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Where There’s Smoke…

Where There’s Smoke…

…There’s central bank manipulation

Central banks around the world have colluded, if not conspired, to elevate and prop up financial asset prices.  Here we’ll present the data and evidence that they’ve not only done so, but gone too far.

When wee discuss elevated financial asset prices we really are talking about everything.

we’re talking not just about the sky-high prices of stocks and bonds, but also of the trillions of dollars’ worth of derivatives that are linked to them, as well as real estate in dozens of countries and locations.  All are intricately linked together. For instance, stocks are elevated, in part, because bond yields are so low.  Sam for real estate.

Here are three questions most alert investors are asking:

  • Question #1: When will financial assets ever ‘correct’ and fall in price?
  • Question #2: How much does overt propping by the central banks have to do with today’s elevated prices?
  • Question #3: How much does covert propping by central banks play a role in these inflated markets?

These are important questions to consider because if central banks have been too involved and gotten themselves mixed up in trying to ‘wag the dog’ by using elevated financial asset prices as a means to drive economic expansion — then the risk is a big implosion in financial asset prices if their efforts fail.

The difficulty, as always, is that you can’t print your way to prosperity.  It’s never worked in history and it won’t work this time either.  You can, however, print (or borrow) to delay a correction, after which a boost in real economic growth (or additional income) had better materialize to save your bacon.   But if enough growth does not emerge to both pay back all the old outstanding loans plus all the newly created debt and currency, then you’re going to experience a worse correction than if you had not tried to print/borrow your way to prosperity.

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

The Economy Is Like a Circus

The Economy Is Like a Circus

The reason the circus stays in town is because the economy stays in sufficient balance that the economy can go on. This is much like the way many other self-organized systems function. For example, our bodies continue to function as long as there are suitable balances in many different areas (oxygen, food, water, air pressure). Ecosystems continue to function as long as there is sufficient rain, adequate temperatures, and enough sunlight.

There are many different views as to what limits we reach in a finite world. Some people think we will “run out” of oil, or of energy products. Some think that the energy return will fall too low, as measured in some manner. I see the adequacy of the energy return as being very much tied to the financial system. Thus, the forecast by US Atlanta Fed GDPNow indicating that first quarter 2017 US GDP growth will only be 0.5% is likely to be a problem, assuming it is correct.

Our economy operates on economies of scale. Once we get too close to shrinking, or actually start shrinking, we reach a point where the economic circus starts to leave town. At some point, we will discover the circus is gone. The economy we thought we had, will have left us. If some people are survivors, they will need to pick up the pieces and start over with an entirely new system.

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

Will Trump Accept Responsibility When This Shitshow Implodes?

WILL TRUMP ACCEPT RESPONSIBILITY WHEN THIS SHITSHOW IMPLODES?

Donald J. Trump has taken credit for making America’s economy great again. He’s been crowing about all the jobs being created, the soaring consumer confidence and record highs in the stock market. It’s all because the Donald has inspired Americans about our glorious future.

But, a funny thing has been happening in the real world. The economy has gone into the shitter and GDP will be lucky to reach 1% in the first quarter of his presidency. The bullshit consumer confidence surveys mean absolutely nothing. Feelings don’t mean shit. What consumers do is what matters.

67% of the US economy is dependent upon Americans spending money they don’t have on shit they don’t need. And they’ve dramatically reduced that spending. If consumers are so confident, why are a record number of major retailers going bankrupt and closing 3,500 stores in 2017? Mom and pop retailers have been shuttering for years.

If the narrative about a dramatically improving housing market was true, why would furniture store sales and building material store sales be falling? They wouldn’t. It seems even the spendthrift millennials have run out of dough, as restaurant sales are in free fall. Restaurant chains have begun closing units now. It has only just begun.

The auto industry ponzi scheme has come to an end, as billions in subprime loans to deadbeats is finally coming home to roost. If you lend money to idiots with no means to repay you, the loans will go bad. Auto sales have begun to fall and will continue to fall for the next couple years, as this house of cards built on the Fed’s easy money collapses.

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

The American Dream, Twice Removed


Vincent van Gogh Corridor In The Asylum 1889
 

Nicole Foss is in Christchurch, New Zealand right now for the Living Economies Expo, and sent me, I’m still in Athens, Greece, a piece written by yet another longtime Automatic Earth reader, Helen Loughrey (keep ’em coming!), who describes her efforts trying to find a rental home in Fairfield County, Connecticut.

The first thing that struck me is how effortless and global sending information has become (category things you know but that hit you anyway occasionally, which is a good thing). The second is that the fall-out of the financial crisis has followed the same path as the information ‘revolution’: that is, it’s spreading faster than wildfire.

And I can’t avoid linking that to earlier periods of American poverty (see the photos), times in which ‘leaders’ thought it appropriate to let large swaths of the population live in misery, so everyone else would think twice about raising their voices. A tried and true strategy.

But of course there are large differences as well today between the likes of Greece and Connecticut. In Athens, there’s a poverty problem. In Fairfield County, there’s a (fake) ‘wealth problem’. Ever fewer people can afford to buy a home, so the rental market is ‘booming’ so much many can’t even afford to rent.

We can summarize this as ‘The Ravages Of The Fed’, and its interest rate policies. Or as ‘The Afterburn of QE’. That way it’s more obvious that this doesn’t happen only in the US. Every country and city in the world in which central banks and governments have deliberately blown real estate bubbles, face the same issue. Toronto, Sydney, Hong Kong, Stockholm, you know the list by now.

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

 

Maybe The Recovery Wasn’t Real After All

Maybe The Recovery Wasn’t Real After All

Then it all started to evaporate. Lackluster manufacturing and consumer spending reports sent the Atlanta Fed’s reading of Q1 GDP off a cliff to less than 1%:

And this morning the Wall Street Journal highlighted some recent changes in the yield curve that point towards further slowing:

Flatter Yield Curve in 2017 Shows Growth Concern Lingers

Long-term Treasury yields have declined modestly, while short-term yields have risen.A flattening of the Treasury yield curve in 2017 is a worrying sign for investors banking on resurgent U.S. inflation and growth.

Long-term Treasury yields, which are largely driven by the U.S. economic and inflation outlook, have declined modestly this year, following a sharp rise in the wake of the November election of Donald Trump as president. The 10-year U.S. Treasury yield has fallen to 2.396% from 2.446% at the end of 2016.

At the same time, short-term yields, which are more influenced by monetary policy, have risen in 2017 as Federal Reserve officials have made clear that they expect to continue raising the fed-funds rate through the rest of the year.
As a result, the yield premium on the 10-year note relative to the two-year note—known in the market as the 2-10 spread—slipped Wednesday to 1.107 percentage points, its lowest level since the election.

FIRST QUARTER REPORT CARD
While the yield curve, like all market indicators, is subject to the ebb and flow of investor sentiment, economic data and political developments, a flattening yield curve gets special attention from investors world-wide because it can serve as an early signal of both economic slowing and overpricing in riskier asset classes.

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

The Long Run Economics of Debt Based Stimulus

Something both unwanted and unexpected has tormented western economies in the 21st century.  Gross domestic product (GDP) has moderated onward while government debt has spiked upward.  Orthodox economists continue to be flummoxed by what has transpired.

What happened to the miracle? The Keynesian wet dream of an unfettered fiat debt money system has been realized, and debt has been duly expanded at every opportunity.  Although the fat lady has so far only cleared her throat (if quite audibly, in 2008) and hasn’t really sung yet, it is already clear that calling this system careening toward a catastrophic failure.

Here is the United States, since the turn of the new millennium (starting January 1, 2001) real GDP has increased from roughly $10.5 trillion to $18.6 trillion, or 77 percent.  Over this same time government debt has spiked nearly 250 percent from about $5.7 trillion to $19.9 trillion.  Obviously, some sort of reckoning’s in order to bring the books back into balance.

Throughout this extended episode of economic and financial discontinuity, the government’s solution to jump-starting the economy has been to borrow money and spend it.  Thus far, these efforts have succeeded in digging a massive hole that the economy will somehow have to climb out of.  We’re doubtful such a feat will ever be attained.

In short, additions of government debt over this time have been at a diminishing return.  Specifically, at the start of the new millennium the debt to GDP ratio was about 54 percent.  Today, it’s well over 100 percent.

US GDP and US federal debt, indexed (1984 = 100). Mises noted back in the late 1940s already that “it is obvious that sooner or later all these debts will be liquidated in some way or other, but certainly not by payment of interest and principal according to the terms of the contract.

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

Eric Peters: “If China And The World Bank Are Right, We’re Headed For A Depression”

Eric Peters: “If China And The World Bank Are Right, We’re Headed For A Depression”

“Some people blindly invested offshore and were in a rush to do so,” explained China’s central bank chief, justifying his recent capital controls.

“Some of this outbound investment was not in line with our own policies and had no real gain for China.” No doubt he’s right. The tycoons fleeing Chinese capital markets have done so selfishly. “So to regulate capital flows, I think it is normal,” concluded the central banker.

Chinese credit relative to GDP has doubled in the past decade to 300%. Which remains less than the US at 350%, but the rate of Chinese credit growth is as unsustainable as it is difficult to reverse — without tanking the economy. The tycoons are running from this dynamic. Because such loops almost always end badly. 

Anyhow, after so many years of secular stagnation fears, global investors have grown conditioned to run. They’ve been running away from fear for so long, they’ve forgotten how to run toward greed. Which has left them blindly holding over $10trln of bonds, which yield negative interest.

Now, this might make sense in a deflationary depression. But the global economy has not seen such strong synchronized cyclical growth in years. Inflation is likewise firming everywhere.

But China lowered its growth target again. As the World Bank warned that today’s strong global upswing in confidence and financial markets are not enough to pull the world out of a “low-growth trap.” If they’re right, we’re surely headed for depression. Because all this new debt requires robust economic strength to shoulder the weight.

But European debt markets are still largely priced for depression. And with JP Morgan’s CEO Jamie Dimon announcing the return of animal spirits in America’s economy, it seems more likely that this cycle ends like every other. With a blind run toward greed.

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

China Central Bank Admits It Has A Debt Problem, Warns No Easy Solution

China Central Bank Admits It Has A Debt Problem, Warns No Easy Solution

It’s a well-known risk, perhaps the biggest to the global financial system: China’s debt is too high, with estimates ranging from 250% to 300% of GDP per the IIF:

And while China has largely ignored, or avoided, discussing the troubling implications of its unprecedented debt load, this changed today when the head of China’s central bank, Zhou Xiachuan finally admitted that it has a debt “problem” saying that corporate debt levels are too high and that “it will take time to bring them down to more manageable levels”, underlining what has become the defining battle to put the world’s second-largest economy on a more sustainable footing: keeping GDP growing at 6.5% (or above) while injecting trillions in new debt.

“Non-financial corporate leverage is too high,” PBOC Governor Zhou Xiaochuan told reporters at a news conference on the sidelines of the annual parliament session.

Quoted by Reuters, he said that efforts will be made to contain debt levels, including restructuring of firms with heavy debt burdens, alongside a push to reduce excess industrial capacity.  Furthermore, banks will withdraw support for financially unviable firms, he added, repeating pledges by other officials last year to drive such “zombie” firms out of the market.

“I personally think this process is relatively medium-term. It won’t have very obvious results in the short-term because the existing stock (of debt) is very large,” he said.


Zhou Xiaochuan, Governor of the People’s Bank of China, attends a news 

conference in Beijing China March 10, 2017. REUTERS/Jason Lee

Zhou also said that measures by local governments to cool rising house prices will slow mortgage growth to some degree, but housing loans will continue to grow at a relatively rapid pace. We profiled China’s mortgage debt problem last October when we showed that over 70% of all new loans went to fund mortgages, which in turn now account for a fifth of total Chinese outstanding loans.

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

Bill Gross: “Our Financial System Is A Truckload Of Nitroglycerin On A Bumpy Road”

Bill Gross: “Our Financial System Is A Truckload Of Nitroglycerin On A Bumpy Road”

Courtesy of Bill Gross’ latest monthly letter “Show Me The Money“, here are some perspectives on the only thing that has kept the global economy going since the financial crisis: debt, and lost of it.
in 2017, the global economy has created more credit relative to GDP than that at the beginning of 2008’s disaster. In the U.S., credit of $65 trillion is roughly 350% of annual GDP and the ratio is rising. In China, the ratio has more than doubled in the past decade to nearly 300%. Since 2007, China has added $24 trillion worth of debt to its collective balance sheet. Over the same period, the U.S. and Europe only added $12 trillion each. Capitalism, with its adopted fractional reserve banking system, depends on credit expansion and the printing of additional reserves by central banks, which in turn are re-lent by private banks to create pizza stores, cell phones and a myriad of other products and business enterprises. But the credit creation has limits and the cost of credit (interest rates) must be carefully monitored so that borrowers (think subprime) can pay back the monthly servicing costs. If rates are too high (and credit as a % of GDP too high as well), then potential Lehman black swans can occur. On the other hand, if rates are too low (and credit as a % of GDP declines), then the system breaks down, as savers, pension funds and insurance companies become unable to earn a rate of return high enough to match and service their liabilities. 

U.S. Total Credit Market Debt as a Percent of GDP

Chart: U.S. Total Credit Market Debt as a Percent of GDP

Central banks attempt to walk this fine line – generating mild credit growth that matches nominal GDP growth – and keeping the cost of the credit at a yield that is not too high, nor too low, but just right. Janet Yellen is a modern day Goldilocks.

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

Europe or Anti-Europe?

Europe or Anti-Europe?

MILAN – A knowledgeable friend in Milan recently asked me the following question: “If an outside investor, say, from the United States, wanted to invest a substantial sum in the Italian economy, what would you advise?” I replied that, although there are many opportunities to invest in companies and sectors, the overall investment environment is complicated. I would recommend investing alongside a knowledgeable domestic partner, who can navigate the system, and spot partly hidden risks.

Of course, the same advice applies to many other countries as well, such as China, India, and Brazil. But the eurozone is increasingly turning into a two-speed economic bloc, and the potential political ramifications of this trend are amplifying investors’ concerns.

At a recent meeting of high-level investment advisers, one of the organizers asked everyone if they thought the euro would still exist in five years. Only one person out of 200 thought that it would not – a rather surprising collective assessment of the trending risks, given Europe’s current economic situation.

Right now, Italy’s real (inflation-adjusted) GDP is roughly at its 2001 level. Spain is doing better, but its real GDP is still around where it was in 2008, just prior to the financial crisis. And Southern European countries, including France, have experienced extremely weak recoveries and stubbornly high unemployment – in excess of 10%, and much higher for people younger than 30.

Sovereign debt levels, meanwhile, have approached or exceeded 100% of GDP (Italy’s is now at 135%), while both inflation and real growth – and thus nominal growth – remain low. This lingering debt overhang is limiting the ability to use fiscal measures to help restore robust growth.

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

Is The Renewable Transition Harming The U.S. Economy?

Is The Renewable Transition Harming The U.S. Economy?

solar panels

Recent data from the 2017 Sustainable Energy in America Factbook suggests that sectors of America’s energy market are quickly shifting towards greener energy, while also dispelling the myth that such shifts will hurt the economy. Despite a GDP growth of 12 percent since 2007, America’s usage of energy has fallen by 3.6 percent. Analysts believe this to be indicative of a new stage of American history in which energy productivity is improving, while increasingly less energy is needed to sustain growth.

These movements are overlapped by dramatic decreases in greenhouse gas emissions. In fact, 2016 marked a 25-year low – emissions have dropped 12 percent since 2007. As part of the original Paris Agreement, the U.S. has pledged to reduce national greenhouse gasses by over 25 percent by 2025 – these new numbers mean we are nearly halfway there.

These numbers are supplemented by the fact that consumers spent less than 4 percent of their annual household income on energy. This is the smallest estimate ever collected in America. Further, retail rates for electricity have fallen nationally by 3 percent. But in some regions, Texas for example, retail prices have fallen by as much as 29 percent. Moreover, since its peak in 2014, demand for electricity has fallen 1.2 percent. During the same period of time, GDP has grown 4.2 percent.

These numbers seem to contradict the widely-held belief that if America shifts away from carbon-based energy, we will either face economic deceleration, or radical price increases.

Further details concerning 2016 show that renewable energy sources have also spiked. Last year, the U.S. created 22 gigawatts of new renewable-energy-generating capacity. 12.5 of these gigawatts were generated from the solar industry. The wind industry contributed 8.5 gigawatts, and the remainder was comprised of additions from hydropower, biomass, biogas and waste-to-energy.

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

How Do We Design a DeGrowth Economy?

How Do We Design a DeGrowth Economy?

The conventional objections to DeGrowth boil down to: it isn’t the status quo, so it can’t work. Actually, it’s the status quo that isn’t working.
I’ve written about DeGrowth for many years, including Degrowth, Anti-Consumerism and Peak Consumption (May 9, 2013), Degrowth Solutions: Half-Farmer, Half-X (July 19, 2014) and And the Next Big Thing Is … Degrowth? (April 7, 2014)
These are the basic concepts of Degrowth:
1. Consumerism is psychological/ spiritual junk food (French: malbouffe) that actively reduces well-being (bien-etre) rather than increases it.
2. Better rather than more: well-being is increased by everything that cannot be commoditized by a market economy or financialized by a cartel-state financial machine– friendship, family, community, self-cultivation. The goal of economic and social growth should be better, not more. On a national scale, the cancerous-growth measured by gross domestic product (GDP) should be replaced with gross domestic happiness/ gross national happiness (GNH).
3. A recognition that resources are not infinite, despite claims to the contrary. For one example of many: China Is Plundering the Planet’s Seas (The Atlantic). Indeed, all the evidence suggests that access to cheap energy only speeds up the depletion and despoliation of every other resource.
4. The unsustainability of consumerist “growth” that’s dependent on resource depletion funded by financialization (i.e. the endless expansion of credit and phantom collateral). (This is covered in greater depth in my short book Why Our Status Quo Failed and Is Beyond Reform.)
5. The diminishing returns on private consumption and “bridges to nowhere” (crony-capitalist public consumption).
6. The failure of neoliberal capitalism and communism alike in their pursuit of growth at any cost.
Degrowth is heresy in what John Michael Greer calls the religion of progress (i.e. growth). The faith that growth equals progress is akin to the Cargo Cult of Keynesianism, the notion that expanding debt exponentially to drive diminishing returns of growth is not only necessary but a moral imperative.

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

Conference Board sees modest economic growth in 2017

Conference Board sees modest economic growth in 2017

Alberta expected to lead all provinces in economic growth this year

Retail sales activity is expected to cool this year and next, the Conference Board of Canada says.

Retail sales activity is expected to cool this year and next, the Conference Board of Canada says. (Chris Wattie/Reuters)

The national economy should see a slight pick-up this year, the Conference Board of Canada said in a new report out Thursday.

The independent research group said it sees overall growth of 1.9 per cent this year, up from the 1.3 per cent it expects will be reported for last year.

“The plunge in energy investment is expected to slow and we should finally see a resurgence in non-energy investment,” the Conference Board said.

“Canadian exports are also expected to fare a little better as the U.S. economy picks up speed and the Canadian dollar remains weak,” the group said, but added that exports levels will still remain low by historical standards.

Federal stimulus spending is expected to give a boost to national economic growth, although provincial belt-tightening is forecast to offset some of that.

Looking ahead to 2018, “dismal” business investment levels and slowing labour force growth mean it is unlikely there will be any acceleration in GDP growth, they said.

Retail sector seen cooling

The group said that consumer spending has been a “bright spot” in the economy, seeing increases in recent years despite weak job growth in some provinces and  soft wage gain.

“However, the ability to sustain these increases will be limited by the run-up in household debt over the last several years,” they said.

The Conference Board sees retail sales growth cooling from 3.8 per cent in 2016 to 2.9 per cent this year and down to 1.9 per cent in 2018.

The soft economic growth expected for this year and next mean the Bank of Canada is expected to hold off boosting interest rates until 2018.

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

Alan Greenspan: Ron Paul Was Right About The Gold Standard

Alan Greenspan: Ron Paul Was Right About The Gold Standard

As John Rubino eloquently puts it, “when the history of these times is written, former Fed Chair Alan Greenspan will be one of the major villains, but also one of the greatest mysteries. This is so because he has, in effect, been three different people.” Greenspan started his public life brilliantly, as a libertarian thinker who said some compelling and accurate things about gold and its role in the world. An example from 1966: “This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”

Yet everything changed a few decades later when Greenspan was put in charge of the Federal Reserve in the late 1980s, instead of applying the above wisdom, for example by limiting the bank’s interference in the private sector and letting market forces determine winners and losers, he did a full 180, intervening in every crisis, creating new currency with abandon, and generally behaving like his old ideological enemies, the Keynesians. Predictably, debt soared during his long tenure.

Along the way he was also instrumental in preventing regulation of credit default swaps and other derivatives that nearly blew up the system in 2008. His view of those instruments:

The reason that growth has continued despite adversity, or perhaps because of it, is that these new financial instruments are an increasingly important vehicle for unbundling risks.

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

Which Assets Are Most Likely to Survive the Inevitable “System Re-Set”?

Which Assets Are Most Likely to Survive the Inevitable “System Re-Set”? 

Your skills, knowledge and social capital will emerge unscathed on the other side of the re-set wormhole. Your financial assets held in centrally controlled institutions will not.

Longtime correspondent C.A. recently asked a question every American household should be asking: which assets are most likely to survive the “system re-set” that is now inevitable? It’s a question of great import because not all assets are equal in terms of survivability in crisis, when the rules change without advance notice.

If you doubt the inevitability of a system implosion/re-set, please read Is America In A Bubble (And Can It Ever Return To “Normal”)? This brief essay presents charts that reveal a sobering economic reality: America is now dependent on multiple asset bubbles never popping–something history suggests is not possible.

It isn’t just a financial re-set that’s inevitable–it’s a political and social re-set as well. For more on why this is so, please consult my short book Why Our Status Quo Failed and Is Beyond Reform.

The charts below describe the key dynamics driving a system re-set. Earned income (wages) as a share of GDP has been falling for decades: this means labor is receiving a diminishing share of economic growth. Since costs and debt continue rising while incomes are declining or stagnating, this asymmetry eventually leads to insolvency.

The “fix” for insolvency has been higher debt and debt-based spending–in essence, borrowing from future income to fund more consumption today. But each unit of new debt is generating less economic activity/growth. This is called diminishing returns: eventually the costs of servicing the additional debt exceed the increasingly trivial gains.

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

Olduvai II: Exodus
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