Home » Economics

Category Archives: Economics

Olduvai
Click on image to purchase

Olduvai III: Catacylsm
Click on image to purchase

Post categories

Olduvai
Click on image to purchase

Olduvai II: Exodus
Click on image to purchase

Olduvai
Click on image to purchase

Olduvai II: Exodus
Click on image to purchase

Olduvai
Click on image to purchase

Olduvai II: Exodus
Click on image to purchase

Olduvai
Click on image to purchase

Olduvai II: Exodus
Click on image to purchase

Olduvai
Click on image to purchase

Olduvai II: Exodus
Click on image to purchase

Olduvai III: Cataclysm
Click on image to purchase

California Farmland To Plunge “20% Or More” As Returns Sink To Lowest Level Since 1992

California Farmland To Plunge “20% Or More” As Returns Sink To Lowest Level Since 1992

Last August we questioned whether California farmland was overvalued by $70 billion (see our aptly named post: “Is California Farmland Overvalued By $70 Billion?“).  Our reasoning was fairly simple, as we argued such a draconian outcome was the inevitable result of large institutional buyers scooping up 1,000s of acres of Cali farmland and massively overplanting almonds because, at least at the time, it was the hottest crop earning the highest returns…and that’s what NYC hot money likes.

Unfortunately, chasing short-term returns by massively overplanting a permanent crop with a 25 year useful life and creating a huge supply bubble in the process rarely works out all that well.  Here’s what we said 9 months ago:

But the Midwest is not the only place where farmland has bubbled over.  California farmland has been bubbling up for years now with unplanted farm ground with “decent” access to water currently selling for $20,000 – $30,000 per acreLand with mature almonds, California’s cash crop, is more likely to trade at $30,000 – $40,000 per acre.  This bubble, like so many others, has been caused in large part by institutional capital “reaching for yield” in a low interest rate environment…yet another Fed bubble lurking under the surface.

The plan was relatively simple, in the absence of attractive fixed income yields, large asset managers (like TIAAmentioned above with $850BN of AUM) decided to purchase hard assets like farmland instead.  Farmland could then be planted with the highest value crop, which just happens to be almonds in California, to drive attractive ROICs on invested capital.  A few simple charts illustrate perfectly how the story played out.

And, right on cue, almond prices crashed leaving land owners with a ~4% ROIC, down from 16%, on land they likely purchased for north of $35,000 per acre.

…click on the above link to read the rest of the article…

This bubble finally burst. Which one’s next?

Like so many other high-flying Silicon Valley startups, Clinkle was supposed to ‘make the world a better place’.

Founded in 2011 by a guy barely out of his teens, the company picked up early buzz after proclaiming they would disrupt mobile payments. Or something.

Silicon Valley venture capital firms were apparently so impressed with the idea that they showered the company with an unprecedented level of cash.

(Given that investing in an early stage company is high-risk, investors might provide a few hundred thousand dollars in funding, at most. Clinkle raised $25 million.)

The company went on to burn through just about every penny of its investors’ capital.

There were even photos that surfaced of the 21-year old CEO literally setting bricks of cash on fire.

At the end of the farce, Clinkle never actually managed to build its supposedly ‘world-changing’ product, and the website is now all but defunct.

This is rapidly becoming a familiar story in Silicon Valley.

For the last 6-7 years, Silicon Valley startups have been able to raise unbelievable amounts of cash.

Yet so many of those companies haven’t managed to turn a profit. Ever.

There’s some of the big names like Uber and AirBnb which are supposedly worth tens of billions of dollars despite having racked up enormous losses.

(Last year ride-sharing company Lyft promised investors that it would cap its losses at ‘only’ $600 million per year. . .)

But there are countless other examples of startups being anointed with absurd valuations and continually replenished with fresh capital even though they keep losing money… and have no plan to ever make money.

Snapchat’s investment prospective summed it up best:

“We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.

…click on the above link to read the rest of the article…

Canada Housing Regulator Warns Of “Strong Evidence Of Housing-Market Problems”

Canada Housing Regulator Warns Of “Strong Evidence Of Housing-Market Problems”

In an perculiar coincidence, just hours after Home Capital Group imploded in what we dubbed Canada’s “New Century” moment, Canada’s housing regulator, the Canada Mortgage And Housing Corporation, which describes itself as “contributing to the stability of the housing market and financial system” moments ago the CMHC issued a report, warning that there is “strong evidence of overall problematic conditions.

In the report, the Housing regulator again warns that while conditions in Canada’s housing markets are showing some signs of improvement, the official overall rating from the Canada Mortgage and Housing Corporation (CMHC) will be held at “strong evidence of problematic conditions”.

Every quarter, the CMHC issues its Housing Market Assessment (HMA) “to provide Canadians with both expert and impartial insight and analysis, based on the best data available in Canada.” The report is meant to serve as an “early warning system” for the country’s housing markets “an important tool supporting financial and housing market stability.” Or lack thereof because as the CMHC said while “conditions in Canada’s housing markets are showing some signs of improvement” the official overall rating from the Canada Mortgage and Housing Corporation (CMHC) will be held at “strong evidence of problematic conditions”.

As noted in the press release, some of the report highlights are the following:

  • Overall rating to be held at “strong evidence of problematic conditions”.
  • Evidence of overvaluation at the national level has been downgraded from strong to moderate. It is now present in six centers instead of eight.
  • Evidence of overvaluation has increased from moderate to strong in Victoria, as fundamentals are not keeping up with higher prices. There is also moderate evidence of price acceleration and overheating, leading to strong overall evidence of problematic conditions.
  • Conditions have improved in Regina, Montreal and Quebec relative to home prices.

…click on the above link to read the rest of the article…

Canada’s Housing Bubble Explodes As Its Biggest Mortgage Lender Crashes Most In History

Canada’s Housing Bubble Explodes As Its Biggest Mortgage Lender Crashes Most In History

Call it Canada’s “New Century” moment.

We first introduced readers to the company we said was the “tip of the iceberg in Canada’s magnificent housing bubblenearly two years ago, in July 2015 when we exposed a major problem that we predicted would haunt Home Capital Group, Canada’s largest non-bank mortgage lender: liar loans in particular, and a generally overzealous lending business model with little regard for fundamentals. In the interim period, many other voices – most prominently noted short-seller Marc Cohodes – would constantly remind traders and investors about the threat posed by HCG.

Today, all those warnings came true, when the stock of Home Capital Group cratered by over 60%, its biggest drop on record, after the company disclosed that it struck an emergency liquidity arrangement for a C$2 billion ($1.5 billion) credit line to counter evaporating deposits at terms that will leave the alternative mortgage lender unable to meet financial targets, and worse, may leave it insolvent in very short notice.

As part of this inevitable outcome, one which presages the company’s eventual disintegration and likely liquidation, Bloomberg reports that the non-binding rescue loan with an unnamed counterparty will be secured by a portfolio of mortgage loans originated by Home Trust, the Toronto-based firm said in a statement Wednesday. Home Capital shares dropped by 61% in Toronto to the lowest since 2003, dragging down other home lenders. Equitable Group Inc. fell 17 percent, Street Capital Group Inc. fell 13 percent, while First National Financial Corp. declined 7.6 percent. In short, the Canadian mortgage bubble has finally burst.

Some more details on HCG’s emergency source of funding: Home Capital will pay 10% interest on outstanding balances and a non-refundable commitment fee of C$100 million, while standby fee on undrawn funds is 2.5%. The initial draw must be C$1 billion.

…click on the above link to read the rest of the article…

Fed’s Policy of Price Stability Results in More Instability

For most economists the key factor that sets the foundation for healthy economic fundamentals is a stable price level as depicted by the consumer price index.

According to this way of thinking, a stable price level doesn’t obscure the visibility of the relative changes in the prices of goods and services, and enables businesses to see clearly market signals that are conveyed by the relative changes in the prices of goods and services. Consequently, it is held, this leads to the efficient use of the economy’s scarce resources and hence results in better economic fundamentals.

For instance, let us say that a relative strengthening in people’s demand for potatoes versus tomatoes took place. This relative strengthening, it is held, is going to be depicted by the relative increase in the prices of potatoes versus tomatoes.

Now in a free market, businesses pay attention to consumer wishes as manifested by changes in the relative prices of goods and services. Failing to abide by consumer wishes will lead to the wrong production mix of goods and services and will lead to losses.

Hence in our case businesses, by paying attention to relative changes in prices, are likely to increase the production of potatoes versus tomatoes.

According to this way of thinking, if the price level is not stable, then the visibility of the relative price changes becomes blurred and consequently, businesses cannot ascertain the relative changes in the demand for goods and services and make correct production decisions.

This leads to a misallocation of resources and to the weakening of economic fundamentals. Unstable changes in the price level obscure changes in the relative prices of goods and services. Consequently, businesses will find it difficult to recognize a change in relative prices when the price level is unstable.

…click on the above link to read the rest of the article…

Surplus or Stimulus

Surplus or Stimulus

René Magritte Le Cri du Coeur 1960

Austerity is over, proclaimed the IMF this week. And no doubt attributed that to the ‘successful’ period of ‘five years of belt tightening’ a.k.a. ‘gradual fiscal consolidation’ it has, along with its econo-religious ilk, imposed on many of the world’s people. Only, it’s not true of course. Austerity is not over. You can ask many of those same people about that. It’s certainly not true in Greece.

IMF Says Austerity Is Over

Austerity is over as governments across the rich world increased spending last year and plan to keep their wallets open for the foreseeable future. After five years of belt tightening, the IMF says the era of spending cuts that followed the financial crisis is now at an end. “Advanced economies eased their fiscal stance by one-fifth of 1pc of GDP in 2016, breaking a five-year trend of gradual fiscal consolidation,” said the IMF in its fiscal monitor.

In Greece, the government did not increase spending in 2016. Nor is the country’s era of spending cuts at an end. So did the IMF ‘forget’ about Greece? Or does it not count it as part of the rich world? Greece is a member of the EU, and the EU is absolutely part of the rich world, so that can’t be it. Something Freudian, wishful thinking perhaps?

However this may be, it’s obvious the IMF are not done with Greece yet. And neither are the rest of the Troika. They are still demanding measures that are dead certain to plunge the Greeks much further into their abyss in the future. As my friend Steve Keen put it to me recently: “Dreadful. It will become Europe’s Somalia.”

…click on the above link to read the rest of the article…

The Fate of the Euro

QUESTION: The bounce in the Euro is a fool’s’ game?

ANSWER: Absolutely. The Euro is doomed because especially if Le Pen loses, Brussels will be relieved and proceed as usual. The same problems will merely exist and no reform will come forward to save the day. A good wind will blow over the European banking system. You are expecting politicians to admit they were wrong and surrender power in Brussels. NOT GOING TO HAPPEN. As Einstein said, you will NEVER solve the problem of the Euro with the same thinking process.

IBEUUS-M 4-24-2017

A weekly closing above the 10860 level in the Euro will imply the rally will press higher to test the 112-114 level. Just look at the technical perspective on a monthly level. The Downtrend Line stands in May up at 12622. We are nowhere near reversing the trend in the Euro.

We have the French, British, and then German elections here in 2017. We do not expect total chaos before 2018. That seems to be the point of a major shift.

Feudalism and the “Algorithmic Economy”

Feudalism and the “Algorithmic Economy”

Using AI and algorithms to return to feudal economic models

For the sake of this essay, feudal economic models imply the idea that a very tiny segment of the society is fantastically rich while the bulk of society works hard, has few choices about the work they do, and tend to be poorly compensated for their efforts.

feu·dal·ism: noun, historical

  1. the dominant social system in medieval Europe, in which the nobility held lands from the Crown in exchange for military service, and vassals were in turn tenants of the nobles, while the peasants (villeins or serfs) were obliged to live on their lord’s land and give him homage, labor, and a share of the produce, notionally in exchange for military protection.

Welcome to the Algorithmic Economy, a future which uses machines to determine how effective you can be and how little they can pay you in the process.

There are no unions in this economy. There are no bosses to complain to. There are no people you can ask for redress. Because in this economy, the people doing the labor are considered the least important part of the machine and it’s best if they never communicate with someone living if it can be helped.

This is just like something out of a dark and dystopian science fiction novel, except its likely happening to you, right now. If it isn’t, unless you are very fortunate, it will be, soon. I write about the near-future in my speculative fiction. Often these are my most unpopular stories because they paint technology in a less-than-ideal light.

…click on the above link to read the rest of the article…

Chinese Stocks Give Up Trump Gains As $1.7 Trillion Source Of Funds Unwinds

Chinese Stocks Give Up Trump Gains As $1.7 Trillion Source Of Funds Unwinds

The Chinese and U.S. stock markets are going in opposite directions, as an intensifying crackdown against leverage has slammed the recently ‘stable’ Shanghai Composite over the past week, erasing all post-Trump gains.

The relatsionship between the two markets is the weakest since August 2008 – just before the collapse of Lehman unleashed chaos on the global financial system.

Bloomberg reports that given how mainland stocks have become increasingly linked to global markets, however, the divergence may prove to be a short-term phenomenon, according to Daniel So, a strategist at CMB International Securities Ltd. in Hong Kong.

The Chinese government is squeezing speculation out of the market and while investors adjust, it will inevitably lag behind other parts of the world,” So said.

And as we noted previously, for a market relying more on liquidity than fundamentals, China’s worsening monetary conditions index suggests tough times ahead…

China’s deleveraging drive and the renewed focus on market irregularities have put the mainland share market into a “bad mood,” but officials aren’t likely to tolerate a lot of instability ahead of the Communist Party’s twice-a-decade leadership reshuffle later this year, said George Magnus, a former adviser to UBS Group AG and current associate at the University of Oxford’s China Centre.

“The authorities are trying to calm down leverage and housing at the margin but will not go any further than the minimum necessary,” he said. “If it looks as though regulatory tightening is delivering unfavorable outcomes, and risks any form of instability, you won’t be able to say the world ‘backtrack’ fast enough.”

…click on the above link to read the rest of the article…

The Fed Will Blink

Honest Profession

GUALFIN, ARGENTINA – The Dow rose 174 points on Thursday. And Treasury Secretary Steve Mnuchin said we’d have a new tax system by the end of the year.

Animal spirits were restless. But which animals? Dumb oxes? Or wily foxes? Probably both.

Since Thursday there have been two additional very spirited up days with large gaps – this is very rare in the DJIA, particularly from such a high level after a ~240% rally since the lows made 8 years ago… it continues to feel like a blow-off (and it happens against the backdrop of a sharp slowdown in money supply growth) – click to enlarge.

But what caught our attention were the central bankers strutting across the yard and crowing with such numbskull cackles that even barnyard animals would be embarrassed by them. There was a time when central banking was an honest profession.

Central bankers provided financing for the government. They backed the banking system, too, by holding savings as reserves, which they lent to solvent member banks in emergencies. They were tight-lipped, tight-laced, and tightwads. Their role was to say “no” more often than “yes.”

When the king wanted money to fight in a war… or build a bridge… the banker would give the terse reply: “Sire, we don’t have any.” Real money was backed by gold. And credit had to be backed by real money, which meant it had to be saved. Savings were limited, as was money.

Cackling central planners – this reminds us of the “FOMC meeting laughtrack” of 2003-2007 – the more Fed members laughed at their meetings, the closer the economy and financial system came to the near fatal implosion of 2007-2009. Do today’s monetary bureaucrats have more of a clue than their predecessors just before the GFC? The answer is an emphatic no – they have simply doubled down and blown an even bigger credit and asset bubble.

…click on the above link to read the rest of the article…

Cataclysm

Cataclysm

Collapse generally comes as a surprise, even to those who predict it.

The USSR didn’t just fail one day, as does a person who dies of a sudden heart attack or stroke. It was more like a wasting illness brought on by an unhealthy lifestyle. A physician tells a morbidly obese patient: “Your daily consumption of twelve cocktails, three packs of cigarettes, and 4,000 calories, and your refusal to engage in exercise more strenuous than walking to the refrigerator will kill you, but I can’t say when.” For both individuals and governments, certain choices are incompatible with continued existence, and the Soviet government made plenty of those.

Very few people foresaw its failure when it was imminent, even purported experts. The small group who said Soviet communism wouldn’t work because it couldn’t work were disparaged right up until it didn’t work. However, the deck is always stacked in favor of those predicting this or that government will fail. Ultimately they all do because they all come to rest on a foundation of coercion and fraud, which doesn’t work because it can’t work.

There is both a quantitative and qualitative calculus for individuals subject to a government: what the government takes versus what individuals get back. Government is a protection racket: turn over your money and it promises physical security from invasion and crime, and adjudication and restitution in the event of civil or criminal wrongs. The quantitative calculus: am I getting more back than I put in? The qualitative calculus: what activities and people does the government help or hinder?

Protection rackets are often indistinguishable from extortion rackets, the “protector” a bigger threat to the “protected” than the threats against which they’re supposedly protected. Such is the case with the US government, as it was with the former Soviet government.

…click on the above link to read the rest of the article…

Podcast: How Residents of an English Town Took Governance and the Local Economy Into Their Own Hands

Podcast: How Residents of an English Town Took Governance and the Local Economy Into Their Own Hands

Upstream's picture

The stories in this series come from a small town in the United Kingdom called Frome, but the themes and topics explored are global in scale, ranging from the Americas to the Himalayas. Despite its unique setting, nestled in the sleepy countryside of southeast England, Frome is a microcosm of much of what is taking place in towns and cities around the world. The voices of Frome tell stories that will sound familiar all across the globe, and if you listen closely, you just might hear your own story in there as well.

Our story begins in a noisy bar. A few years ago, a group of disgruntled Frome residents were sitting around a table at their local pub, complaining about how bad their local town council was. Sound familiar? Well, this story is a bit different. Fast forward a few years, and the coalition that these residents decided to form has completely replaced every last council member. This coalition is known as the Independents of Frome, and their platform is based on a rejection of traditional party politics and on bringing power down to the local level.

This episode explores the Independents of Frome, as well as many of the initiatives that they have promoted and supported: a community fridge, a library of things, a town resilience officer, and more.

But the story of Frome, like most things in life, is not as simple as it may appear. This town has a long and at times dark history, and when parts of that history are uncovered, old wounds are revealed which tell an all too familiar story of division and gentrification. We’ll touch on this history here before we delve much deeper into these divides next week, in part two of this three-part series.

…click on the above link to read the rest of the article…

Legendary technical investor Robert Prechter is awaiting a depression-like shock in the U.S.

He tells Avi Gilburt in a Q&A that today’s mood of optimism will give way to a funk that will rival that of the 1930s

Robert Prechter with the 61,000 sheets of paper generated in the editing process for his new book, “The Socionomic Theory of Finance.”

A June 2015 profile of Robert Prechter, the world’s foremost proponent of Elliott Wave technical analysis, turned out to be the most popular investing story on MarketWatch for the week in which it was published.

One of the reasons is that, at the time, Prechter said the bull market in U.S. stocks was in a “precarious position” as a “mania” gripped investors, who pushed stocks to sky-high levels of overvaluation. The market has only risen since then, and it even got a bump from the November 2016 election of businessman Donald Trump as president.

I recently interviewed Prechter, who released a ground-breaking book, “The Socionomic Theory of Finance,” at the end of December. In the 813-page book, which took 13 years to write, he proposes a cohesive model that takes into account trends in sociology, psychology, politics, economics and finance. I highly recommend the book.

As I’ve explained here, Elliott Wave theory says public sentiment and mass psychology move in five waves within a primary trend, and three waves in a counter-trend. Once a five, or V, wave move (the waves are sometimes described in Roman numerals) in public sentiment is completed, it is time for the subconscious sentiment of the public to shift in the opposite direction, which is simply a natural cause of events in the human psyche, and not the operative effect from some form of “news.”

…click on the above link to read the rest of the article…

Venezuela On The Verge Of Revolution As Hyperinflated Currency Crashes To New Record Low

Venezuela On The Verge Of Revolution As Hyperinflated Currency Crashes To New Record Low

Venezuela, a country with only $10 billion left in reserves to run on, is in trouble. As the currency hyperinflates to new record lows against the dollar…

James Holbrooks points out that the people are starving. The government has gone full-on authoritarian, and now desperate human beings are dying in the streets. From an Associated Press report on Friday:

“Authorities in Venezuela say 12 people were killed overnight following looting and violence in the South American nation’s capital amid a spiraling political crisis.”

“Most of the deaths took place in El Valle, where opposition leaders say 13 people were hit with an electrical current while trying to loot a bakery protected by an electric fence.”

These are people without options, forced to turn to thievery to stay alive. And they died because of it.

On April 6, The Economist reported that over the past year, 74 percent of Venezuelans lost an average of 20 pounds. Venezuela, incidentally, has topped Bloomberg’s Economic Misery Index for the past three years.

The country began its slide downward into chaos with the election of President Nicolas Maduro, who immediately began implementing socialist programs and has since taken extreme measures to secure his position.

At the end of March, for instance, Maduro effectively shut down Venezuela’s congress — his primary political opposition — and gave those legislative duties to his puppet Supreme Court.

The latest news coming out of the South American nation — aside from the deaths of people trying to steal bread to live — is that General Motors, whose Venezuelan production facility was overtaken by local authorities, has now ceased all operations in the country.

To put that in perspective, consider that in 2016, only 3,000 vehicles were sold in Venezuela, a country of 30 million people.

…click on the above link to read the rest of the article…

“The Retail Bubble Has Now Burst”: A Record 8,640 Stores Are Closing In 2017

“The Retail Bubble Has Now Burst”: A Record 8,640 Stores Are Closing In 2017

        “Thousands of new doors opened and rents soared. This created a bubble, and like housing, that bubble has now burst.”

        – Richard Hayne, Urban Outfitters CEO, March 2017

The devastation in the US retail sector is accelerating in 2017, and in addition to the surging number of brick and mortar retail bankruptcies, it is perhaps nowhere more obvious than in the soaring number of store closures.

While the shuttering of retail stores has been a frequent topic on this website, most recently in the context of the next “big short”, namely the ongoing deterioration in the mall REITs and associated Commercial Mortgage-Backed Securities and CDS, here is a stunning fact from Credit Suisse:“Barely a quarter into 2017, year-to-date retail store closings have already surpassed those of 2008.”

According to the Swiss bank’s calculations, on a unit basis, approximately 2,880 store closings were announced YTD, more than twice as many closings as the 1,153 announced during the same period last year. Historically, roughly 60% of store closure announcements occur in the first five months of the year. By extrapolating the year-to-date announcements, CS estimates that there could be more than 8,640 store closings this year, which will be higher than the historical 2008 peak of approximately 6,200 store closings, which suggests that for brick-and-mortar stores stores the current transition period is far worse than the depth of the credit crisis depression.

As the WSJ calculates, at least 10 retailers, including Limited Stores, electronics chain hhgregg and sporting-goods chain Gander Mountain have filed for bankruptcy protection so far this year. That compares with nine retailers that declared bankruptcy, with at least $50 million liabilities, for all of 2016. On Friday, women’s apparel chain Bebe Stores said it would close its remaining 170 shops and sell only online, while teen retailer Rue21 Inc. announced plans to close about 400 of its 1,100 locations.

Broken down by retailer, either in bankruptcy or not yet:

…click on the above link to read the rest of the article…

Olduvai II: Exodus
Click on image to purchase

Olduvai
Click on image to purchase

Olduvai II: Exodus
Click on image to purchase

Olduvai III: Cataclysm
Click on image to purchase