing it. Could it be an agreement between the U.S. and Saudi Arabia to punish Iran and affect the economies of Russia and Venezuela? It could.”</span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Without a doubt, Obama wants to “punish” Russia for what has been going on in Ukraine. Going after oil is one of the best ways to do that. And if the U.S. shale industry gets hurt in the process, that is a bonus for the radical environmentalists in Obama’s administration.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">There are yet others that see this oil war as being even more complicated.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Marin Katusa believes that this is actually <a href="http://finance.yahoo.com/news/oil-wars--opec--russia---shale-182539804.html" target="_blank" title="a three-way war">a three-way war</a> between OPEC, Russia and the United States…</span><br /><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">“It’s a three-way oil war between OPEC, Russia and North American shale,” says Marin Katusa, author of “<a href="http://amzn.to/1rB1dyA" target="_blank" title="The Colder War">The Colder War</a>,” and chief energy investment strategist at Casey Research. </span></blockquote><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Katusa doesn’t see production slowing in 2015: “We know that OPEC will not be cutting back production. They’re going to increase it. Russia has increased production to all-time highs.” With Russia and OPEC refusing to give up market share how will the shale industry compete? </span></blockquote><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Katusa thinks the longevity and staying power of the shale industry will keep it viable and profitable. “The versatility and the survivability of a lot of these shale producers will surprise people. I don’t see that the shale sector is going to collapse over night,” he says. Shale sweet spots like North Dakota’s Bakken region and Texas’ Eagle Ford area will help keep production levels up and output steady.</span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Whatever the true motivation for this oil war is, it does not appear that it is going to end any time soon.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">And so that means that the price of oil is going to go lower.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;">How much lower?</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">One analyst recently told <a href="http://money.cnn.com/2014/12/31/investing/crude-oil-52-dollars-even-lower/index.html?iid=HP_LN" target="_blank" title="CNN">CNN</a> that we could see the price of oil dip into the $30s next year…</span><br /><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Few saw the energy meltdown coming. Now that it’s here, industry analysts warn another move lower is possible as the momentum remains firmly to the downside.</span> </blockquote><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">“If this doesn’t hold, we could go back to price levels in late 2008 and early 2009 — down in the $30s. There’s no reason why it couldn’t happen,” said Darin Newsom, senior analyst at Telvent DTN.</span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Others are even more pessimistic. For instance, <a href="http://www.smh.com.au/business/comment-and-analysis/oil-could-fall-to-us20-over-the-coming-year-20141231-12fv9q.html" target="_blank" title="Jeremy Warner of the Sydney Morning Herald">Jeremy Warner of the Sydney Morning Herald</a>, who correctly predicted that the price of oil would fall below $80 this year, is now forecasting that the price of oil could fall all the way down to $20 next year…</span><br /><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Revisiting the past year’s predictions is, for most columnists a frequently humbling experience. The howlers tend to far outweigh the successes. Yet, for a change, I can genuinely claim to have got my main call for markets – that oil would sink to $US80 a barrel or less – spot on, and for the right reasons, too. </span></blockquote><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Just in case you think I’m making it up, this is what I said 12 months ago: “My big prediction is for $US80 oil, from which much of the rest of my outlook for the coming year flows. It’s hard to overstate the significance of a much lower oil price – Brent at, say, $US80 a barrel, or perhaps lower still – yet this is a surprisingly likely prospect, the implications of which have been largely missed by mainstream economic forecasters.”</span> </blockquote><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">If on to a good thing, you might as well stick with it; so for the coming year, I’m doubling up on this forecast. Far from bouncing back to the post crisis “normal” of something over $US100 a barrel, as many oil traders seem to expect, my view is that the oil price will remain low for a long time, sinking to perhaps as little as $US20 a barrel over the coming year before recovering a little.</span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">But even Warner’s chilling prediction is not the most bearish.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">A technical analyst named Abigail Doolittle recently told <a href="http://www.cnbc.com/id/102303607" target="_blank" title="CNBC">CNBC</a> that under a worst case scenario the price of oil could fall as low as $14 a barrel…</span><br /><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">No one really saw 2014’s dramatic plunge in oil price coming, so it’s probably fair to say that any predictions about where it’s going from here fall somewhere between educated guesses and picking a number out of a hat. </span></blockquote><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">In that light, it’s less than shocking to see one analyst making a case—albeit in a pure outlier sense—for a drop all the way below $14 a barrel. </span></blockquote><blockquote><span style="font-family: Arial, Helvetica, sans-serif;"><a href="http://www.cnbc.com/id/46101575" target="_blank" title="Abigail Doolittle">Abigail Doolittle</a>, who does business under the name Peak Theories Research, posits that current chart trends point to the possibility that crude has three downside target areas where it could find support—$44, $35 and the nightmare scenario of, yes, $13.65.</span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">But the truth is that none of those scenarios need to happen in order for this oil war to absolutely devastate the U.S. economy and the U.S. financial system.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">There is a very strong correlation between the price of oil and the performance of energy stocks and energy bonds. But over the past couple of weeks this correlation has been broken. The following chart comes from <a href="http://www.zerohedge.com/news/2014-12-31/crude-carnage-resumes-wti-52-handle-new-cycle-lows-heres-why" target="_blank" title="Zero Hedge">Zero Hedge</a>…</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><div class="separator" style="clear: both; text-align: center;"><a href="http://theeconomiccollapseblog.com/archives/behind-oil-war-low-will-price-crude-go-2015/energy-stocks-zero-hedge" rel="attachment wp-att-8163" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: Arial, Helvetica, sans-serif;"><img alt="Energy Stocks - Zero Hedge" class="aligncenter size-large wp-image-8163" height="225" src="http://theeconomiccollapseblog.com/wp-content/uploads/2014/12/Energy-Stocks-Zero-Hedge-425x225.jpg" width="425" /></span></a></div><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">It is inevitable that at some point we will see energy stocks and energy bonds come back into line with the price of crude oil.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">And it isn’t just energy stocks and bonds that we need to be concerned about. There is only one other time in all of history when the price of oil has crashed by more than 50 dollars in less than a year. That was in 2008 – just before the great financial crisis that erupted in the fall of that year. For much, much more on this, please see my previous article entitled “<a href="http://theeconomiccollapseblog.com/archives/guess-happened-last-time-price-oil-crashed-like" title="Guess What Happened The Last Time The Price Of Oil Crashed Like This?…">Guess What Happened The Last Time The Price Of Oil Crashed Like This?…</a>”</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Whether the price of oil crashed or not, we were already on the verge of massive financial troubles.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">But the fact that the price of oil has collapsed makes all of our potential problems much, much worse.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">As we enter 2015, keep an eye on energy stocks, energy bonds and listen for any mention of problems with derivatives. The next great financial crisis is right around the corner, but most people will never see it coming until they are blindsided by it.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><a href="http://theeconomiccollapseblog.com/archives/behind-oil-war-low-will-price-crude-go-2015"><span style="font-family: Arial, Helvetica, sans-serif;">Source</span></a>Anonymoushttp://www.blogger.com/profile/14547106675749492684noreply@blogger.com0tag:blogger.com,1999:blog-853396052790090582.post-56971546644032146862014-12-31T04:53:00.000-08:002017-01-02T01:40:55.858-08:00The Rigging Triangle Exposed: The JPMorgan-British Petroleum-Bank Of England Cartel Full Frontal<span style="font-family: Arial, Helvetica, sans-serif;">The name Dick Usher is familiar to regular readers: he was the head of spot foreign exchange for JPMorgan, and the bank's alleged chief FX market manipulator, who was <a href="http://www.wsj.com/articles/three-senior-traders-fired-amid-global-forex-probe-1413312358">promptly fired </a>after it was revealed that JPM was the bank coordinating the biggest FX rigging scheme in history, as initially revealed in "<a href="http://www.zerohedge.com/news/2013-10-14/another-jpmorganite-busted-market-manipulation">Another JPMorganite Busted For "Bandits' Club" Market Manipulation</a>." Subsequent revelations - which would have been impossible without the <a href="https://twitter.com/liamvaughanBBG">tremendous reporting </a>of Bloomberg's Liam Vaughan - showed that JPM was not alone: as recent legal actions confirmed, virtually <em><strong>every single bank </strong></em>was also a keen FX rigging participant. However, the undisputed ringleader was always America's largest bank, which would make sense: having a virtually unlimited balance sheet, JPM could outlast practically any margin call, and make money while its far smaller peers were closed out of trades... and existence. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">But while the past year revealed that FX rigging was a just as pervasive, if not even more profitable industry for banks than the great Libor-fixing scandal (for details see "<a href="http://www.zerohedge.com/news/2014-11-12/how-rig-fx-pro-bandit-and-make-millions-process">How To Rig FX Like A Pro "Bandit", And Make Millions In The Process</a>"), the conventional wisdom was that it involved almost exclusively bankers at the largest global banks including JPM, Goldman, Deutsche, Barclays, RBS, HSBC, and UBS. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Now, courtesy of some more brilliant reporting by Vaughan, we can finally link banks with the other two facets of what has emerged to be an unprecedented FX-rigging "triangle" cartel: private sector companies that have no direct banking operations yet who have intimate prop trading exposure, as well as central banks themselves. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">By "banks" we, of course, refer to the ringleader itself: JP Morgan, and its former head of spot forex trading in London, Dick Usher. As for the company that benefited from its heretofore secret participation in the biggest FX rigging scandal in history, it is none other than British Petroleum.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">We learn about all this thanks to a story that begins with, of all thing, a story about freshwater fishing at a lake in Essex called "Wharf Pool." </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">As Bloomberg reports, "an hour away by train, in London’s financial district, the lake’s owners ply their trade. <strong>Wharf Pool was purchased for about 250,000 pounds ($388,000) in 2012 by Richard Usher, the former JPMorgan Chase & Co. trader at the center of a global investigation into corruption in the foreign-exchange market, and Andrew White, a currency trader at oil company BP Plc.</strong> "</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">The plot thickens: was there more than a passing connection between the head FX trader at JPM and White "who’s known in the market as Tubby, is one of half a dozen spot currency traders working for British Petroleum (BP) in London. He and his colleagues, most of them ex-bankers, decide which firms will carry out their foreign-exchange transactions. That makes them prized clients for banks seeking a slice of the business and a glimpse into potentially market-moving trades. Passing on information was a way to curry favor."</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">In short, a typical Over The Counter relationship between a banker and a buyside client, one which is largely unregulated and where the bank hopes to be able to frontrun the client's orders by providing the client with confidential market moving information, thus generating more business with the client in the future. In this case, however, the buyside client was not a typical hedge fund, but the FX trading group at one of the world's largest energy companies: a group which trades enormous amounts of FX every single day, both with intent to hedge, and to generate a profit.</span><br /><blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><span style="font-family: Arial, Helvetica, sans-serif;">The trading unit’s primary role is to manage the firm’s exposure to financial risks, including fluctuations in interest rates and foreign exchange, according to the company’s website. <strong>Unlike at most corporations, it also is run as a profit center, which means that in addition to hedging risks, traders can place their own bets on the direction of markets. </strong>The company doesn’t break out how much money the treasury unit makes</span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Basically, BP's energy operations were just a balance sheet funding cover: what its FX traders did in the front office was trade for a profit pure and simple, just like any prop trading desk or hedge fund anywhere else in the world. And it did so in collusion with a small group of market rigging individuals all located at the biggest, market-moving banks around the globe. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">A quick reminder on the "Cartel":</span><br /><blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><span style="font-family: Arial, Helvetica, sans-serif;"><strong>The four banks in the Cartel controlled about 45 percent of the global spot-currency market, </strong>according to a survey by Euromoney Institutional Investor Plc, so information about their plans was valuable. Some days they worked together to push around the 4 p.m. fix, settlements with the banks show. </span><br /><br /><span style="font-family: Arial, Helvetica, sans-serif;"><strong>The Cartel chat room was started by Usher as early as 2009, according to a person with knowledge of the matter. Usher had risen quickly to the top of his profession</strong>. After joining HBOS Plc in 2001, he was hired by Royal Bank of Scotland Group Plc in 2003 and a year later collected an industry award on his employer’s behalf.... The four members of the chat room ribbed each other like high school buddies. Usher was referred to as Feston because he resembled an overweight version of British chef Heston Blumenthal, according to people who have seen the chats. Matt Gardiner, a UBS trader based in Zurich, was called Fossil because he was a few years older than the others. Rohan Ramchandani, Citigroup’s cricket-loving head of spot trading, was called Ruggy, while Chris Ashton, the last one to join, was dubbed Robocop. </span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Now we can add BP too, a BP which doesn't even hide the prop-trading nature of its FX "hedging" group, which is located two blocks away from, wait for it, JPMorgan! </span><br /><blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><span style="font-family: Arial, Helvetica, sans-serif;">The two dozen traders in BP’s treasury trading unit are housed above a Porsche showroom on the second and third floors of the company’s office in Canary Wharf, an area of reclaimed docklands three miles east of the City of London, the historic financial district. <strong>The building, two blocks from JPMorgan’s, was completed in 2003 on the cusp of an oil boom.</strong> Lights in meeting rooms flick from green to white when someone enters, in keeping with the company’s corporate colors. </span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">And while until today the last sentence would be pure conjecture, thanks to Bloomberg's release of exchanges between JPM and BP revealing the extent to which the "cartel" would stoop in order to make money for its members on a daily, <em>risk-free </em>basis, it is not a fact.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;">From <a href="http://www.bloomberg.com/news/2014-12-30/-cartel-chat-room-tied-to-bp-gave-fx-tips-from-banks-to-client.html">Bloomberg</a>:</span><br /><blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><span style="font-family: Arial, Helvetica, sans-serif;">Copies of messages sent to BP traders over the course of a year were provided to Bloomberg News by a person with access to the online conversations. The person, who redacted the names of banks sending the messages and dates of conversations, <strong>said they came from firms whose senior foreign-exchange traders belonged to a chat room called “The Cartel” that was set up by Usher and included dealers at JPMorgan, Citigroup Inc., Barclays Plc and UBS Group AG.</strong></span><br /><br /><span style="font-family: Arial, Helvetica, sans-serif;">The information offered an insight into currency moves minutes, sometimes hours before they happened. <strong>The messages could drag the U.K.’s biggest energy company into a scandal that has enveloped 11 banks and led to more than 30 traders from London to Singapore losing or being suspended from their jobs</strong>. Last month six banks were fined $4.3 billion for passing along information about their clients and working together to rig foreign-exchange markets. </span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Presenting BP: collusive, insider trading hedge fund extraordinaire. All comparisons and similarities to Enron are purely coincidental.</span><br /><blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><span style="font-family: Arial, Helvetica, sans-serif;">With revenue of almost $400 billion last year and operations in about 80 countries, BP trades large quantities of currency each day. <span style="text-decoration: underline;"><strong>Traders at the company regularly received valuable information from counterparts at some of the world’s biggest banks -- including tips about forthcoming trades, details of confidential client business and discussions of stop-losses, the trigger points for a flurry of buying or selling -- according to four traders with direct knowledge of the practice. </strong></span></span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Of course, in any non-banana republic, whose regulatory and enforcement divisions were not captured by the same megacorp that is in question here, this would have been the basis for a massive lawsuit, one which would ultimately seek to break apart the company's "profitable" FX trading division from its core energy business. But not in this republic: after all, between one of the world's biggest banks and one of the world's biggest corporations, and a corrupt, crony government it should be clear to everyone by now just who calls the shots.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">BP of course is quick to note that it did nothing illegal: after all the last thing the company needs is its own Enron-type scandal, where an ancillary business manages to drag down the entire company. Sure enough it has promptly denied everything:</span><br /><blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><span style="font-family: Arial, Helvetica, sans-serif;">BP said in a statement that it conducted an internal review after regulators began probing currency markets. “BP’s FX desk has relationships as a customer with 26 relationship banks, including JPMorgan, Citibank and Barclays,” the London-based company said. “<strong>BP has a robust framework of compliance requirements and internal controls which are constantly reviewed, and maintains an open dialogue with the appropriate regulators.”</strong></span><br /><br /><span style="font-family: Arial, Helvetica, sans-serif;">The firm, <strong>the third-largest publicly traded company in the U.K</strong>., hasn’t been investigated by regulators looking into currency manipulation, according to a person with knowledge of the matter. Chris Hamilton, a spokesman for the U.K. Financial Conduct Authority, declined to comment, as did representatives of JPMorgan, Barclays, Citigroup and UBS. </span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">So how does one explain the joint equity interest in - for example - the little fishing lake ?</span><br /><blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><span style="font-family: Arial, Helvetica, sans-serif;">“BP’s Code of Conduct includes mandatory requirements for employees to disclose potential conflicts of interests internally,” the company said in response to a question about the commercial relationship between Usher and White through the fishing lake. “<strong>Following such disclosure, steps are taken to manage and monitor these appropriately. It is our policy not to comment on individuals.” </strong></span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">In other words, one can't. Which is how BP likes it. Which is also why Bloomberg was quite cautious with how it phrases BP's involvement into something that could promptly turn out to be Britain's own Enron:</span><br /><blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><span style="font-family: Arial, Helvetica, sans-serif;">While there’s no evidence that any BP traders were members of the Cartel, <strong>Usher participated in at least one chat room with White</strong>, according to a person who has examined conversations that included both men. <strong>It couldn’t be determined from the messages reviewed by Bloomberg News who sent the information to BP or whether BP employees acted on any of the tips. </strong></span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">They did, and this is how we know: "Traders at BP haven’t been accused of any wrongdoing. Last year, <span style="text-decoration: underline;"><strong>within hours of regulators announcing probes, the chats between BP and the banks were shut down</strong></span>, people with knowledge of the matter said. Soon after, a compliance officer was placed on the desk for the first time, one of them said."</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Not exactly something one would do if one was, for lack of a better term, innocent. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">And while we hold our breath until UK's justice (don't laugh please) system assigns blame - by which we mean a $19.95 one time settlement with a promise by BP it will never do it again - here is a glimpse at the full extent of just how this rigging took place:</span><br /><blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><span style="font-family: Arial, Helvetica, sans-serif;">In the clubby, lightly regulated world of foreign exchange, traders passed around tips to their circle of trusted contacts like candy. <strong>The victims: mutual-fund investors, pensioners and day traders who took the other side of a transaction at a lower price than they would have if they had the same information</strong>....</span><br /><br /><span style="font-family: Arial, Helvetica, sans-serif;">In an undated message seen by Bloomberg News, a trader at a bank told BP he would be buying U.S. dollars against Australian dollars at the WM/Reuters fix at 4 p.m. in London, the one-minute window during which traders around the world exchange billions of dollars of currency on behalf of pension funds and asset managers. <strong>The message was received at BP about 30 minutes before the fix. By tipping his hand, the sender was telling BP about a potential fall in the Australian currency </strong></span><br /><br /><span style="font-family: Arial, Helvetica, sans-serif;"><strong>At about 3 p.m. in London on a different afternoon, BP traders were informed that banks were selling dollars against the yen at 4 p.m.</strong> In a third message, this one arriving as the oil company’s traders drank their first coffee of the morning, a trader at a bank said he had just sold a quantity of an emerging-market currency, to whom and the price he received.</span><br /><br /><span style="font-family: Arial, Helvetica, sans-serif;">The settlements the banks reached with regulators reveal that in the minutes before 4 p.m. the traders would meet on chat rooms to discuss their positions and how they planned to execute them. Sometimes they also agreed to work together to push exchange rates around to boost their profits <strong>–- something they called “double-teaming.”</strong></span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">All of the above would be, if proven, criminal but in line with expectations: after all when given a carte blanche to do anything they want, humans will do just that, even if it means trample every regulation known to man. In fact, the bigger one's balance sheet, the greater one's percevied (and realized) leeway of sneaking between the legal cracks, facilitated by the number of politicians and regulators that have been coopted and outright purchased courtesy of said big balance sheet. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">However, the true punchline is this: "[Usher] joined JPMorgan as head of spot foreign exchange in 2010, <span style="text-decoration: underline;"><strong>where he became a member of the now-defunct Bank of England’s Chief Dealers Sub Group</strong></span>, a collection of about a dozen currency traders and central bank officials who met at restaurants and bank offices to discuss industry developments."</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">In other words, all of this rigging, all of the FX manipulation, all of the criminal abuse of naive, innocent market participants <strong>took place with the Bank of England's own seal of approval. </strong>Which, of course, is why the BofE itself had to scapegoat its own sacrificial lamb to avoid any further connection to this criminal cartel - something it did in early November when it fired its Chief FX dealer, <a href="http://www.zerohedge.com/news/2014-11-12/bank-england-fires-chief-fx-dealer-participating-currency-rigging-scandal">Martin Mallett</a>, who on November 12 "was dismissed by the Bank of England yesterday for “<strong>serious misconduct relating to failure to adhere to the Bank’s internal policies</strong>,” according to a statement by the central bank today."</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">And just like that all loose ends have been cut off, although if we were Mr. Mallett, we would certainly keep away from loose nail guns, hot tubs or airplanes for the next several months.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;">In the meantime, after the mandatory pause of 3-6 months, all rigging, all manipulation, and all criminal abuse with blessing from the central bank itself will quietly return, because until the great (and as increasingly more predict, very violent) reset finally comes, nothing can possibly change in a system as corrupt as this one. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><a href="http://www.zerohedge.com/news/2014-12-30/rigging-triangle-exposed-jpmorgan-british-petroleum-bank-england-cartel-full-frontal"><span style="font-family: Arial, Helvetica, sans-serif;">Source</span></a>Anonymoushttp://www.blogger.com/profile/14547106675749492684noreply@blogger.com0tag:blogger.com,1999:blog-853396052790090582.post-37710038992177832542014-12-30T03:10:00.000-08:002017-01-02T01:40:55.829-08:00How Increased Inefficiency Explains Falling Oil Prices<span style="font-family: Arial, Helvetica, sans-serif;"><strong>Since about 2001, several sectors of the economy have become increasingly inefficient,</strong> in the sense that it takes more resources to produce a given output, such as 1000 barrels of oil. I believe that this growing inefficiency explains both slowing world economic growth and the sharp recent drop in prices of many commodities, including oil.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">The mechanism at work is what I would call the <em>crowding out effect</em>. <strong>As more resources are required for the increasingly inefficient sectors of the economy, fewer resources are available to the rest of the economy.</strong> As a result, wages stagnate or decline. Central banks find it necessary lower interest rates, to keep the economy going.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Unfortunately, with stagnant or lower wages, consumers find that goods from the increasingly inefficiently sectors are increasingly unaffordable, especially if prices rise to cover the resource requirements of these inefficient sectors. For most periods in the past, commodities prices have stayed close to the cost of production (at least for the “marginal producer”). <strong>What we seem to be seeing recently is a drop in price to <em>what consumers can afford</em> for some of these increasingly unaffordable sectors. Unless this situation can be turned around quickly, the whole system risks collapse.</strong></span><br /><strong><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></strong><u><strong><span style="font-family: Arial, Helvetica, sans-serif;">Increasingly Inefficient Sectors of the Economy </span></strong></u><br /><u><strong><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></strong></u><span style="font-family: Arial, Helvetica, sans-serif;">We can think of several increasingly inefficient sectors of the economy:</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><strong>Oil.</strong> The problem with oil is that much of the easy (and thus, cheap) to extract oil is gone. There seems to be a great deal of expensive-to-extract oil available. Some of it is deep under the sea, even under salt layers. Some of it is very heavy and needs to be “steamed” out. Some of it requires “fracking.” The extra extraction steps require the use of more human labor and more physical resources (oil and gas, metal pipes, fresh water), but output rises by very little. Liquid extenders to oil, such as biofuels and coal-to-liquid operations, also tend to be heavy resource users, further exacerbating the problem of the rising cost of production for liquid fuels.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">I have described the problem behind rising costs as <em>increasing inefficiency of production</em>. The technical name for our problem is <em>diminishing returns. </em>This situation occurs when increased investment offers ever-smaller returns. Diminishing returns tends to occur to some extent whenever resources of any kind are extracted from the ground. If the extent of diminishing returns is small enough, total costs can be kept flat with technological advances. Our problem now is that diminishing returns have grown to such an extent that technological advances are no longer keeping pace. As a result, the cost of producing many types of goods and services is growing faster than wages.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><strong>Fresh Water. </strong>This is another increasingly inefficient sector of the economy, in terms of the amount of fresh water that can be produced with a given amount of resource investment. In some places deeper wells are needed; in others, desalination plants. Water from deeper wells may need additional treatment to remove the harmful minerals and radiation found in water from deeper wells.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">As a result of the extra investment required, the price of fresh water is rising in many parts of the world. The higher cost is often justified as necessary to encourage conservation of a scarce resource. But from the point of view of the buyer, what is happening is an increasing price for the same product, or diminishing returns.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><strong>Grid Electricity.</strong> The price of grid electricity has been rising faster than inflation in many parts of the world for a variety of reasons. If nuclear plants are planned, they are being made in ways that are hopefully safer, but are more expensive. Adding solar PV and offshore wind is expensive, especially when grid changes to accommodate them are considered as well. Functioning plants of various kinds (coal, nuclear) are being replaced with other generation because of pollution problems (CO2) or feared pollution problems (radiation). The cost of producing electricity then rises because the cost of electricity from a fully depreciated plant of any kind is extremely low. Building any kind of new facility, no matter how theoretically efficient over, say, the next 40 years, requires physical resources and people’s time, in the current time period.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">As these changes are made, the amount of grid electricity output does not rise very much compared to the resources and human labor required in the current period. The user experiences a higher cost for the same product. From the perspective of the user’s pocketbook, the result looks like diminishing returns.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><strong>Metals and Other Minerals.</strong> In the same manner as oil, we extract the easiest (and cheapest) to extract minerals first. These minerals include metals and other substances such as uranium, lithium, and rare earth minerals. Part of the problem is that ores of lower concentration must be used, leading to a need to move larger amounts of extraneous material that later must be disposed of. These ores may be found deeper in the ground or in more remote locations, adding to extraction costs. Furthermore, oil is generally used in the extraction of these minerals. As the cost of oil cost rises, this adds to the cost of mineral extraction, making minerals increasingly unaffordable. <strong> </strong></span><br /><strong><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></strong><span style="font-family: Arial, Helvetica, sans-serif;"><strong>Advanced Education of Would-Be Workers. </strong>If 20% of the work force needs college educations, it makes sense to provide 20% of young people workers with college educations. If the percentage of workers requiring college educations rises to 30%, it makes sense to provide 30% of young people with college educations. Small percentages of more advanced degree recipients are needed as well.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Instead of following a common sense approach of educating only the number of workers who need a given amount of education with that amount of education, in the United States we have gotten onto a treadmill of encouraging increasing numbers of young people to pursue bachelors, masters, and Ph.D. degrees. To make matters worse, universities have established requirements that faculty do more research and less teaching, whether or not research in a particular field can be expected to benefit the economy to any significant extent. To accommodate this research-intensive approach, a layer of deans is added to work on obtaining funding for research. In addition, students are often provided more comfortable dorms with private rooms and private baths, adding costs to obtaining advanced education but not really enhancing future job prospects.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">All of this produces an incredibly expensive higher education system, with costs way out of proportion to the increased wages a student can expect to earn from attending the university. Students are expected to pay for much of the cost of this system through debt to be paid back after graduation (or after dropping out). In some ways, the system might be viewed as an extremely expensive system of sorting out would-be job applicants, with widget makers with a college degree or master’s degree viewed more favorably than ones without, even if there is little use for an advanced degree in that particular job.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><strong>US Medical System. </strong>The US Medical system is particularly affected by the trend toward more advanced degrees. This approach results in a system where patients need to visit a variety of specialists to handle fairly common ailments, such as a broken arm or dementia in old age. To compensate for the high cost of their advanced education, specialists charge high fees. Hospitals have a large number of testing instruments at their disposal and use them whenever there is even slight justification.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Health outcomes in the US are remarkably bad compared to other developed countries, based on a study by the US Institute of Medicine called <a href="http://www.iom.edu/Reports/2013/US-Health-in-International-Perspective-Shorter-Lives-Poorer-Health.aspx">U.S. Health in International Perspective: Shorter Lives, Poorer Health</a>.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><a href="http://www.zerohedge.com/news/2014-12-29/how-increased-inefficiency-explains-falling-oil-prices"><span style="font-family: Arial, Helvetica, sans-serif;">Read the entire article</span></a>Anonymoushttp://www.blogger.com/profile/14547106675749492684noreply@blogger.com0tag:blogger.com,1999:blog-853396052790090582.post-17104621609534807582014-12-29T02:41:00.000-08:002017-01-02T01:40:55.819-08:00Google Further Crapifies Search, Exploiting Both Users and Advertisers<span style="font-family: Arial, Helvetica, sans-serif;">Google is a case study of why we need antitrust enforcement. With Google at 97% market share in search [correction: 67%], Yahoo and Bing don’t have enough of a foothold for it to be worth the gamble of trying to beat Google at search, even with Google having degraded its service so badly that there are now obvious ways that a challenger could best them.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">I had assumed that the ongoing crapification of Google was for a commercial purpose, namely to optimize the browser for shopping and the hell with everything else. But as we will discuss in more detail below, my experience in poking around to see about buying a new laptop demonstrates that Google has gotten worse at that too. Lambert, who I enlisted to confirm my experience, was appalled and said, “What have they been doing with all that money?” But as we’ll see, there is an evil purpose here, just not the evil purpose we’d first assumed. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">It isn’t as if the degradation of Google is a new phenomenon. I used Google heavily while researching ECONNED, which was written on an insanely tight time schedule. It worked really well then. But even a mere year later, by late 2010, the search algo had been restructured in some mysterious way to make the results much less targeted, and it’s been downhill since then. The most recent appalling change came in the last few months: eliminating the ability to do date range searches. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">But all of this ruination was so Google could make more money by optimizing for shopping right? Apparently not. I’ve idly and actively looked for stuff on the Internet over the years. A reliable way to do that was to type in a rough or better yet precise description of the product/product name plus the word “price”. That would usually get you a nice list of vendors selling what you wanted so you could comparison shop, and often you’d get links to sites like Nextag which would provide a list of vendors with all-in prices as well as vendro ratings.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Over the last two months, I’ve been looking for an easy-to-install monochrome laser printer (I have NO time to deal with anything more demanding than plug and play, and sadly, dealing with printers on a Mac is not plug and play). I didn’t get any good answers from all my searching and would up buying a used version of my current out-of-production printer. In retrospect, it appears some of my search hassles may have been due to Google, not to having atypical requirements.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">To the case study: I am thinking of buying a new Macbook Air and January is when prices are supposed to be the best for computers.* My current one is over four years old and seems to be functioning just fine, but one of my buddies says her employer never would have let me keep a machine that long. And I am only a one-computer household these days, so if my machine died, I’d have to run to the Apple Store and make an emergency purchase (which is one of the advantages of living in Manhattan) But even though I keep a backup on a hard disk on Time Machine, I recently deleted an important file and had to pull a backup off Time Machine. Perhaps I wasn’t doing it right, but the file on the backup disk was months behind the current version, which makes me a bit nervous.**</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">I want a Macbook Air with a 13 inch screen (I attach an external monitor at home, but on the road, as now, I can get by with just the existing real estate) and 8GB of RAM. All I need is the newest version and the most RAM I can get, since you can’t upgrade the RAM in these solid-state Macs. Note that the 8GB is not the standard configuration, but some stores carry it in stock. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">So what happens when I search? Lambert and I used slightly different search strategies, but w got similar results (and yes, I used “8GB” rather than “8 gb”). Here are his results:</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><img alt="IMG_2488" class="aligncenter size-large wp-image-62065" height="800" src="http://www.nakedcapitalism.com/wp-content/uploads/2014/12/IMG_2488-768x1024.png" width="600" /></span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Why is this so terrible? First, none of the five sponsored links takes you to an 8GB Macbook Air. The Amazon link doesn’t either. The Apple one takes you to a landing page for Macbook Airs (the Apple site is an abortion, too much making you read the sales hype and too many clicks to actually make a purchase if you are so inclined). The Macmall link is the only good link on the mess of links. It takes you to a page of MacBook Airs with enough specs listed with each that you can see what one with 8GB of RAM costs. The eBay link was close to useless, in that I’m not interested in a used machine (if I were, I would have gone to eBay directly and yes, the overwhelming majority are used). But even worse, if you click through, it is again not limited to 8GB machines and the results are almost entirely off spec. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">But you can see how this defeats comparison shopping, which is one of the alleged big bennies of the Web, if you have to click through a whole bunch of irrelevant links to get to a quote or two. And my version was in some ways worse than Lambert’s. I played with some variants (as in putting terms in quotes, including the screen size). The patterns were that I’d either get a first page with looked like product listings, with at most two of ten links, and none of the sponsored links taking me to what I was looking for. The other results would be heavy on reviews when I was not looking for reviews (and I would not typically get reviews on a “price” search).</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">So what is going on here? It becomes clearer when you search for something simpler. Apple just launched a swanky new iMac called the Retina iMac for its “retina” screen. Look at these search results:</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><img alt="Screen shot 2014-12-27 at 1.44.32 AM" class="aligncenter size-full wp-image-62066" height="452" src="http://www.nakedcapitalism.com/wp-content/uploads/2014/12/Screen-shot-2014-12-27-at-1.44.32-AM.jpg" width="600" /></span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Now we do have Apple as the first Google-like search result and sponsored link as before but in this case, you go straight to a landing page with what you want to see. But the Apple links being better in this case has everything to do with Apple quirks, so we’ll put that aside.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Of the rest of the first page standard search listings, the ONLY other one that takes you to a page where you can buy the product is the Amazon listing, #4 on the page. All the rest are product reviews.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">What can we infer? Unless you are Amazon or the manufacturer, if you are a retailer and want to show up on the first page of a Google search, you have to pay for an ad. Otherwise. Google appears to be making sure you won’t get there for free.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Yet Google isn’t making much if any effort to make sure those sponsored ads are all that relevant to you as shopper. Now if it is a unique product, like the Retina iMac, the sponsored ads are more likely to be a match with the search target. But even so, several are links to irrelevant models, such as the BestBuy, WalMart, and Stuccu ads. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">So Google is indeed being optimized…..for its own advertising. The message to all but the very biggest vendors is that you must pay to show up. No more getting in the back door by being picked up by an price listing service that gets on Google’s first page, or by matching the search terms well. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">But as a user, it looks like Google is cooking its own goose. These crappy results makes me much more inclined to go to Amazon and look at Amazon merchants, and compare price at 3 or 4 Apple vendors I know are reliable with returns in case I get a bum machine. The fact that I’m not getting remotely usable results from Google searches and that means I’ll skip them. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">How long will it take for advertisers to realize that they are effectively being scammed by Google, that they are often paying for bad clickthroughs because Google is putting them on search results where they don’t belong but the retailer has written successful clickbait ads so they get bad visits? My impression is that Google Adsense reporting is opaque enough that they might not recognized Google’s culpability (indeed, I can see Google optimizing its algos to keep the bad clickthroughs at the highest level that an advertiser would tolerate). </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">And in the meantime, all we have as customers to look forward to is the Godzilla versus Mothra battle of Amazon versus Google in shopping search. It’s enough to make one think nostalgically about malls. And I was never a fan of them either. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Update: Some readers say that they can access date range searches through “Search Tools. One provided a link as to how it displays. It sits on the far right of the list of options that starts with “Web Images Videos” etc.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">I do not have Search Tools appear, as you can see below. So my statement is accurate. I cannot access date range searches:</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><img alt="Screen shot 2014-12-27 at 7.40.14 PM" class="aligncenter size-full wp-image-62078" height="114" src="http://www.nakedcapitalism.com/wp-content/uploads/2014/12/Screen-shot-2014-12-27-at-7.40.14-PM.jpg" width="600" /><br /> _____<br /></span><br /> <span style="font-family: Arial, Helvetica, sans-serif;">* Just so you know, I hate buying new computers. I hate all the time the setup takes, I hate that some things never work the same, I hate having to find and download drivers. My pattern is to use machines until they die or become so hopelessly memory constrained that I am forced to abandon them. I used my NeXT for 10 and a half years and my TiBook for over eight. The idea of giving up a working machine after four years and a few months offends the Yankee in me, aside from the large tax on my time of getting a new machine broken in.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /> ** Time Machine does dutifully chug with great frequency and slows down my machine in the process, so it appears to be doing something. I’m just not convinced that it is the right something. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><a href="http://www.nakedcapitalism.com/2014/12/google-further-crapifies-search-exploiting-both-users-and-advertisers.html"><span style="font-family: Arial, Helvetica, sans-serif;">Source</span></a>Anonymoushttp://www.blogger.com/profile/14547106675749492684noreply@blogger.com0tag:blogger.com,1999:blog-853396052790090582.post-75492421326464787192014-12-26T04:42:00.000-08:002017-01-02T01:40:55.866-08:00Correcting Scrooge’s Economics<span style="font-family: Arial, Helvetica, sans-serif;">As Charles Dickens himself admits, <a href="http://www.amazon.com/Christmas-Carol-Dover-Thrift-Editions/dp/0486268659/?tag=misesinsti-20" target="_blank">Ebenezer Scrooge</a> is a thoroughly peaceful man, <a href="http://mises.org/library/case-ebenezer">guilty of no true crime</a>, who has robbed no one. Therefore, we must conclude that his wealth is a sign of his ability to please at least some people, and as Michael Levin notes:<strong><em> “Dickens doesn't mention Scrooge's satisfied customers, but there must have been plenty of them for Scrooge to have gotten so rich.”</em></strong></span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><strong><em><br /></em></strong></span><span style="font-family: Arial, Helvetica, sans-serif;">But as he is a person with bad manners and a disagreeable personality, many have conflated Scrooge’s personality traits with his business practices, although the two are unrelated phenomena. As a miser and businessman, Scrooge provides numerous valuable services to the community including, <a href="http://direct.mises.org/library/defending-miser" target="_blank">as Walter Block has shown</a>, driving down prices and making liquidity available to those who, unlike the wrongly maligned misers, have been either unwilling or unable to save in comparable amounts.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">His business prowess notwithstanding, however, a closer look at Scrooge’s economics suggests some significant blind spots in several areas. <strong>Scrooge, as displayed in many of his comments and observations, misunderstands some key economics concepts.</strong> Indeed, Scrooge’s ignorance in these areas may contribute to his bad habit of assuming that others are taking advantage of him, or are too foolish or lazy to attain what Scrooge has.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><h4><u><span style="font-family: Arial, Helvetica, sans-serif;">Value is Subjective</span></u></h4><div><u><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></u></div><span style="font-family: Arial, Helvetica, sans-serif;">As Carl Menger <a href="http://mises.org/library/carl-menger-pioneer-empirical-theory">demonstrated long ago</a>, value is subjective and different persons value goods differently depending on the person’s goals in life. Does the person want to raise a family? Perhaps he wishes to be an independent scholar who devotes all his time to reading and research. Perhaps he wishes to be a hermit who prays most of the day. Money prices reflect these goals, and a hermit will value a video game console differently from a gamer. But of course not everything can be calculated in terms of money prices. A like or dislike of Christmas, for example, cannot be calculated this way.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><strong>Scrooge, who is apparently not a Christmas enthusiast, greatly values money, and likes to have plenty of it handy. But why?</strong> If we accept the analysis of Scrooge’s former fiancée, (a fairly reliable source on that period in his life) she suggests that Scrooge “fear[s] the world too much” and that all his other hopes “have merged into the hope of being beyond the chance of its sordid reproach.”</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">So here we see the real root of Scrooge’s fondness of money. In <em>Human Action</em>, Ludwig von Mises explained that human action stems from a desire to “remove unease” about one’s present situation. With Scrooge we see (if his fiancée is to be believed) that the thought of being destitute is a source of constant unease for him. Thus, he desires to build as much wealth as possible in the hope of being beyond the possibility of poverty.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><strong>As Scrooge’s primary goals is poverty avoidance, this colors how he views all economic action.</strong> His peers tend to not recognize this in him, either dismissing his as simply “odious,” as Mrs. Cratchit does, or as unhappy.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">In fact, as Levin demonstrates, Scrooge appears rather content with his situation at this point, although, unfortunately — just as Scrooge’s colleagues and family members do not appreciate his ranking of values — Scrooge does not seem to appreciate that others might value money for different reasons.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">This is demonstrated in an early exchange with Scrooge’s nephew. When wished a merry Christmas by his nephew Fred, Scrooge retorts "What right have you to be merry? What reason have you to be merry? You're poor enough."</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">To this Fred replies, "What right have you to be dismal? What reason have you to be morose? You're rich enough."</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Fred is probably wrong about Scrooge being morose, and he also appears to not understand <em>why</em> Scrooge values money.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">But at the same time, Scrooge also displays an ignorance of value subjectivity by suggesting that Fred’s ability to be merry is rendered impossible by his poverty.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">(Now, in this case, “poverty” as used by Scrooge is a highly relative term. We know from the text that Fred enjoys a comfortable middle-class lifestyle in which he can afford a servant girl, plenty of lamplight, and a Christmas feast for his many friends. Moreover, Fred’s wife is, according to Scrooge’s own assessment, “exceedingly pretty.”)</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">In this same exchange, although Fred doesn’t understand how Scrooge could be happy, it is Fred who displays a better understanding of economic value when, in response to Scrooge’s declaration of Fred’s poverty, Fred declares “There are many things from which I might have derived good by which I have not profited.” By this, Fred means that he profits from many things which bring him no <em>money</em> profits.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><h4><u><span style="font-family: Arial, Helvetica, sans-serif;">Is Scrooge More Prudent?</span></u></h4><div><u><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></u></div><span style="font-family: Arial, Helvetica, sans-serif;">It is often supposed by both critics and defenders of Scrooge (and by Scrooge himself) that he is a more skilled businessman than most, and that he is more savvy, more intelligent, and more prudent in his management of his own affairs. Other people, Scrooge supposes, are more likely to be incautious and trust to fate for good fortune.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><strong><span style="font-family: Arial, Helvetica, sans-serif;">But there is ample evidence that the lack of material wealth enjoyed by others is not due to any lack of intelligence or prudence, but simply that they value things differently from Scrooge.</span></strong><br /><strong><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></strong><span style="font-family: Arial, Helvetica, sans-serif;">Scrooge’s ex-fiancée, for example, is no fool when it comes to money. In her final conversation with Scrooge, she notes that when she and Scrooge had agreed to marry, it was assumed that they would be poor in the beginning, but that “we could improve our worldly fortune by our patient industry.” In this, she is expressing what most young heads of household know — that in most circumstances, households build wealth slowly, since raising a family is costly. Her words hardly suggest a woman who plans to throw caution to the wind.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><strong>There is no denying that Scrooge is highly skilled at attaining what <em>he</em> values</strong>, (i.e., large amounts of material wealth in the form of cash and revenue-producing capital) but it does not follow that others do not possess these things because they are less intelligent or less industrious. Others simply value other things in life such as child rearing, Christmas celebrations, and consumption as well as the things that can be obtained by “patient industry.”</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Scrooge is quick to assume that others are imprudent for marrying (he is dismayed by his nephew’s decision to marry for love) or doing other activities they find to be pleasurable when those same energies could be devoted to making money. But Scrooge is simply imposing his value systems on others, although in this, he is no more guilty than Dickens, Fred, and all the others who insist that Scrooge absolutely must celebrate Christmas.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><h4><u><span style="font-family: Arial, Helvetica, sans-serif;">Bob Cratchit: Victim or Wily Negotiator?</span></u></h4><div><u><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></u></div><strong><span style="font-family: Arial, Helvetica, sans-serif;">In addition to lacking insight on the subjective nature of value, Scrooge also fails to understand the intricacies of voluntary exchange.</span></strong><br /><strong><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></strong><span style="font-family: Arial, Helvetica, sans-serif;">Much is made by Dickens of how Cratchit is the hapless victim of Scrooge’s miserliness, and in response, the contrarians note that if Cratchit were indeed underpaid, as Dickens implies, then Cratchit is free to find employment elsewhere.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">This is no doubt true, all things being equal, but we also find that Scrooge himself, well before his change of heart at the end of the story, is open to re-negotiating the terms of Cratchit’s employment. Scrooge denies his openness to renegotiation in words, but shows it with his actions.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">When Cratchit asks for a vacation day on Christmas day, Scrooge <em>claims</em> that this is akin to “picking a man’s pocket,” but ultimately, Cratchit negotiates for himself the day off, with nothing more than a tepid “be here all the earlier next morning,” from Scrooge. Scrooge was not <em>compelled</em> to give Cratchit the day off, so given Scrooge’s clearly demonstrated immunity to social pressures, it stands to reason that Scrooge concluded it was more profitable to give Cratchit the day off than face the possibility of losing Cratchit as his clerk. But even if he <em>were </em>susceptible to being shamed into giving the day off, he is nonetheless voluntarily doing so.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><strong>At this point, Scrooge shows that his claim of having his pocket picked is sheer nonsense since we plainly see that his demonstrated preference was to grant the day off. </strong>Scrooge cannot now claim that he was somehow robbed. If he felt he was being robbed, he could have denied Cratchit the day off. It turns out, however, that Cratchit, while not “underpaid,” is at least seen as a bargain employee by Scrooge, and so much so that Scrooge felt he could afford to voluntarily pay Cratchit a small raise in the form of a day off.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><h4><u><span style="font-family: Arial, Helvetica, sans-serif;">Poor Scrooge</span></u></h4><div><u><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></u></div><span style="font-family: Arial, Helvetica, sans-serif;"><strong>Ebenezer Scrooge asks very little of his fellow human beings. He only asks that they keep up their ends of the bargains in the business agreements they make.</strong> It was just his misfortune, then, that he is surrounded by a bevy of control freaks who are hell bent on making sure Scrooge enjoys Christmas in <em>just</em> the way they want him to.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Scrooge returns the favor by maintaining a ferociously low opinion of most others around him, concluding quite often that others are simply fools for choosing to enjoy the company of friends and family when there’s money to be made.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Ultimately, though, it’s all just an unfortunate misunderstanding, and one that might be improved by a reading of <a href="http://store.mises.org/Man-Economy-and-State-with-Power-and-Market-The-Scholars-Edition-P177.aspx" target="_blank"><em>Man, Economy, and State</em></a>.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><a href="http://www.zerohedge.com/news/2014-12-25/correcting-scrooge%E2%80%99s-economics"><span style="font-family: Arial, Helvetica, sans-serif;">Source</span></a>Anonymoushttp://www.blogger.com/profile/14547106675749492684noreply@blogger.com0tag:blogger.com,1999:blog-853396052790090582.post-17176065880981716062014-12-25T00:49:00.000-08:002017-01-02T01:40:55.822-08:00The Dangerous Economics of Shale Oil<span style="font-family: Arial, Helvetica, sans-serif;">For years, <a href="http://www.peakprosperity.com/search/apachesolr_search/shale%20oil" target="_blank">we've been warning</a> here at PeakProsperity.com that the <strong>economics of the US 'shale revolution' were suspect</strong>. Namely, that they've only been made possible by the new era of 'expensive' oil (an average oil price of between $80-$100 per barrel). We've argued that many players in the shale industry simply wouldn't be able to operate profitably at lower prices.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><strong><span style="font-family: Arial, Helvetica, sans-serif;">Well, with oil prices now suddenly sub-$60 per barrel, we're about to find out.</span></strong><br /><strong><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></strong><span style="font-family: Arial, Helvetica, sans-serif;">Using the traditional corporate income statement, it is difficult to determine if shale drilling companies make money. There are a lot of moving parts, some deliberate obfuscation at some companies, and the massive decline rates make analysis difficult – since so much of reported profitability depends on assumptions made regarding depreciation and depletion.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><u><strong><span style="font-family: Arial, Helvetica, sans-serif;">So, can shale oil be profitable? If so, at what price? And under what conditions?</span></strong></u><br /><u><strong><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></strong></u><span style="font-family: Arial, Helvetica, sans-serif;">I try to deconstruct all this here.</span><br /><h2><u><span style="font-family: Arial, Helvetica, sans-serif;">Technology</span></u></h2><span style="font-family: Arial, Helvetica, sans-serif;">A shale well consists of a vertical shaft that drives down into the earth to get to the right geological layer where the oil is located. Then the shaft bends 90 degrees, and extends horizontally 5000-10000 feet. It is in the horizontal section where the magic takes place. At intervals along the horizontal section, the “frac stages” happen, each of which fracture the surrounding rock to release the oil locked inside the rock.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Constructing a shale well happens in two stages. First both the vertical and horizontal sections of the well are drilled, and that costs around $4 million taking perhaps 20 days. Then, the well is “completed” - this is where the frac stages are placed. Each frac stage costs around $70k, and there are often 20-30 frac stages per well. The entire completion process costs around $4M. Once completed, the well starts producing oil and gas.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">The initial production (IP) of a new well is a critical number for estimating the total amount of oil likely to be produced over the lifetime of the well (“Estimated Ultimate Recovery” = EUR), along with the expected decline rate. While the EUR is a theoretical number and assumes a recovery time of 10-30 years, from a practical standpoint, companies need to recoup the costs of drilling the well within 3 years.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Shale drilling has dramatically improved over the past five years. Horizontal lengths have doubled, upgraded drill rigs result in fewer breakdowns and faster drilling speeds, pad drilling has eliminated the downtime required to move the drill.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Today's wells (vs wells drilled in 2008-2011) have horizontal sections twice as long, with three times more frac stages, with closer frac groupings, and the wells are drilled in about half the time. This results in wells that produce about twice as much, and take half the time to drill. However at the same time, many of the best spots have already been drilled, so the significant improvements in drilling efficiency have only been able to increase per-well production by a modest amount – perhaps 7%.</span><br /><h2><u><span style="font-family: Arial, Helvetica, sans-serif;">Regions, Geography, Decline Rates</span></u></h2><span style="font-family: Arial, Helvetica, sans-serif;">There are three primary geographical regions where shale oil drilling takes place: Bakken, Eagle Ford, and the Permian Basin. Total production in these three areas: 4.6 mbpd, or 92% of shale-region oil production in the US. Shale regions provide all the growth in US domestic oil production.</span><br /><div class="rtecenter" style="text-align: center;"><span style="font-family: Arial, Helvetica, sans-serif;"><img alt="" src="http://media.peakprosperity.com/images/us-shale-production-dft1.jpg" style="height: 450px; width: 600px;" /></span></div><span style="font-family: Arial, Helvetica, sans-serif;">Of these three areas, Bakken and Eagle Ford are the most productive oil shale areas, and of these two regions, I've selected the Bakken for a more detailed analysis.</span><br /><h2><u><span style="font-family: Arial, Helvetica, sans-serif;">Decline Rates</span></u></h2><span style="font-family: Arial, Helvetica, sans-serif;">The decline rate of shale is the defining characteristic of a shale well, and a shale region. Decline rates vary by region. On average, the Eagle Ford region has a 62% decline rate, the Bakken region overall has a 54% rate, and the Permian region (many wells there are not horizontal wells) declines at a 33% rate.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Individual wells decline more rapidly, and most steeply in their first year of production: Bakken wells decline at a 72% rate for the first year, and then more slowly in the following years. Many Permian wells are vertical wells, and so their decline rates are much more gradual, accounting for the slower Permian region decline rate.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">If a well's IP (initial production) is 1000 bbl/day, a 72% well decline rate means that one year later, that well will only be producing 280 bbl/day. With the IP=1000, the first year production is 205k bbls, and the EUR (lifetime theoretical) is 650k bbls. Here is a look at changes in the decline rates of the different regions over time. [source: <a href="http://www.eia.gov/petroleum/drilling/" title="http://www.eia.gov/petroleum/drilling/">http://www.eia.gov/petroleum/drilling/</a>]</span><br /><div class="rtecenter" style="text-align: center;"><span style="font-family: Arial, Helvetica, sans-serif;"><img alt="" src="http://media.peakprosperity.com/images/us-shale-decline-dft2.jpg" style="height: 450px; width: 600px;" /></span></div><h2><u><span style="font-family: Arial, Helvetica, sans-serif;">Drilling Rights</span></u></h2><span style="font-family: Arial, Helvetica, sans-serif;">In order to acquire the right to drill on a particular patch of land, the drilling company must purchase these rights from the landowner, and/or another drilling company that has already bought the rights. In the most productive areas such as the Bakken shale, rights are expensive, with recent transactions priced around $10k per acre.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">After a fair amount of experimentation, drillers have determined they can put from 1-3 wells on one square mile before the wells start interfering with each other. There are 640 acres per square mile, therefore drilling rights are about $6.4M/square mile. This makes land costs to be around $2M-$6M per well.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Before you can drill, you have to get the rights. Typically, you go into debt in order to buy the rights, then you start drilling to recoup your investment and pay the interest costs on all that debt. Maybe you can even sell those rights to someone else for a profit. That's the ponzi aspect of shale: buying land rights with junk bond financing for $2000/acre, and selling those right off to an unsuspecting oil major for $10,000/acre.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Rights only last from 5-10 years. Failure to drill = wasted money.</span><br /><h2><u><span style="font-family: Arial, Helvetica, sans-serif;">Shale Economics</span></u></h2><span style="font-family: Arial, Helvetica, sans-serif;">To understand the economics of shale, we view company performance through the lens of accounting. A good accountant is a historian, honestly assessing the success or failure of a particular venture. (A bad accountant – at Enron, for example – is a fiction writer).</span><br /><span style="font-family: Arial, Helvetica, sans-serif;">So first, some accounting terms:</span><br /><ul><li><span style="font-family: Arial, Helvetica, sans-serif;"><b>Revenues</b>: barrels of oil sold x the price of oil. Its pretty simple.</span></li><li><span style="font-family: Arial, Helvetica, sans-serif;"><b>Capex</b>: capital expenditures. In shale, this is all the costs involved in drilling and completing wells, purchasing equipment, land drilling rights, and other long-lived assets required to run the business.</span></li><li><span style="font-family: Arial, Helvetica, sans-serif;"><b>Opex</b>: operating expenses. In shale, this includes all the other expenses the business has:</span><br /><ul><li><span style="font-family: Arial, Helvetica, sans-serif;">well operations: insurance, repairs, maintenance, pumping costs, etc</span></li><li><span style="font-family: Arial, Helvetica, sans-serif;">G&A: general & administrative costs – including paying the CEO</span></li><li><span style="font-family: Arial, Helvetica, sans-serif;">interest expense: for bonds, bank loans, preferred stock dividends</span></li><li><span style="font-family: Arial, Helvetica, sans-serif;">transport: getting the oil to market</span></li><li><span style="font-family: Arial, Helvetica, sans-serif;">royalties: paying the landowner a chunk of your revenues</span></li><li><span style="font-family: Arial, Helvetica, sans-serif;">production taxes: paying the state a chunk of your revenues</span></li></ul></li></ul><ul><li><span style="font-family: Arial, Helvetica, sans-serif;"><b>depreciation/depletion</b>: a fraction of capex – it should be the decline rate of each well multiplied by the cost of the land plus the cost to drill & complete.</span></li><li><span style="font-family: Arial, Helvetica, sans-serif;"><b>Income</b> = <b>revenues</b> – <b>opex</b> – <b>depreciation</b></span><br /><ul><li><span style="font-family: Arial, Helvetica, sans-serif;">here is where the funny stuff happens. If you want your company to <b>look</b> profitable, you will tell your accountant to write a work of fiction rather than be a historian. Instead of having her use your actual 72% well decline rate, you will instead tell her to use, say, 10%. </span></li><li><span style="font-family: Arial, Helvetica, sans-serif;">Key concept: <b>understating depreciation increases reported profits</b>. Why would you do this? Well, if you wanted to sell your shale properties to a greater fool, you probably want to look profitable in the meantime. Or if you wanted to get a bank loan, or sell junk bonds, you probably want to look profitable too. Banks are more clever than junk bond buyers, however; they use ratios that depend on EBITDA, not phony “profits.”</span></li></ul></li><li><span style="font-family: Arial, Helvetica, sans-serif;"><b>EBITDA</b>: <b>revenues – opex</b></span><br /><ul><li><span style="font-family: Arial, Helvetica, sans-serif;">Simply put, this is “earnings before accounting/depletion fraud.”</span></li><li><span style="font-family: Arial, Helvetica, sans-serif;">This is the number I use to study profitability in the shale world. I can then apply my own depreciation based on decline rates and figure out for myself how the business is really doing.</span></li></ul></li></ul><span style="font-family: Arial, Helvetica, sans-serif;">All right, armed with your new degree in shale accounting, let's look at a simple fictional example. The hypothetical One-Well Shale Company obtains property for $10k/acre, then drills and completes a Bakken shale well costing $9M, with an IP of 500 bbl/day, 1<sup>st</sup> year production: 102k bbl, decline rate 72%. Further, we assume an eventual 3 wells per square mile, and an oil price of $99/bbl.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><div class="rtecenter" style="text-align: center;"><span style="font-family: Arial, Helvetica, sans-serif;"><img alt="" src="http://media.peakprosperity.com/images/shale-article-chart-update1.jpg" style="height: 485px; width: 600px;" /></span></div><span style="font-family: Arial, Helvetica, sans-serif;">The income statement shows that with honest accounting, we are barely profitable just looking at the 3-year P&L statement. The price I selected wasn't an accident – I searched for the break-even price and found it at around $99/bbl. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">However, will this well at $99/bbl ever make back its drilling costs? It won't, since in the following years, the “fixed costs” for the company will be a heavier and heavier burden on the well whose production declines every year. Likely, $99/bbl is even too low. We can call it a “best case scenario” - only if we assume One Well Shale sells the well to someone else for $986k (the remaining depreciation) at the end of year 3.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">What's more, companies have already spent huge sums accumulating land, on which they've drilled a relatively smaller number of wells, so this “One-Well” shale company is definitely fictional. Take OAS, which has 468 wells in production (45k bbl/day = 98 bbl/well) and 779 square miles of land they've bought for $1.8 billion. That's only 0.6 wells per square mile. However, they've already spent the money for the land, so from a “cash flow basis”, they don't really count the land cost when answering the question: “do I want to drill a well here or not.” At this point, money to buy the land is gone, so from a corporate survival standpoint, all they ask is, “if I drop a well, will it pay me back in 3 years?” And in the current environment, they probably only look at year 1 when making this analysis.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">But from an overall economic analysis of shale profitability over the longer term, land cost really is an important factor, so we include it in our accounting. If we were to be hard-nosed, we would probably assume a “wells per sq mile” of 0.6, since that's the “actual debt burden” on the real drillers like OAS.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Now lets drop the oil price to $55/bbl and see what happens to One-Well Shale.</span><br /><div class="rtecenter" style="text-align: center;"><span style="font-family: Arial, Helvetica, sans-serif;"><img alt="" src="http://media.peakprosperity.com/images/shale-article-chart-update2.jpg" style="height: 489px; width: 600px;" /></span></div><span style="font-family: Arial, Helvetica, sans-serif;">Its a sea of red ink. Clearly this well loses money. It cost $9M to drill, and we get back $2M in EBITDA at the end of year 1, the best year for the well. By the end of year 3, EBITDA is negative. It is definitely not worthwhile to drill this well, not even if we assume the land is free.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">This represents the average well in the Bakken. At current prices, the average well loses money, no matter how you slice it. So how will this affect capex budgets in 2015? Here's one data point from OAS, a company for whom 100% of their production comes from the Bakken: they are cutting their capex budget in half, choosing only to drill in their better properties. [Source: an awesome, detailed, fact-filled investor document that Google located for me – one wonders if they meant to release it to the public: <a href="http://www.oasispetroleum.com/wp-content/uploads/2014/12/2014-12-OAS-IR-PresentationvFINAL.pdf">http://www.oasispetroleum.com/wp-content/uploads/2014/12/2014-12-OAS-IR-PresentationvFINAL.pdf</a>]</span><br /><h2><u><span style="font-family: Arial, Helvetica, sans-serif;">Hedging</span></u></h2><span style="font-family: Arial, Helvetica, sans-serif;">Shale producers don't want to expose themselves to bouncing oil prices – they have fixed costs, and so they'd prefer to have fixed revenues too. So they typically engage in oil price hedging to eliminate one big variable from their business plan. One-Well Shale certainly had big problems when oil dropped to $55/bbl; if One-Well had engaged in hedging, it might have been able to ride out the low prices at least for a time.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">There are many types of hedges available – our friendly banking establishment stands ready to provide all sorts of financial tools to shale companies to help them out. For a fee, of course. I'll start with the simple ones, and gradually get more complicated.</span><br /><ul><li><span style="font-family: Arial, Helvetica, sans-serif;">Swaps: buyer locks in a fixed price for oil. No upside, complete downside protection – you know exactly what price you'll get, and on what date. Low cost. This is why futures markets exist. Speculators take the risk, and companies get to operate in a more predictable world.</span></li><li><span style="font-family: Arial, Helvetica, sans-serif;">Puts: complete downside protection, unlimited upside. The higher the floor and the longer the date, the higher the cost. Puts are relatively expensive.</span></li><li><span style="font-family: Arial, Helvetica, sans-serif;">Collars: complete downside protection, lower cost, limited upside. Buyer writes a call, and buys a put. Upside available up to the call strike price, and the call helps make the put less expensive. As with the standard put, the higher the put's strike price and the farther out the date, the more expensive it is.</span></li><li><span style="font-family: Arial, Helvetica, sans-serif;">3-Way Collars: limited downside protection, limited upside, usually free cost. Buyer writes a call and a put, and buys another put. This complicated beast generally ends up being free, but only is good for maybe $10-$15 of coverage. It's probably a banker's delight. It sounds vaguely salacious.</span></li></ul><span style="font-family: Arial, Helvetica, sans-serif;">When you look at the company hedge book, which they report in their 10-Q, understanding just what sort of coverage they have is quite important. Swaps provide perfect coverage, while 3-way collars only protect against a fraction of the drop we've just experienced. And its important to match up the number of barrels of coverage to the oil production, to see the percentage of coverage the company has in place. A survey of shale companies shows a range of from 20-60% coverage, at an oil price of about 90.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Looking at our favorite Bakken company OAS, we see their hedge book below, helpfully provided in their investor document. It looks complicated. So we just look for key words: first, what type of hedges? Swaps, puts, & 2-way collars. Great, that's 100% coverage. Second, how much production do they represent? 1H 2015: 32k bbl day, and 2H 2015: 15k bbl/day. Let's assume OAS keeps production steady at 45k bbl/day. That's a 71% coverage for 1H 2015, and a 33% coverage for 2H 2015 at “around” $90/bbl. Looks like they'll be mostly ok for 1H 2015, but for 2H 2015 they will definitely be losing money if oil stays at $55/bbl.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><div class="rtecenter" style="text-align: center;"><span style="font-family: Arial, Helvetica, sans-serif;"><img alt="" src="http://media.peakprosperity.com/images/shale-table3-dft5.jpg" style="height: 285px; width: 599px;" /></span></div><span style="font-family: Arial, Helvetica, sans-serif;">Hedges can be cashed in at any time. A company with a trader as a CEO, or one that needs to raise cash to stay in business today might well decide to “go naked” and take their chances with market oil prices and close out their positions. One company did this just recently. CLR sold their entire hedge book in Q3 2014, raking in a cool $420 million. They did this (from what I can tell) when oil was trading at about $77 – about $20/bbl too early. They left $500 million on the table. Maybe more. And now they're fully exposed to $55 oil. Factoid: $420 million will fund <b>one month</b> of 3Q capex at CLR.</span><br /><h2><u><span style="font-family: Arial, Helvetica, sans-serif;">Shale History & Accumulated Debt</span></u></h2><span style="font-family: Arial, Helvetica, sans-serif;">One-Well Shale's “honest income statement” shows that 2014 shale technology is economical at $100 oil, assuming “average well production” - an IP of 500 is average in the Bakken.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Of course, shale companies must survive today, with oil at $55/bbl. Let's assume OAS gets serious, and drills only in their really hot areas. Viewed through the One Well Shale P&L statement, if I set the IP=750, and I set the oil price to $87/bbl, cash flow is $9M in the first year and a 3-year ROI of 67%. Through 1H 2015, OAS will be all right if they can just drill their best opportunities, and rely on their hedge book to keep them afloat.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">That's not the the same thing as asking if the wells they drill will be “profitable long term” since that $87/bbl price obtained via hedges will only last through 1H 2015. Once the hedges run out, those IP=750 wells will be just barely above break-even (after 3 years!) at $55/bbl. But for the moment, OAS can stay above water.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">I'm deliberately avoiding the question of how long-lived the shale resource is. I am just answering the question: what is the break-even oil price for drilling a Bakken shale well. The answer is, with an average well (IP=500) at a company with an average cost structure is long-term break-even at about $99/bbl, best case, assuming 3 wells per square mile and a property cost of $10k/acre.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><strong><span style="font-family: Arial, Helvetica, sans-serif;">Bottom line: the average US shale oil well is uneconomical even with hedging in place, since most hedging is around $90/bbl and the break-even is $99/bbl.</span></strong><br /><h2><u><span style="font-family: Arial, Helvetica, sans-serif;">The Risk We Now Face</span></u></h2><em><span style="font-family: Arial, Helvetica, sans-serif;">In <a href="http://www.peakprosperity.com/insider/90219/destruction-awaits" target="_blank">Part 2: The Destruction That Awaits</a>, we delve into the important question of the longevity of shale oil supply. The projections we can make from the latest data are quite frightening.</span></em><br /><em><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></em><em><span style="font-family: Arial, Helvetica, sans-serif;">As is the massive impact today's oil prices will have on the shale industry should they persist. Simply put, if oil prices stay at $55/bbl, we will eventually lose the vast bulk of US shale oil production, simply because perhaps 3/4 of even Bakken shale is just not economical at that price.</span></em><br /><em><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></em><em><span style="font-family: Arial, Helvetica, sans-serif;">And this prediction assumes the economy continues along as it has for the past several years. Should there be a serious economic contraction and/or a tightening of the credit markets, and the declines hit harder, many fewer shale drillers will be able to find any sort of funding, property sales will be fewer and for lower prices, and a lot more shale drillers will go bankrupt – and recoveries on those bankruptcies will be lower. Knock-on effects will hose the banks providing credit lines, vendors that provided services to companies and were not paid, and pension (and bond) funds that bought the junk bonds that are now worth pennies on the dollar. All of this will simply worsen the carnage to the shale sector.</span></em><br /><em><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></em><em><span style="font-family: Arial, Helvetica, sans-serif;"><a href="http://www.peakprosperity.com/insider/90219/destruction-awaits" target="_blank">Click here to access Part 2</a> of this report (free executive summary; <a href="http://www.peakprosperity.com/enroll" target="_blank">enrollment </a>required for full access)</span></em><br /><em><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></em><a href="http://www.zerohedge.com/news/2014-12-24/dangerous-economics-shale-oil"><span style="font-family: Arial, Helvetica, sans-serif;">Source</span></a>Anonymoushttp://www.blogger.com/profile/14547106675749492684noreply@blogger.com0tag:blogger.com,1999:blog-853396052790090582.post-47802045812060441782014-12-24T02:04:00.000-08:002017-01-02T01:40:55.846-08:00Christmas Economics: Challenging Some Common Beliefs<span style="font-family: Arial, Helvetica, sans-serif;">Christmas may be not so merry as we hope. Economists have argued that gift giving is an inefficient way to allocate resources, and it is widely suggested that Christmas brings a peak in prices and the number of suicides, or even disrupts the business cycle. This column discusses some conventional wisdom about Christmas and shows that economic research in fact runs counter to some of these common beliefs.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">The idea that Christmas might incur a welfare loss has been well known to economists since Joel Waldfogel published his research on the deadweight loss associated with the holiday season (Waldfogel 1993). In addition, several articles discuss topics like Christmas pricing, weight gain at Christmas, and the optimal height of Christmas trees. In a recent paper (Birg and Goeddeke 2014), we present findings that contradict some common beliefs about Christmas held by economists (and maybe non-economists too).</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><b><span style="font-family: Arial, Helvetica, sans-serif;">Do You Believe That Prices Peak During Christmas Time?</span></b><br /><b><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></b><span style="font-family: Arial, Helvetica, sans-serif;">Basic economic theory suggests that before Christmas, demand for Christmas-specific goods such as certain foods or consumer goods increases, causing the demand curve to shift outwards. As long as this is not accompanied by an increase in supply, we should expect to see higher equilibrium prices at Christmas. But empirical research shows the opposite – Warner and Barsky (1995) find falling prices for consumer goods such as action figures, power tools, and food processors. This is in line with the research of Chevalier et al. (2003) and MacDonald (2000) who show reduced prices for groceries. Different reasons for this (maybe at first sight) surprising result have been discussed. Warner and Barsky (1995) argue that due to higher economies of scale in price search during periods of high demand it pays-off for consumers to search more for lower prices before Christmas. The demand elasticity for each retailer is thus higher and this reduces prices. Another reason for lower prices might be a higher incentive for firms to deviate from tacit collusion during periods of high demand (Rotemberg and Saloner 1986). Nevo and Hatzitaskos (2006) estimate brand level demand for groceries, finding more price sensitive demand and changed brand preferences during periods of high demand. Consumers switch to cheaper brands and this reduces average prices.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">In some countries a popular belief (or rather fear) is that gas prices increase before long weekends or holidays such as Christmas as the increase in holiday travel increases demand for gasoline.<sup>1</sup> Is this true for Christmas time? Again, in contrast to the belief, researchers could not to show a price increase before Christmas in the US, Canada, or Australia.<sup>2</sup></span><br /><sup><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></sup><span style="font-family: Arial, Helvetica, sans-serif;">In one market where one would not have expected it, a price increase before Christmas has been clearly established. In countries celebrating Christmas, stock prices increase in the days before Christmas.<sup>3</sup> This particular price increase might be a surprise, at least for economists believing in Fama’s (1970) ‘Efficient Market Hypothesis’, according to which abnormal returns on predetermined occasions such as Christmas cannot exist, as the knowledge of that this effect exists should be sufficient for all rational investors to exploit this effect, so that it eventually disappears. But Chong et al. (2005) show that the Christmas effect declined in the US stock market over the last three decades of the twentieth century. In the long run, this pre-Christmas stock market effect might disappear.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><b><span style="font-family: Arial, Helvetica, sans-serif;">Do You Believe That the Number of Suicides Peaks Before Christmas?</span></b><br /><b><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></b><span style="font-family: Arial, Helvetica, sans-serif;">Another common belief is that holiday joy and cheer amplify loneliness and hopelessness and therefore increase suicide rates. Another reason discussed is that high expectations during the holiday season could only be disappointed and thereby cause suicides.<sup>4</sup> In a literature review, Carley (2004) shows that empirical research points again in the opposite direction – fewer people commit suicide at Christmas. However, the number of people committing suicide increases subsequently at New Year.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Nevertheless, there seem to be other reasons why Christmas can be life threatening to all of us. The homicide rate increases in the US.<sup>5</sup> In addition, a hospital emergency department visit might be especially dangerous at Christmas time. As Phillips et al. (2010) show for the US, the number of people dying in hospital increases at Christmas and New Year. Similar findings have been established for the UK by Keatinge and Donaldson (2005), although Milne (2005) cannot find such an increase in death rates. The reasons for this increase in death, according to Phillips, do not seem to be the excitement for Christmas but rather overcrowded emergency departments.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><b><span style="font-family: Arial, Helvetica, sans-serif;">Do you Think That the Monetary Value of Presents You are Giving to Your Beloved is of Importance?</span></b><br /><b><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></b><span style="font-family: Arial, Helvetica, sans-serif;">In his seminal paper, Waldfogel (1993) discusses whether Christmas entails a welfare loss due to Christmas presents that the receivers do not value as high as givers thought. A lively debate arose amongst economists about the right ways to measure this possible welfare loss, resulting in some researchers showing a welfare gain and others confirming Waldfogel’s welfare loss.<sup>6</sup> Even if the discussion on the welfare effect of Christmas is ongoing, some institutional settings should be discussed to solve (potential) welfare loss – Flynn and Adams (2009) show that givers systematically overestimate the importance of the present’s monetary value to the gift-recipient. One solution to this possible welfare problem might therefore be to opt for more humble Christmas presents.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Giving cash would be another economically efficient, but socially inappropriate solution. Therefore gift cards may represent an intermediate between in-kind presents and cash (Offenberg 2007, Principe and Eisenhauer 2009). Offenberg (2007) also finds a welfare loss of 10% for gift cards, as measured by the difference between the face-value of a gift card and the willingness-to-accept –that is the resell price on eBay. So, as long as gift cards also do not seem to be the right solution, humble presents or a wish-list might be an economically reasonable way to reduce a potential welfare loss.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><b><span style="font-family: Arial, Helvetica, sans-serif;">Do You Believe That at Christmas Time the Economy Peaks? </span></b><br /><b><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></b><b><span style="font-family: Arial, Helvetica, sans-serif;">If microeconomic research suggests that Christmas could incur a welfare loss, from a macroeconomic point of view, it might still be a good thing because it “leads to more people working, but faced with a surge of demand, managers somehow manage to get everyone to work smarter and more efficiently even as the total number of workers grows”.<sup>7</sup></span></b><br /><b><sup><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></sup></b><span style="font-family: Arial, Helvetica, sans-serif;"><b></b></span><br /><span style="font-family: Arial, Helvetica, sans-serif;">Several macroeconomists have tested for a so called ‘Santa Claus Effect’ in business cycles, that is, a boom in the fourth quarter and a following trough in the first quarter. Overall the results are mixed, with some papers finding this effect, while others could not – or only in some countries – establish a ‘Santa Claus Effect’.<sup>8</sup> More interesting than the question of whether Santa establishes a business cycle is whether such an increase in output and employment in the fourth quarter followed by a contraction the following first quarter is economically efficient.<sup>9</sup> Reliable research results on the effects of Christmas on growth are very limited. Maybe the government should smooth the business cycle and decrease spending in the fourth quarter, while increasing spending in the remaining three quarters. In this way, there could be a bit of Christmas every day.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><a href="http://www.nakedcapitalism.com/2014/12/christmas-economics-challenging-common-beliefs.html"><span style="font-family: Arial, Helvetica, sans-serif;">Source</span></a>Anonymoushttp://www.blogger.com/profile/14547106675749492684noreply@blogger.com0tag:blogger.com,1999:blog-853396052790090582.post-23921913063775387042014-12-23T01:28:00.000-08:002017-01-02T01:40:55.824-08:00Janet Yellen's Christmas Gift to Wall Street<span style="font-family: Arial, Helvetica, sans-serif;">Last week we learned that the key to a strong economy is not increased production, lower unemployment, or a sound monetary unit. Rather, economic prosperity depends on the type of language used by the central bank in its monetary policy statements. All it took was one word in the Federal Reserve Bank's press release – that the Fed would be "patient" in raising interest rates to normal levels – and stock markets went wild. The S&P 500 and the Dow Jones Industrial Average had their best gains in years, with the Dow gaining nearly 800 points from Wednesday to Friday and the S&P gaining almost 100 points to close within a few points of its all-time high.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Just think of how many trillions of dollars of financial activity occurred solely because of that one new phrase in the Fed's statement. That so much in our economy hangs on one word uttered by one institution demonstrates not only that far too much power is given to the Federal Reserve, but also how unbalanced the American economy really is.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">While the real economy continues to sputter, financial markets reach record highs, thanks in no small part to <a href="http://www.thedailybell.com/definitions/params/id/1855/" rel="shadowbox;type=iframe;width=800;height=500;"><strong>the Fed</strong></a>'s easy money policies. After six years of zero interest rates, Wall Street has become addicted to easy money. Even the slightest mention of tightening monetary policy, and Wall Street reacts like a heroin addict forced to sober up cold turkey.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">While much of the media paid attention to how long interest rates would remain at zero, what they largely ignored is that the Fed is, "maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities." Look at the Fed's balance sheet and you'll see that it has purchased $25 billion in mortgage-backed securities since the end of QE3. Annualized, that is $200 billion a year. That may not be as large as QE2 or QE3, but quantitative easing, or as the Fed likes to say "accommodative monetary policy" is far from over.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">What gets lost in all the reporting about stock market numbers, unemployment rate figures, and other economic data is the understanding that real wealth results from production of real goods, not from the creation of money out of thin air. The Fed can rig the numbers for a while by turning the monetary spigot on full blast, but the reality is that this is only papering over severe economic problems. Six years after the crisis of 2008, the economy still has not fully recovered, and in many respects is not much better than it was at the turn of the century.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Since 2001, the United States has grown by 38 million people and the working-age population has grown by 23 million people. Yet the economy has only added eight million jobs. Millions of Americans are still unemployed or underemployed, living from paycheck to paycheck, and having to rely on food stamps and other government aid. The Fed's easy money has produced great profits for Wall Street, but it has not helped – and cannot help – Main Street.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">An economy that holds its breath every six weeks, looking to parse every single word coming out of Fed Chairman Janet Yellen's mouth for indications of whether to buy or sell, is an economy that is fundamentally unsound. The Fed needs to stop creating trillions of dollars out of thin air, let Wall Street take its medicine, and allow the corrections that should have taken place in 2001 and 2008 to liquidate the bad debts and malinvestments that permeate the economy. Only then will we see a real economic recovery.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><a href="http://www.thedailybell.com/editorials/35932/Ron-Paul-Janet-Yellens-Christmas-Gift-to-Wall-Street/">Source</a></span>Anonymoushttp://www.blogger.com/profile/14547106675749492684noreply@blogger.com0tag:blogger.com,1999:blog-853396052790090582.post-45995349416741543312014-12-22T01:58:00.000-08:002017-01-02T01:40:55.844-08:00The Global Monetary Reset Is Under Way<span style="font-family: Arial, Helvetica, sans-serif;"><strong>The Global Monetary Reset is under way, but people have not noticed it yet.</strong> <em>The key is the move to zero interest rates.</em> </span><br /><em><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></em><span style="font-family: Arial, Helvetica, sans-serif;">Government debt almost everywhere is too high to ever pay off, let alone pay a traditional rate of interest on. <strong>As debts come due, including as bond issues mature, the only option governments have is to roll over the debt and accumulated interest, and the only way they can afford to do that is if money printing is a continued practice and interest rates are at or near zero.</strong> QE is the latest name for money-printing, inflating the amount of currency available. Logically, QE dilutes the value of a currency by inflating the number of currency units in circulation, and, theoretically, should lead to price inflation. However, if all nations engage in monetary expansion, the effects of money printing on exchange rates may be effectively concealed by a balance of expansion. <strong>Or, as in the case of the US dollar, a currency with the status of world reserve currency may be expanded with relative impunity by the nation creating that currency, effectively exporting its inflation to the rest of the world that continues to sell to that nation, or trades in a monetary system based on that currency</strong>. Injections of QE into an economy with weak fundamentals is likely to result in speculative bubbles as QE funds show up in investors' hands and not in the hands of general consumers. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Inflation has become a necessary element of economic life according to the mainstream meme of economists. <strong>Inflation is a key strategy in coping with immense and increasing debts.</strong> Debt so large that it cannot be paid must be inflated away or governments must default. Deflation makes current debt increasingly difficult to pay or service out of deflating GDP and tax revenue. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><strong>Exporting nations have engaged in competitive exchange rate reductions to gain or maintain competitiveness for their exports. </strong> A strong currency hurts export competitiveness but lowers the cost of imports. A weak currency raises the cost of living of residents who must buy imports - a common feature for nations that import oil, for example. There is a necessary balancing act between export competitiveness and consumer price inflation, regulated often through exchange rate manipulation. Some of the Euro zone nations are learning the painful effects of locking themselves into one currency and losing the ability to use exchange rates to maintain export competitiveness.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><strong>The monetary expansions of the past ( done to re-inflate the world economy when it met a crunch - thank you Greenspan and successors) have flooded the world with currency. </strong> That currency has expanded speculation portfolios to the extent that the volume of currency sloshing around in search of returns or safety can quickly overwhelm a country's financial system and trade relations (competitiveness impaired, artificial investment bubbles, sudden debt crises when money is withdrawn, etc.). </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><strong>The international trade and financial systems have made most countries relatively defenceless against trade and, more critically, capital flows. </strong>Vast sums can flow in or out of a country and its currencies almost instantaneously via computer clicks. Huge profits and losses can be made betting on exchange rate fluctuations, and on manipulating those exchange rates. ZIRP and NIRP are now regularly employed, ostensibly to dissuade residents from hoarding cash rather than adding to monetary velocity by spending, but ZIRP and NIRP are also used to dissuade speculators from buying a country's currency and hence raising its exchange rate.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><strong><span style="font-family: Arial, Helvetica, sans-serif;">Traditional stores of value and media of exchange among central banks - precious metals- have been debased through price manipulation in paper markets.</span></strong><br /><strong><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></strong><span style="font-family: Arial, Helvetica, sans-serif;"><strong>The strategies that seem unique and strange, and contrary to tradition - rampant money printing, the monetizing of debt through central banks buying government bonds, ZIRP, NIRP, and the suppression of precious metal prices, are the necessary strategies of a new monetary system set up to cope with the problems arising from monetary excesses of the past. </strong> They are the new normal. By disabusing the public of the notion that currency should be a stable store of value, that saving is a virtue, and that money borrowers should pay a reasonable rent on the money borrowed, the monetary authorities are conditioning the public to the new normal. In the paradigm of Modern Monetary Theory, currency creation can continue to infinity without destructive inflation since interest rates and expectation of return on lent money can be maintained at or near Zero. <strong>Any interest rate significantly above zero will crash the system</strong>, so do not expect interest rate increases except as a short-term emergency strategy to counter a fall in the exchange rate of a currency.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;"><strong>Necessity is the mother of invention, and the necessity of coping with overwhelming debt and unfunded liabilities has led us to the invention of Modern Monetary Theory. </strong> Add to this the new rule of bank bail-ins, the rule that bank deposits are part of a bank's capital, and the pledging of the public purse to bail out bank losses. This is the public/government debt side of the strategy. For those with large sums of currency who wish to continue to speculate, there are the stock and commodities markets, and the casino is open for derivatives bets. To accomodate the speculators, we have seen the insulation of Wall Street from criminal liability for fraud, the repeal of Glass Steagall, the weakening of Dodd Frank, the delay of the Volker Rule, the use of the public purse to bail out Wall Street losses in 2008, and the recent pledging of the public purse to cover Wall Street losses from any future derivative bets losses - all in the CRomnibus bill.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><strong><span style="font-family: Arial, Helvetica, sans-serif;">Welcome to the New Normal. We shall see how long it lasts.</span></strong><br /><strong><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></strong><a href="http://www.zerohedge.com/news/2014-12-21/global-monetary-reset-under-way"><span style="font-family: Arial, Helvetica, sans-serif;">Source</span></a>Anonymoushttp://www.blogger.com/profile/14547106675749492684noreply@blogger.com0tag:blogger.com,1999:blog-853396052790090582.post-48492046197508925842014-12-19T03:12:00.000-08:002017-01-02T01:40:55.848-08:00Junk Bonds Are Going To Tell Us Where The Stock Market Is Heading In 2015<span style="font-family: Arial, Helvetica, sans-serif;"><a href="http://theeconomiccollapseblog.com/archives/junk-bonds-going-tell-us-stock-market-heading-2015/dominoes-public-domain" rel="attachment wp-att-8130"></a>Do you want to know if the stock market is going to crash next year? Just keep an eye on junk bonds. Prior to the horrific collapse of stocks in 2008, high yield debt collapsed first. And as you will see below, high yield debt is starting to crash again. The primary reason for this is the price of oil. The energy sector accounts for approximately 15 to 20 percent of the entire junk bond market, and those energy bonds are taking a tremendous beating right now. This panic in energy bonds is infecting the broader high yield debt market, and investors have been pulling money out at a frightening pace. And as I have written <a href="http://theeconomiccollapseblog.com/archives/near-perfect-indicator-precedes-almost-every-stock-market-correction-flashing-warning-signal" title="about previously">about previously</a>, almost every single time junk bonds decline substantially, stocks end up following suit. So don’t be fooled by the fact that some comforting words from Janet Yellen caused stock prices to jump over the past couple of days. If you really want to know where the stock market is heading in 2015, keep a close eye on the market for high yield debt.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">If you are not familiar with junk bonds, the concept is actually very simple. Corporations that do not have high credit ratings typically have to pay higher interest rates to borrow money. The following is how <a href="http://www.usatoday.com/story/money/2014/12/16/junk-bond-funds-get-trashed/20496843/" target="_blank" title="USA Today">USA Today</a> describes these bonds…</span><br /><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">High-yield bonds are long-term IOUs issued by companies with shaky credit ratings. Just like credit card users, companies with poor credit must pay higher interest rates on loans than those with gold-plated credit histories.</span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">But in recent years, interest rates on junk bonds have gone down to ridiculously low levels. This is another bubble that was created by Federal Reserve policies, and it is a colossal disaster waiting to happen. And unfortunately, there are already signs that this bubble <a href="http://www.usatoday.com/story/money/2014/12/16/junk-bond-funds-get-trashed/20496843/" target="_blank" title="is now beginning to burst">is now beginning to burst</a>…</span><br /><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Back in June, the average junk bond yield was 3.90 percentage points higher than Treasury securities. The average energy junk bond yielded 3.91 percentage points higher than Treasuries, Lonski says. </span></blockquote><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">That spread has widened to 5.08 percentage points for junk bonds vs. 7.86 percentage points for energy bonds — an indication of how worried investors are about default, particularly for small, highly indebted companies in the fracking business.</span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">The reason why so many analysts are becoming extremely concerned about this shift in junk bonds is because we also saw this happen just before the great stock market crash of 2008. In the chart below, you can see how yields on junk bonds started to absolutely skyrocket in September of that year…</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><div class="separator" style="clear: both; text-align: center;"><span style="font-family: Arial, Helvetica, sans-serif; margin-left: 1em; margin-right: 1em;"><img alt="High Yield Debt 2008" class="aligncenter size-large wp-image-8128" src="http://theeconomiccollapseblog.com/wp-content/uploads/2014/12/High-Yield-Debt-2008-425x282.png" height="282" width="425" /></span></div><br /> <span style="font-family: Arial, Helvetica, sans-serif;">Of course we have not seen a move of that magnitude quite yet this year, but without a doubt yields have been spiking. The next chart that I want to share is of this year. As you can see, the movement over the past month or so has been quite substantial…</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><div class="separator" style="clear: both; text-align: center;"><span style="font-family: Arial, Helvetica, sans-serif; margin-left: 1em; margin-right: 1em;"><img alt="High Yield Debt 2014" class="aligncenter size-large wp-image-8129" src="http://theeconomiccollapseblog.com/wp-content/uploads/2014/12/High-Yield-Debt-2014-425x282.png" height="282" width="425" /></span></div><br /> <span style="font-family: Arial, Helvetica, sans-serif;">And of course I am far from the only one that is watching this. In fact, there are some sharks on Wall Street that plan to make an absolute boatload of cash as high yield bonds crash.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">One of them is Josh Birnbaum. He correctly made a giant bet against subprime mortgages in 2007, and now he is making a giant bet <a href="http://www.businessinsider.com/joshua-birnbaum-bet-against-high-yield-energy-2014-12" target="_blank" title="against junk bonds">against junk bonds</a>…</span><br /><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">When Josh Birnbaum was at Goldman Sachs in 2007, he <a href="http://www.businessinsider.com/josh-birnbaum-the-shorts-were-not-a-hedge-2011-4" target="_blank" title="made a huge bet">made a huge bet</a> against subprime mortgages. </span></blockquote><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Now he’s betting against something else: <strong>high-yield bonds.</strong> </span></blockquote><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">From <a href="http://www.wsj.com/articles/junk-bond-worries-spread-beyond-oil-1418605618" target="_blank" title="The Wall Street Journal">The Wall Street Journal</a>: </span></blockquote><blockquote><em><span style="font-family: Arial, Helvetica, sans-serif;">Joshua Birnbaum, the ex-Goldman Sachs Group Inc. trader who made bets against subprime mortgages during the financial crisis, now has more than $2 billion in wagers against high-yield bonds at his Tilden Park Capital Management LP hedge-fund firm, according to investor documents.</span></em></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Could you imagine betting 2 billion dollars on anything?</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">If he is right, he is going to make an incredible amount of money.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">And I have a feeling that he will be. As a recent <a href="http://www.thenewamerican.com/tech/energy/item/19712-energy-junk-bond-investors-heading-for-the-exits" target="_blank" title="New American article">New American article</a> detailed, there is already panic in the air…</span><br /><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">It’s a mania, said Tim Gramatovich of Peritus Asset Management who oversees a bond portfolio of $800 million: “Anything that becomes a mania — ends badly. And this is a mania.” </span></blockquote><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Bill Gross, who used to run PIMCO’s gigantic bond portfolio and now advises the Janus Capital Group, explained that “there’s very little liquidity” in junk bonds. This is the language a bond fund manager uses to tell people that no one is buying, everyone is selling. Gross added: “Everyone is trying to squeeze through a very small door.”</span> </blockquote><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Bonds issued by individual energy developers have gotten hammered. For instance, Energy XXI, an oil and gas producer, issued more than $2 billion in bonds just in the last four years and, up until a couple of weeks ago, they were selling at 100 cents on the dollar. On Friday buyers were offering just 64 cents. Midstates Petroleum’s $700 million in bonds — rated “junk” by both Moody’s and Standard and Poor’s — are selling at 54 cents on the dollar, if buyers can be found.</span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">So is there anything that could stop junk bonds from crashing?</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Yes, if the price of oil goes back up to 80 dollars or more a barrel that would go a long way to settling things back down.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Unfortunately, many analysts are convinced that the price of oil is <a href="http://www.cnbc.com/id/102278613" target="_blank" title="going to head even lower">going to head even lower</a> instead…</span><br /><blockquote><span style="font-family: Arial, Helvetica, sans-serif;">“We’re continuing to search for a bottom, and might even see another significant drop before the year-end,” said Gene McGillian, an analyst at Tradition Energy in Stamford, Connecticut.</span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">As I write this, the price of U.S. oil has fallen $1.69 today to $54.78.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">If the price of oil stays this low, junk bonds are going to keep crashing.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">If junk bonds keep crashing, the stock market is almost certainly going to follow.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">For additional reading on this, please see my previous article entitled “<a href="http://theeconomiccollapseblog.com/archives/near-perfect-indicator-precedes-almost-every-stock-market-correction-flashing-warning-signal" title="‘Near Perfect’ Indicator That Precedes Almost Every Stock Market Correction Is Flashing A Warning Signal">‘Near Perfect’ Indicator That Precedes Almost Every Stock Market Correction Is Flashing A Warning Signal</a>“.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">But just like in the years leading up to the crash of 2008, there are all kinds of naysayers proclaiming that a collapse will never happen.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Even though our financial problems and our underlying economic fundamentals have gotten much worse since the last crisis, they are absolutely convinced that things are somehow going to be different this time.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">In the end, a lot of those skeptics are going to lose an enormous amount of money when the dominoes start falling.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><a href="http://theeconomiccollapseblog.com/archives/junk-bonds-going-tell-us-stock-market-heading-2015"><span style="font-family: Arial, Helvetica, sans-serif;">Source</span></a>Anonymoushttp://www.blogger.com/profile/14547106675749492684noreply@blogger.com0tag:blogger.com,1999:blog-853396052790090582.post-7225785158828300062014-12-18T04:10:00.000-08:002017-01-02T01:40:55.864-08:00China Prepares To Bailout Russia<span style="font-family: Arial, Helvetica, sans-serif;">Earlier this evening China's State Administration of Foreign Exchange's (SAFE) Wang Yungui noted "the impact of the Russian Ruble depreciation was unclear yet, and, as Bloomberg reported, "<strong>SAFE is closely watching Ruble's depreciation</strong> and encouraging companies to hedge Ruble risks." His comments also echoed the ongoing FX reform agenda aimed at increasing Yuan flexibility which <a href="http://www.scmp.com/business/banking-finance/article/1664567/russia-may-seek-china-help-deal-crisis">The South China Morning Post then hinted in a story entitled "Russia may seek China help to deal with crisis,"</a> which which noted that <strong>Russia could fall back on its 150 billion yuan ($24 billion) currency swap agreement with China</strong> if the ruble continues to plunge, <a href="http://www.zerohedge.com/news/2014-10-13/china-russia-sign-cny150-billion-local-currency-swap-plunging-oil-prices-sting-putin">that was signed in October</a>. Furthermore, <strong><span style="text-decoration: underline;">two bankers close to the PBOC reportedly said the swap-line was meant to reduce the role of the US dollar if China and Russia need to help each other overcome a liquidity squeeze</span></strong>.</span><br /><br /><span style="font-family: Arial, Helvetica, sans-serif;">As Bloomberg reported, earlier in the evening, China's Wang Yungui noted</span><br /><ul><li><strong><span style="font-family: Arial, Helvetica, sans-serif;">*CHINA IS CLOSELY WATCHING RUBLE'S DEPRECIATION: SAFE'S WANG</span></strong></li><li><strong><span style="font-family: Arial, Helvetica, sans-serif;">*CHINA ENCOURAGES COS. TO HEDGE RUBLE RISKS, SAFE'S WANG SAYS</span></strong></li><li><strong><span style="font-family: Arial, Helvetica, sans-serif;">*REAL IMPACT OF RUBLE DEPRECIATION UNCLEAR YET, SAFE'S WANG SAYS</span></strong></li></ul><span style="font-family: Arial, Helvetica, sans-serif;">Adding that China plans sweeping reforms to promote FX flexibility.</span><br /><a href="http://www.scmp.com/business/banking-finance/article/1664567/russia-may-seek-china-help-deal-crisis"><em><span style="font-family: Arial, Helvetica, sans-serif;">And then The South China Morning Post hints,</span></em></a><br /><blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><strong><span style="font-family: Arial, Helvetica, sans-serif;">Russia could fall back on its 150 billion yuan (HK$189.8 billion) currency swap agreement with China if the rouble continues to plunge.</span></strong><br /><br /><span style="font-family: Arial, Helvetica, sans-serif;">If the swap deal is activated for this purpose, it would mark the first time China is called upon to use its currency to bail out another currency in crisis. The deal was signed by the two central banks in October, when Premier Li Keqiang visited Russia.</span><br /><br /><span style="font-family: Arial, Helvetica, sans-serif;"><u><strong>"Russia badly needs liquidity support and the swap line could be an ideal tool," </strong></u>said Bank of Communications chief economist Lian Ping.</span><br /><br /><span style="font-family: Arial, Helvetica, sans-serif;">The swap allows the central banks to directly buy yuan and rouble in the two currencies, rather than via the US dollar.</span><br /><br /><strong><u><span style="font-family: Arial, Helvetica, sans-serif;">Two bankers close to the People's Bank of China said it was meant to reduce the role of the US dollar if China and Russia need to help each other overcome a liquidity squeeze.</span></u></strong><br /><br /><span style="font-family: Arial, Helvetica, sans-serif;">China has currency swap deals with more than 20 monetary authorities around the world. Swaps are generally used to settle trade.</span><br /><br /><strong><span style="font-family: Arial, Helvetica, sans-serif;">"The yuan-rouble swap deal was not just a financial matter," said Wang Feng, chairman of Shanghai-based private equity group Yinshu Capital. "It has political implications as it is a sign of mutual trust."</span></strong><br /><br /><span style="font-family: Arial, Helvetica, sans-serif;">The rouble has lost more than 50 per cent against the US dollar this year, pushing Russia to the brink of a currency crisis, though measures announced by the central bank helped it recover some ground yesterday.</span><br /><br /><span style="font-family: Arial, Helvetica, sans-serif;">Li Lifan, a researcher at the Shanghai Academy of Social Sciences, said the swap would not be enough for Russia even if it is used in its entirety.<strong> "The PBOC might agree to extend something like 15 billion yuan initially as a way of showing China's commitment to Russia."</strong></span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;"><a href="http://www.zerohedge.com/news/2014-12-17/china-prepares-bailout-russia">Source</a> </span>Anonymoushttp://www.blogger.com/profile/14547106675749492684noreply@blogger.com0tag:blogger.com,1999:blog-853396052790090582.post-56068398681168293332014-12-17T02:52:00.000-08:002017-01-02T01:40:55.854-08:00Western Banks Cut Off Liquidity To Russian Entities<span style="font-family: Arial, Helvetica, sans-serif;">As Zero Hedge <a href="http://www.zerohedge.com/news/2014-12-16/russian-ruble-hereby-halted-until-further-notice">first reported today</a>, shortly before noon one (and <a href="http://www.reuters.com/article/2014/12/16/us-markets-forex-fxcm-idUSKBN0JU2G720141216">subsequently more</a>) FX brokers advised clients that any existing Ruble positions would be forcibly closed out because "<em>western banks have stopped pricing USDRUB</em>", over concerns of Russian capital controls. Ironically, it was this forced liquidation of mostly short RUB positions that pushed the RUB higher, which in turn had a briefly favorably impact on energy commodities and risk assets, as the market had by then perceived the Ruble selloff as excessive. Of course, since nothing had actually changed aside from a temporary market technical, the selloff promptly resumed into the close of trading once the market finally understood what we had explained hours previously. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">And unfortunately for the bulls, various falling knife-catchers, and those who hope the Russian situation will stabilize imminently with or without capital controls, it appears things in Russia are about to get a whole lot worse because as the <a href="http://www.wsj.com/articles/western-banks-curtail-flow-of-cash-to-russian-entities-1418762656?mod=WSJ_hp_RightTopStories">WSJ reports</a>, the next driver of the Russian crisis is likely to come from within the banking system itself because <em>"<strong>global banks are curtailing the flow of cash to Russian entities, a response to the ruble’s sharpest selloff since the 1998 financial crisis."</strong></em></span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><em><strong><br /></strong></em></span><span style="font-family: Arial, Helvetica, sans-serif;">Presenting Russia's banks: now cut off from the outside world as the second cold war goes nuclear, at least when it comes to the financial system: <em><br /></em></span><br /><blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><span style="font-family: Arial, Helvetica, sans-serif;">Such banks as Goldman Sachs Group Inc. this week started rejecting requests from institutional clients to engage in certain ruble-denominated repurchase agreements and other transactions designed to raise cash, according to people familiar with the matter. </span><br /><br /><span style="font-family: Arial, Helvetica, sans-serif;">Bankers and traders say the moves to restrict some ruble transactions have become increasingly widespread among major Western financial institutions this week, even as the same institutions continue to try to profit from the ruble’s wild swings. <strong>The moves, which the banks are deploying to protect themselves against further swings in the currency, have the potential to add to the strain on Russia’s financial system.</strong></span><br /><br /><span style="font-family: Arial, Helvetica, sans-serif;">Goldman in recent days largely stopped doing longer-term ruble-denominated repurchase agreements, or repos, in which securities or other assets are swapped in exchange for cash, said a person familiar with the matter. <strong>The Wall Street bank is still doing short-duration ruble repos, those that mature in less than a year, this person said.</strong></span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">And where Goldman goes, everyone else follows, even though according to the WSJ this has not happened, yet:</span><br /><blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><span style="font-family: Arial, Helvetica, sans-serif;">Other banks, including Bank of America Corp. and Citigroup Inc., haven’t changed their trading with Russia or in rubles, according to people familiar with those banks.</span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">They will, it is only a matter of time. Meanwhile, the entire Russian capital market, and not just its currency, is becoming isolated from the rest of the Western world:</span><br /><blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><span style="font-family: Arial, Helvetica, sans-serif;">In one sign of the banking industry’s hasty retreat, the London-based manager of an emerging-markets hedge fund said Tuesday that he couldn’t get any banks to trade Russian government bonds with him. </span></blockquote><span style="font-family: Arial, Helvetica, sans-serif;">Of course, anyone who read our article in early November explaining "<a href="http://www.zerohedge.com/news/2014-11-03/how-petrodollar-quietly-died-and-nobody-noticed">How The Petrodollar Quietly Died, And Nobody Noticed</a>", predicting the crunch in global intermarket liquidity as a result of the collapse in crude, would know this is coming. As for the death of the Petrodollar we warned about, a death which has resulted in the disintegration of market volume just as warned, suddenly everyone is noticing. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">Regardless, what all of the above means is that Russia now has at best a few weeks in which to find an alternative source of short-term funding. One coming from the East. </span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><span style="font-family: Arial, Helvetica, sans-serif;">The question is will Putin swallow his pride and proceed with the next logical step as the Eurasian axis realizes the time to abandon the dollar has long past, that now only actions matter and not words, and joins forces with China in a new monetary union, one which combines the Ruble and the Yuan, and is backed by China's gold and Russia's natural resources, as cheap as they may be for the time being... until one or more of the largest middle-east oil exporters experiences a major and "unexpected" geopoolitical incident, one which sends the price of oil soaring right back up.</span><br /><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span><a href="http://www.zerohedge.com/news/2014-12-16/western-banks-cut-liquidity-russian-entities"><span style="font-family: Arial, Helvetica, sans-serif;">Source</span></a>Anonymoushttp://www.blogger.com/profile/14547106675749492684noreply@blogger.com0