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.
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).
Do You Believe That Prices Peak During Christmas Time?
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.
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.1 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.2
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.3 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.
Do You Believe That the Number of Suicides Peaks Before Christmas?
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.4 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.
Nevertheless, there seem to be other reasons why Christmas can be life threatening to all of us. The homicide rate increases in the US.5 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.
Do you Think That the Monetary Value of Presents You are Giving to Your Beloved is of Importance?
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.6 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.
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.
Do You Believe That at Christmas Time the Economy Peaks?
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”.7
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’.8 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.9 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.
Source
Wednesday, 24 December 2014
Tuesday, 23 December 2014
Janet Yellen's Christmas Gift to Wall Street
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.
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.
While the real economy continues to sputter, financial markets reach record highs, thanks in no small part to the Fed'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.
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.
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.
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.
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.
Source
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.
While the real economy continues to sputter, financial markets reach record highs, thanks in no small part to the Fed'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.
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.
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.
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.
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.
Source
Monday, 22 December 2014
The Global Monetary Reset Is Under Way
The Global Monetary Reset is under way, but people have not noticed it yet. The key is the move to zero interest rates.
Government debt almost everywhere is too high to ever pay off, let alone pay a traditional rate of interest on. 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. 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. 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. 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.
Inflation has become a necessary element of economic life according to the mainstream meme of economists. Inflation is a key strategy in coping with immense and increasing debts. 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.
Exporting nations have engaged in competitive exchange rate reductions to gain or maintain competitiveness for their exports. 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.
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. 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.).
The international trade and financial systems have made most countries relatively defenceless against trade and, more critically, capital flows. 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.
Traditional stores of value and media of exchange among central banks - precious metals- have been debased through price manipulation in paper markets.
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. 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. Any interest rate significantly above zero will crash the system, 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.
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. 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.
Welcome to the New Normal. We shall see how long it lasts.
Source
Government debt almost everywhere is too high to ever pay off, let alone pay a traditional rate of interest on. 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. 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. 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. 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.
Inflation has become a necessary element of economic life according to the mainstream meme of economists. Inflation is a key strategy in coping with immense and increasing debts. 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.
Exporting nations have engaged in competitive exchange rate reductions to gain or maintain competitiveness for their exports. 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.
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. 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.).
The international trade and financial systems have made most countries relatively defenceless against trade and, more critically, capital flows. 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.
Traditional stores of value and media of exchange among central banks - precious metals- have been debased through price manipulation in paper markets.
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. 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. Any interest rate significantly above zero will crash the system, 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.
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. 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.
Welcome to the New Normal. We shall see how long it lasts.
Source
Friday, 19 December 2014
Junk Bonds Are Going To Tell Us Where The Stock Market Is Heading In 2015
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 about previously, 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.
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 USA Today describes these bonds…
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…
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.
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 against junk bonds…
If he is right, he is going to make an incredible amount of money.
And I have a feeling that he will be. As a recent New American article detailed, there is already panic in the air…
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.
Unfortunately, many analysts are convinced that the price of oil is going to head even lower instead…
If the price of oil stays this low, junk bonds are going to keep crashing.
If junk bonds keep crashing, the stock market is almost certainly going to follow.
For additional reading on this, please see my previous article entitled “‘Near Perfect’ Indicator That Precedes Almost Every Stock Market Correction Is Flashing A Warning Signal“.
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.
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.
In the end, a lot of those skeptics are going to lose an enormous amount of money when the dominoes start falling.
Source
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 USA Today describes these bonds…
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.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 is now beginning to burst…
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.
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.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…
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…
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.
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 against junk bonds…
When Josh Birnbaum was at Goldman Sachs in 2007, he made a huge bet against subprime mortgages.
Now he’s betting against something else: high-yield bonds.
From The Wall Street Journal:
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.Could you imagine betting 2 billion dollars on anything?
If he is right, he is going to make an incredible amount of money.
And I have a feeling that he will be. As a recent New American article detailed, there is already panic in the air…
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.”
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.”
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.So is there anything that could stop junk bonds from crashing?
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.
Unfortunately, many analysts are convinced that the price of oil is going to head even lower instead…
“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.As I write this, the price of U.S. oil has fallen $1.69 today to $54.78.
If the price of oil stays this low, junk bonds are going to keep crashing.
If junk bonds keep crashing, the stock market is almost certainly going to follow.
For additional reading on this, please see my previous article entitled “‘Near Perfect’ Indicator That Precedes Almost Every Stock Market Correction Is Flashing A Warning Signal“.
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.
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.
In the end, a lot of those skeptics are going to lose an enormous amount of money when the dominoes start falling.
Source
Thursday, 18 December 2014
China Prepares To Bailout Russia
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, "SAFE is closely watching Ruble's depreciation and encouraging companies to hedge Ruble risks." His comments also echoed the ongoing FX reform agenda aimed at increasing Yuan flexibility which The South China Morning Post then hinted in a story entitled "Russia may seek China help to deal with crisis," which which noted that Russia could fall back on its 150 billion yuan ($24 billion) currency swap agreement with China if the ruble continues to plunge, that was signed in October. Furthermore, 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.
As Bloomberg reported, earlier in the evening, China's Wang Yungui noted
And then The South China Morning Post hints,
As Bloomberg reported, earlier in the evening, China's Wang Yungui noted
- *CHINA IS CLOSELY WATCHING RUBLE'S DEPRECIATION: SAFE'S WANG
- *CHINA ENCOURAGES COS. TO HEDGE RUBLE RISKS, SAFE'S WANG SAYS
- *REAL IMPACT OF RUBLE DEPRECIATION UNCLEAR YET, SAFE'S WANG SAYS
And then The South China Morning Post hints,
SourceRussia could fall back on its 150 billion yuan (HK$189.8 billion) currency swap agreement with China if the rouble continues to plunge.
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.
"Russia badly needs liquidity support and the swap line could be an ideal tool," said Bank of Communications chief economist Lian Ping.
The swap allows the central banks to directly buy yuan and rouble in the two currencies, rather than via the US dollar.
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.
China has currency swap deals with more than 20 monetary authorities around the world. Swaps are generally used to settle trade.
"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."
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.
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. "The PBOC might agree to extend something like 15 billion yuan initially as a way of showing China's commitment to Russia."
Wednesday, 17 December 2014
Western Banks Cut Off Liquidity To Russian Entities
As Zero Hedge first reported today, shortly before noon one (and subsequently more) FX brokers advised clients that any existing Ruble positions would be forcibly closed out because "western banks have stopped pricing USDRUB", 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.
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 WSJ reports, the next driver of the Russian crisis is likely to come from within the banking system itself because "global banks are curtailing the flow of cash to Russian entities, a response to the ruble’s sharpest selloff since the 1998 financial crisis."
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:
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.
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.
Source
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 WSJ reports, the next driver of the Russian crisis is likely to come from within the banking system itself because "global banks are curtailing the flow of cash to Russian entities, a response to the ruble’s sharpest selloff since the 1998 financial crisis."
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:
And where Goldman goes, everyone else follows, even though according to the WSJ this has not happened, yet: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.
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. 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.
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. The Wall Street bank is still doing short-duration ruble repos, those that mature in less than a year, this person said.
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: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.
Of course, anyone who read our article in early November explaining "How The Petrodollar Quietly Died, And Nobody Noticed", 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.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.
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.
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.
Source
Tuesday, 16 December 2014
Inflation ... Deflation ... When a Central Bank Produces It, It's Wrong!
Ambrose Evans-Pritchard: Why Paul Krugman is wrong ... Central banks can always create inflation if they try hard enough ... He is wrong that you cannot create inflation when interest rates are at the zero bound, says Ambrose Evans-Pritchard ... Professor Paul Krugman is the world's most influential commentator on economic issues by a wide margin. – UK Telegraph
Dominant Social Theme: Deflation is coming and it's going to be terrible.
Free-Market Analysis: A recent article of ours made the point that deflation and disinflation are unstable monetary states in an era of central banking.
While we didn't draw precise definitional lines between various kinds of deflation, our point was clear enough: Deflation and disinflation in a monetarist world are a product of asset expansion.
We explained that Eurocrat cries of alarm over EU price deflation were insincere and merely meant to provide justifications for central bank actions that Brussels was not allowed to take. We explained that there were both monetary and price inflation in Europe and that Europe was more likely affected by "stagflation" than disinflation or deflation.
EU Deflation: Real Problem or Eurocrat Exaggeration?
The recent argument between Ambrose Evans-Pritchard and Paul Krugman gives us an opportunity to revisit the issue and expand on why, in a central banking world, disinflation and outright deflation from a monetary and price standpoint are fairly rare events that take place mostly as asset bubbles collapse.
Krugman first. The New York Times columnist recently argued once again that monetary inflation is vastly overrated in terms of its impact. Why is this important? Because Krugman, as a good socialist, wants government to be as proactive as possible.
Money printing as a central economic cure is not enough for him. He wants FDR's New Deal programs re-initiated on an even more expansive basis.
But there is another reason that Krugman downplays money printing and that has to do with the impact of central banks generally. You see ... if it doesn't matter how much money a central bank prints, then central banking itself is a fairly unimportant matter. And those who stand behind central banking, control central banking and reap its impossible rewards would like to encourage this concept of Krugman's.
We don't believe this, of course. Those who coordinate central banks around the world and run the Bank for International Settlements are surely among the most powerful people in the world. About 100 years ago there were perhaps five central banks. Now there are around 150, many directly involved in a BIS pan-global structure.
The hundreds and hundreds of trillions printed via BIS-operated central banks have created a situation unheard of in the world. This money has apparently been used to buy control of universities, think tanks, media properties, politicians, governments and military men and armies. The same money is likely to control – secretly – most of the major corporations in the world.
The control is staggering and it's been used to further centralize and internationalize the West's sociopolitical and economic system. So Krugman is arguing a very important point when he says that printing money is at least somewhat irrelevant some of the time. By proxy, he is saying that central banking is not nearly so important as it's made out to be.
And since there doesn't seem either monetary inflation or price inflation after seven years of crisis-response money printing, Krugman is beginning to write columns emphasizing his point of view.
It is one of these comments that Evans-Pritchard is responding to. Here's more from Evans-Pritchard:
He is brilliant, wide-ranging, readable, and the point of his rapier is very sharp. He correctly predicted and described the Long Slump; though whether he did so entirely for the right reasons is an interesting question.
[Krugman] demolished claims by hard-money totemists that zero rates and quantitative easing would lead to spiraling inflation in a global liquidity trap, as he calls it – or in a China-led world of excess supply and deficient demand, as others would put it.
He correctly scolded those who claimed that rich developed countries with their own sovereign currencies are at risk of a bond market crisis unless they retrench into the downturn, or might go the way of Greece.
... The dispute is over whether central banks can generate inflation even when interest rates are zero. He says they cannot do so, and that it is jejune to float such an outlandish idea. Monetary policies are to all intents and purposes impotent at that point. He goes on to suggest that the historical and global evidence has demonstrated this beyond any possible doubt, and here he ventures into flinty terrain.
... He rebukes me for quoting Tim Congdon from International Monetary Research, specifically for invoking traditional monetary theory to suggest that QE can work even when bond yields are hyper-compressed. The precise quote: "The interest rate is totally irrelevant. What matters is the quantity of money. Large scale money creation is a very powerful weapon and can always create inflation."
Mr Congdon's claim is a self-evident truism. Central banks can always create inflation if they try hard enough. As Milton Friedman said, they can print bundles of notes and drop from them helicopters. The modern variant might be a $100,000 electronic transfer into the bank account of every citizen. That would most assuredly create inflation.
... It is becoming ever clearer that the US and UK recoveries are a serious challenge to the Krugman opus and what I would loosely call (though I have much sympathy for New Keynesian arguments) the doctrine of fiscal primacy. These recoveries should not really be as strong as they are, especially in a depressed world of flat global trade. America has carried out the most drastic fiscal squeeze since demobilization after the Korean War without falling into recession. The economy is growing briskly. The jobless rate is plummeting.
The last paragraph illustrates the sterility of this debate. Despite denials, Evans-Pritchard more and more has adopted a neo-Keynesian point of view in his columns, arguing that monetary stimulation is necessary to keep the world afloat until such time as the "recovery" takes hold more fully.
But there is no "recovery" in the classical sense of the word, nor can there be in a world filled with central banks. If the money were private, if the volume of money were not produced via force, if interest rates were not set metaphorically at the point of a gun, then perhaps one could speak of a recovery. But instead, in this modern world, we can have nothing but varying degrees of asset bubbles.
At the beginning of the business cycle the asset bubbles have been deflated or at least are subject to disinflation, monetarily and even pricewise. But as more money is force-fed into the economy, these bubbles begin to swell again.
The faster they swell, the more commentators and professors begin to speak of a recovery. It is not a recovery. The bubbles are simply advancing.
First bank coffers swell and then the money leaks into multinational pockets and into stock markets, mostly. Marts travel up, and the wealthy and upper middle classes begin to leverage the wealth effect. High-end homes, yachts, expensive cars and the like begin to sell more quickly. The "recovery" is underway.
Eventually the recovery reaches the middle classes. Factories gear up, wages rise, the "recovery" is proclaimed a success. But actually, such a recovery is merely a way-station to a further disaster because the asset bubbles will continue to swell until they burst. At which point we will once again, as before, have a conversation about deflation and disinflation.
We should try to be fair, of course. Evans-Pritchard is in a sense correct about deflation. As we wrote before it is very hard to have real, long-lasting deflation in a modern, central bank economy where the printing presses are always churning out currency.
What SEEMS like deflation or disinflation is mostly the collapse of bubbles that were stuffed by previously printed currency.
Krugman is wrong. When you have central banks you almost always have unrestrained money printing. Central banks cannot know how much money is enough because there are no forward looking indices, as Alan Greenspan himself admitted during his tenure.
And so central bankers print too much. If economies subside catastrophically, it is not because of deflation or disinflation but because of monetary INFLATION to begin with.
Deflation is NOT the main problem by any means. Central banks are the problem. People like Krugman want to draw our attention away from the real issue. In this case, Evans-Pritchard has done us a favor by drawing our attention back to it.
The trouble with Evans-Pritchard is that he then goes on to make the argument that central bank inflating is a kind of Keynesian good. But monopoly money printing is not good, either. And there you have it – a modern debate in which both sides are wrong because they are arguing effectively a false premise.
Krugman wants to focus on the lack of monetary policy. Evans-Pritchard argues for continued inflation.
We'll take the side of the argument that is NOT represented – which is that money ought to be privatized and that central banks ought to lose their monopoly money printing privileges.
Conclusion When we begin to see that argument made in the mainstream press, we'll call it what it is ... Progress.
Source
Dominant Social Theme: Deflation is coming and it's going to be terrible.
Free-Market Analysis: A recent article of ours made the point that deflation and disinflation are unstable monetary states in an era of central banking.
While we didn't draw precise definitional lines between various kinds of deflation, our point was clear enough: Deflation and disinflation in a monetarist world are a product of asset expansion.
We explained that Eurocrat cries of alarm over EU price deflation were insincere and merely meant to provide justifications for central bank actions that Brussels was not allowed to take. We explained that there were both monetary and price inflation in Europe and that Europe was more likely affected by "stagflation" than disinflation or deflation.
EU Deflation: Real Problem or Eurocrat Exaggeration?
The recent argument between Ambrose Evans-Pritchard and Paul Krugman gives us an opportunity to revisit the issue and expand on why, in a central banking world, disinflation and outright deflation from a monetary and price standpoint are fairly rare events that take place mostly as asset bubbles collapse.
Krugman first. The New York Times columnist recently argued once again that monetary inflation is vastly overrated in terms of its impact. Why is this important? Because Krugman, as a good socialist, wants government to be as proactive as possible.
Money printing as a central economic cure is not enough for him. He wants FDR's New Deal programs re-initiated on an even more expansive basis.
But there is another reason that Krugman downplays money printing and that has to do with the impact of central banks generally. You see ... if it doesn't matter how much money a central bank prints, then central banking itself is a fairly unimportant matter. And those who stand behind central banking, control central banking and reap its impossible rewards would like to encourage this concept of Krugman's.
We don't believe this, of course. Those who coordinate central banks around the world and run the Bank for International Settlements are surely among the most powerful people in the world. About 100 years ago there were perhaps five central banks. Now there are around 150, many directly involved in a BIS pan-global structure.
The hundreds and hundreds of trillions printed via BIS-operated central banks have created a situation unheard of in the world. This money has apparently been used to buy control of universities, think tanks, media properties, politicians, governments and military men and armies. The same money is likely to control – secretly – most of the major corporations in the world.
The control is staggering and it's been used to further centralize and internationalize the West's sociopolitical and economic system. So Krugman is arguing a very important point when he says that printing money is at least somewhat irrelevant some of the time. By proxy, he is saying that central banking is not nearly so important as it's made out to be.
And since there doesn't seem either monetary inflation or price inflation after seven years of crisis-response money printing, Krugman is beginning to write columns emphasizing his point of view.
It is one of these comments that Evans-Pritchard is responding to. Here's more from Evans-Pritchard:
He is brilliant, wide-ranging, readable, and the point of his rapier is very sharp. He correctly predicted and described the Long Slump; though whether he did so entirely for the right reasons is an interesting question.
[Krugman] demolished claims by hard-money totemists that zero rates and quantitative easing would lead to spiraling inflation in a global liquidity trap, as he calls it – or in a China-led world of excess supply and deficient demand, as others would put it.
He correctly scolded those who claimed that rich developed countries with their own sovereign currencies are at risk of a bond market crisis unless they retrench into the downturn, or might go the way of Greece.
... The dispute is over whether central banks can generate inflation even when interest rates are zero. He says they cannot do so, and that it is jejune to float such an outlandish idea. Monetary policies are to all intents and purposes impotent at that point. He goes on to suggest that the historical and global evidence has demonstrated this beyond any possible doubt, and here he ventures into flinty terrain.
... He rebukes me for quoting Tim Congdon from International Monetary Research, specifically for invoking traditional monetary theory to suggest that QE can work even when bond yields are hyper-compressed. The precise quote: "The interest rate is totally irrelevant. What matters is the quantity of money. Large scale money creation is a very powerful weapon and can always create inflation."
Mr Congdon's claim is a self-evident truism. Central banks can always create inflation if they try hard enough. As Milton Friedman said, they can print bundles of notes and drop from them helicopters. The modern variant might be a $100,000 electronic transfer into the bank account of every citizen. That would most assuredly create inflation.
... It is becoming ever clearer that the US and UK recoveries are a serious challenge to the Krugman opus and what I would loosely call (though I have much sympathy for New Keynesian arguments) the doctrine of fiscal primacy. These recoveries should not really be as strong as they are, especially in a depressed world of flat global trade. America has carried out the most drastic fiscal squeeze since demobilization after the Korean War without falling into recession. The economy is growing briskly. The jobless rate is plummeting.
The last paragraph illustrates the sterility of this debate. Despite denials, Evans-Pritchard more and more has adopted a neo-Keynesian point of view in his columns, arguing that monetary stimulation is necessary to keep the world afloat until such time as the "recovery" takes hold more fully.
But there is no "recovery" in the classical sense of the word, nor can there be in a world filled with central banks. If the money were private, if the volume of money were not produced via force, if interest rates were not set metaphorically at the point of a gun, then perhaps one could speak of a recovery. But instead, in this modern world, we can have nothing but varying degrees of asset bubbles.
At the beginning of the business cycle the asset bubbles have been deflated or at least are subject to disinflation, monetarily and even pricewise. But as more money is force-fed into the economy, these bubbles begin to swell again.
The faster they swell, the more commentators and professors begin to speak of a recovery. It is not a recovery. The bubbles are simply advancing.
First bank coffers swell and then the money leaks into multinational pockets and into stock markets, mostly. Marts travel up, and the wealthy and upper middle classes begin to leverage the wealth effect. High-end homes, yachts, expensive cars and the like begin to sell more quickly. The "recovery" is underway.
Eventually the recovery reaches the middle classes. Factories gear up, wages rise, the "recovery" is proclaimed a success. But actually, such a recovery is merely a way-station to a further disaster because the asset bubbles will continue to swell until they burst. At which point we will once again, as before, have a conversation about deflation and disinflation.
We should try to be fair, of course. Evans-Pritchard is in a sense correct about deflation. As we wrote before it is very hard to have real, long-lasting deflation in a modern, central bank economy where the printing presses are always churning out currency.
What SEEMS like deflation or disinflation is mostly the collapse of bubbles that were stuffed by previously printed currency.
Krugman is wrong. When you have central banks you almost always have unrestrained money printing. Central banks cannot know how much money is enough because there are no forward looking indices, as Alan Greenspan himself admitted during his tenure.
And so central bankers print too much. If economies subside catastrophically, it is not because of deflation or disinflation but because of monetary INFLATION to begin with.
Deflation is NOT the main problem by any means. Central banks are the problem. People like Krugman want to draw our attention away from the real issue. In this case, Evans-Pritchard has done us a favor by drawing our attention back to it.
The trouble with Evans-Pritchard is that he then goes on to make the argument that central bank inflating is a kind of Keynesian good. But monopoly money printing is not good, either. And there you have it – a modern debate in which both sides are wrong because they are arguing effectively a false premise.
Krugman wants to focus on the lack of monetary policy. Evans-Pritchard argues for continued inflation.
We'll take the side of the argument that is NOT represented – which is that money ought to be privatized and that central banks ought to lose their monopoly money printing privileges.
Conclusion When we begin to see that argument made in the mainstream press, we'll call it what it is ... Progress.
Source
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