Archives for September 2012

NY's Ultraluxury Office Vacancy Rate Jumps To Two Year High

Courtesy of ZeroHedge. View original post: New York’s Ultraluxury Office Vacancy Rate Jumps To Two Year High As Financial Firms Brace For Impact.

Submitted by Tyler Durden.

Traditionally, when it comes to reading behind the manipulated media’s tea leaf rhetoric and timing major inflection points in the economy, the most accurate predictor are financial firms, whose sense of true economic upside (or downside) while never infallible, is still better than most.

Yet unlike employment, which is usually a lagging, or at best concurrent indicator, one aspect that has always been a tried and true leading indicator, has been real estate demand, in this case rental contracts. Due to the long-term lock up nature of commercial real estate contracts, firms are far less eager to engage in rental transactions (and bidding wars) when they expect a worsening macroeconomic environment. Which is why news that office vacancy in Manhattan’s Plaza district, the area between Sixth Avenue and the East River from 47th to 65th streets, anchored by the landmark Plaza Hotel at Fifth Avenue and Central Park South which is home to some of the nation’s most expensive and prestigious office towers, and where America’s largest hedge funds and PE firms have their headquarters, has just risen to 12.3%, or a two year high, is probably the most troubling news for the economy and a real indicator of what to expect of the immediate future.

From Bloomberg:

The availability rate for offices in the Plaza submarket reached 12.3 percent last month, a two-year high, as space leased to Citigroup Inc. and General Motors Co. went on the market, according to data from brokerage Colliers International. It was 10.5 percent in the third quarter of last year.

If there is any indicator of financial firm demand for property, and thus their outlook on future prosperity, it is the state of the Plaza real estate market:

About 30 percent of the market is financial-service firms, which have announced about 60,000 job cuts worldwide this year, according to data compiled by Bloomberg.

“The Plaza’s weakness is symptomatic of a larger problem,” said Michael Knott, a real estate investment trust analyst with Green Street Advisors Inc. in Newport Beach, California. “Manhattan’s economic engine is not firing, and that, of course, is finance.”

Office owners in the Plaza district have historically sought higher rents than in the rest of Midtown, even if it means leaving space unleased for longer. Asking rents averaged $80.74 a square foot at the end of August, the highest in midtown Manhattan, where the average is $71.28, according to Colliers. Midtown Manhattan rents are the most expensive of all U.S. business districts.

The Plaza area is so pricey because securities firms, hedge funds and money-management companies want to be near one another in New York’s top buildings, said Joseph Harbert, president of Colliers’ eastern region. The park, hotel and the Fifth Avenue and 57th Street shopping corridors are draws, as well as the idea that “it is close enough to transportation but not in the midst of all the congestion of Grand Central” Terminal, Harbert said in an e-mail.

Needless to say, the primary driver of the surge of vacancy, is ongoing corporate downsizing coupled with collapsing tenant cash flows.

Those are GM’s last offices in the building, said Laura Toole, a company spokeswoman. The staff of about 200 has been relocated to smaller offices at 1345 Avenue of the Americas, she said.

The GM Building offices “were sized for about 500 people,” Toole said. “So we’re going to a smaller, right-sized space, which in the end we hope will result in a significant savings for the company.”

“We’re still seeing a lot of interest from smaller financial-service firms,” he said. “It’s not a growth industry for the large financial firms today.”

Kozel said he expects the Plaza district’s availability rate to tick higher in the coming months as financial firms continue to reduce staff, citing Deutsche Bank as an example. The Frankfurt-based company said on Sept. 11 that job cuts will exceed the 1,900 it announced in July, and it will reduce regional back-office functions.

“The Plaza district will come back again,” said Hennessy of Cassidy Turley. “This may be somewhat of an aberration in the marketplace. How often is the Plaza the weakest market in Midtown? We need some stability both in Europe and in the United States, and we need some certainty about what our tax environment is going to look like going in post-2013.”

The reason why landlord REITs and other entities can keep rents as high as they want even as vacancy rates soar is that the funding cost in a ZIRP environment is virtually nil.

Some of the biggest U.S. REITs own or have stakes in real estate in the district, including Boston Properties Inc. (BXP), which controls the GM Building and 601 Lexington. At the GM Building, the Detroit-based automaker’s asset-management unit is leaving 114,000 square feet, which it has put on the market as a sublease. That is one of the Plaza district’s largest new vacancies, according to Kozel of Colliers.

Office owners are still getting top dollar in the Plaza district. The spread this year between rents landlords achieved there and those in Midtown overall is 17.2 percent, the highest in records dating to 2002, according to CompStak Inc., a New York-based leasing data service.

Rents tend to take awhile to adjust to higher vacancies, Harbert said.

Of course, under ZIRP, it will take much, much longer, before a true clearing market manifests itself. As a result, there is little opportunity cost to keep space unoccupied as there is little required cash outflows. It also means that many skyscrapers in what was once NY’s most desired area, are now half empty.

“Right now, Midtown just isn’t cool,” Jason Pizer, president of Trinity Real Estate, a landlord in the area, said last week at a forum sponsored by Bisnow Media, a publisher of online business newsletters. “The people who come to our buildings, they use words like ‘dude’ and ‘totally.’ They pound you, they don’t shake your hand. And right now, those are the ones making the space decisions.”

In the Plaza district, about 234,000 square feet leased to Citigroup at 666 Fifth Ave. went on the market in August. That building, a 41-story skyscraper at West 53rd Street, has almost 500,000 of its 1.5 million square feet available, according to Cassidy Turley, a St. Louis-based commercial-property brokerage with offices in New York.

The tower housed Citigroup’s private-banking operation, which has relocated to the bank’s offices at 601 Lexington Ave., the skyscraper formerly known as Citigroup Center, which is part of the Plaza District.

Vornado Realty Trust (VNO), which co-owns 666 Fifth with Kushner Cos., declined to comment, said Wendi Kopsick, a spokeswoman. The New York-based REIT is overseeing the search for new tenants.

The building in question is 666 Fifth. This is ironic, because it is the same building we discussed years ago, and was captured in one of our first posts, when we began our narrative of the Second Great Depression. Nearly four years ago we said:

Looks like the commercial mortgage apocalypse is about to claim its next victim, this time in the form of the appropriately numbered 666 Fifth Avenue building, home to such previously flourishing tenants as Citi Private Wealth Management. Now that private wealth is no more, Citi has decided to take a hike and has so far vacated over 80,000 square feet of space (and since it has over 482,000 sq feet in the building, one can bet it has a ways to go). As a result, the building’s DSCR (or ratio of rent generated to interest owed for us non mortgage bankers) has fallen to an abysmal 0.69. Even when taking into account the $98 million (or much less) reserve fund the building has set aside to cover rent shortfalls, one can assume it won’t be long before the 666 insignia again prominently graces the roof, especially since it would have to replace a laughable Citi sign.

Sure enough, in the end we were once again proven right. And had it not been for the now ubiquitous manipulation of every market by the Federal Reserve, this prediction would have been validated long ago. Yet while under the New Normal one can dilute cash infinitely, one can never print actual cash flows, economic growth, and true wealth. It is the last three, or rather their absence, that is once again starting to become felt by everyone, and certainly the critical, and most “marginal”, sector of the economy.

China New Export New Orders Decline At Fastest Pace in 42 Months; China’s Precarious Rebalancing Act

Courtesy of Mish.

HSBC China Manufacturing PMI™ shows Output falls at fastest pace since March.

Key points

New export orders fall at fastest rate in 42 months
Output and input prices continue to fall
Purchasing activity declines amid weak demand and lower production requirements

Data in September signalled a stronger decline in Chinese manufacturing output, as the volume of new orders fell for the eleventh consecutive month. New export orders declined at the sharpest rate in 42 months amid reports of weak international demand, while lower workloads were linked to a fall in backlogs of work.

After adjusting for seasonal factors, the HSBC Purchasing Managers’ Index™ (PMI™) – a composite indicator designed to give a single-figure snapshot of operating conditions in the manufacturing economy – posted 47.9 in September, up slightly from 47.6 in August, and signalling an eleventh successive month-on-month deterioration in Chinese manufacturing sector operating conditions. However, the latest data signalled the rate of deterioration eased marginally.

The rate of reduction in manufacturing output in China accelerated during September, signalling the strongest contraction since March. A number of respondents that reported a fall in production levels attributed this to lower order volumes as both domestic and international demand weakened. However, the rate of reduction in new export orders remained stronger than the decline in overall new orders. Panellists commented on tough trading conditions in a number of key trading markets.

China’s Precarious Rebalancing Act

Discounting the continually over-optimistic comments from Markit economists in general, I would otherwise be puzzled by comments of Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC who said: “Chinese manufacturing growth is likely to be bottoming out. However, the sharper contraction of new export orders and the lingering pressures on job markets mean that Beijing should step up easing to support growth and employment. Fiscal measures should play a more important role in the coming months.

What indication is there that manufacturing growth is bottoming out? In the first place, China manufacturing is contraction, not growth. Moreover, the European recession is strengthening and a US recession is underway (just not recognized yet in my opinion). Thus it would be logical to assume China’s export-driven economy is going to take another hit.

Trade matters with Japan, and the debate over ownership of islands in the East China Sea are also unsettling. For a discussion, please see Japan PMI: Output and New Orders Contract Further

Is Beijing going to step up and support employment and growth? I do not have the answer to that, but China needs to rebalance, and that rebalancing act will be painful. The transition to a consumer-led economy from an export and infrastructure-building economy will be slow and painful, but also very necessary.

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China New Export New Orders Decline At Fastest Pace in 42 Months; China's Precarious Rebalancing Act

Courtesy of Mish.

HSBC China Manufacturing PMI™ shows Output falls at fastest pace since March.

Key points

New export orders fall at fastest rate in 42 months
Output and input prices continue to fall
Purchasing activity declines amid weak demand and lower production requirements

Data in September signalled a stronger decline in Chinese manufacturing output, as the volume of new orders fell for the eleventh consecutive month. New export orders declined at the sharpest rate in 42 months amid reports of weak international demand, while lower workloads were linked to a fall in backlogs of work.

After adjusting for seasonal factors, the HSBC Purchasing Managers’ Index™ (PMI™) – a composite indicator designed to give a single-figure snapshot of operating conditions in the manufacturing economy – posted 47.9 in September, up slightly from 47.6 in August, and signalling an eleventh successive month-on-month deterioration in Chinese manufacturing sector operating conditions. However, the latest data signalled the rate of deterioration eased marginally.

The rate of reduction in manufacturing output in China accelerated during September, signalling the strongest contraction since March. A number of respondents that reported a fall in production levels attributed this to lower order volumes as both domestic and international demand weakened. However, the rate of reduction in new export orders remained stronger than the decline in overall new orders. Panellists commented on tough trading conditions in a number of key trading markets.

China’s Precarious Rebalancing Act

Discounting the continually over-optimistic comments from Markit economists in general, I would otherwise be puzzled by comments of Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC who said: “Chinese manufacturing growth is likely to be bottoming out. However, the sharper contraction of new export orders and the lingering pressures on job markets mean that Beijing should step up easing to support growth and employment. Fiscal measures should play a more important role in the coming months.

What indication is there that manufacturing growth is bottoming out? In the first place, China manufacturing is contraction, not growth. Moreover, the European recession is strengthening and a US recession is underway (just not recognized yet in my opinion). Thus it would be logical to assume China’s export-driven economy is going to take another hit.

Trade matters with Japan, and the debate over ownership of islands in the East China Sea are also unsettling. For a discussion, please see Japan PMI: Output and New Orders Contract Further

Is Beijing going to step up and support employment and growth? I do not have the answer to that, but China needs to rebalance, and that rebalancing act will be painful. The transition to a consumer-led economy from an export and infrastructure-building economy will be slow and painful, but also very necessary.

Continue Here

A Few Remarks on Elections

Courtesy of Pater Tenenbrarum of Acting-Man

A Few Remarks On Elections

There Is No Choice

We have previously pointed out that there is actually no choice at all for the US electorate at the upcoming presidential election. This is because in terms of the policies they support, it is nigh impossible to differentiate between the two candidates. We were not just making an unsupported assertion – we offered proof, by showing a video in which they speak for themselves. If one cannot rely on their own words to represent what they stand for, what should one rely on?

Of course it has often been that way in the past too, but usually one only finds out for sure after the election, not already before it. However, the Obamney – clones are so glaringly similar that this time there can be no doubt about it from the very outset. Anyone who actually votes in this election (except if they log a protest vote for a write-in candidate) is basically wasting his time. Not only that, they are announcing that they are gullible and that they meekly support the status quo. As George Carlin once said, 'they lose the right to complain'.

Carlin suggested that if as an alternative to voting on election day, he were to stay at home and masturbate, he 'would at least have something to show for it at the end'. And that was actually quite a few years ago, we wonder what he would have to say about the 'choice' voters are presented with today. Evidently though, Carlin had come to the conclusion that democracy was for Old Greeks.

Allen Keyes on Obama/Romney

What prompted us to write this post was that a friend pointed us to the following video in which Allan Keyes discusses the very same problem. He says a number of interesting things:

Just to make that clear: we were hitherto only aware of Alan Keyes in passing and are not saying that we would endorse his political views in toto. In fact, a cursory examination of some other material we have come across suggests that we would have a number of differences with him. However, what he says in the video above is in our opinion both true and important.

He makes inter alia the point that if one can no longer differentiate between candidates based on their political program, one is theoretically reduced to judging them on the basis of personal sympathy or antipathy. However, unless one actually knows them personally, such a judgment is necessarily based on nothing but superficial impressions – in fact it is not possible to come to an informed decision.

To our mind the most interesting and important observation is however the following: Keyes suggests that if e.g. Mitt Romney were to be elected,  he would have it very easy to pursue the very agenda currently associated with Obama – there would be little push-back from conservatives. They would likely cheer on the very policies they hated when Obama proposed or implemented them, if Romney were to propose them if he comes to power. At the very least their protest would probably be extremely muted.

Think back in this context to Bush the Second and the PATRIOT act, the warrant-less wiretapping scandal, the torture allegations and his wars. Left-liberals were manning the barricades against many of these policies when Bush introduced them. Many of them were convinced that if they voted for Obama, many, or even all of these policies would be repealed (that was certainly part of the whole 'hope and change' shtick). They have for the most part mutely watched for four years while there was not only no repeal, but an intensification of every Bush era rape of the Bill of Rights. Occasionally one of Obama's supporters took notice, such as Rachel Maddow did when the president talked about instituting presidential powers that sound like something from a dystopian science fiction novel (essentially he argued in favor of the president becoming the nation's personal 'pre-crime' division):

We are merely astonished that she seems so surprised by this. This is precisely how the ruling elites operate. In order to cement unpopular policies, they use the guy who is officially widely thought to be against them. Keyes has essentially hit on the establishment's very modus operandi in directing history in modern times.

The NDAA's provisions for military detention of mere 'suspects' were an Obama administration brainchild. Most Republicans were fine with it. There were only a few exceptions, such as Rand Paul, who delivered a notable and excellent speech against them (to no avail of course).

 

Our point is, regardless of who you vote for, you can firmly depend on being disappointed in the areas that actually count. The whole idea that the democratic system such as it is allows voters to alter a nation's course by simply voting for a different batch of politicians is profoundly mistaken. In reality, the ruling elites use the apparent differences as a slick political ploy: namely to implement whatever agenda they have already decided upon without arousing the anger of the hoi-polloi too much.

One must very carefully parse everything one sees or hears on the 'approved' news media these days. More often than not things are not what they seem, and it only becomes clear after some time in what direction they are about to be taken. Often we are confronted with seemingly diametrically opposed opinions on how to tackle a burning problem. Later a 'compromise' will suddenly and 'unexpectedly' make its entrance, consisting of the very policies the elites wanted to introduce in the first place. Upon hearing of the 'compromise', everybody nods sagely and agrees that this is what should be done, not realizing that they were duped from the very beginning.

A good recent example is actually provided by the euro area crisis. Although it appears at times as though the eurocracy's control over events may be lost, it evidently hasn't happened yet.

Consider though what has happened: decisive steps have been taken to protect the banks on the backs of tax payers and to take the EU closer to the point where it becomes a giant socialistic superstate/transfer union. Which as it were is precisely what Romano Prodi predicted back in 2001 already – namely that the EU's political elite would just wait for a sufficiently dire crisis to implement all the measures it couldn't yet put into place at the time the euro was introduced.

When looking at the countries making up the euro area, one quickly notices that voters in them are likewise faced with the 'no choice' dilemma.  It matters not one whit who they vote for, the centralization agenda continues exactly as before every time.

Occasionally a referendum is held to decide whether there is sufficient popular support for things like e.g. the Lisbon treaty. In cases where the vote is unfavorable for the centralization agenda, the  referendum is simply repeated until the desired outcome has been obtained. Of course it's all just a coincidence, right?

Right,  and we have a bridge in Brooklyn for sale.

The Media Is “The Enemy of the American People”

Courtesy of Larry Doyle.

Having written about the importance of truth, transparency, and integrity in relentless fashion since the launching of this blog almost 4 years ago, I will not ask for forgiveness or beg indulgence while running the video below. This commentary is not political. It is far more important than that.

If you care about the truth and our nation, watch this clip. Then do with it as you may. I for one plan on blasting this throughout the blogosphere in tireless fashion.

The pursuit of the truth means that much to me.

What happened to our country?

I HAVE HAD ENOUGH OF THE GARBAGE SPEWING FORTH FROM SO MANY MEDIA OUTLETS THAT DISGUISE THE TRUTH AND POLLUTE OUR NATION.

I want a better society for my children and your children than that which condones and promotes a media as we have today.

NOW IS THE TIME. THIS IS THE PLACE. LET’S MAKE OUR STAND. Share this clip!!

This is not about Pat Caddell, Larry Doyle, Barack Obama, Mitt Romney, or any other individual. This is about the virtue upon which a free society rests, that is THE TRUTH.

THE TRUTH SHALL SET US FREE.

Larry Doyle

Japan PMI: Output and New Orders Contract Further

Courtesy of Mish.

The global economy continues to weaken most everywhere you look. The focus of this post is Japan where the Markit/JMMA Japan Manufacturing PMI™ shows Modest deterioration in operating conditions recorded in September.

Key points:

Output and new orders both down again, albeit at slower rates
Weaker underlying demand and strong yen impact on export orders
Charges cut at sharpest rate for over two years

Summary:

Operating conditions in Japan’s manufacturing sector continued to worsen at a modest pace in September. Output and new orders both fell amid reports of a general stagnation of economic activity in domestic and overseas markets. Manufacturers continued to deplete inventories, while they made further sharp inroads into their work outstanding. Payroll numbers were little changed.

On the price front, companies responded to the weaker demand environment by discounting their charges to a greater degree. These efforts were aided in part by a further modest reduction in input prices.

After adjusting for seasonal factors, the headline Markit/JMMA Purchasing Managers’ Index™ (PMI™) improved to a three-month high of 48.0 in September (August: 47.7) but, by remaining below the 50.0 no-change mark, again signalled a modest deterioration in operating conditions.

Production and new order volumes continued to decline on a monthly basis. Although slightly weaker than in August, rates of contraction remained marked, particularly in the investment goods sector.

Looking ahead, the widening rift between Japan and China over disputed islands certainly cannot help yet Voice of America reports there is No Sign of Progress in Dispute.

September 26, 2012
A bitter territorial dispute between China and Japan showed no signs of improvement Tuesday, as foreign ministers from both countries held high-level talks to ease tensions.

Relations have sunk to their lowest point in years, with anti-Japan protests breaking out across China and many Chinese refusing to buy Japanese-made goods. On Wednesday, Japanese automakers Toyota and Nissan said they are reducing production in China because of lessened demand….

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By 2015 hard commodity prices will have collapsed

By 2015 hard commodity prices will have collapsed

Courtesy of Michael Pettis of China Financial Markets

For the past two years, as regular readers know, I have been bearish on hard commodities. Prices may have dropped substantially from their peaks during this time, but I don’t think the bear market is over. I think we still have a very long way to go.

There are four reasons why I expect prices to drop a lot more.?First, during the last decade commodity producers were caught by surprise by the surge in demand. Their belated response was to ramp up production dramatically, but since there is a long lead-time between intention and supply, for the next several years we will continue to experience rapid growth in supply. As an aside, in my many talks to different groups of investors and boards of directors it has been my impression that commodity producers have been the slowest at understanding the full implications of a Chinese rebalancing, and I would suggest that in many cases they still have not caught on.

Second, almost all the increase in demand in the past twenty years, which in practice occurred mostly in the past decade, can be explained as the consequence of the incredibly unbalanced growth process in China. But as even the most exuberant of China bulls now recognize, China’s economic growth is slowing and I expect it to decline a lot more in the next few years.

Third, and more importantly, as China’s economy rebalances towards a much more sustainable form of growth, this will automatically make Chinese growth much less commodity intensive. It doesn’t matter whether you agree or disagree with my expectations of further economic slowing. Even if China is miraculously able to regain growth rates of 10-11% annually, a rebalancing economy will demand much less in the way of hard commodities.

And fourth, surging Chinese hard commodity purchases in the past few years supplied not just growing domestic needs but also rapidly growing inventory. The result is that inventory levels in China are much too high to support what growth in demand there will be over the next few years, and I expect Chinese in some cases to be net sellers, not net buyers, of a number of commodities.

This combination of factors – rising supply, dropping demand, and lots of inventory to work off – all but guarantee that the prices of hard commodities will collapse. I expect that certain commodities, like copper, will drop by 50% or more in the next two to three years.

Not everyone agrees. In the July 17 blog entry I made a reference to a book by Dambisa Moyo, a former investment banker turned economic writer, called Winner Take All, in which the author argues that the world is facing a crisis in the form of a commodity shortage, and she expects prices to surge.  Unlike her, however, I expect the price of hard commodities and certain industry-related soft commodities (like rubber) to drop sharply in the next three years, and to stay low for many years thereafter.

To address the first of the four reasons I expect hard commodity prices to drop, excess growth in supply, one month ago I spoke at a conference in Sydney, after which Gerard Minack, chief economist at Morgan Stanley Australia, gave a presentation on the world economy and, more specifically, on commodities. His presentation was an eye-opener for me.

Based on my many trips in recent years to places like Australia, Peru and Brazil, I had plenty of anecdotal reasons to believe that commodity producers had significantly overestimated the sustainability of the Chinese growth model (or, perhaps more accurately, had not really thought about whether or not it was sustainable). I was worried that they were expanding production very quickly.?Everywhere I went I heard stories of large-scale investments to expand production.

Many producers have acknowledged recent price declines, but they seem to believe that these are likely to be short-lived and that prices will soon rebound when Chinese demand returns. For example the Financial Times’ Alphaville quotes Nev Power, chief executive of Fortescue Metals, discussing iron ore at a recent meeting:

Iron ore prices have slumped to $US104 a tonne in recent days, yet Mr Power said it could soon rebound as high as $US150. ”As soon as restocking and production returns to normal we expect to see prices back in the $US120 to $US150 per tonne range,” he said.

Production capacity has grown

He will almost certainly be wrong. But whereas my evidence for claiming continued high growth rates in production was conceptual and anecdotal, Minack has actually gone out and tried to measure the potential increase in supply. Minacks’ argument is that because of twenty years of stable or falling prices, until the early part of the last decade there had been a minimal amount of investment globally into commodity producing facilities. Commodities seemed to be in a permanent slump and no one was interested in expanding supply.

The surge in Chinese demand at the beginning of the last decade consequently caught everyone by surprise. Minack shows, for example, that in the past twenty years, global demand for steel grew by roughly 6% a year, with most of that coming in the past decade. If you exclude China, however, global demand for steel grew by only 2% a year in the past twenty years, implying that China accounted for almost all the increase in global demand in the last twenty years – and almost all of that occurred in the past decade. In the past ten years Chinese demand for iron ore has grown by 16% a year on average.

The initial surge in demand caught commodity producers off-guard. Because they were unable to ramp up production quickly enough, prices surged. After a few years of high prices, however, commodity producers responded to the huge new increase in demand by planning major expansions in production facilities.

Changing production requires years of exploration, investment, and upgrading, however, so the decision to increase production could only result in higher production many years later. This is shown by a set of cost curves, which are at the heart of Minack’s presentations, and these curves graph the short-term relationship between price and volume. For any given amount of demand, in other words, the graph showed the corresponding price.

The supply curves, of course, are positively sloped – the higher the price of copper, for example, the more copper will be produced and sold.?The slopes of the curves, furthermore, are very sensitive to existing production capacity, and Minack lists curves for several points in time as production capacity changes. As one would expect, when demand for copper is less than production capacity the curves slope gently upwards, implying that small increases in copper prices correspond to very large increases in copper supply.

But this curve slopes gently upwards only up to a point, representing the limits of normal production capacity, after which the slope of the curve is almost vertical. Beyond this point – of maximum capacity – no matter how high the price of copper, in the short term supply cannot be substantially increased. Or to put it another way, beyond that point small increases in demand translate into large increases in price.

In 2001, according to Minack’s numbers, this transition point for copper was roughly 12 million tons, above which it would be extremely difficult for copper producers to supply demand except at extremely high prices. There was some improvement in capacity during this time but not much. By 2004 this same inflection point had increased only slightly, to roughly 13 million tons. This, as Minack pointed out, reinforces the argument that copper producers were not expecting any significant increase in demand and so had not prepared for it.

But by 2004-5 it was increasingly evident that demand was rising quickly. Copper producers responded, and thanks to increased investment in countries like Peru and Chile, among others, production capacity surged. By 2018 the inflection point is projected to be at roughly 21 million tons, suggesting that between 2004 and 2018 an enormous amount of additional copper production has become or is going to become available. In his July 17 “Down Under” note, Minack goes on to say:

What’s notable, in my view, is the forecast increase in supply versus the actual supply increases seen over the past decade. For copper, the increase in global supply in each of the next seven years will be roughly equal to the increase in supply over the decade to 2011. Consequently, it would require a material acceleration in demand to keep prices at current levels in the face of this supply increase.

The same story is more or less true for iron ore, although the expansion is supply has been more dramatic. In 2006, according to Minack’s numbers, the inflection point was at roughly 900 million tons, above which iron ore producers would have difficulty supplying demand. By 2011 it was at 1,300 million tons and by 2014 and 2020 it is expected to be1,900 million and 2,600 million tons respectively. In just over ten years, in other words, production capacity will have nearly tripled. This is a lot of iron that has to be absorbed by someone.

The supply considerations are exacerbated by the amount of stockpiling taking place in China. I won’t rehash all my arguments from earlier newsletters about stockpiling but it is enough, I think, simply to list some of the articles I found in my daily readings last week.

Stockpiling

The first article came on Tuesday from Bloomberg:

Cotton consumption in China, the world’s largest user, may shrink 11 percent this year as a deteriorating economy hurts demand and causes a buildup in commodities, according to Weiqiao Textile Co.

…Coal inventories at Qinhuangdao port rose to 9.33 million tons on June 17, the highest since 2008, data from the China Coal Transport and Distribution Association showed. Stockpiles were at 6.69 million tons as of Aug. 19. While steel-product stockpiles at the nation’s 26 major markets have dropped for five months as the end of July, they’re still 19 percent higher this year, according to the China Iron & Steel Association.

Commodity-related companies have flagged their concern. Noble Group Ltd. (NOBL), Asia’s biggest listed commodity supplier, expects a tough environment for the next 12 to 24 months, Chief Executive Officer Yusuf Alireza said yesterday. Vale SA (VALE5), the world’s largest iron-ore producer, said this month that China’s so-called golden years are gone as economic growth slows.

The article in Tuesday’s Financial Times talks about excess inventory of a wide variety of products and refers to an earlier article, from July, that claims that China’s coal inventory is up 50% from last year:

Memories of the London Olympics are already beginning to fade. Li Ning, a Chinese sportswear maker, had better hope that they last a while longer.? Like thousands of Chinese companies from property developers to car manufacturers, Li Ning is sitting on a mountain of unsold products. Whether they can whittle down these bulging inventories is the single most important question facing corporate China and arguably the economy as a whole.

…The problems of Li Ning and the sportswear industry are just the tip of the iceberg in China. Across virtually all corporate sectors, inventories are excessive.? The stock of unsold homes is the most worrying, because property plays such a dominant role in the economy. Vanke, the country’s biggest developer, estimates that it would take about 10 months to absorb all the unsold homes in China, which is reasonably quick. The snag is that this figure doesn’t count the millions of homes that have been sold but are sitting empty.

Then there is the auto sector. Car sales have been remarkably resilient despite the economic slowdown. But manufacturers have been more bullish than consumers. The inventory index (inventories divided by sales) was 1.98 at the end of June, according to industry data. More than 1.5 is seen as critically high.

The unsold mountains of electronics and white goods are also looking Himalayan in scale. Over the past week, the country’s main retailers descended into a price war. It began when online retailer 360buy.com vowed that it would sell home appliances at a zero profit margin.?

The commodities sector is also dealing with a huge inventory overhang, most graphically in the piles of coal that have built up at ports across the country.

In an article one day later from the South China Morning Post, the concern is about copper:

At first glance, China’s copper demand is soaring. According to Ross Strachan, commodities analyst at independent research house Capital Economics, if you add domestic production of refined copper to China’s imports and changes to official stockpiles, then it appears that copper consumption leapt 22 per cent in the first seven months of 2012 compared with the same period last year.

But if you look at the volume of copper products actually turned out by China’s factories – pipes for air conditioners, windings for electrical transformers, foil for circuit boards and the like – then output was flat in July compared with a year earlier (see the second chart).? Weak output makes sense. Together, manufacturing industries, home appliances and the construction sector accounted for half of China’s copper consumption last year.

With economic growth now slowing and property investment weak, demand is bound to be soft. Analysts at Credit Suisse expect China’s copper usage to grow by just 2 per cent this year and 1 per cent in 2013, in contrast to the 26 per cent growth seen at the height of China’s stimulus effort in 2009.

This gaping discrepancy between apparent demand and actual consumption implies there has been a massive build-up in unreported stocks of refined copper held in bonded warehouses and elsewhere.

Strachan at Capital economics believes these stockpiles have climbed by 900,000 tonnes since the middle of last year. Standard Chartered puts the total amount held in bonded warehouses at 600,000 tonnes, together with another 400,000 held elsewhere.

To put these figures into perspective, the LME’s worldwide network of warehouses reports copper stocks of just 231,000 tonnes.? In other words, China is sitting on a huge overhang of refined copper.

This partly reflects state corporations’ efforts to build strategic reserves of the metal. But it is also the result of massive speculation in copper.? The details of the trade are complex. But in a nutshell, companies buy copper on margin, then use the metal as collateral to obtain low-cost loans, using the proceeds to bet on higher-yielding assets.

Not just the raw stuff

And just one day later I saw this article in Bloomberg:

Rubber is poised to drop as sustained supplies from Southeast Asia and falling demand from China’s tiremakers push stockpiles to match their record at Qingdao port, the main shipment hub, an industry executive said. Futures fell for the first time in four days.

Inventories in the bonded zone, where traders store deliveries before paying duties, will probably climb to 250,000 metric tons by end-August from 240,000 tons last week, Li Xiangou, chairman at the Qingdao International Rubber Exchange Market, said in an Aug. 17 interview. China accounts for 33 percent of global demand and tires represent 70 percent of natural-rubber consumption in the country. Reserves last reached 250,000 tons in mid-January, he said.

The article goes on to quote one Chinese rubber trader as saying “Many Chinese tire makers are mired in high inventories of end-products right now.”

I can easily cite many more articles, but as this short roundup suggests, finding articles about huge stockpiles in China is a pretty easy game to play. This shouldn’t come as a surprise and indeed I have been discussing this for the past three or four years. When financing costs are low or even negative in any economy, there is a tendency to accumulate inventory since it is not only easy to finance but, thanks to low or negative financing costs, it can also be extremely profitable. If prices just keep up with inflation, inventory earns a profit, and the greater the pile, the greater the profit.

In addition in the past decade as China’s trade relationship with the rest of the world has expanded and as China’s economy has grown, most Chinese businesses have only experienced rising prices – both for commodities and many kinds of goods. As a result firms that tended to hold high inventory have outperformed firms that haven’t.

This has created a selection process that favors accumulation. Companies that prefer to hold more, rather than less, inventory of commodities and goods in which commodities are a high cost component have outperformed their rivals, and so the whole market has moved towards a preference for stockpiling, much in the same way that, according to Hyman Minsky, periods of stable or rising asset prices force the financial system into taking on excessive risk.? Since overstocking has always been a winning strategy until very recently, it is a pretty safe bet to assume that Chinese traders, speculators, end-users and investors have a built-in prejudice towards being long or longer inventory.

The overstocking problem in part has also had to do with financing constraints. In late 2010 and early 2011 in this newsletter I wrote often about commodity inventory financing as a popular tactic among Chinese businesses and banks aimed at getting around regulatory constraints on lending.

By importing commodities that were funded through trade financing and then using inventory receipts to borrow domestically, banks and borrowers could get around lending restrictions.? We have never been able to figure out exactly how much of this was going on, but there was plenty of anecdotal evidence to suggest that this was a pretty wide-spread scheme and it involved a variety of commodities – copper, most famously, but also soy, magnesium, cotton, rubber and several others.

Finally, I should add that in China there is, more than in any other country I know, a sense that physical ownership of commodities or of commodity producing facilities creates substantial intangible benefits.?This may be a legacy of Maoist perceptions of self-sufficiency, or it may have to do with a history of unstable political and monetary arrangements, but whatever the reason Chinese are often obsessed with the need for physical control of commodities.

The result has been a tendency to hold much larger commodity inventories than can be justified by business needs and risk management concerns. By the way when economists try to calculate the amount of unsold inventory of commodities they typically focus on the raw commodity, but it is important to remember that inventories of finished goods are also forms of raw inventory.

An empty apartment, for example, contains lots of copper wiring, and although it is extremely unlikely that the copper will ever be melted down and sold, it nonetheless has the same price effect as unsold copper inventory. Why? Because an empty apartment today is one less apartment that will be built tomorrow to fill real demand, and so it represents a reduction in the future amount of copper that will be purchased to make copper wire. The same is true of other finished goods.

What about demand?

China currently is the leading consumer of a wide variety of commodities wholly disproportionate to its share of global GDP. The country represents roughly 11% of global GDP if you accept the stated numbers, and substantially less if you believe, as I do, that growth has been overstated because of the difference over many years between reported investment, i.e. its input value, and the actual economic value of output. China nonetheless accounts for between 30% and 40% of total global demand for commodities like copper and nearly 60% of total global demand for commodities like cement and iron ore.

The only reason China has provided such an extraordinarily disproportionate share of global demand for hard commodities has been the nature of China’s growth model. While China may represent only 11% or less of the global economy, it represents a far, far greater share of the world’s building of bridges, railroad lines, subway systems, skyscrapers, port facilities, dams, shipbuilding facilities, highways, and so on.

Over the next decade, two things are going to change. The first is increasingly recognized, and that is that Chinese growth rates will drop sharply. The second is that China will rebalance its economic growth away from its appetite for commodities.

The consensus on expected economic growth among Chinese and foreign economist living in China has already declined sharply in the past few years. From 8-10% just two years ago, the consensus for average growth rates in China over the next decade has dropped to 5-7%. But the historical precedents suggest we should be wary even of these lower estimates. Throughout the last 100 years countries that have enjoyed investment-driven growth miracles have always had much more difficult adjustments than even the greatest skeptics had predicted.

After all, there were many Brazilians in the late 1970s who worried that Brazil’s growth miracle was unsustainable and would end badly, but none expected negative growth for a decade, which is what happened during the terrible Lost Decade of the 1980s. Towards the end of the 1980s, to take another example, a few brave skeptics proclaimed that the Japanese miracle was dead and predicted that for the next five or ten years average Japanese growth rates would slow to 3 or 4% (in 1994 the IMF belatedly proclaimed that Japan’s long-term growth rate had dropped to 4%), but no one, even the most skeptical, predicted twenty years of growth below 1 percent.

Finally when the USSR’s economy was hurtling forward in the 1950s and 1960s, and expected to overtake the US within a few decades, even the most die-hard anti-communists did not expect the virtual collapse of the economy in the 1970s and 1980s.

Similarly, the current consensus for Chinese growth over the next decade is almost certainly too high. Even if Beijing is able to keep household income growing at the same pace it has grown during the past decade, when Chinese and global conditions were as good as they ever could be, it will prove almost impossible for the economy to rebalance at average GDP growth rates over the next decade of much above 3 percent.

This 3% average will not be distributed evenly, of course, and we should expect higher growth rates at the beginning of the period (perhaps 5-6 percent over the next two years) and lower growth rates towards the end. But as this happens, over the next two years the consensus on China’s long-term growth rate will continue to drop sharply, and this will further affect commodity prices.

But even this underestimates the change in demand for commodities. For thirty years, and especially for the past ten years, China’s extraordinary GDP growth was driven by even higher rates of investment growth – generating for China the highest investment rates and investment growth rates in history. Consumption growth failed to keep pace during this time.

But rebalancing means, by definition, that for the next few years consumption growth must outpace GDP growth, and so also by definition investment growth must be less than GDP growth. Even if China is able to achieve 5-7% growth rates over the next decade, which I think is almost impossible, this implies that consumption growth will rise to 7-10% annually, and so from 25% growth in the last few years Beijing will be able to allow investment to grow no more than 2-4% annually, and much less if GDP growth rates are as low as I expect.

Which way can prices go?

For these reasons I am very pessimistic about hard commodity prices and expect them to drop substantially further in the next two to three years.

  1. Production capacity for hard commodities is rising much too quickly, in a belated response to the unexpected surge in demand just under a decade ago.
  2. Expected economic growth rates in the country that has been biggest source of new demand – virtually the only source – have fallen sharply and commodity prices have fallen with them. Historical precedents and the arithmetic of rebalancing suggest, however, that the current consensus for medium-term Chinese growth is still too optimistic. Expected growth rates will almost certainly fall further in the next two years.
  3. Beijing has finally become serious about rebalancing China’s economy, and rebalancing means shifting Chinese growth away from being disproportionately commodity intensive.? Instead of representing 30-60% of global demand for most hard commodities, Chinese demand will shift to a more “normal” level. Remember that even a very limited shift – from 50% of global demand, for example, to a still high 40% of global demand – represents a sharp drop in global demand.
  4. There has been so much stockpiling of commodities and finished goods with implicit commodity content in China that the country could well become a net seller, and not net a buyer, of a wide variety of commodities in the next few years.

This is going to come as a shock to many people. In my discussions with senior officials in the commodity sectors in Brazil, Australia, Peru, Chile and even Indonesia, it seems to me that many analysts have been insufficiently skeptical about the Chinese growth model and are unaware of how dramatically the consensus has changed in the past two years. They have failed to understand how deep China’s structural problems are and how worried Beijing has become (this worry may be best exemplified by the extraordinary growth in flight capital from China since early 2010).

Under these conditions I don’t see how we can avoid a very nasty two or three years ahead for commodity producers. This isn’t all bad news, of course. What will be a disaster for hard commodity producers will be great news for companies and countries that are commodity users or importers. One way or the other, however, we are going see a big change in the distribution of winners and losers.

 

This is an abbreviated version of the newsletter that went out three weeks ago.  Academics, journalists, and government and NGO officials who want to subscribe to the newsletter should write to me at chinfinpettis@yahoo.com, stating your affiliation, please.  Investors who want to buy a subscription should write to me, also at that address.

Pictures by Tom at Cycle Editing.

France Piles €20 Billion in Tax Hikes on Businesses and Wealthy

Courtesy of Mish.

It’s now official. The top tax rate in France is now 75% for those who make over a million euros. Moreover, there is a new band of 45% for those who make over 150,000 euros. Don’t forget the existing VAT on all purchases.

Europe is imploding and instead of fixing onerous work rules, France Hits Rich and Business to Slash Deficit.

Socialist President Francois Hollande unveiled higher levies on business and a 75-percent tax for the super-rich on Friday in a 2013 budget aimed at showing France has the fiscal rigor to remain at the core of the euro zone.

Of the total 30 billion euros of savings, around 20 billion will come from tax increases on households and companies, with tax rises already approved this year to contribute some 4 billion euros to revenues in 2013. The freeze on spending will contribute around 10 billion euros.

To the dismay of business leaders who fear an exodus of top talent, the government confirmed a temporary 75 percent super-tax rate for earnings over one million euros and a new 45 percent band for revenues over 150,000 euros.

Tough New Measures or Idiotic Measures?

The Financial Times reports France unveils tough budget measures

The measures announced on Friday included the controversial 75 per cent marginal tax rate on earned income above €1m a year, put in place for two years.

But, as promised by President François Hollande, France was largely spared the kinds of hefty cuts in public spending, pensions and salaries imposed in other eurozone countries struggling to contain their sovereign debt.

The official forecast of 0.8 per cent growth next year is above most independent forecasts, but Mr Pierre Moscovici [finance minister] said: “I am certain that if Europe steadies, then we are going to achieve this 0.8 per cent or more.”

For starters, with government spending in France accounting for 55% of GDP, those are not “Tough Measures” those are idiotic measures. France needs to reduce government spending and ease work rules. Instead it has tightened pressure on companies laying off workers.

If Wishes Were Fishes

The French Finance minister is “certain that if Europe steadies, France will achieve 0.8 per cent growth or more”. That is about as meaningful as this statement by me “I am certain that if I had a billion dollars, I would be a billionaire”.

Simply put, neither Europe nor France is going to steady, but given France’s growth is currently 0%, steady would not be enough anyway.

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When big money chases rentals

Courtesy of ZeroHedge. View original post here.

Submitted by drhousingbubble.

Another interesting trend courtesy of the low interest rate environment created by the Federal Reserve is the feverish chase for yield. In a previous article we discussed that a large part of the higher rental prices were coming from a segment that had lost their homes via foreclosure. Since the housing bubble popped millions of Americans have lost their homes. As the report also found, many of those stayed within the same area but likely shifted to a single-family rental or an apartment. What we did not discuss however is how investors are playing a role in pushing up rental yields as well. As bigger blocks of large investors purchase distressed properties, many add value to the property and try to push rental prices upwards. I saw a presentation a few months ago of some local investors in Southern California purchasing older apartment buildings (some built in the 1970s) and upgrading them to more modern standards. Once the upgrades were complete, these investors pushed rents up by 7 to 10 percent. What impact is the flood of investors having on the market?

Shift from owning to renting

The drop in home ownership has largely come from the removal of two factors:

-1. The easy access toxic loans that provided leverage to anyone with a pulse

-2. The millions that have lost their home via foreclosure

Even with super low down payment loans like FHA insured products, many Americans simply cannot afford to purchase a home even in today’s low rate environment. Yet this low rate environment has had a big impact on rentals:

rental vs owner occupied units

 
“BNP Paribas: – As investors seek returns, housing looks increasingly attractive. A lot of increased activity has come from cash buyers; the National Association of Realtors reports that the share of existing single-family home sales purchased by cash buyers has risen to just below 30% from 20% a few years ago. Private equity investors have also been reportedly buying blocks of homes for rental conversion.”

This is major shift. 30 percent of recent single-family home sales went to cash buyers. Private equity is now having a big impact on this market. The chase for yield is largely driving these investors and rental yields are favorable in many markets. Many investors have looked at markets that have been forgotten and jump in, buy up places in blocks, and try to push rents up because of the perceived added value of their upgrades. It is an interesting process but once again the Federal Reserve is largely pushing big money into a market that is impacting most Americans. At a time when incomes are stagnant higher rents stretch budgets even further.

Monthly payment versus price

The massive drop in mortgage rates is largely a method to keep home values inflated. Do not doubt this for one second. Even the Fed came out directly stating that QE3 was largely going to be a MBS program. You do not get more specific than that. They have an open commitment that is likely to buy nearly half a trillion in MBS within a 12 month period.

mortgage 30 year

The impact is enormous here. For example, let us run a $500,000 mortgage from 2000 at 8 percent and one today at 3.5 percent:

Principal and interest @ 8%: $3,668

Principal and interest @ 3.5% $2,245

To get the monthly PI similar to what it is today with an 8 percent mortgage would require that $500,000 mortgage to be at $300,000. Even with a low rate people will be paying this much over the life of the loan only with principal and interest:

$500,000 mortgage PI @ 3.5% over 30 years: $808,000

Add in taxes, insurance, and maintenance and you are inching closer to $1 million for a $500,000 mortgage. The focus on the monthly payment is really driving a large part of the housing market today. That is why FHA insured loans have come in to plug the low down payment market left by the toxic mortgage debacle.

Thanks to these low rates, big investors are likely also bidding home prices up competing with families simply looking to buy a home. More unintended consequences. It is a fascinating trend seeing so many investors actually jumping into the rental game. Big money however is fickle and as quickly as the trend ends, it will quickly evaporate.

Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog to get updated housing commentary, analysis, and information.

Sheila Bair’s Book Gores Citigroup’s Bull

Courtesy of Pam Martens.

U.S. Treasury Secretary Tim Geithner is now three for three in the book world: the quintessential poster boy for regulatory capture who ended up as Citigroup’s bitch.  In Ron Suskind’s  Confidence Men, Geithner ignores a directive from the President of the United States to wind down Citigroup.  In Neil Barofsky’s Bailout, Geithner is the evil genius using the Home Affordable  Modification Program (HAMP) to “foam the runways” for the banks, slowing down the foreclosure stream so the banks could stay afloat, with no genuine goal to help struggling families stay in their homes. 

Now Sheila Bair, the ultimate insider as former head of the FDIC during the crisis, has completed the microscopic job on Geithner in Bull by the Horns. The image that emerges is a two-headed monster: a regulator functioning as a Citigroup messenger boy and an insanely mismanaged bank that was somehow able to shield from public scrutiny that it had a measly $125 billion in U.S. insured deposits while turning government on its head and raking in over $2.5 trillion in taxpayer capital, guarantees and loans. 

When I came to the part about the $125 billion in insured deposits, I thought my Kindle had malfunctioned. What! It was well publicized that Citigroup had over $2 trillion in assets; how could it have only $125 billion in U.S. insured deposits?  

Sheila Bair may not have realized it, but she was filling in the missing piece of a puzzle that has captivated much of Wall Street since 2008: why was every regulator jumping through hoops to save Citigroup, a serial predator that constantly promised to change but never did. 

As it turns out, the bulk of Citigroup’s deposits were foreign and much of those deposits were not insured or had low insurance amounts.  Had this foreign money decided to run for the exits on fear of a Citigroup collapse, FDIC might have been looking at just a $125 billion problem but the rest of the financial system was looking at $2 trillion on the books, $1 trillion off the books and God knows what kind of counterparty agreements in the closets.  

Bair indicates her belief that Citigroup’s two main regulators, John Dugan (a former bank lobbyist) at the Office of the Comptroller of the Currency (OCC) and Tim Geithner, then President of the Federal Reserve Bank of New York, were not being forthright on Citigroup’s real condition.  Bair explains Citigroup’s situation in 2008 as follows: 

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Cue Stagflationary Recession

Courtesy of ZeroHedge. View original post: Cue Stagflationary Recession: Chicago PMI Huge Sub-50 Miss, Back To September 2009 Levels; Prices Paid Spikes.

Submitted by Tyler Durden.

QE1, QE2, Operation Twist 1, Operation Twist 2, a Fed balance sheet that is now expected to be $5 trillion in 2 years, and all we get is a lousy manufacturing economy that according to the Chicago PMI just dipped into contraction, or for all intents and purposes, recession, printing its first sub-50 print, 49.7 specifically, on expectations of a 52.8, and down from 53.

This was the lowest since September 2009 and the biggest miss in 4 months. Specifically, the employment index came at a two and a half year low, New Orders, Backlogs and Deliveries had their 3 month moving averages at the lowest since Mid 2009, and Capital Equipment printed at a 17 month low. But not all hope is lost: at least prices paid soared for the third consecutive month to 63.2 from 57. Cue not just recession, but stagflationary recession. It also means that both the Manufacturing ISM and Q3 GDP will be a total disaster. Time to start pricing in QE X to be followed 24 hours later by QE X+1. The central bank cartel is starting to lose control.

 

Employment:

 

The good news: you can now completely ignore anyone and everyone who told you over the past 4 years, that the economy was improving.

Caddell: Lack of Truth is “Fundamental Threat to Democracy”

Courtesy of Larry Doyle.

Gut check.

Those who have played competitive sports know there comes a point in time during the game when one needs to dig ever deeper for the intestinal will and fortitude to press on in pursuit of victory.

As a nation, I firmly believe we are at that very point. Will we answer the call or allow our opponents to determine the manner in which the game is played and seriously influence the  outcome? The fact is the “game” I talk about today is in fact no game at all. I am talking about the future of our nation. . . . and I am pissed off and sick and tired as I think about this topic. What topic? 

A random scroll through this blog packs more than enough evidence of the assault on our nation and our values.

I am not here today to talk about the respective candidacies of those running for President. I am talking about a principle and a purpose far greater than a mere political office. I am talking about that most prized virtue which readers of this blog have hopefully come to know me by. I am talking about the truth.

Day after day, week after week, and now month after month I believe we experience incessant and insidious attacks on the truth. We witness it from both sides of the political aisle and every corner of society. Are we to think that these assaults come without a price? We would be exceptionally naive to accept that premise. Are we to allow these assaults under the guise that the ends justify the means or this is mere politics at play? Mere politics? These attacks upon the truth occur  daily. Ends justifying the means? Many would seem to embrace this badly misguided and ill-conceived notion.

I truly believe the very future well being of our nation for our children and our children’s children lies in the wake.

Where are the real journalists and the real media enterprises who will make the stand for the truth? Regrettably they are all too often drowned out by those who prize power over principle. I am certainly not alone in sending out this warning siren. Pat Caddell echoes my grave concern. In recent remarks,

Caddell added that it is one thing for the news to have a biased view, but “It is another thing to specifically decide that you will not tell the American people information they have a right to know.”

He closed his talk with these words: “The press’s job is to stand in the ramparts and protect the liberty and freedom of all of us from a government and from organized governmental power.

When they desert those ramparts and go to serve—to decide that they will now become an active participants—when they decide that their job is not simply to tell you who you may vote for, and who you may not, but, worse—and this is the danger of the last two weeks—what truth that you may know, as an American, and what truth you are not allowed to know, they have, then, made themselves a fundamental threat to the democracy, and, in my opinion, made themselves the enemy of the American people.

And it is a threat to the very future of this country if…we allow this stuff to go on, and…we’ve crossed a whole new and frightening slide on the slippery slope this last two weeks, and it needs to be talked about.”

Let’s talk about it. What do readers think?

I am sure there will be some in the audience who will attack Caddell. Others may care to attack me. I welcome it and would issue the following challenge in return. Are you comfortable attacking the truth, the very bedrock upon which this nation lies?

Lonely may be the truth tellers but I would rather stand alone than with the cowards for whom the prized virtue of the truth is a foreign concept.

I hope readers will speak their minds on this commentary because I believe this erosion of the truth is actually far more important than any election.

Gut check . . . navigate accordingly.

Larry Doyle

Can the Fed Fight Droids and Win?

Can the Fed Fight Droids and Win? Apple’s SIRI, Driverless Trucks, What’s Next? Riveting Video: Are Droids Taking Our Jobs?

Courtesy of Mish.

Today, as single farmer can produce as much goods a 100 farmers a half-century or less ago. That freed up labor for manufacturing and the service economy.

However, droids are now replacing humans in both manufacturing and services.

When does it stop?

Every time I go into a grocery store, I see more self-service checkout lanes and fewer manned ones. When RFID checkout comes into vogue, and it will quickly, an entire grocery basket will be scanned at once, and even fewer checkout clerks will be needed.

For a discussion of RFID, please see JCPenney to Eliminate All Checkout Clerks, Instead Using RFID Chips and Self-Checkout.

With each technological advance more and more goods and services are produced by fewer and fewer people. In isolation, that drives down costs, and in the process, standards-of-living have soared.

Because of ever-increasing productivity, it’s easy to show that deflation is the natural state of affairs.

But what does that mean looking ahead? Will there be any jobs left? If so where? And what happens to the Fed’s effort to prevent falling prices?

Riveting Video: Droids Taking Our Jobs

Let’s start off with an entertaining, yet scary video by Andrew McAfee who asks Are droids taking our jobs?


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In 2005 Raghuram Rajan Told Bernanke, Geithner, Summers, and Greenspan that We Were Headed for Economic Crisis

Courtesy of Jaime Falcon.

I am re-watching Charles Ferguson’s Inside Job. It is a fantastic movie, but it is so frustrating to see our failed leaders being rewarded for their incompetence, obstructionism, and failure.

In 2005, Raghuram Rajan, who was then Chief Economist at the IMF, delivered a paper to the central bankers of the world. In attendance were Alan Greenspan, Ben Bernanke, Tim Geithner, and Larry Summers.  He concluded that the financial world was becoming riskier. The paper focused on warped incentive structures which created huge short term profits and cash bonuses, but with no penalties for later losses. He argued that this encouraged bankers to take on huge losses that would potentially bankrupt their own firms or even crash the entire financial system.

Summers criticized Rajan and accused Rajan of being a luddite.

So Summers (and Geithner and Greenspan and Bernanke) had terrible judgment. If the story ended there, it would be an unfortunate one. But the story only really becomes tragedy when we see what happened to those failed thinkers following their pathetic intellectual performance; Obama appointed Geithner Treasury Secretary, kept on Ben Bernanke as Fed Chairman, and appointed Summers to be his Chief Economic Advisor.

These people should have been able to see the coming tsunami on their own. After all, they are the most esteemed and highly regarded economic analysts in this country. But in this case, they were actually given a roadmap. The Chief Economist of the IMF stood in front of them and laid out in detail how the warped incentive structures in our political economy were creating a highly unstable and precarious financial sector that could bring the entire system crashing down. And they still did not act. And our system imploded. And they were all promoted.

They failed as badly as individuals can fail. They were then given the reins to this country and asked to fix it – as if they were fit to do so. That is just unforgivable.

I have to say it again: Charles Ferguson is an American hero. Watch this movie.

Jaime Falcon

Two No-Brainer Ways To Play Rising Food Prices

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Submitted by Simon Black of Sovereign Man blog,

Last summer, two researchers from the New England Complex Systems Institute published a short paper examining the correlation between rising food prices and civil unrest. It was a timely analysis, to say the least. A number of food riots were occurring throughout the world, not to mention waves of revolution sparked by the high cost of food.

This is nothing new; throughout history whenever people have struggled to put food on the table for their families, social unrest has been a common consequence.

The French Revolution is a classic example; after decades of unsustainable fiscal and monetary practices that wrecked the French economy, the harvest season and subsequent winter of 1788 were particularly harsh. People went hungry, and it ultimately started the revolution.

The researchers' analysis went a step further, though; they modeled the relationship between food prices and social unrest to reach a simple conclusion– whenever the UN Food and Agricultural Organization (FAO)'s global food price index climbs above 210, conditions ripen for social unrest.

Today, the FAO's food index is at 213… and rising. Netherlands-based Rabobank recently published its own analysis, forecasting further rises in food prices well into the 3rd quarter of 2013.

There are so many factors driving food prices higher. From a demand perspective, world population is growing at an extraordinary rate… plus the rise of billions of people from developing countries (especially in Asia) into the middle class is quickening demand for resource-intensive foods like beef.

From a supply perspective, drought, soil erosion, and reduction of available farmland all put significant pressure on global agricultural output. And finally, from a monetary perspective, the enormous amount of paper currency being printed in the world is finding its way into agricultural commodities.

I cannot envision a slowdown in any of these factors anytime soon. Central bankers will continue printing, people will continue procreating, developing countries will continue becoming wealthier, etc. So we should absolutely expect rising food prices for quite some time.

Long-term, technology will ultimately solve these problems… but large-scale implementation is a long way off, and it may certainly be a bumpy ride ahead.

Individuals can hedge their exposure in a number of different ways. The simple option is to invest in agricultural ETFs or long-term futures contracts. But I can hardly recommend this as a course of action given the massive systemic risk in the financial system.

Just as we often recommend holding physical gold and silver rather than owning a gold ETF, it's much better to own physical agricultural assets.

If you're on a budget, small gardens can be planted for a pittance as long as you're willing to roll up your sleeves. Even if you live in an urban area surrounded by a sea of concrete, tabletop hydroponic and aquaponic systems can be set up on the cheap… and they're easy to maintain.

If you have more capital to deploy, consider buying agricultural property, preferably overseas. Buying foreign real estate is a great way to move money overseas, plus it gives you a place to go if you really need to escape.

As I survey farmland prices around the world, the best region to buy is South America, particularly Chile, Paraguay, or Uruguay. I'll have more detail on those locations in a future letter.

Bottom line, if the analysis is correct and food prices continue to rise, agriculture will be one of the best investments of the decade. As Jim Rogers has said so many times before, it will be farmers driving Maseratis, not stock brokers.  Plus, you will have secured yourself a steady, reliable supply of food.

Even if the analysis is wrong and all the world's food challenges are magically solved, it's hard to imagine being worse off for having your own food supply… or owning beautiful, well-located land in a rapidly developing foreign country.

California Hit Parade Rolls On: Atwater Scrambles to Avoid bankruptcy

Courtesy of Mish.

The California hit parade keeps on rolling as yet Another California city scrambles to avoid bankruptcy.

Atwater, a city of roughly 28,000 in California’s Central Valley, may declare a fiscal emergency as soon as next week, but it is trying to avoid becoming the fourth California city to file for municipal bankruptcy this year, its mayor said.

Under California law, a local government must either declare a “fiscal emergency” or go through a 60-to-90 day confidential negotiation process with its creditors before it files for municipal bankruptcy. Since late June, three Golden State cities-Stockton, San Bernardino and Mammoth Lakes-have filed for bankruptcy protection.

“We are planning to stay current on our … bonds,” said Mayor Carol Joan Faul in a telephone interview with Dow Jones Newswires. “We are hoping to avoid” bankruptcy, she said, “but as far as I’m concerned, we may have to declare a fiscal emergency” on Oct. 3.

According to its fiscal 2011 financial statement, Atwater had roughly $95 million in outstanding debt, a mixture of bonds related to its sewer as well its now-defunct redevelopment agency. Ms. Faul said Atwater intends to make an upcoming bond payment of $2 million on its sewer bonds.

Atwater is Burnt Toast

Once things reach this stage, one does not even need to look at the details because it’s a done deal.

Yet, I did look further and as expected, public unions appear to be smack in the middle of things as noted in a Reuters article on Potential Atwater Bankruptcy.

Atwater’s economy is “pretty bleak” and starving the city of so much revenue its leaders must consider a drastic overhaul of the services, said Jim Price, vice president of operations at Gemini Flight Support at Atwater’s Castle Airport.

“Police and fire, you keep them – and everything else is going to have to be privatized,” Price said. “I just don’t know how they can do it any other way.”

RAISING REVENUE, CUTTING COSTS

Atwater’s officials are just beginning to consider their options, Faul said, noting the city must consider raising 20-year-old rates for water services and 10-year-old rates for garbage services while clamping down on costs.

Union representative Nancy Vinson said she expects the city will seek concessions from its roughly 30 non-safety employees, who gave up 10 percent of pay last year through furloughs.

“They could ask for a wage reduction, they could ask for a different contribution to the retirement system, they could ask for a higher health benefit contribution,” Vinson said. “We have not been unwilling to talk to them.”

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How Crony Capitalism (Or The ‘Undiluted Lunacy’ Of The Fed) Corrupts The Free Markets

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

"This is the final abomination" is how David Stockman begins his epic rant on the Federal Reserve and crony capitalism in this clip. The "undiluted lunacy" of their actions prompted him to address the Fed's decision to "print ourselves to death" by saying "this has gone too far, it's street-fighting time" as he decides, instead of the erudite philosophical view of how capitalism is being destroyed by statist philosophies of one type or another, to launch into a full-strength tirade about The Fed. For starters, "The Fed is being run by the single most-dangerous man ever to hold high office in the history of the United States, "as he opines that Bernanke is more dangerous than Geithner, Greenspan, Summers, Hank Paulson all put together. Must watch…

"Bernanke is so bad that we should wish to return to the age of Marriner Eccles in 1935 – a fiscal Keynesian who believed that money-printing would fuel speculation and inflation; if the government were going to rob the people, it should do it the honest way – through taxes"

 

How Crony Capitalism (Or The 'Undiluted Lunacy' Of The Fed) Corrupts The Free Markets

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

"This is the final abomination" is how David Stockman begins his epic rant on the Federal Reserve and crony capitalism in this clip. The "undiluted lunacy" of their actions prompted him to address the Fed's decision to "print ourselves to death" by saying "this has gone too far, it's street-fighting time" as he decides, instead of the erudite philosophical view of how capitalism is being destroyed by statist philosophies of one type or another, to launch into a full-strength tirade about The Fed. For starters, "The Fed is being run by the single most-dangerous man ever to hold high office in the history of the United States, "as he opines that Bernanke is more dangerous than Geithner, Greenspan, Summers, Hank Paulson all put together. Must watch…

"Bernanke is so bad that we should wish to return to the age of Marriner Eccles in 1935 – a fiscal Keynesian who believed that money-printing would fuel speculation and inflation; if the government were going to rob the people, it should do it the honest way – through taxes"

 

Greece, Tell Brussels “To Take A Hike” And Let The Troika Bail Out The ECB Instead

Courtesy of ZeroHedge. View original post here.

Submitted by testosteronepit.

Wolf Richter   www.testosteronepit.com

Awful as Greece’s GDP has been, it doesn’t do justice to the economic fiasco. Take new vehicle registrations: in August, they plunged 46.7% from prior year. Only 3,886 new vehicles were sold. A collapse of 80% from August 2008 at the cusp of the crisis. For the first eight months of 2012, sales were down 42% from prior year, and 65% from 2008. People have stopped buying new cars. And not just cars.

“The situation continues to deteriorate,” wrote an acquaintance. “My normally honest friends and relatives have all begun to find ways to avoid the ever increasing taxes. The horrible bureaucracy worsens even in this small town of 5,000. It took a friend a month of running from office to office just to get a permit to repair, not construct, but repair an existing balcony. Hopeless.”

Ten years ago, he built a house in Southern Greece not far from Sparta—”with many fine workers, most of them Albanians and some excellent Greeks as well, but it took a long, long time.” The house is surrounded by citrus and olive groves. In the distance, mountains and the sea. He writes:

“I detest going to Athens because of the gridlock. Buildings built over the last twenty years have little or no dedicated parking. Why? Parking is low or no-revenue space that city planners have reserved for cronies with fakelos (envelopes with cash). Thus cars and scooters clog not only streets but sidewalks.”

Though the gridlock might be thinning out. Over the last two years, 68,000 businesses have shut down; another 63,000 might succumb next year, predicted Vassilis Korkidis, president of the National Confederation of Hellenic Commerce (ESEE). It infected the busiest shopping streets in Athens: on Panepistimiou, 34.7% of the shops were shuttered; on Akadimias, 42%!

So a new austerity package must be devised for the Troika—the bailout and austerity gang from the EU, the IMF, and the ECB—in return for more money so that Greece could service its debt that is rotting in some drawer at the ECB. As the coalition government was fighting over the provisions, a 24-hour general strike paralyzed parts of Greece on Wednesday. In Athens, 50,000 – 100,000 demonstrators streamed through the streets, shouting “enough is enough.”

Yet on Thursday, the leaders of the three coalition parties apparently agreed on the outlines of the austerity package, to be implemented in 2013 and 2014. It would include tax measures that might be applied to 2012 incomes. They’re even trying to go after the well-represented freelance professionals such as engineers, doctors, and architects. But my acquaintance remained cynical:

“There’s a popular saying here: ‘I threw him.’ Loosely it means, ‘I cheated him’ or ‘I was smarter than him.’ It’s considered a national sport to apply it to the taxman. Well, the taxman cometh—and he is fighting either 30 years or 2000 years of tradition. And he won’t win.”

As people refuse to pay taxes, the government is slowing disbursements. State-owned institutions have run out of money, and so have companies and individuals. And they stopped paying their bills. The ensuing circular absurdities push the country deeper into fiasco.

For example, the state-owned Social Insurance Foundation (IKA), itself out of money, hasn’t paid Saronikos Gulf Kidney Dialysis Center on Aegina Island in months for the treatment of its patients. So the center hasn’t paid its staff in six month, and couldn’t even pay its electricity bill. On Wednesday, Public Power Corporation (DEI), fighting its own liquidity crisis, cut power to the center. Instant media uproar. And power was restored. But still, the money hasn’t started flowing.

“Greece is a victim of the monetary union,” explained Czech President Vaclav Klaus. “It would be much better for them not to be in the straightjacket. It would be a victory for them.”

If the Greeks told the Troika “to take a hike,” as David Stockman said in his incomparable interview [The Emperor Is Naked], it would solve a host of problems. Greece would return to the drachma and regain control over its printing press. Troika members, and particularly taxpayers in Germany, who’re reluctant, very understandably, to throw good money after bad in Greece, would then have to look at the ECB. It owns most of the now worthless Greek debt. The Troika could then bail out the ECB directly rather than via Greece. It would be closer to home, and more honest—though it still wouldn’t solve the problem of taxpayers bailing out investors.

And then new money would start flowing because Greece would still be a member of the 27-nation EU and of NATO. That’s the difference between Greece and Argentina. Greece could restructure its government and society, or it could slide back into its old ways of doing things. It would be up to the Greeks, not the Troika.

It should look at Argentina, however. A perfect example of how not to run a post-default economy. And its policies are now taking on desperate and ugly forms. Read…. Not An Effective Capital Control, Import Control, Or Tax Measure – But An Effective People Control, by stilettos-on-the-ground economist Bianca Fernet.

And here is Jan Bennink, a Dutch columnist and self-described anti-EU populist, who wonders, “Is there anything more frightening than bureaucrats with a dream?” Read…. The New Great Dictators Are Gaining Momentum In Europe.

How The Fed Crushed China’s Ability To Join The Ease-Fest

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

It will not come as a surprise to anyone who has spent any time reading Zero Hedge (here, here, and here very recently) but now yet another one of our 'crazy fringe blog' non-consensus ideas – the fact that China is cornered by inflation concerns and unable to ease aggressively – has now been confirmed by none other than the Bank of China and Bank of Korea themselves. As the WSJ reports, "The rise in global liquidity could lead to rapid capital inflows into emerging markets including South Korea and China and push up global raw-material prices."

The latest round of easing by the U.S. will increase inflationary pressures for emerging-market economies, Mr. Chen said. "This contributes to a monetary-policy dilemma for Chinese authorities", he added. While markets have looked for signs of more forceful action by China's leaders to rekindle growth, some officials attribute the government's caution to fears of reigniting inflation.

This confirms previous comments by the PBoC that "A domestic policy may be optimal for the U.S. alone. However at the same time it is not necessarily optimal for the world," he said at the time. "There is a conflict between the U.S. dollar's domestic role and its international settlement role."

Via WSJ: Harsh Words From Beijing, Soeul

BEIJING–Chinese and South Korean central-bank officials criticized the U.S. Federal Reserve's latest easing efforts and advocated reducing Asia's dependence on the U.S. dollar.

The comments Thursday, at a joint seminar in Beijing by the two central banks, are the clearest indication yet of a rising backlash in Asia against U.S. monetary policy, suggesting it could speed up the search for alternatives to the dollar as the main global currency.

"The rise in global liquidity could lead to rapid capital inflows into emerging markets including South Korea and China and push up global raw-material prices," said Bank of Korea Gov. Kim Choong-soo. "Therefore, Korea and China need to make concerted efforts to minimize the negative spillover effect arising from the monetary policies of advanced nations."

Asia needs a "regional core currency" to reduce its dependence on the dollar. China's ultimate goal is for the yuan to be as important as the euro or the dollar, he said.

The latest round of easing by the U.S. will increase inflationary pressures for emerging-market economies, Mr. Chen said. This contributes to a monetary-policy dilemma for Chinese authorities, he added. While markets have looked for signs of more forceful action by China's leaders to rekindle growth, some officials attribute the government's caution to fears of reigniting inflation.

"On the one hand, China needs to stabilize growth, but on the other hand China is very worried about a property-price rebound," Mr. Chen said.

The Korean and Chinese economies are also likely to be affected differently by the Fed's easing. The freer flow of South Korea's currency, the won, means sudden rushes of capital can destabilize the financial system quickly, while China's tighter controls means pressures build more slowly.

Mr. Kim of the Bank of Korea is already on the record fretting about the effects of QE3 on Korea. Earlier this month he said that the Bank of Korea may need to take steps to curb the potential influx of liquidity into South Korea.

"A domestic policy may be optimal for the U.S. alone. However at the same time it is not necessarily optimal for the world," he said at the time. "There is a conflict between the U.S. dollar's domestic role and its international settlement role."

A year earlier, Mr. Zhou argued in an influential essay that the world should move to a multicurrency system, including an increased role for Special Drawing Rights, a synthetic international currency created by the International Monetary Fund.

Mr. Kim said Thursday that China and Korea should consider making the two countries' bilateral currency-swap agreement permanent.

Both countries should also try to use the yuan and the won in bilateral trade, to cut costs and reduce their reliance on the dollar in transactions, Mr. Kim said. In the long-term, the two countries may consider setting up a won-yuan foreign-exchange market, he added.

How The Fed Crushed China's Ability To Join The Ease-Fest

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

It will not come as a surprise to anyone who has spent any time reading Zero Hedge (here, here, and here very recently) but now yet another one of our 'crazy fringe blog' non-consensus ideas – the fact that China is cornered by inflation concerns and unable to ease aggressively – has now been confirmed by none other than the Bank of China and Bank of Korea themselves. As the WSJ reports, "The rise in global liquidity could lead to rapid capital inflows into emerging markets including South Korea and China and push up global raw-material prices."

The latest round of easing by the U.S. will increase inflationary pressures for emerging-market economies, Mr. Chen said. "This contributes to a monetary-policy dilemma for Chinese authorities", he added. While markets have looked for signs of more forceful action by China's leaders to rekindle growth, some officials attribute the government's caution to fears of reigniting inflation.

This confirms previous comments by the PBoC that "A domestic policy may be optimal for the U.S. alone. However at the same time it is not necessarily optimal for the world," he said at the time. "There is a conflict between the U.S. dollar's domestic role and its international settlement role."

Via WSJ: Harsh Words From Beijing, Soeul

BEIJING–Chinese and South Korean central-bank officials criticized the U.S. Federal Reserve's latest easing efforts and advocated reducing Asia's dependence on the U.S. dollar.

The comments Thursday, at a joint seminar in Beijing by the two central banks, are the clearest indication yet of a rising backlash in Asia against U.S. monetary policy, suggesting it could speed up the search for alternatives to the dollar as the main global currency.

"The rise in global liquidity could lead to rapid capital inflows into emerging markets including South Korea and China and push up global raw-material prices," said Bank of Korea Gov. Kim Choong-soo. "Therefore, Korea and China need to make concerted efforts to minimize the negative spillover effect arising from the monetary policies of advanced nations."

Asia needs a "regional core currency" to reduce its dependence on the dollar. China's ultimate goal is for the yuan to be as important as the euro or the dollar, he said.

The latest round of easing by the U.S. will increase inflationary pressures for emerging-market economies, Mr. Chen said. This contributes to a monetary-policy dilemma for Chinese authorities, he added. While markets have looked for signs of more forceful action by China's leaders to rekindle growth, some officials attribute the government's caution to fears of reigniting inflation.

"On the one hand, China needs to stabilize growth, but on the other hand China is very worried about a property-price rebound," Mr. Chen said.

The Korean and Chinese economies are also likely to be affected differently by the Fed's easing. The freer flow of South Korea's currency, the won, means sudden rushes of capital can destabilize the financial system quickly, while China's tighter controls means pressures build more slowly.

Mr. Kim of the Bank of Korea is already on the record fretting about the effects of QE3 on Korea. Earlier this month he said that the Bank of Korea may need to take steps to curb the potential influx of liquidity into South Korea.

"A domestic policy may be optimal for the U.S. alone. However at the same time it is not necessarily optimal for the world," he said at the time. "There is a conflict between the U.S. dollar's domestic role and its international settlement role."

A year earlier, Mr. Zhou argued in an influential essay that the world should move to a multicurrency system, including an increased role for Special Drawing Rights, a synthetic international currency created by the International Monetary Fund.

Mr. Kim said Thursday that China and Korea should consider making the two countries' bilateral currency-swap agreement permanent.

Both countries should also try to use the yuan and the won in bilateral trade, to cut costs and reduce their reliance on the dollar in transactions, Mr. Kim said. In the long-term, the two countries may consider setting up a won-yuan foreign-exchange market, he added.

There's Only One Way Forward For Europe, And This Isn’t It

Courtesy of The Automatic Earth.

Dorothea Lange "Mississippi Delta. Negro woman carrying her shoes home from church." July 1936

As Groucho once put it: "I've had a perfectly wonderful evening, but this wasn't it."

Vaclav Klaus is perhaps the only man out there I've seen so far who says the right things. Well, other than myself, that is. Chest thumping? I'm just worried, and increasingly so, by the level of complacency I witness every single day in whatever it is I see and read about Europe (I read a lot).

People follow stock markets. In the sense that if the markets are doing fairly well, they think everything else must be doing fairly well too (like their own lives). And that's all they do. But you can't gauge European reality through looking at stock markets. That seems to me to be so obvious, and I've written about it numerous times, that the ongoing head in sand blinders become harder to bear every single day. We're not talking about the number of flatscreen TVs the Greeks and Spanish can buy, we're talking about their bare survival.

That head in sand following of stock exchange digits is not smart, not for anyone. It allows for Ben Bernanke to claim he wants to attack unemployment – something that sounds good, beneficial – (but hardly his mandate to begin with), while all he actually does with QE 1,2,3,4,5, n…, is transfer bank losses to the public account. Ditto for Draghi. Central bankers don't help the nations they purport to represent, they represent the banks in those nations. And since the largest banks are multinationals, the central bankers largely represent international banking interests. Not you or me.

Central banks are the ideal conduit for Grand Theft Auto. And they will remain so for as long as the people in the street can be fooled into thinking that it's their interests that are the focus of the bailouts. More jobs, cheaper mortgage loans, that sort of thing. It doesn’t stop, does it? I see a big coordinated push from builders, unions, banks, developers etc. for the yet to be formed new Dutch government to make it easier for more people to borrow more money, in the face of the 5% drop in sales and 8% drop in prices the country saw in 2011.

And tons of people undoubtedly WANT to borrow more. Because they see no connection with the lower prices. On the contrary, they've been fed the idea that lower prices, like the entire recession, is something temporary, so they even see it as an opportunity. To buy more. To buy larger. 10 years ago Dutch home prices rose 20% per year, for years on end. And they all think that is some sort of new normal. Why the builders and banks think so is obvious. Why the buyers do, not so much. They are simply never told what is real. Not by builders, not by banks, and not by the people they voted into government.

Well, here's your reality, homebuyers in Holland and everywhere else in the western world: you're signing up to be shoved into the lower ranks of a pyramid scheme. You will start losing your jobs, your benefits, your pensions, but your debts will remain as high as they are now. And if you can't pay them off, your debts will grow.

Who should take preference when it comes to government protection and information, banks and industries, or the people? The official line of course is that if and when the government makes sure the banks and large industries do well, the people's interests will trickle down and follow. But we have seen five years, at the very least, of proof that this is bogus. You can pour behemoth amounts of money into your banking system, but if its debts are behemoth squared, nothing will trickle down. Oh wait, that's not true. Something will start trickling down. Debt.< /p>

The people who are already knee and neck deep in obligations they will never be able to meet, have new debt laden on their shoulders every single day, and more so with every iteration of QE, and they will never be the wiser for it; the poorer all the more, however.

Along the same lines, the EU is trying frantically to keep itself together, and most of all obviously the eurozone. Why? Because it puts the interests of the banks and industries before those of the people, just like the national governments do. It's even working hard to get more power over more aspects of life in member countries, especially financial aspects. Nothing could be worse for member states. Once you give away the freedom your ancestors fought so hard for, you'll have to fight the same battles all over again to get it back.

Look, in the end it's real simple: the Germans and the Dutch don't really want to buy Greek products, they want the Greeks to buy theirs. But there’s no way, never was, that the Greeks can produce all the extra wealth they would need to buy those products. Selling off the Acropolis for cheap was always in the works. Not because the richer countries are so much smarter than the poorer, but because neither understand basic math. After all, how much olive oil can the average German household consume?

Which leads us to the point that Greece doesn't have now, and never had, any long term reason to be in the eurozone. Nor do Portugal, Spain, Ireland and a bunch of other nations, for that matter. Italy is a different case: it simply screwed up big time. Thanks to the Vatican, the Cosa Nostra and all the links in between.

Let's move on to Vaclav Klaus. Again. And again, let me say he's not my favorite man. Not even my fave Czech. He just happens to have the proper words. Here goes, as per Laura Zelenko for Bloomberg:

Euro Can Bear Fewer Members as Czech Leader Calls Greeks Victims

The exit of one or more member states from the euro won’t destroy the monetary union or the project of European integration, Czech President Vaclav Klaus said.

And a Greek departure from the currency would be a “victory” for that country, which has been a victim of the monetary system,

The Czech Republic, which pledged to adopt the euro as part of its agreement to join the European Union in 2004, is under no official deadline to do so and the question of joining the common currency is a “non-issue” in the country [..]

“I don’t think the euro as a currency disappears,” [..] “The issue is whether all of the 17 countries and potentially a few others should be or will be in this system or not.”

[..] the euro- zone system is punishing some countries that would be better off pulling out.

“Greece is a victim of the monetary union,” he said. “It would be much better for them not to be in the straightjacket. It would be a victory for them.”

[..] .. he supports European integration while not embracing the shift towards “unification, centralization, harmonization, standardization” of the whole continent, including the single currency.

“We were aware of the fact that joining the euro system was one of the conditions. But we are quite happy with the fact that there was no timing.&qu
ot;

“So perhaps in the year 2074 we can join the European Monetary Union as well,” he said. “No one is pushing us.” [..]

Poland, which three years ago shelved plans to join in 2013, deems the euro “completely unattractive,” Prime Minister Donald Tusk said in July. Hungary won’t adopt the currency before 2018, Premier Viktor Orban said in March. Bulgaria has indefinitely delayed plans to scrap the lev, Prime Minister Boyko Borisov told the Wall Street Journal [..]

“It’s technically possible,” to manage the departure from a common currency, Klaus said. “It’s not true what all the politicians are saying about disastrous consequences. You have to do it in an organized way. You can’t allow an anarchy situation.”

Before we get back to Klaus, here's a relevant quote from the Guardian:

The Spanish public won't accept a financial coup d'etat

Spanish citizen movements, like those in Greece, Ireland, Portugal, Italy and France have demanded a debt audit, to see who really owes what to whom. Opposition politician Cayo Lara is asking for any bailout conditions to be debated in parliament, while a group called Judges for Democracy are looking at whether the virtual deconstruction of the social state could be unconstitutional.

Every single EU country should have a debt audit, it's just common sense. None are scheduled to have one, Why do you think that is?

What Vaclav Klaus says, and what I've been saying for a while, is that letting, allowing, Greece and other PIIGS to leave the eurozone is not as big of a negative deal as the politicians and bankers make it out to be. Not from the point of view of those countries.

The reason Merkel and Monti et al. keep on holding on to the Armageddon idea is that Greece, Spain, etc. leaving the EMU, will trigger actions in the financial world. There will be credit events, i.e. credit default swaps will have to be settled. Banks, governments, pension funds will have to write down losses. But those losses have already been incurred, they just haven't been put to paper. Creative accounting goes a long way, but not all the way. Of course, the EU and ECB will have to incur and declare losses on their PIIGS bond holdings too.

The only way forward for the EU and the Eurozone is to let the weaker members leave, and to let them do that with grace, respect and dignity. Anything else is not just doomed to fail, it's doomed to incite violence. Europe has a long history, and it doesn't take much to evoke lots of that, any and all of that. Not something to leave in the hands of Mario Draghi, that's for sure.

Look, I'll say it here and now and you can hold it against me on future developments: The EU must, make that capital MUST, not just allow, but facilitate for its weaker members to leave the eurozone. If it doesn't do that, it calls upon itself the wrath of the gods (Europe has lots of those).

As per Draghi and Merkel and Monti et al., they have no plans for that kind of facilitating. Not because they like the Greeks so much, but because their banks would need to – at least partially – come clean; derivatives, don't you know. And those banks are far worse off and much more broke than anyone has been allowed to know.

Unless a sufficiently large number of us wake up in time, as in right now, people will be shot to death in the streets of Athens and Barcelona just so the banks can continue to hide their losses. Is that the kind of world you want to live in? If not, why are you sitting in that chair?

So yeah, you're right, there's more than one way forward for Europe. Most of them lead to futures ugly enough for all of us to reject right out of the bat. The one that doesn't is the only real way, and it requires for all of us, Europeans, Americans, everyone, to stand up and act. Too bad we're too busy counting our pieces of silver and gold.

 

The Greatest Growth Sector in the World

The Greatest Growth Sector in the World

Courtesy of Casey Research, with Alex Daley

Genome sequencing has gone from a cost of $3 billion to $10,000 – within just nine years, says Alex Daley, Chief Technology Investment Strategist at Casey Research. And that's only one example of how fast new technologies are now being implemented and made affordable to the public. Watch this eye-opening speech from the just-concluded Casey/Sprott Summit to find out where today's and tomorrow's big investment profits lie, and how you can get your own slice of them.

 

 

Technology is becoming an increasingly important sector for investors looking to make money in a weakened economy burdened by ceaseless government meddling. And there are many other investments that can help you protect and grow your wealth – even while inflation and real negative interest rates whittle away the profits of income investors. Listen to 28 renowned financial experts today, and learn how to Navigate the Politicized Economy.

Real Per Capita “Core” Durable Goods Orders

Courtesy of Mish.

Courtesy of Doug Short, here is an excellent pair of charts on Real Per Capita “Core” Durable Goods Orders

Core Durable Goods

click on either chart for sharper image

Core Durable Goods Percent Decline From Peak

Doug Short does excellent work. Click on the top link to see additional charts.

I have little to add other than this is how recessions start, an opinion expressed earlier in Durable Goods Orders Ex-Transportation “Unexpectedly” Drop, Down Third Month, July Revised Lower; GDP +1.3% Second Quarter; June Recession Call Looking More Likely.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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