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The Economy is in Liquidation Mode
The Economy is in Liquidation Mode
Capital Consumption
If you’re an American over a certain age, you remember roller skating rinks (I have no idea if it caught on in other countries). This industry boomed in the 1970’s disco era. However, by the mid 1980’s, the fad was fading. Imagine running a rink company at the end of the craze. You know it is not going to survive for long. How do you operate your business?
The birthplace of roller disco turned out to be edible, sort of
Photo via realskatestories.com
You milk it. You spend nothing on capital improvements, slash maintenance, and reduce operating expenses. There’s no return on investment, so you cut to the bone and wring out as much cash as possible. When a business has no future, you operate in liquidation mode.
Your rink generates cash flow, but this is no profit. It’s simply the conversion of accumulated capital into present income. You are consuming capital, almost literally eating the business.
A fad that went away… roller skating rink in the 70s
Photo credit: Picnicface
I have used a family farm as an example to paint a clear picture of capital consumption. Imagine using your farm, not to grow food, but to swap for it. You tear down the barn to sell the oak beams for flooring, auction off the back 40 (acres), put the tractor on Craigslist, then finally sell the farm and house. All to buy the produce you can no longer harvest.
Let this sink in. The farm’s falling crop yield can’t feed you any longer, but you still need to eat. You’re liquidating the farm merely to buy groceries.
The conventional view encourages you to be grateful that the purchasing power of the farm is high, that it trades for a big stash of food. While it may be true that you can eat for years on the proceeds, it’s small consolation for the loss of what had been an evergreen income.
…click on the above link to read the rest of the article…
What you “Owe to Society”
What you “Owe to Society”
The “Club Dues” Theory of Taxation
Sadly this is an ancient thesis that’s being revived now in a country that was founded on denying it. The idea is well expressed in a recent book by Professor William E. Hudson, titled, The Libertarian Illusion: Ideology, Public Policy, and the Assault on the Common Good (Washington, DC: CQ Press, 2008).
Hudson states, on page 43, that “The ability that any of us have to earn income and acquire wealth depends only partly on our own individual efforts. It relies as well on the operation of political, economic, and social institutions that make it possible for any of us to ‘earn a living.’ . . .Viewed in this light, …deductions from my paycheck can be seen as reimbursements to society for that portion of my earnings derived from social goods.”
Author and confirmed etatiste William E. Hudson, a Professor of Political Science at Providence College where he teaches courses in American politics and public policy, and has also served in a variety of “administrative functions”. In the words of Hans-Hermann Hoppe: “[…] if practically all intellectuals are employed in the multiple branches of the state, then it should hardly come as a surprise that most of their ever-more voluminous output will, either by commission or omission, be statist propaganda.”
Screenshot via wn.com
The very same idea has been championed for years by one of President Obama’s favorite intellectuals, Cass Sunstein, for example in the book the latter co-authored with Stephen Holmes, The Cost of Rights: Why Liberty Depends on Taxes (W. W. Norton & Co., 1999).
Reimbursements to society! What a lie that is, given that society is nothing more than all of us together as individuals and that what we own, so long as we stole it from no one, ought to be left to each of us to allocate as we judge proper, not to the likes of the sneaky professor and his gang in centers of political power.
…click on the above link to read the rest of the article…
Brain-Drained
Brain-Drained
Venezuela: Real Wages Collapse amid Continuing Crack-Up Boom
While the crack-up boom in Venezuela continues, real wages in the country have have utterly collapsed. The bolivar is still trading close to 700 to the US dollar on the black market, and the Caracas stock index keeps making new all time highs in nominal terms almost every day. Ironically, Venezuela’s currency is called the “bolivar fuerte” (VEF), i.e. “the strong bolivar” ever since it has been “reverse split” 1 for 1,000 in January 2008.
Image via designlimbo.com
As an aside, the stock market has likewise been subject to a reverse split of 1 for 1,000 about a year ago – pre-split the index would now be trading at a cool 15.5 million points.
The black market rate of the “strong” bolivar (VEF) – 1 USD now buys nearly 700 VEF – click to enlarge.
Meanwhile, Venezuela has the highest sovereign CDS spreads in the world. Below is a chart of Venezuela’s annual default probabilities based on 5 yr. CDS spreads at a 40% recovery assumption:
Venezuela: annual sovereign default probability from 5 year CDS spreads at an assumed recovery rate of 40% (which may prove to be a generous assumption) – click to enlarge.
Venezuela’s Economy Loses its Best People
The great successes of socialism in Venezuela aren’t confined to increasing shortages of basic goods, a collapsing currency and extremely high sovereign CDS spreads.
Businesses are confronted with a mixture of sharply rising input costs and price controls and as a result are unable to pay their employees wages that can even remotely balance the sharp losses in the bolivar’s purchasing power. As Reuters reports, skilled workers have been hit the worst:
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Gold and the Grave Dancers
Gold and the Grave Dancers
The Asset They Love to Hate …
Back in the 1960s, Alan Greenspan wrote a well-known essay that to this day is an essential read for anyone who wants to understand the present-day monetary and economic system (which is a kind of “fascism lite” type of statism, masquerading as capitalism) and especially the almost visceral hate etatistes harbor toward gold. Greenspan’s essay is entitled “Gold and Economic Freedom”, and as the title already suggests, the two are intimately connected.
Alan Greenspan in the mid 1970s – although he later turned out to be a sell-out, his understanding of economics undoubtedly dwarfed that of his successors at the Fed (and we are not just saying this based on the essay discussed here).
Photo credit: Charles Kelly / AP Photo
What makes Greenspan’s essay especially noteworthy is that it manages to present both theory and history in a concise, easy to understand manner. There isn’t a word in it we would change. At one point, Greenspan provides a brief history lesson. Yes, the (relatively) free banking era in the United States in the 19th century involved fractional reserve banking and as a result, there were frequent boom and bust cycles. However, since there was no “lender of last resort” with an unlimited money printing capacity, these business cycles were sharp and brief, and the market economy quickly righted itself every time:
“A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled.
…click on the above link to read the rest of the article…
Venezuela’s Hyperinflation Crack-Up Boom on its Way to Outer Space
Venezuela’s Hyperinflation Crack-Up Boom on its Way to Outer Space
Why Stock Markets Are Not an Indicator of the Economy
In a free unhampered market economy based on a sound monetary system – this is to say a market-chosen monetary system with a free banking industry and no central planning institution that is manipulating interest rates and determining the size of the money supply – the gains and losses of shares prices in the stock market will simply be a reflection of entrepreneurial profits achieved in the past, plus embedded expectations of profits likely to be achieved in the future.
Nicolas Maduro, the hapless president of socialist Venezuela, here seen hung with all sorts of bling supposed to testify to his achievements.
Photo credit: Prensa Presidencial
Under the assumption that such a free market money system would be largely non-inflationary, this mixture of “historical record” and expectations would primarily be expressed by the relative prices of shares. The bulk of the returns achieved by investors would come from dividend payments, as a general inflation of “the market” would be nigh impossible.
And yet, although the stock market as a whole would barely appreciate in price in nominal terms, the gains achieved in real terms as well as real economic growth, would be far stronger than they are under our current, centrally planned system of constant inflation. Moreover, economic progress would be far more equitable as well, as the reverse redistribution of wealth caused by inflationary policy wouldn’t exist.
This is why a rising stock market tells us absolutely nothing about the state of the underlying economy in the present inflationary system. In fact, we once again have a real life example providing ample empirical confirmation of this assertion. Venezuela’s economy is in free-fall. Its desperate socialist government, in an attempt to satisfy the masses of voters who have voted for it in order to receive handouts, is resorting to ever more repressive economic policy and money printing on a truly gargantuan scale to at least keep up theappearance that bread and circuses will continue.
…click on the above link to read the rest of the article…
The China Syndrome
The China Syndrome
Getting Ugly
I am sure that you have all been watching the meltdown in the Chinese stock markets. I posted a blog (in the China Ad Nauseam section) on May 6 about the Chinese stock market, finishing up with the statement that “this is going to get really ugly.” It looks like the ugliness is here.
I claim no particular prescience here and I certainly wouldn’t want anyone to mistake my writings for investment advice. With this one, the only question was when it would blow, not if. My own investment abilities are largely encapsulated in the famous saying that “the graveyards of Wall Street are filled with the bodies of men who were right too soon.” But this is still better than being right too late.
I won’t bother to repeat all the statistics about the meltdown, which are readily available elsewhere. I just want to make two points.
In the meantime, the Shanghai Composite has bounced a bit, but only after China’s authorities had thrown everything and then some at the situation, including bans on short selling an banning large domestic institutional investors from selling at all, via StockCharts, click to enlarge.
No “Yellen Put”
The first is the implication of what is happening in China for asset prices around the world. The Chinese government is doing everything possible to prop up the market at this point: cutting interest rates, reducing reserve requirements, providing central bank liquidity to brokers, directing government entities to buy shares, organizing “private sector” (as if that phrase means anything in China) stabilization funds, restricting IPOs, loosening margin requirements, restricting short selling, and suspending share trading.
…click on the above link to read the rest of the article…
Bank of Canada Decides More Bubble-Blowing is Needed
Bank of Canada Decides More Bubble-Blowing is Needed
You Can’t Keep the Printing Press Idle for too Long …
We have recently portrayed Canada’s new central bank governor Stephen Poloz, to whom we have alternately referred to as a comedian and a delusional bubble blower. This may perhaps strike some readers as uncharitable; then again, central economic planning bureaucrats should be fair game, especially as nearly all of them are slaves to hoary inflationism and are apodictically certain to do grave damage to the economy, based on economic theories that at best deserve to be called a form of voodoo. It’s really that bad.
Mr. Stephen Poloz, Canada’s new bubble-blower in chief, gazing into the distance – presumably in a futile attempt to divine the future.
Photo credit: Adrian Wyld / The Canadian Press
As readers may recall, Mr. Poloz has continued where his fellow bubble-blower and predecessor Mark Carney left off, by keeping the bubble blown with all his might. We imagine he may be a bit intimidated by the truly daunting size the combined real estate and consumer credit bubbles have attained in Canada. To call them monuments to monetary megalomania would be an understatement. Among developed nations, only the bubbles in a few Scandinavian countries and Australia can hold a candle to them.
Surely Poloz must be aware that there can simply be no painless way of getting out of this mess. Hence, he is trying to delay said end, possibly in the hope that the bust can be postponed beyond his watch (Carney showed judicious timing, we think, when jumping off the Canadian ship).
We were therefore decidedly unsurprised when it emerged yesterday that the Bank of Canada has cut rates again – apparently the Canadian economy has entered an official recession, which must however not be mentioned (!).Really.
According to the Financial Post:
…click on the above link to read the rest of the article…
Greek Parliament Votes In Favor of “Prior Actions” – Protests Erupt in Athens (Live Stream)
Greek Parliament Votes In Favor of “Prior Actions” – Protests Erupt in Athens (Live Stream)
Euro-Group Deal Approved by Greek Parliament
The result of the parliamentary vote in Athens just came through, and was remarkably closely aligned with recent surveys of Greek voters. Funny enough, these surveys revealed approximately 70% approval of the dealoffered by the euro-group among the population. No doubt the fact that the insolvency of Greece’s fractionally reserved banking system was recently painfully revealed to depositors after the ECB froze ELA had something to do with this sudden surge in support. Moreover, it is always possible that a majority of Greece’s citizens actually realizes that there is no way around wide-ranging reform.
Recent polls show soaring support for Syriza in spite of Tsipras ignoring the referendum outcome (source: Keep Talking Greece)
There were 229 “Yes” votes, 64 “No” votes and 6 abstentions. Make of this what you will, but the only parties unanimously voting “No” were the Stalinist KKE and the Neo-Nazi party “Golden Dawn”. In addition, a greater number of Syriza MPs rebelled than was previously expected (apparently 38 of the 149 Syriza MPs voted “No”, roughly equivalent to the size of the party’s Marxist Bloc) . Ironically, even though Mr. Tsipras has decided to completely ignore the “No” vote returned in the referendum, support for Syriza has soared among voters as well.
As a result of the vote, there are now protests in Athens – of which you can see a live stream below:
…click on the above link to read the rest of the article…
Italy – Non-Performing Loans Hit a New Record High
Italy – Non-Performing Loans Hit a New Record High
While all Eyes are on Greece, Italy’s Banks are Drowning in Bad Debt
The real danger to the euro area probably doesn’t emanate from Greece, but from two of its heavyweights, namely France and Italy. A small note in the European press reminds us that all is not well in at least one of these countries, least of all with its banks (currently this is only a “page 16 story”, but it has great potential to eventually move to the front page).
Regional distribution of non-performing loans in Italy
The note reads as follows:
“Rome – because of the recession of recent years and corporate bankruptcies, the total of bad loans has continued to rise in Italy. According to Italy’s banking association ABI, non-performing loans amounted to 193.7 billion euro in May, 25.1 billion more than in the same month in 2014. This is the highest level since 1996.
Non-performing loans represent 10.1 percent of all loans granted by Italian banks, ABI said on Tuesday. Especially small and medium enterprises continue to be under pressure due to bad loans, so will take a long time before banks will see the bad loan situation ease, the ABI report stated. Italian companies are currently struggling with the effects of the longest economic crisis since World War II and are therefore often no longer able to service their loans.”
(emphasis added)
If our calculator can be trusted, this means that bad loans in Italy’s banking system have increased by roughly 14.9% over just the past year – by no means a peak crisis year, although Italy’s listing economy continued to contract slightly.
As the following chart shows (unfortunately we were only able to obtain this slightly dated version), Italian NPLs stood at € 165 bn. in Q1 2014. However, to this one must actually add all sorts of loans that are otherwise delinquent/dubious or sub-standard, but haven’t yet reached “full” NPL status. These are summarized together with NPLs under the term impaired loans below.
…click on the above link to read the rest of the article…
The Kicking of the Can
The Kicking of the Can
Hello, Mr. Tusk … New Orders
Yesterday it emerged that the normally hardline European Council president Donald Tusk (the former prime minister of Poland), suddenly felt “debt relief” for Greece was needed after all. While he is undoubtedly correct, it seems to us that he likely received a stern phone call from Washington.
Donald Tusk, the life-like android currently presiding over the EU council, here photographed in hardline mode
Photo credit: Radek Pietruszka / PAP
It is also unlikely to be a coincidence that the IMF released its debt sustainability analysis last week, in what appeared to be a case of especially ill-chosen timing, at least from the perspective of the euro-group. Note here that the IMF only wants the EU to provide debt relief to Greece – the IMF itself intends to get back every cent of its Greek loans.
Politicians in neo-con infested Washington no doubt don’t want to let slip Greece away into the arms of its Russian Orthodox co-religionists, which would almost certainly happen after a Grexit. Such strategic considerations are certainly exercising the NATO bureaucracy and very likely the EU’s movers and shakers as well. A Grexit would also be a victory of the Marxist wing of Syriza (a Pyrrhic victory though it may be), which would over time throw Greece’s continued NATO membership into doubt.
According to press reports from this morning:
“The White House has been putting its immense diplomatic weight behind a debt restructuring for Greece. Treasury secretary Jack Lew made an intervention earlier this week, and seems cautiously optimistic that Greece’s current proposals should be enough to satisfy creditors, and gain some crucial debt concessions in return.
…click on the above link to read the rest of the article…
Gold and the “Grexit” Threat
Gold and the “Grexit” Threat
The Everything is Fine Meme
Initially, we were also a bit surprised that the gold price didn’t rise when the threat of a Greek exit from the euro area became more palpable following the breakdown in negotiations and the outcome of the Greek referendum. After all, it was to be expected that “risk assets” would suffer and so-called safe haven assets would be sought after, at least temporarily.
However, upon giving the matter some thought, we have concluded that gold’s lack of a response (in fact, it went slightly down rather than up, so there was actually a response) could actually be explained quite easily. For one thing, speculators increased their net long position in gold futures by more than 20,000 contracts net in the week before the negotiations broke down, apparently in anticipation. While they did so, the gold price barely budged, so in a sense it was “wasted firepower”.
Image via eghtesadnews.com
Prior to the breakdown in negotiations between the troika and Greece, speculators increased their net long position in gold (above the net hedger position is shown, which is the inverse of the speculative position) – click to enlarge.
When no large increase in prices occurred on the Monday after the referendum had been announced, these new positions were quickly liquidated again. The downturn in prices in turn emboldened speculators to add to their short positions, pressuring prices even further.
There are other reasons for the reaction as well. One is that in spite of a bit of a wobble in stocks, the essential “everything is just fine” story hasn’t really been derailed. The dangers of a “Grexit” are probably underestimated and up until recently, no-one believed it to be a likely outcome anyway (it still isn’t, although it is more likely than it once used to be).
…click on the above link to read the rest of the article…
The Crash in China Continues – and is Engulfing Hong Kong
The Crash in China Continues – and is Engulfing Hong Kong
Efforts of Potent Directors Ignored
When we first commented on the emerging problems with China’s market bubble, we warned that although a bounce from oversold levels was the most likely outcome, it wasn’t set in stone. It appeared to us that Chinese investors were especially prone to falling for the “potent directors fallacy” (a term coined by Robert Prechter of EWI many years ago) – the belief that powerful decision makers, in this case the central bank and the government – would be willing and able support the market no matter what. Willing they have been – able, less so.
Chinese retail investors are shell-shocked
Photo credit: EPA
For a long time it has been the general impression that due to its tight control over the banking system and other sectors in the economy, China’s leadership could just “order the markets around”. Investors who were aware of China’s enormous debt problems and its insanely overvalued real estate markets were regularly baffled by the fact that China’s mandarins were apparently capable of arresting any decline in prices or any emerging credit blow-ups with the flick of a finger. Faith in their abilities is currently being shaken to its core. This is highly relevant to the asset bubbles currently underway in other countries, even though what happens in China has little direct effect due to the country’s closed capital account.
China’s stock market crash just keeps going – the index has now reached an important lateral support level. It will probably bounce from there, but for a variety of reasons this is actually somewhat less certain than it would otherwise be – click to enlarge.
…click on the above link to read the rest of the article…
Greece and the Marxism of Syriza
Greece and the Marxism of Syriza
Has the Leopard Really Changed its Spots?
Back in February, a brief article at the BBC remarked on the seeming transformation of Syriza from a bunch of Marxist dreamers into (shudder..) quasi-“Blairites”. To be sure, we also approved of the signs of pragmatism that emerged at the time. The party had seemingly ditched its previously implacable opposition to privatizations and didn’t even try to tax the country’s shipping magnates. The tax exemptions enjoyed by the latter strike many as unjust, but the fact is that they provide around 7% of Greek employment and their assets are out at sea. It is up to them under which flag said assets are sailing and it would be self-destructive to chase them away.
Given the stunt Mr. Tsipras just pulled (note that the Greek negotiators learned of his referendum announcement via Twitter – they were not privy to what was about to happen), we are not so sure that the leopard has really changed its spots. We are not critical of a referendum as such, on the contrary. However, the timing and the way Tsipras has gone about it, suggest that he is really trying to arrange for a “Grexit” and one cannot help getting the impression that this may have been the intention all along. As noted previously, a referendum could have been held months ago already – why wait until it is almost too late for all practical purposes?
A reminder was provided by a mail correspondent of ours in Spain, who pointed out that the parties voting in favor of Tsipras’ plan were Syriza, ANEL and Golden Dawn. As to the Stalinist KKE, he noted “[the] KKE is against everything (as usual), but I still have hope in their “No” vote, closing the circle: from the Nazis to the Communists, all united against a free Europe, in a “Molotov-Ribbentrop v2.0″.
…click on the above link to read the rest of the article…
In Gold We Trust 2015
In Gold We Trust 2015
The Gold Standard of Gold Reports is Back
As every year around this time, our good friends Ronald Stoeferle and Mark Valek, the managers of the Incrementum Fund, have published their annual “In Gold We Trust” report, the extended version of which can be downloaded below.
This year’s report is slightly longer than the 2014 report and discusses practically the entire breadth of gold-related topics, including highly instructive excursions into economic theory, monetary history and an extensive discussion of current political and economic trends.
For the past few years, gold investors certainly had little to write home about. In dollar terms, gold has essentially been going nowhere, with a slight downward bias. Actually, the past three years in the USD gold price look a bit like the past 18 years of “global warming”.
And yet, a lot depends on one’s home currency. Gold’s sideways trend in dollar terms actually represents a small victory, given the strong rally in the dollar in 2014. As a result, gold price charts actually look quite encouraging in terms of most non-dollar currencies. In fact, its performance in euro and yen terms over the past 18 months has been none too shabby.
Moreover, as Ronnie and Mark point out, gold has held up extremely well in a disinflationary environment in which many commodities such as crude oil have been obliterated. As our readers know, we believe that the underlying bid that is supporting gold is from people who are looking at the third huge asset bubble blown by loose monetary policy within the past two decades and are feeling increasingly queasy. It can’t hurt to hold some insurance – and sooner or later it will be essential.
…click on the above link to read the rest of the article…
The Money is Just Sleeping … Let us Wake it Up!
The Money is Just Sleeping … Let us Wake it Up!
J.C. Juncker Sets Out to “Wake Up Liquidity”
In a recent article on the never-ending Greek Kabuki theater, we have come across parts of an interview EU budget commissioner Kristalina Georgieva has given to AFP, in which she explains J.C. Juncker’s cunning plans to “kick-start” the European economy by pumping €300 billion he doesn’t have into infrastructure projects and other assorted white elephants (we have previously discussed this Stalinesque plan, as well as what usually happens when even some of the “best stewards of EU funding” are “investing in in infrastructure” – see The EU’s Ghost Airports for the ghastly details). The interview contained the following gem:
“The Juncker plan is to wake up the liquidity sleeping in our financial system, to give courage to our money, to pump investment into the real economy,” Georgieva said.
The always open spigot, spitting out what is apparently valiumed money.
So the idea is that the enormous mountain of money created by the ECB and depicted below is somehow “just sleeping” and if only someone – ideally JC Juncker – manages to wake it up and give it the necessary courageto get wasted on projects no-one needs or wants, the economy will magically improve. Prosperity is practically around the corner! Riiiiight.
Europe’s huge pile of ECB confetti – just sleeping! The total is the red line, the annualized rate of change the blue line. Yes, that red line is going parabolic, via ECB, click to enlarge.
Apart from the problems with this plan we have already discussed, which consist mainly of the fact that governments cannot sensibly invest, because rational economic calculation is situated somewhere between totally alien and utterly impossible for them, there is another problem with this idea Juncker (and many others) apparently don’t understand.
…click on the above link to read the rest of the article…
