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A Dangerous Spot

SANTORINI, Greece – “Gods were gods. Men were men,” explained our tour guide, Spiros.

“The ancient Greeks thought there was a difference. Men had to realize they weren’t gods. They couldn’t do the things gods could do. If they tried, it provoked a disaster. The gods got jealous and punished them.”

What has changed? There are still things humans can and can’t do. When men get too big for their britches, the gods still punish them. The disaster we were looking at had nothing to do with the hubris of mankind. The problem was geological.

Santorini – world improvers from Hollywood have apparently found housing there.
Photo via kiklamino.com

Having built their city over the fault line between the African and European tectonic plates, the ancient Cycladians were in a dangerous spot. Every few thousand years there were bound to be fireworks. As it turned out, trouble came – big time – in about 1650 B.C. The earth trembled. A huge volcano rose from the sea near Akrotiri and blew up.

The remains of Akrotiri, which was buried in a massive volcanic surprise eruption in 1640 BC.
Photo credit: Klearchos Kapoutsis

“The people had plenty of warning,” Spiros went on. “There are no human bones in the town. No one was killed by the eruption. They were a seafaring people. They were fishermen. They probably got in their boats and headed for Crete, which you can see from here on a clear day.

“These people were not Minoans, like the people of Crete. But they traded with one another and knew one another.”

akrotiri-4 More Akrotiri leftovers. Archaeologists love sites that have been buried in volcanic ash – usually a lot of stuff turns out to be preserved quite well.
Photo credit: Klearchos Kapoutsis

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

Debt Déjà Vu

October 7, 2015

Debt Déjà Vu

For two years, financial markets have repeated the same error – predicting that US interest rates will rise within about six months, only to see the horizon recede. This serial misjudgment is the result not of unforeseeable events, but of a failure to grasp the strength and global nature of the deflationary forces now shaping the economy.

We are caught in a trap where debt burdens do not fall, but simply shift among sectors and countries, and where monetary policies alone are inadequate to stimulate global demand, rather than merely redistribute it. The origin of this malaise lies in the creation of excessive debt to fund real-estate investment and construction.

During Japan’s 1980s boom, real-estate loans quadrupled in just four years, and land prices increased 2.5-fold. After the property bubble burst in 1990, over-leveraged companies were determined to pay down their debts, even when interest rates fell close to zero. While large fiscal deficits partly offset the demand-suppressing effects of private deleveraging, the inevitable consequence was rising public debt. Corporate debt slowly fell (from 140% of GDP in 1990 to about 100% today); but public debt rose relentlessly, and now exceeds 230% of GDP.

Since the financial crisis of 2008, that pattern has been repeated elsewhere. In the United States and several European countries, excessive debt creation before 2008 was followed by efforts at private deleveraging, initially offset by large government budget deficits. Advanced economies’ cumulative private debt-to-GDP ratio has fallen slightly – from 167% to 163%, according to a recent report; but public debt has grown, from 79% to 105% of GDP. Fiscal austerity has therefore seemed essential; but it has exacerbated the deflationary impact of private deleveraging.

Before 2008, China’s economy was highly dependent on credit expansion, but not within the country itself. Rather, it ran large current-account surpluses – 10% of GDP in 2007 – with credit-fueled consumption growth in the US and elsewhere powering its export-led economy.

Read more at https://www.project-syndicate.org/commentary/demand-crisis-radical-measures-by-adair-turner-2015-10#cH3yY1jUKSTxDbKV.99

IMF downgrades Canadian growth outlook to 1% for 2015

October 7, 2015

IMF downgrades Canadian growth outlook to 1% for 2015

Risks for the world include low commodities prices, China’s slowdown and rate hikes

The IMF has downgraded its outlook for Canadian growth to one per cent this year because of the impact of lower oil and commodities prices.

It also has revised its expectations for global growth downwards to 3.1 per cent, the lowest since 2009.

In a report Tuesday in advance of the IMF-World Bank annual meetings this week in Lima, Peru, it highlights the downside risks to the world economy from the economic slowdown in China and low prices for commodities.

The recovery it expected earlier in the year has become uneven, it said in its World Economic Outlook with marginal advances in developed economies and slowing in most emerging economies.

“Six years after the world economy emerged from its broadest and deepest postwar recession, the holy grail of robust and synchronized global expansion remains elusive,” said Maurice Obstfeld, IMF director of research.

Growth slower in most nations

“Despite considerable differences in country-specific outlooks, the new forecasts mark down expected near-term growth marginally but nearly across the board.”

It has revised its estimate for Canadian GDP growth downward by half a percentage point from its July forecast to one per cent this year, and to 1.7 per cent in 2016. Last year, the IMF was forecasting 2.2 per cent growth for the Canadian economy.

A side report explores how the sharp decline in commodity pricesover the last three years has hurt economies dependent on commodities, including Canada, Chile and Australia.

“The weak commodity price outlook is estimated to subtract almost one percentage point annually from the average rate of economic growth in commodity exporters over 2015–17 as compared with 2012–14,” the IMF said.

“In exporters of energy commodities, the drag is estimated to be larger: about 2¼ percentage points on average over the same period.”

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

US Economy Flies into “Coffin Corner,” But We Don’t Mind!

October 6, 2015

US Economy Flies into “Coffin Corner,” But We Don’t Mind!

Every year, Wall Street economists see a spike in a few indicators and announce an imminent boom. This slowly fades away, leaving another year of slow growth — preventing full recovery from the crash. Readers of the FM website have seen this accurately reported since the crash, avoiding the boom-bust cycle of of crushed euphoria. Here’s a new update, as we start another slowing cycle. Eventually, inevitably, we will hit a bump that pushes slow growth to outright decline. Then, when we no longer can prepare, economic news will become exciting.

Seeing the US economy as it is

Slowly economists see the dilemma facing the Fed’s governors): they’re desperate to raise interest rates, but the US economy can grow only slowly, and so remains vulnerable to a shock that knocks it into a recession (probably a severe downturn, given its weakness).

Seven years of the Fed’s Zero Interest Rate Policy (ZIRP, since December 2008) have distorted America’s large and dysfunctional capital markets. Not just in the obvious bubbles in the stock market (e.g, biotech and social media stocks), in equity investors’ mad belief that bad news is good news (small cap stocks up 5% after the ugly jobs data), but also in ways we can only dimly see today.

Worse, ZIRP means that in the next recession the Fed will have to take America to negative interest rates — with consequences impossible to foresee (so far only small nations have crossed this Rubicon). Long experience in the US, Europe, and Japan has proven the ineffectiveness of their only other tool, quantitative easing.

On the other hand, the data suggests that raising rates now would be insane: near-zero inflation, a too-strong US dollar (already depressing exports), and slow growth (even slower on a per capita basis).

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

Failure to Launch

October 6, 2015

Failure to Launch

The popular belief that the U.S. economy has been steadily recovering has endured months of disappointing data without losing much of its appeal. A deep bench of excuses, ranging from the weather to the Chinese economy, has been called on to justify why the economy hasn’t built up any noticeable steam, and why the Fed has failed to move rates off zero, where they have been for seven years. But the downright dismal September jobs report that was released last Friday may prove to be the flashing red beacon that even the most skilled apologists can’t explain away. The report should make it abundantly clear that we are far closer to recession than recovery. But old notions die hard and, shockingly, most economists still believe that we have hit a temporary speed bump not a brick wall. But at some point healthy hope turns into dangerous delusion. We may have just turned that corner.

The report was horrific any way you slice it. The consensus of economists had expected to see 203,000 new jobs in September, not a particularly impressive number, but at least it would have been an improvement from the 173,000 new jobs that were added in August. Not only did September miss substantially, at just 142,000 jobs, but August was revised down to 136,000 (Bureau of Labor Statistics) (there were economists who had even expected August to be revised up to as high 247,000). This means that the last three months have averaged just 167,000 jobs, a level that is not even close to where we should have been in a real recovery. But it gets worse from there.

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

Why NIRP may trump QE4

October 3, 2015

Why NIRP may trump QE4

The Fed unsurprisingly chickened out from the much touted September hike. International conditions and a disapproval from Mr. Market was enough to unnerve an increasingly bewildered FOMC board.

Less well known is the fact that the FOMC gave a strong, and unexpected, signal to the Pavlovian world of central bank front runners. Dovish hold as the enlightend call it. It is all about managing expectations – see Goebbelnomicswhere we said

As the Keynesian revolution was merged with the models of Robert Lucas, it eventually morphed into something called neoclassical economic thought. The general gist was that economic agents can be tricked into changing their behaviour through surprises in monetary policy, which yes, has somewhat miraculously become the mainstay of central bank economists… … the academic transition led to the “economics of money shifting to economics of psychology”.

With this in mind it seem untenable that the radical change in the dot-plots is due to a rogue, independent minded FOMC member. On the contrary, everything coming out of the Federal Reserve is well coordinated and is there to signal to the rest of the world where the Fed would like speculators to place their bets, or in this case, should not put their money.Source: Federal Reserve, Bawerk.net

With the probability of the Federal Reserve’s funds rate going negative in 2016 suddenly much higher, the one way bet on a stronger dollar (and hence emerging market crash) is put into question. Investors will thus think twice before sending their money into the dollar from now on. This is obviously a desperate move from the FOMC in a futile attempt to stem the emerging market capital exodus.

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

U.S. jobs and global gloom may mean more mortgage relief: Don Pittis

October 3, 2015

U.S. jobs and global gloom may mean more mortgage relief: Don Pittis

Interest rate hikes fade into the future as economic recovery appears to go flat

It seems a terrible thing to cheer about, but a new feeling of gloom may be good for Canadians weighed down by mortgage debt.

A worse-than-expected U.S. jobs report and increasing fears for the state of developing world economies mean that U.S. central banker Janet Yellen may have to once again delay a hike in interest rates.

Fed chair Yellen has repeatedly warned that U.S. interest rates are on the way up. Last month, she delayed that rate rise once again while suggesting the increase could very likely come by the end of this year.

Now a growing number of analysts say a hike in U.S. interest rates will be delayed to 2016 or beyond.

Why U.S. rates matter in Canada

Before going on, I should insert a quick reminder of why U.S. interest rates matter to so many Canadian mortgage holders.

While short-term rates are set by the Bank of Canada, mortgage rates depend on the cost of borrowing money on international bond markets. Before lending long-term cash, Canadian banks like to make sure they can spread the load if rates begin to rise. That means they look to the bond market to set the price of the long-term cash they lend.

When the U.S. Fed rates begin to rise, international bond rates begin to rise as well, and banks must pass along those increased interest interest costs to their customers.

As recently as June, Yellen foresaw not just an autumn rate rise, but her advisers on the Federal Open Markets Committee also suggested that rates would continue to rise at about a whole percentage point each year. In other words, long-term rates that were four per cent this year would be five per cent next and six per cent the year after.

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

Dammit, Janet

October 2, 2015

Dammit, Janet

According to Einstein, time is affected by gravity. Clocks far from strong gravitational fields run more quickly; those close by run more slowly. We can only assume, then, that Janet Yellen has the density of a neutron star. Under her leadership of the US Federal Reserve, time seems to have stopped altogether.

It is now seven years since the Fed pegged short term interest rates at zero percent. That was in response to the credit crunch that engulfed the world after the collapse of Lehman Brothers. A lot can happen in seven years. The typical newborn, by the age of seven, can talk fluently, has well-developed physical coordination, and can read and write. Evidence of intellectual or kinetic progress at the Fed has been somewhat more limited.

Unlike many central banks, the Federal Reserve is empowered to pursue two specific mandates: stable prices, and maximum employment. The data on jobs looks clear enough: the US unemployment rate stands at just 5.1 percent, or half its level during the height of the financial crisis. (Just ignore the fact that those out of work who are politely called ‘discouraged’ tend to fall out of the statistics after a while, so the true count is some way off.) But the progress on prices – or rather, the lack of it – is even more startling. Despite quadrupling the size of its balance sheet to $4.5 trillion (which incidentally means the Fed is sitting on $4.5 trillion worth of existing bonds), signs of ‘proper’ inflation – in the prices of goods and services, say – are almost invisible.

Given that the experimental policy of Quantitative Easing was always predicated on triggering inflation, the almost complete lack of inflation so far might be regarded as something of a failure.

The neo-Keynesians will no doubt argue that QE has worked, and that Janet and our own Mark Carney simply haven’t done enough of it yet. I have a subtler fear: what if expectations of our central bank policymakers are simply too high ?

– See more at: http://www.cobdencentre.org/2015/10/dammit-janet/#sthash.MdXcwTLh.dpuf

From ZIRP to NIRP

October 1, 2015

From ZIRP to NIRP

The sudden end of the Fed’s ambition to raise interest rates above the zero bound, coupled with the FOMC’s minutes, which expressed concerns about emerging market economies, has got financial scribblers writing about negative interest rate policies (NIRP).

Coincidentally, Andrew Haldane, the chief economist at the Bank of England, published a much commented-on speech giving us a window into the minds of central bankers, with zero interest rate policies (ZIRP) having failed in their objectives.

Of course, Haldane does not openly admit to ZIRP failing, but the fact that we are where we are is hardly an advertisement for successful monetary policies. The bare statistical recovery in the UK, Germany and possibly the US is slender evidence of some result, but whether or not that is solely due to interest rate policies cannot be convincingly proved. And now, exogenous factors, such as China’s deflating credit bubble and its knock-on effect on other emerging market economies, are being blamed for the deteriorating economic outlook faced by the welfare states, and the possible contribution of monetary policy to this failure is never discussed.

Anyway, the relative stability in the welfare economies appears to be coming to an end. Worryingly for central bankers, with interest rates at the zero bound, their conventional interest rate weapon is out of ammunition. They appear to now believe in only two broad options if a slump is to be avoided: more quantitative easing and NIRP. There is however a market problem with QE, not mentioned by Haldane, in that it is counterpart to a withdrawal of high quality financial collateral, which raises liquidity issues in the shadow banking system. This leaves NIRP, which central bankers hope will succeed where ZIRP failed.

– See more at: http://www.cobdencentre.org/2015/09/from-zirp-to-nirp/#sthash.Qb02oWjj.dpuf

Look Out Below: Corporate Debt In Emerging Markets Has QUADRUPLED Since 2004

September 30, 2015

Look Out Below: Corporate Debt In Emerging Markets Has QUADRUPLED Since 2004

Debt has skyrocketed globally. And see this.

Governments have – of course – dramatically increased their debt since 2008 to fund questionable actions.

But 141 years of history shows that excessive private debt in and of itself can cause depressions.

American corporations are piling on record amounts of debt. And see this.

Private debt has also gone absolutely ballistic in China recently.

But it’s not just the U.S. and China …

The Telegraph reports today:

The International Monetary Fund (IMF) … said corporate debts in emerging markets ballooned to $18 trillion (£12 trillion) last year, from $4 trillion in 2004 as companies gorged themselves on cheap debt.

It said the quadrupling in debt had been accompanied by weaker balance sheets, making companies more vulnerable to US rate rises.

What could possibly go wrong?

The Peak in Government? A Low in Interest Rates?

September 30, 2015

The Peak in Government? A Low in Interest Rates?

We have warned that capital is in a flight to quality, therefore creating the bubble in government paper. We also warned that the bond market on the long-term peaked in April/May and that we should expect a further rally in the short-end. This significant move has unfolded right before our eyes. The fact that the bonds have peaked in advance, yet we have the short-end rising into this period, reflects the stark reality that capital does not trust government long-term.

The Fed has been warning that they must raise rates to reestablish “normalcy” to the yield curve. No one in their right mind should be buying long-term paper at these rates. The capital has been heading into an even shorter investment cycle, and this presents a highly dangerous potential on the horizon.

FEDFOR-M 9-28-2015

What is the concern? With capital consolidating into short maturities, this means that any change in rates will have a far more immediate impact upon the sovereign debts of all nations. The typical dollar bears say, “Oh, well China sold a huge amount of bonds!” and they twist this into somehow being bearish for the dollar. China is following the trend: sell long-term and move short-term.

We can see that volatility beginning to rise from October moving forward. We are looking at a panic cycle that appears in the U.S. Fed funds by February, followed by another next August.

This is confirming the change in trend that we see with 2015.75. It is not a monumental crash in stocks, nor is it the end of the world with the blood moon. This is the peak in government. As time begins to move forward, you will look back at this turning point as rather significant. It may be more than an announcement that there is water on Mars. We have had so many things happen this week, right down to a meeting between Obama and Putin at the United Nations.

So grab a drink. You might need one as we start to move forward away from the change in trend — 2015.75.

India “Surprises” 51 Out Of 52 “Experts”, Slashes Rates More Than Expected As Easing Bonanza Continues

September 29, 2015

India “Surprises” 51 Out Of 52 “Experts”, Slashes Rates More Than Expected As Easing Bonanza Continues

Late last month, we asked how long it would be before the RBI hit back in the wake of China’s yuan deval.

The Indian government’s chief economic advisor Arvind Subramanian had just told ET Now television that India may need to “respond” to China’s monetary policy stance, and also hinted at further export weakness. It wasn’t hard to read between the lines: more shots were about to the be fired in the ongoing global currency wars.

Reinforcing that contention was the following from Deutsche Bank:

India’s export sector continues to be under pressure, with merchandise exports contracting yet again in July by 10.3%yoy. The weakness in India’s exports is striking (this is the eighth consecutive month of decline), not only in terms of past trend, but also from a cross country perspective. Indeed, India’s exports performance has been the weakest in the region thus far in 2015. In the first quarter of the current fiscal year (April-June’15), Indian exports have contracted by 17%yoy, one of the sharpest declines on record. The main reason for such a weak Indian export performance can be attributed to the sharp decline in oil exports (down 51%yoy between April-June’15), which constitute 18% of total exports.

Another factor that could likely explain the weak performance of exports is the probable overvaluation of the rupee. As per RBI’s 36-country trade based real effective exchange rate, rupee remains overvalued at this juncture and this could be impacting exports to some extent, in our view.

Currency competitiveness is an important factor in influencing exports performance, but global demand is even more important, in our view, to support exports momentum. As can be seen from the chart [below], global demand remains soft at this stage which continues to be a key hurdle for exports momentum to gain traction.

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

The Echo Bubble in Housing Is About to Pop

September 28, 2015

The Echo Bubble in Housing Is About to Pop

And here’s the knife in the heart of the Echo Housing bubble: declining household income.

The Federal Reserve-induced Echo Housing Bubble is finally starting to roll over, and the bubble’s pop won’t be pretty. Why is the bubble finally popping now?

All the factors that inflated the Echo Housing bubble are running dry. These include:

— unprecedented low mortgage rates

— FHA mortgage approvals for anyone who fogs a mirror

— frantic cash buying by Chinese millionaires desperate to get their money out of China

— the Federal Reserve buying up trillions of dollars in mortgages

— lemming-like buying of housing for rentals by everyone from Mom and Pop to huge hedge funds.

The well’s gone dry, folks. There isn’t going to be another push higher or a third housing bubble after this one pops.

Let’s start with the basics: demographic demand for housing and the price of housing. There are plenty of young people who’d like to buy a house and start a family (a.k.a. new household formation), but few have the job or income to buy a house at today’s nosebleed level–a level just slightly less insane than the prices at the top of Bubble #1.

Charts courtesy of Market Daily Briefing)

It’s considered bad form to describe today’s prices as insane. It tends to hurt the feelings of everyone who’s counting on the Echo Bubble to 1) make them even richer or 2) bail them out of the hole they fell into after Housing Bubble #1 popped.

Exhibit B is the insanely low mortgage rate, which has finally reversed course and is notching higher after 30 years of going lower. Why are today’s rates insane? Risk. Mortgages are intrinsically risky. People who are terrific credit risks lose their jobs, experience horrendous medical crises, get divorced, etc., and the net result is a default that is unexpected.

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

This is When Bonds Go Kaboom!

September 28, 2015

This is When Bonds Go Kaboom!

The toxic miasma of “distressed debt.”

It’s getting tougher out there for our QE and ZIRP-coddled corporate junk-bond heroes.

Unisys, whose revenues and profits decline year after year and whose stock dropped from over $400 a share during the prior tech bubble to $13 a share now, withdrew its offer to sell $350 million of bonds on Friday.

The “current terms and conditions available in the market were not attractive for the company to move forward,” it said. According to S&P Capital IQ’s LCD, the five-year senior secured notes due in 2020, rated BB/Ba2, had been guided at around 8%. But buyers were leery, and they demanded more yield. They wanted to be rewarded just a little more for the substantial risk they were taking. So the notes failed to price, and Unisys withdrew the offering.

Unisys isn’t an oil company, or a mining company, or a coal company – sectors that have been eviscerated by the commodities rout and are having trouble issuing any debt at all. Unisys is a tech company.

But Unisys wasn’t the only one: It was the 15th bond offering withdrawn so far this year, according to LCD, though two of them – Fortescue Metals and Presidio – were able to pull them off later. In total, nearly $4 billion in bond offerings were withdrawn this year.

Olin Corp., which manufactures chlor-alkali products, wasn’t that lucky. It had to havethe money to fund its acquisition of the chlorine products business of Dow Chemical. Its $1.5 billion offering came in two tranches: eight-year notes and 10-year notes, guided around 6.5% and 6.75% respectively. But investors sniffed at them and lost their appetite. LCD reported on Thursday that they were pushing for yields “in the mid-to-high 7% range.”

But that wasn’t enough either. On Friday, Olin ended up selling $1.22 billion of bonds, with the eight-year notes priced to yield 9.75% and the 10-year notes 10%.

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

The Fed Can’t Fix It: “All That’s Left is a Reset, Shutdown of the System”

September 24, 2015

The Fed Can’t Fix It: “All That’s Left is a Reset, Shutdown of the System”

federal-reserve-wall-street-regulation

Did Janet Yellen make the right decision in delaying a Federal Reserve rate hike? Did the United States dodge a bullet? Of course not.

And the system is on course for a dangerous, hard landing.

As far as many experts can tell, there is no right way or good way out of this crisis under Fed control, and the exit isn’t likely to be smooth or pretty.

Not raising rates means yet another round of QE – QE Round 4 – which will lead to a further strain on the real economy as those on top get continued easy free, while interest rates on investments, pensions, insurance and savings sit at zero, or even go negative, destroying wealth. Derivatives continue to rule the day, and everything remains in jeopardy.

That’s why the Fed will eventually raise rates, at least just a little bit. But it will be too little way too late. The Fed has, in fact, lost control, according to many experts.

USA Watchdog reports:

Financial writer Bill Holter contends the recent announcement of the Federal Reserve not to raise rates means the “Fed Has Lost Control.” Holter explains, “Whatever the Fed does is wrong. The reason I say that is because no matter what they do, they can’t fix what they have already done. There is no policy at this point that can repair where we are at this point as far as debt ratios, derivative outstanding and the money supply exploding. Nothing that they do now can fix it. The only thing that remains is a reset.”

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

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