Archives for September 2013

Time to Buy Volatility Again?

Courtesy of John Rubino.

The following chart tells two stories. The first is that the deficit spending and debt monetization of the past few years has calmed the markets. Volatility (more accurately fear), as measured by the VIX index of S&P 500 options, has meandered back below 20, implying that most financial market players are pretty relaxed about the world’s near-term prospects.

VIX 2013

The second thing this chart says is that whenever the VIX drops into the 10-15 range for an extended time, craziness ensues. A lack of fear leads to overoptimistic investment decisions, which in turn produce big corrections. The resulting turmoil in the options markets is what the VIX measures.

In most cases, a VIX move back above 20 is followed by a quick spike above 30 and sometimes 40. With debt ceiling negotiations deadlocked and the deadline approaching, US stock futures are down nearly 1% as this is written on Sunday evening, implying that traders are spooked and pointing to a possible VIX move above 20 next week. Then, if history is any guide, the fun begins.

The simplest way to play a spike in volatility is with a “long volatility” exchange traded note (ETN) like VXX.  If VIX spikes, VXX will keep it company. But be aware that VXX is strictly a trading vehicle. It uses derivatives to replicate the VIX and (without going too deeply into how it happens) over time these instruments depreciate, causing VXX and other similar ETNs and ETFs to gradually lose value. So place the bet and then, win or lose, close it down within a month. But it might be an interesting month.

Visit John's Dollar Collapse blog here >

No, the Fall of Lehman Didn’t Cause the Financial Crisis

Barry Ritholtz of The Big Picture discusses the 2008 financial meltdown and the elements contributing to it.


The decades leading to the crisis were a unique period in American history. Under Alan Greenspan, the Federal Reserve lowered interest rates to below 2 percent for three years and to 1 percent for more than a year. This monetary policy was unprecedented, and it had huge ramifications worldwide. The U.S. dollar took a hit; from the start of those low rates in 2001 until 2007, the world’s reserve currency lost 41 percent of its value.

This affected anything priced in dollars or credit. Prices of oil, gold and foodstuff skyrocketed. Home construction and housing sales and prices boomed. There was a land rush, as many banks abandoned traditional lending standards to stake their claim.

The low rates had sent bond managers scrambling for higher-yielding fixed-

income paper. They found that yield in securitized subprime mortgages, a novel financial product. Three elements made this possible: The first was ultra-low yields.

The second was a new class of lenders — Greenspan called them “financial innovators” — that were not traditional depository banks but were mortgage originators only. Their business was strictly making loans for the sole purpose of selling them to Wall Street securitizers. They did not hold the mortgages longer than a few weeks, and they sold these 30-year loans with warranties of only 90 or 180 days.

The third element was the corruption of the ratings agencies. They blessed this junk subprime paper with a pristine AAA rating. “Just as safe as a U.S. Treasury,” they claimed, while failing to disclose that they were paid large fees by the underwriting banks for those ratings.

Full article: No, the Fall of Lehman Didn’t Cause the Financial Crisis | The Big Picture.

The Boxed-In Fed

Courtesy of Pater Tenebrarum of Acting-Man

Exit, shmexit…as our readers know, we have always been among those who have argued that the Federal Reserve will never truly 'exit' from its 'unconventional policies'. At least not for any appreciable period of time – which is to say, we have occasionally held that it might try to reduce or stop 'QE' or similar programs due to a misguided impression that the recovery has become 'self-sustaining' (we are using all these quote marks because we think the entire mainstream phraseology in this context either makes no sense or is slightly Orwellian). However, it would then immediately be forced to reinstate the policy again, as the long-delayed liquidation of malinvested capital would undoubtedly commence with little delay. This continues to be the situation, so we were only moderately surprised that 'QE to Infinity' was not even 'tapered'.

We sometimes discuss individual Fed board members in these pages, as there is a variety of views represented, especially among the district presidents. Of course the money printers have a huge majority, so that the handful of doubters regularly gets outvoted when it is their turn to have a vote. In addition it should be noted that their protests are usually of a token nature: they may dissent once or twice, and then they become quiet again. The sole exceptions to this rule are currently Jeffrey Lacker and Esther George, whereby Lacker is holding views that make one wonder why he even wants to be part of this abominable central planning organization. Over the past decade or so he seems to have gradually realized what enormous economic damage it is doing.

One of the regional presidents we once held in comparatively higher regard is Narayana Kocherlakota. It may be recalled that Kocherlakota once was among those dissenting with the Fed's incessant money printing due to his analysis of the labor market. We commented favorably on his views at the time – contrary to most of his colleagues he seemed to have realized that there is no such thing as 'the labor market', i.e., he acknowledged that labor isn't a homogeneous blob.

He was quite correct of course: when a major bubble unwinds, very particular problems will emerge while the economy restructures to better reflect the actual state of consumer demand and the available pool of real savings. Many workers will lose their jobs and it will be found that there are numerous mismatches between the types of labor actually demanded in the market and the skill sets on offer. Obviously, following the collapse housing bubble, all sorts of labor connected to the building industry, the mortgage credit industry, real estate agent services and so forth were surplus to requirements. In the meantime however, demand for specific labor in other sectors of the economy could not be met (for instance, railway equipment makers could not find enough skilled welders for a time). Kocherlakota concluded that money printing could do nothing about this skills mismatch. It simply takes time for these imbalances to be absorbed.

However, it did not take long for him to make a complete U-turn. We have never understood what made him change his mind, but he moved from being a 'token hawk' to becoming the most vocal supporter of more money printing.

The Lunatics Take Over the Asylum

Yesterday, Kocherlakota once again made his new views known and this time he went completely overboard. It is quite ironic that the political left – the people who allegedly speak for the working class, the poor and the downtrodden – immediately came out judging Kocherlakota's call for massive additional monetary inflation 'brilliant'.

Of course the people that continue to be hurt the most by the Fed's crazy inflationism are precisely those the political left purportedly speaks for. It is testament to the fact that decades of propaganda have put erroneous economic theories almost beyond the pale of debate – it is simply taken for granted that central planning and inflationism will 'work'.

What is so amazing about this is that even if one has little idea of the theoretical debate, the people making these assumptions are completely unswayed by the evidence to the contrary that has amassed after decades of ever greater boom-bust cycles. After all, they have have finally landed us in the 'worst economic environment since the Great Depression'. Do they believe this situation just fell from the sky, unbidden? Why are they unable to  recognize the glaringly obvious: namely that it is the end result of the very interventionism they are pining for?

It should also be noted here that such evidence has not only accumulated in recent decades: it has been accumulating ever since the first major experiments in modern paper money inflationism were conducted by John Law in France in the early 18th century.

Here are a few key points from Kocherlakota's allegedly 'brilliant' speech:

One of my main points today is that this conclusion of monetary policy impotence is at odds with the behavior of inflation. To understand this point, it’s useful to look at the behavior of personal consumption expenditure (PCE) inflation over the past few years. Just to be clear, this is a measure of inflation that incorporates the prices of all goods and services, including food and energy. Since the beginning of the Great Recession in December 2007, the PCE inflation rate has averaged around 1.5 percent. This is noticeably below the FOMC’s target inflation rate of 2 percent per year. And the outlook for future inflation is similarly subdued. Thus, earlier this year, the Congressional Budget Office projected that PCE inflation will remain below the FOMC’s target of 2 percent until the year 2018.

These low levels of inflation tell us that monetary policy can be useful in increasing the rate of improvement in the labor market. Here’s what I mean. At a basic level, monetary stimulus increases the demand for goods among households and firms. This higher demand for goods tends to push upward on both prices and employment. Hence, the downside with using monetary policy to stimulate employment is that, when employment is near its maximum level, further stimulus can lead to unduly high inflation. But the data show that over the past few years inflation has been below the FOMC’s target of 2 percent. It’s expected to remain below desirable levels for years to come. These low levels of inflation show that the FOMC has a lot of room to provide much needed stimulus to the labor market.” (emphasis added)

And here we thought this kind of nonsense had been thoroughly excised in the 1970s. No less than eight papers debunking such 'Phillips curve' type thinking have won Nobel prizes in economics. Of course one can push up employment artificially as long as prices rise faster than wages, i.e., as long as real incomes decline. In fact, what improvement there has been in the labor market to date is probably mainly due to the fact that real incomes have plummeted.

As we have pointed out in our discussion of the 'forced saving' phenomenon, the Weimar Republic's hyperinflation period demonstrated this principle nicely. In 1922, Germany's unemployment rate fell below 1%! The problem was only that this achievement was accompanied by capital consumption on a massive scale and a constant diminution of real wages. Eventually, when the currency finally began its headlong plunge into oblivion, workers woke up and began to insist that their wages be adjusted to reflect the loss of purchasing power. So one year after unemployment had declined to below 1%, it soared to 30%.

As an aside to all of this, if employment for the sake of employment is the main goal to be pursued, no matter the consequences for the economy or society at large, the simplest way of going about it would be to erect a full-scale totalitarian command economy. Those always have zero unemployment. They also produce nothing consumers want and have no liberty, but why should central planners care? They will after all be members of a privileged class.

As an aside, much of the political left's pining for central planning can probably be explained by this: they don't care that if their ideas were fully implemented, the economy would become a stagnant shadow of its former self, since they all hope that they will become members of the ruling class and not suffer any of the deprivations others will have to become accustomed to. The 'real socialism' of the Eastern Bloc in fact demonstrated this nicely. Its ruling elites had command over luxuries common citizens could not even imagine

Kocherlakota then compared the current situation with that the Fed faced in 1979. What he was trying to convey by this is mainly that 'there is a problem, and forceful enough monetary policy can solve it'. Of course the two problems –  a huge decline in money's purchasing power after decades of inflationary policy on the one hand, and high unemployment on the other hand –  are of a completely different nature, so this comparison really makes no sense.

A central bank can jack up interest rates and stop printing money if it is serious about wanting to arrest a decline in money's purchasing power (as long as it is willing to endure the political fall-out). Combating high unemployment by inflating the money supply on the other hand is only certain to create an enormous boom-bust sequence. At the end of it we won't simply be 'back at square one' either – we will be far worse off (this should be crystal clear from what occurred after the Fed fought the post Nasdaq bubble recession with massive monetary pumping).

Kocherlakota then took a leaf from Mario Draghi's cook book and asserted that the Fed “must do whatever it takes” to bring unemployment down. And then he specified what 'doing whatever it takes' actually entails:

“Doing whatever it takes in the next few years will mean something different. It will mean that the FOMC is willing to continue to use the unconventional monetary policy tools that it has employed in the past few years. Indeed, it will mean that the FOMC is willing to use any of its congressionally authorized tools to achieve the goal of higher employment, no matter how unconventional those tools might be. Moreover, doing whatever it takes will mean keeping a historically unusual amount of monetary stimulus in place—and possibly providing more stimulus—even as:

  • Interest rates remain near historic lows.
  • Economic growth rises above historical averages.
  • Per capita employment begins to rise appreciably.
  • Asset prices rise to unusually high levels, leading to concerns about “bubbles.”
  • The medium-term inflation outlook rises temporarily above 2 percent.

It may not be easy to stick to this path. But I anticipate that the benefits of doing so, in terms of employment gains, will be significant.”

There may be temporary 'benefits in terms of employment gains' if the Fed creates an even more gigantic echo bubble than it has already done. We are willing to grant that much. Kocherlakota apparently believes these days that there should be no limits whatsoever to the Fed's monetary pumping. 'Inflation' targets? Forget about it! Asset bubbles? Who cares!

It is as if the past 20 years had not happened – as if Kocherlakota had simply erased the whole period from his memory. Does he really believe that pumping up another giant bubble will have more benefits than drawbacks? Where does it all end?

As noted above, the problem is of course that the policy has already boxed the Fed in: as soon as 'stimulus' is but decreased, the markets are throwing a fit. So onward it is, and damn the torpedoes!

However, this ultimately means that the central bank will have to go down the very path Rudolf Havenstein's Reichsbank and John Law's Banque Generale in France went down: it will never be able to stop, as stopping the stimulus policy will immediately lead to a worsening of unemployment and various data measuring 'aggregate' economic activity.

However,  there is no such thing as a free lunch, and there cannot be an 'eternal boom' by simply continuing to print, as once envisaged by Keynes. All that will happen is that the ultimate disaster will be even greater. In fact, is seems ever more likely that the next disaster will be the last one of the current monetary system.


Broad US money TMS-2 (via Michael Pollaro) – not enough inflation yet? – click to enlarge.

Real Personal Income Less Transfers Per Capita and Real Final Sales Per Capita-

Real per capita personal income less transfers and real final sales (via B.C.) – click to enlarge.



Minneapolis Fed president Narayana Kocherlakota – we need more of the same. Much more.

QE: Because Nobody’s Got Any Better Ideas

In support of quantitative easing. 

QE: Because Nobody’s Got Any Better Ideas

Courtesy of It's Not That Simple (originally published on 5/29/2013)


QE: What you’d call a bit of a controversial policy. Asset prices have shot up recovering pre-crisis highs. Meanwhile the real economy – especially those bits that affect the poor and the young – remain deep in a pit of despair. I don’t agree with Frances Coppola on this, but she’s got some good posts accusing QE of making things worse , especially in the UK. (there’s also this excellent subsite for discussion on the topic). And of course we have the insistence – from thereasonable to the reliably demented that this is all a bubble and that the next hard landing will be worse.

But I come not to bury QE, but to praise it. Or at least point out that it’s probably better than doing nothing, and that “nothing” seems to be a pretty good description of the other politically-acceptable alternatives globally.

First, let’s deal with the “QE distorts prices and changes the behaviour of investors”. This is like complaining that “cars carry people to different places”. It’s not an objection, it’s a description of the WHOLE DAMN POINT of the exercise. A case in point: the recovery of the housing market has been driven byinvestor demand. And it’s the big institutions – the WSJ link points to 20,000 homes snapped up by Blackstone. This is what happens when the search for income, driven out of Treasuries by low yields turns into activity. This is FoBOR at work (Forced Buyers Of Risk to use Dan Davies‘ term)

High maintenance costs traditionally had kept investors out of managing hundreds of scattered-site rentals. But investors set about overcoming those hurdles two years ago because low interest rates engineered by the Federal Reserve generated “a tremendous appetite for yield,” said real-estate consultant John Burns, who advises investor firms. “It really sent capital chasing to figure out this business.”

And Bloomberg on the same story

The firm, along with Thomas Barrack’s Colony Capital LLC and Two Harbors Investment Corp. (SBY), is seeking to transform a market dominated by small investors into a new institutional asset class that JPMorgan Chase & Co. (JPM) estimates could be worth as much as $1.5 trillion.

This is QE working as planned. Reduce the returns on assets like bonds to the point where other activities become interesting to investors. The payoff for the real economy is the considerable money investing in renovating the properties and mobilising the building sector (US homebuilding is the global economy’s Great Hope) by resuscitating demand.

Now, this is definitely a pretty roundabout way of driving money into the real economy. Instead of putting the money directly to work, pay money to people who already have assets even more than their assets are currently trading for, in the hope that they’ll put at least some of the money to work. It’s unkind but not entirely unfair to compare it to trying to persuade a fat man to take some exercise by massively overpaying him for his car. It can work. But it might also put him in the market to pay huge sums for any old piece of crap car in the hope that you’ll overpay for that one too.

Money has to be not just provided by the central bank, it has to be spent. The money can be spent directly by government (Keynesian style); plan B is Chinese-style directed lending. This isn’t the place to rehearse the debates about this, though I personally am very very suspicious of plan B. A “banking system responsive to local needs” quickly becomes “a piggy bank for local politicians” (see Spanish cajas). Everybody has their own view on this – but I’ll confine myself to the deliberately narrow “If Plans A and B are off the table, does QE do more good than harm?”

(Side note: QE is not Plan C “helicopter money” – which in practice might consist of crediting all bank accounts in the country. QE involves paying over a $ (or £, or Yen) amount in return for an existing asset. This is a crucial feature, and accounts for many of the drawbacks – in particular that the policy benefits above all existing holders of assets. In theory, just handing money to everybody in the country is a more effective and equal way of acheiving its aims. But you don’t have to be a hard-money Bundesbanker to be at least a little uncomfortable with where this might end up).

Politics suddenly looks pretty primary here: fiscal stimulation and liquidating the banks are apparently off the table, to the symmetrical disgust of Keynesians and Austrians. It’s easy for those close to the financial system to lose sight of this, and fail to ask the big question of why. So mysteriously we’re left with the only stimulus route which as a design feature favours those who already own assets, and even more those who own those assets via leverage. But can we at least recognise that fiscal expansions, directed lending and money printing are revolutionary and experimental and have massive drawbacks of their own. The same goes for “letting the banks take the pain”, as Cypriots can testify.

There’s plenty to object to about QE. Can it cause bubbles? Yes (though I for one am pretty adamant it hasn’t so far). Does it disproportionately benefit the wealthy over those on fixed incomes? Yes. As long as the banks are dysfunctional and reluctant to lend without collateral, this effect will be reinforced. This may well be why the UK variant of QE has been so unsuccessful compared with the US variety.  But, absent a revolutionary political change, QE (and its lesser cousins, OMT and LTRO) are the only game in town. I’ll lament the political gridlock that has left a dysfunctional and (outside the US at least) partially zombified financial system in place. But given a choice between zombies with and without QE, I beleive evidence strongly supports the former.

Giant Deadly Hornets Kill Dozens In China; Venom Dissolves Flesh and they Can Spray It

Courtesy of Mish.

I have received hundreds of emails regarding my post Attack of the “Digger Bees”.

Many suggested getting an EpiPen® (epinephrine) Auto-Injector‎ for Liz and we will do that.

Many pointed out that “digger bees” are not bees but rather wasps. That is something I knew but did not mention in my post.

I responded to some individuals that I like bees, and even have a “humble bumble” home for bumblebees, and I put out nests for mason bees.

With that backdrop, some of you may be interested in Giant Deadly Hornets Kill Dozens And Injure Hundreds In China.

Deadly hornets have killed at least 28 people in China following a string of recent attacks that have injured hundreds.

A number of tragic cases have been reported, including a mother and son who died after being surrounded by a killer swarm.

A man who tried to help them suffered kidney failure after the giant hornets chased him for 200 metres and stung him repeatedly on the head and legs, The Mirror reported.

In the city of Ankang alone, 18 people have died from the stings, while a further 212 people have been injured health official Zhou Yuanhong told Associated Press.

Experts are blaming the vicious attacks on Asian giant hornets, which terrifyingly grow up to 5cm in length. The mammoth insects also wield a stinger in excess of 6mm long.

The natural predators have jaws powerful enough to chew through regular protective bee suits and their venom, which they can spray, dissolves human flesh.

If their venom lands in the eyes, the eye tissue will melt, according to a National Geographic documentary.

Japanese Hornet Documentary

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Is the U.S. Headed in the Right Direction?

Courtesy of Mish.

Polling Report has an interesting data series on Direction of the Country.

Here is the question: “In general, do you think things in the nation are headed in the right direction, or have they gotten off on the wrong track?

The polls were conducted by Bloomberg, CBS News/New York Times, NBC News/Wall Street Journal, ABC News/Washington Post, Gallup, Pew, and other polling agencies.

The Bloomberg National Poll (show below) was conducted by Selzer & Company. Sept. 20-23, 2013. Sample size was 1,000 adults nationwide. The margin of error is ± 3.1.

To produce the table and graph below, I reordered the rows in date chronological order so that the most recent recent dates are last. These results are from Bloomberg polls, with dates as shown.

Click on the link above to see results from other polling agencies (in table, not chart form).

Date Right Direction % Wrong Track % Unsure %
9/10-14/09 40 52 8
12/3-7/09 32 59 9
3/19-22/10 34 58 8
7/9-12/10 31 63 6
10/7-10/10 31 64 5
12/4-7/10 27 66 7
3/4-7/11 28 63 9
6/17-20/11 26 66 8
6/15-18/12 31 62 7
9/21-24/12 33 60 7
12/7-10/12 38 55 7
2/15-18/13 37 54 9
5/31-6/3/13 32 60 8
9/20-23/13 25 68 7

The Wrong Track

click on chart for sharper image

Mike “Mish” Shedlock

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In trading stocks, one of the biggest mistakes you can make is mistaking luck for skill.  


This article was written on March 3, 2013 by David at Crosshairs Trader Blog, Dept. of Wisdom

We often confuse luck with skill, especially in the stock market. In fact, Michael J. Mauboussin has written a worthy read on separating the two in his newest book The Success Equation:  Untangling Skill and Luck in Business, Sports, and Investing.  But long before the contemporary discussions of luck versus skill, ancient speculators were enthralled by luck’s deceptive ways of making mere mortals feel godlike. 

However, that sense of omniscience, just like a string of luck, is fleeting and continues to lure modern speculators into a trap today just like it did Saxon-les-Bains, a man of culture, almost 150 years ago.  In a 1873 letter to The Spectator entitled “A Study in the Psychology of Gambling” Saxon-les-Bains describes his gambling experience in Monte Carlo.

And what was my experience?  This chiefly, that I was distinctly conscious of partially attributing to some defect of stupidity in my own mind, every venture on an issue that proved a failure; that I groped about within me something in me like an anticipation or warning (which of course was not to be found) of what the next event was to be, and generally hit upon some vague impulse in my own mind which determined me: that when I succeeded I raked up my gains, with a half impression that I had been a clever fellow, and had made a judicious stake, just as if I had really moved skillfully as in chess; and that when I failed, I thought to myself, ‘Ah, I knew all the time I was going wrong in selecting that number, and yet I was fool enough to stick to it,’ which was, of course, a pure illusion, for all that I did know the chance was even, or much more than even, against me.  But this illusion followed me throughout.  I had a sense of deserving success when I succeeded, or of having failed through my own willfulness, or wrong-headed caprice, when I failed.  When, as not infrequently happened, I put a coin on the corner between four numbers, receiving eight times my stake, if any of the four numbers turned up, I was conscious of an honest glow of self-applause…

Evidently, in spite of the clearest understanding of the chances of the game, the moral fallacy which attributes luck or ill luck to something of capacity and deficiency in the individual player, must be profoundly ingrained in us.   I am convinced that the shadow of merit and demerit is thrown by the mind over multitudes of actions which have no possibility of wisdom or folly in them, granted, of course, the folly in gambling at all, as in the selection of the particular chance on which you win or lose.  When you win at one time and lose at another, the mind is almost unable to realize that there was no reason accessible to yourself why you won and why you lost.  And so you invent what you know perfectly well to be a fiction, the conception of some sort of inward divining rod which guided you right, when you used it properly, and failed only because you did not attend ‘adequately to its indications.’

Ah, the trader’s skill versus luck in a nutshell and so it continues to this day.  Speculators often confuse luck with skill, while also attributing losses either to a deficiency in divining the true way or to some birthright prone to stupidity.  We speculators, in our desire to successfully predict, forget that there is really never a reason for winning or losing; there is no certainty that can be latched on to whenever we ask fate to smile upon us with an increase in our wealth.

Although it is in our nature to long for certainty and contribute some skill to its desired outcome we must be acutely aware that in our speculating we have no control over a right that has never been granted nor shall be any time hence.

The Renminbi: Soon to Be a Reserve Currency?

The Renminbi: Soon to Be a Reserve Currency?


I get the question all the time: when will the Chinese renminbi (RMB) replace the US dollar as the major world reserve currency? The assumption behind such questions is almost always that the coming crisis in US entitlement programs will force the Fed to monetize even more debt, thereby killing the dollar. Or some derivative line of that thought. Contrary to the thinking of fretful dollar skeptics, my firm belief is that the US dollar is going to become even stronger and will at some point actually deserve to be the reserve currency of choice rather than merely the prettiest girl in the ugly contest – the last currency standing, so to speak.

But whether the Chinese RMB will become a reserve currency is an entirely different question. Of course it will, over time, but the question has always been when. There are some preconditions required for reserve currency status. Quietly, apart from anything that might happen to the US dollar, China is working to meet those conditions. Rather than wallowing in concerns about China's actions, we might opt for a more thoughtful and constructive response: to welcome the RMB to the reserve currency club and hope that it gets here soon. The world will be a better place when that happens. And off the radar screen, it may be happening right now. Today we look at global trade flows and international balances and try to imagine a world in which much "common wisdom" gets stood on its head. It should make for an interesting thought experiment, to say the least. (This letter will print a little longer than usual, as there are numerous charts and graphs.)

One of the prerequisites for a true reserve currency is that there must be a steady and ready supply of the currency to facilitate global trade. The United States has done its part in providing an ample supply of US dollars by running massive trade deficits with the rest of the world, primarily with oil-producing nations and with Asia (most notably China and Japan), for all manner of manufactured products. The US consumer has been the buyer of last resort for several decades (I say, somewhat tongue in cheek). Those dollars typically end up in the reserve balances of various producing nations and find their way back to the US, primarily invested in US government bonds. In an odd sense, the rest of the world has been providing vendor financing to the US, the richest nation in the world.

The US Trade Deficit Turns Positive

The US trade deficit (a key component of the current account deficit – see chart on next page) fell to an unprecedented percentage of GDP during the last decade, a development that normally heralds a significant drop in a currency. Fortunately, the "exorbitant privilege" of controlling the world's dominant currency in reserve holdings, international trade, and financial transactions has helped shield the US dollar from a hard correction; but that status quo is in danger. After flooding the world with US dollars for more than twenty years, the US has reduced its current account deficit by 58% since the 2007-2008 financial crisis began. Looking ahead, I and many other observers believe this measure can continue to improve, due two surprisingly positive factors:

  1. The US energy boom in shale oil and gas. The US has caught an incredibly well-timed "lucky break" made possible by the combination of new exploration, production, and processing technologies (such as horizontal drilling and fracking) and by the serendipitous discovery of massive supplies of oil and gas, often in areas that already have significant infrastructure and/or are accessible at reasonable costs. This energy renaissance is part of the reality that has made Houston, Texas, the number one port in the United States, with even more growth coming in the near future when the Panama Canal expansion is completed in 2014. US manufacturers are turning less-expensive oil and gas into value-added fossil fuel products and exporting them to the world. This trend will become ever more important. Indeed, when the first LNG export terminal is opened in a few years, the additional exports will approach $80 billion a year, I am told. From one terminal! There are four in the process of being approved and more on the planning boards. The math is there for anyone to do. Spot prices in the US natural gas-producing areas are under $4. The Japanese are paying more than $14. Even I can do that arbitrage. Just for fun, the next graph, from the Energy Information Administration, shows the rise in spot gas prices over the last six months, from a level that had been far too low. It also shows the arbitrage potential that exists right here in the US.

  1. The consequent renaissance in US manufacturing. With cheaper energy and new technologies like advanced robotics and 3D printing, the US is producing more than we ever have – we're just doing it with fewer people.

These two trends are bullish for the US in general. But that's another story for another letter. The point today is that the US current account deficit is collapsing. A positive trade balance is not an unthinkable prospect today. It is quite possible that the US will be more or less energy self-sufficient by the end of the decade and could have a positive trade balance not long after that. I should note that exporting value-added chemicals made from less expensive energy will contribute even more to the positive balance than simply selling the raw natural gas.

Should the US achieve a positive trade balance, that shift would have a BIG impact on the rest of the world. For starters, moving from a current account deficit to a current account surplus will disrupt the two most important trade relationships in the world today: (1) the exchange of US dollars for OPEC oil, and (2) the exchange of US dollars for Asian manufactured goods. And while the US will continue to import significant (one could even say huge) quantities of manufactured goods, the quantity of dollars moving permanently offshore will be significantly reduced.

As a quick aside, by definition, a shrinking US current account deficit also means falling liquidity around the world (since the USD makes up one side of the trade in 87% of global currency transactions); and, as our friends at GaveKal have argued for years, a falling US current account almost always means that we will see a crisis somewhere in the world.

This is why the very same emerging-market central banks that complained about the Federal Reserve's quantitative easing under QE3 are now openly calling upon the Fed to reconsider its tapering stance. Now that Fed has hugely inflated the emerging-market balloon, these economies are more vulnerable to popping. I recently read that the Monetary Authority of Singapore (the Republic of Singapore's central bank) suggested rather strongly that the US Federal Reserve should consider its role to be that of central banker to the world and that it should thus make sure there is a sufficient supply of dollars to facilitate global trade. (Their suggestion may be due in part to the fact that they have lost $10 billion in the last year trying to keep the value of their currency from rising.)

With the US current account deficit continuing its fall, we need to be alert for the next crisis abroad. It is very difficult to predict exactly when, where, and how markets will panic, but taking US dollars out of the trading system is akin to losing a chair in a game of musical chairs. Someone is going to be left out. It could be Europe or Japan – there are more chapters to come in the sordid European and Japanese economic sagas – but more likely it will be emerging-market countries loaded with a lot of external debt denominated in US dollars who struggle to keep a seat at the table.

Emerging markets, particularly Asian and Latin American economies, took a beating during the 1990s precisely because of boom-and-bust credit cycles caused by hot capital inflows followed by rapid capital outflows. This volatile boom/bust cycle is precisely what emerging-market policy makers were hoping to forestall by holding larger foreign exchange reserves starting in the late '90s, but trading predominantly in the US dollar left them to vulnerable to swings in market interest rates and Fed policy.

Let's review the current state of global trade imbalances. Fortunately for us, the Bank for International Settlements just released a paper that gives us the data on this very topic (BIS Working Paper No 424: "Global and Euro Imbalances: China and Germany," by Guonan Ma and Robert N McCauley).

You'll want to view following chart in color (if you printed this letter in black and white) in order to appreciate how important the US trade deficit has been to world trade in the past 15 years. Remember, by definition, if there is a surplus in one part of the world, there must be a deficit in another. World trade balances must even out. That can happen through adjustments in the value of currencies or through countries producing as much as they sell. The US is a special case, since 87% of world trade is denominated in dollars; and the demand for dollars is evidently high enough to keep the price up, despite massive quantitative easing.

China Moves to Float Its Currency

Now back to China. I did an extended interview with Louis Gave this past Monday on BNN, the national Canadian business network (part 1part 2). Let me offer a rough transcription of what he said. I had just commented on my belief that the US is on its way to a positive trade balance, which will make the dollar remarkably strong. The corollary is that there will be fewer dollars available to the world for global trade. Then Louis jumped in:

I think it [a positive US trade balance] is a very important development for the part of the world I come from. I live in Hong Kong. Asia up to now has mostly been a US dollar zone. In Asia we basically produce manufactured goods, sell them to the US, and earn the US dollars we need to trade with one another. So when China trades with Indonesia, the trade is denominated in dollars. When Japan trades with Taiwan, that trade is denominated in dollars.

The big issue is, if we move into a world where the US current account deficit disappears – both through the energy revolution that the US is going through and the consequent manufacturing renaissance – then, all of the sudden, manufacturing in the US is a lot cheaper than elsewhere because the cost of energy is so much cheaper. If the US basically imports [brings back] all of its manufacturing and no longer exports US dollars, how will Asia trade with itself? And how will emerging-market trade grow if they don't earn the dollars?

I think the answer to those very important questions will increasingly be the RMB. What you have witnessed in the past two to three years is China making a very apparent play to internationalize its currency. In just two years, China has gone from settling 0% of its exports in RMB to settling 18% of its exports in RMB. Two years ago, the RMB was a non-currency [in international trade/finance]. Nobody owned it. Nobody traded it. Today, the renminbi is already – in just two years – in the top ten traded currencies in the world…. [See the table my research staff found, below. –John]

I think this shift is taking place because China has a massive comparative advantage that most people never think of. If I asked, "What's China's comparative advantage?" 99 out of 100 people would say "cheap labor," but that's not true. Labor is not that cheap in China anymore. China's comparative advantage is that China – alone amongst emerging-market nations – has a deep and credible financial center. It takes 50 years to build a financial center – to, you know, have auditors, lawyers, accountants, judges. And China is very lucky, because in 1997 the Brits – who are quite good at building financial centers – basically built one in Hong Kong and told China, "Here it is. Try not to mess it up."

For twelve years, China did nothing with Hong Kong. It was kind of a deal of "You don't bother us, we won't bother you. We've got other fish to fry." And that worked well until all of a sudden, in the past two to three years, China has been internationalizing its currency through Hong Kong, and it is taking off like wildfire. We always talk about what you see and what you don't. Everybody talks about the China slowdown. Everybody talks about the impact this is going to have on commodities, on countries like Canada, on countries like Australia. Nobody talks about what you don't see. And what you don't see is that China is slowly but surely internationalizing its currency. It's slowly freeing capital controls. It's creating deep and liquid capital markets, and this is going to change the way that companies and individuals finance themselves among emerging markets. It's going to make for more stable emerging markets and hopefully for higher growth.

Just as Louis predicted years ago, the Chinese RMB has continued to quickly climb the ranks from an internationally non-existent currency to number nine on the list!

This process is happening at lightning speed by historical standards, but we can still expect it to progress over the next 5-10 years. The renminbi is still only involved in 2.2% of foreign currency transactions, but this number can take a big jump when the RMB floats freely, though there is a big difference between the RMB and the true reserve currencies (USD, EUR, JPY, GBP) today. (Note that the renminbi is also called the yuan, abbreviated as CNY in the chart below.) As Louis mentioned, China stands alone among the emerging markets as having the only mature and credible financial center with deep and liquid capital markets, in Hong Kong. The building of a true global financial center typically takes about 50 years, so China is taking advantage of its lucky break to fast-track its currency to reserve status.

What may speed the process up is increasing cooperation between Chinese officials and the UK government to support RMB internationalization through London's FX markets. Gregory Clark, Financial Secretary to the UK Treasury, was in Hong Kong this past week and wrote an op-ed in the South China Morning Post. Let's look at a few telling sentences:

Over 50 percent of UK investment in Asia is in or flows through Hong Kong. That is a tremendous vote of confidence in Hong Kong by UK companies….

Bilaterial trade in goods between Hong Kong and the UK rose by 13.5% between 2009 and 2012, to a total value of £12.1 billion in 2012. This makes Hong Kong the UK's second biggest export market for goods in Asia Pacific….

According to the Society for Worldwide Interbank Financial Telecommunications (SWIFT), London now accounts for 28 per cent of offshore RMB settled transactions.

In London, the volume of Renminbi-denominated import and export financing has increased 100 per cent since 2011. This is delivering real benefits and savings for business. It is estimated that firms can reduce their transaction costs with China by up to 7 per cent by denominating their trade in Renminbi.

The Renminbi’s rise is being enabled not just in Hong Kong and London. Chinese banks have established clearing banks and accounts in more than 80 other countries in the last four years. But the story runs even deeper. It appears to me that China is getting ready to create another Hong Kong in the traditional financial center of China, Shanghai. My good friend and decades-long China expert Simon Hunt notes:

The proposed development of the Free Trade Zone (FTZ) in Shanghai, covering 28sq km, will have huge consequences for China's financial markets and that of the world. It will be a tax-free zone; the RMB will be fully convertible; the FTZ will have its own rules and regulations that cannot be trumped by central government; it will be legally outside the Chinese Customs, in fact a separate territory inside China; it has the effect of abolishing control over capital account investment, so allowing freedom to set up all kinds of companies and moving capital in and out of the FTZ, meaning in and out of China; it will become an international settlement centre for international trade and it will allow banks within the FTZ greater flexibility in conducting business. In short, the implications of the development of the FTZ, if the pilot scheme goes smoothly, will be humungous not just for China but for the global economy.

One near-term consequence will be that interest rate arbitrage can be more effectively conducted in the zone and will take business away from Hong Kong and Singapore. Chinese companies won't have to set up offshore companies in Hong Kong or Singapore to conduct this business. Already, Chinese and foreign companies are either renting space, putting up buildings or buying office space in the FTZ, just waiting for the final details to be publicised.

This move makes sense for China, as it is a large step toward eventually floating the currency, which is yet another requirement for a true reserve currency. I've written in the past that I think the initial move when the Chinese eventually float their currency will be for the RMB to go down against the dollar (although longer-term it should become quite strong), because there is a lot of money in China that would like to diversify. Setting up a free-trade zone, as they propose in Shanghai, is a way to slowly let the air out of the balloon and perhaps even avoid the dramatic dislocations that might occur if they were to float the currency all at once.

Even so, internationalizing the RMB carries a lot of risk, so why does China really want to globalize its currency? Summarizing from a recent report from DBS Bank (based in Singapore), we can piece the picture together:

  • "China has experienced 35 years of relatively stable 10% GDP growth. It's 28 times bigger today than it was in 1978. Why risk this kind of success for a globalized RMB and an open capital account?
  • The structure of the global economy has changed radically since 1978 while the financial architecture has changed barely at all.
  • Between now and 2020, China's two-way trade will grow by $4 trillion. That's nearly the size of the entire of offshore eurodollar market.
  • China doesn't just want a globalized RMB; it needs one. The Middle Kingdom's growth since the 1970s can largely be explained by mobilizing two key factors of production: land and labor. Now that economic growth is slowing in China as a whole (although there are still regional booms in some areas), Chinese policymakers hope they can regain momentum by mobilizing the last factor: capital.

For China to become a powerhouse exporter of its own products, it is eventually going to need to be able to offer financing to its ultimate customers in Indonesia, Vietnam, and the rest of Asia. If you are competing with Caterpillar and Komatsu, you not only need to have a less expensive product, you need to be able to offer financing. The same goes if you're selling telecom gear, power-generation equipment, automobiles, or bullet trains.

In order for a currency to achieve reserve status, there has to be something for the country receiving the currency to invest in. If a country receives US dollars, they can invest in our bonds and stock markets. Just a few years ago, China created the dim sum bond market in Hong Kong, which is beginning to provide a real investment alternative for emerging markets – particularly in Greater China and Southeast Asia, where trade is largely intraregional. With China's having the largest trading flows in the world (it just passed the US, by roughly $1 billion, in 2012), a free-floating RMB could quickly reach reserve status and, oddly enough, take FX market share from the USD, which could become be too strong and too scarce to work well in global trade.

China is on its way to becoming a reserve currency not because of weakness in the US dollar but precisely because the US dollar is going to get stronger and become less readily available. Countries are going to need to be able to trade in something besides dollars. It simply makes sense that if 20% of an emerging-market country's trade is with China, it should do the trades in RMB rather than in relatively scarcer dollars. Of course, this means that China needs to have a relatively stable monetary policy so that its trading partners will have confidence in the long-term RMB, but China realizes that. And of course the RMB will have to meet all the other requirements for being a reserve currency.

Note that there is a difference between a reserve currency and a safe-haven currency. A safe-haven currency must be immune from government confiscation, currency controls, taxation, rapid exchange-rate depreciation, etc.

As I mentioned, the RMB will probably depreciate rather than appreciate when the currency floats freely. There is a lot of capital trapped behind China's capital-control wall that wants out, and party leaders know the trick is to make the transition to floating very gradually and without precipitating a crisis. The trouble (although the Chinese will not admit it) is that China is even more addicted to money printing than the US or Japan are. For years, the People's Bank of China has been injecting money into the system each time excess foreign capital flows into the region. (This is necessary as long as China wants to effectively peg the RMB to the USD). Recent rate volatility suggests the Chinese credit system is quite fragile. Quite simply, interest rates do not spike from 3% to 13% in a healthy economy, as they recently did in China (see chart below). This instability suggests there is more going on than we understand. It is also why the floating of the RMB will occur as a series of steps on a journey rather than one big leap. And frankly, that makes sense.

Finally, floating the RMB would also let China dive right into the global currency war that Japan launched last spring. After all, they would just be "giving in" to long-standing US demands that they not manage their currency. China would be able to simply say, "We did what you asked. Why are you complaining about what the free market says about the value of the RMB?" What a perfectly innocent way to escalate a currency war.

In less than a month I will have a new book in the bookstores (see below) on central bank policy and the major global currency war that I and co-author Jonathan Tepper see coming right around the corner. As the proverbial Chinese curse says, "May you live in interesting times."

Transformational Technologies

I mentioned last week that Pat Cox has come to work for Mauldin Economics and that we will soon be launching a new letter called Transformational Technology Alert. I have spent a good deal of time with Pat over the last few years, talking about the technologies that are changing our future; and those discussions have become intense as we have worked out how to get that information to you. There's just so much happening around us every day that is hard to keep track of. I can't tell you how excited I am to finally have Patrick on board, where he can put into writing our shared belief that transformational technologies will build wealth, eradicate disease, extend lives, create jobs, and eventually help build a world of abundance. Rapid change is never easy for those in its path; but I would not want to go back to the "good old days" of the '60s or '70s and find myself once again mired in inefficient medical care, making do with snail's-pace communications, and wandering in an information desert. I had some good moments then, but I'm enjoying the world a great deal more today and expect to have even more fun in the future.

My team is working hard behind the scenes right now to get Pat's new website up and running. But I'm so excited to pull back the curtain on what we have planned forTransformational Technology Alert that I want you to have a clear view of Patrick's work today. You should start reading Patrick immediately – his research is that important. Click here to get access to his letter without delay.

Tucson, the Barefoot Ranch, and New York

I started this letter on the plane from New York and am finishing it at my apartment in Dallas. I'm wrapping up unusually early for me, as I want to go to good friend David Tice's birthday party this evening. (You may recognize him as the founder of the Prudent Bear Fund.) He is hosting us at the Dallas opening of the new film he invested in, called The Secret Lives of Dorks. It is family fare, with James Belushi and a funny part with Mike Ditka. It will open in LA and New York next week and will soon be available on iTunes. Having grown up as a dork before it was cool to be a dork, I will be interested to see what sorts of memories the film evokes.

Next Friday is my birthday, and I will spend it in Tucson with my friends from Casey Research and maybe even try to work in a round of golf. Then I'm back home for a day before driving out to East Texas to join Kyle Bass and a number of fascinating investment minds as we hash through the current economic environment. I will report back.

Later in the month I will return to New York, where we will launch my new book, calledCode Red, co-authored with Jonathan Tepper (who also co-authored Endgame). The book is about the effects of unorthodox central bank policies and what we believe will be a quite serious currency war that has already begun and will escalate into the latter part of the decade. I will be doing a few presentations, as much media as I can, and taping a video webinar or two for the launch. Jonathan Tepper has promised to fly over from London, so it should be quite fun.

I got a text this week from my daughter Melissa, inviting me to a Dallas launch party for something called Lyft, an outfit that she is going to be working with part-time. Basically, it is on-demand ride sharing. They offer a web-based service that lets you arrange for a car and driver to come pick you up and take you to your next destination. Rather than charging a specific fare, they operate on the basis of donations. There is of course a phone app, and your donation is tracked remotely. There were 4,000 applications to be Lyft drivers in Dallas, and they chose 86 people. Lyft is in about seven major cities and seems to be rapidly expanding.

I mentioned this new service to my driver as he brought me home from the airport today. He said he had heard of it and then began to tell me about the drama unfolding at the Dallas City Council over the predecessor to Lyft, called Uber. It seems Uber (which is a service that helps you find a town car rather than call a taxi) is taking significant market share from the Yellow Cab franchise, which he says has 70% of the local taxi business. Now those taxis are sitting in a lot during the evenings, as the kids would rather call a town car than a taxi. Go figure. (And given that I prefer my driver service over a cab as I go to and from the airport, I completely understand.) So the Yellow Cab company went to city hall to get Uber banned. And Uber shot back that they don't need a city license because they are licensed by the state.

It turns out that the Yellow Cab owners make substantial donations to people running for city council, or at least that is what Mike (my driver) claims. An even more interesting, it turns out that the Dallas Police and Fire Pension Fund (remember them from last week?) is invested in the Yellow Cab company – but now the company is not quite the cash machine that it was. The lawyers are engaged. It will be interesting to see the response from both Yellow Cab and Uber to the new competition from Lyft. Lyft sees itself as a service to help friends help friends find a ride. Melissa just sees it as a way to make a little money to help pay for her auto insurance (which is a move Dad encourages), while she works on her studies and does freelance writing. (By the way, Melissa was the daugher who had the thyroid cancer 19 months ago. She is doing fine, and there appear to be no further problems.)

I should note that Lyft has raised $83 million from a group of serious venture capital funds. Mike tells me that Uber just got another $33 million from Google. Serious money, considering that $4 million bought 40% of Yellow Cab of Dallas just over 10 years ago.

As a codicil to the above story, when I arrived at the apartment, I stepped out of the car and heard a terrible crunching sound that could only be a serious car wreck. I ran a few feet to the cars, and amazingly both drivers seemed to be okay, although a little shaken up. A Chevy Suburban hit a Lincoln Town Car, so there was a little solid iron around both drivers. It turns out that the town car decided to turn left from the far right-hand lane, which meant it tried to cross four lanes to do so. Looking at the car and driver, Mike speculated, "That must have been an Uber driver. He got a call and was trying to get to the client quickly."

Maybe Dad needs to have a serious discussion about driver safety with Melissa before she goes out Lyfting people.

We had perfect weather in New York this week. And the conversations were even better. You have a great week and drive safely.

Oh, and take a look at our new Mauldin Economics home page! Our techies tell me that if it doesn't look right, you should hit refresh and/or clear your browser's cache. This is just part one of a two-part upgrade we're doing. In the next few weeks the site will be optimized for mobile, so those of you on phones or iPads will soon have a much better experience.

Your still thinking about China analyst,

John Mauldin

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We Are Seeing An All-out Defense of the Status Quo

Last week, Lars Schall interviewed Jesse of the Cafe Americain. Here's the beginning: 

“We Are Seeing An All-out Defense of the Status Quo”

lecafeOn behalf of Matterhorn Asset Management, financial journalist Lars Schall talked with Jesse, the host of the popular financial web site Jesse’s Café Américain, about, inter alia: his interest in precious metals; why he thinks the U.S. Commodity Futures Trading Commission decided to take no action regarding complaints about manipulation of the silver market; the future of the so called “currency wars;” and last but not least why he believes that the Federal Reserve is laying the groundwork for its own demise.

By Lars Schall

Jesse’s web site Jesse’s Café Américain can be found here.

Lars Schall: Jesse, tell us at the beginning a bit about your background, please. For example, what motivates you to run your web site and comment on a daily basis on the financial markets?

Jesse: I had a long career in engineering, computers, and communications that was based on a good foundation, a classical education in the arts and natural sciences. As you might expect there was a significant amount of post graduate study in specialized and developing areas of computer science and networking. Fortunately I had a good mind for math, and a talent for music, which makes for a good encoder and algorithm developer.

Our minds and our time are the two resources that are most within our control. I naturally loved to learn, but it was coupled with a sense of ‘obligation for use’ that is embodied in the parable of the talents: with advantages come obligations.

This is not to say that I always used what I have been given well and wisely, but I have always made the attempt, even while falling. One learns, and learns to forgive, first others and then themselves. None is perfect in this world.

My corporate career ended at age 50, leaving it in order to spend more time at home, and especially with my young son. I had been working very long hours and spending a significant amount of time away from home for too many years, and did not wish to lose any more of that precious gift of family. Calculations showed that given our savings, and naturally modest lifestyle, we could get by on what I could make from trading in markets and some other investments. And so this has been the way it has been for the past twelve years.

Solitary work lacks the camaraderie of the workplace, and I also knew that without the impedance of producing something ‘on paper’ and subjecting it to objective evaluation and criticism, that it was all too easy to be fooled into self-indulgence and the subtle misapprehensions of self-reinforcing thought. And a person is not fully alive unless they are changing and creating something.

Voila, Le Café.

Keep reading: We Are Seeing An All-out Defense of the Status Quo – Jesse.

Future of Medicine: Meet Sedasys – Your New Robot Anesthesiologist

Courtesy of Mish.

Johnson & Johnson’s new sedation machine promises cheaper colonoscopies, but anesthesiologists, among the highest paid physicians, don’t like it one bit. It’s yet another case of robots replacing humans.

Please consider the New York Times article Robots vs. Anesthesiologists.

Anesthesiologists, who are among the highest-paid physicians, have long fought people in health care who target their specialty to curb costs. Now the doctors are confronting a different kind of foe: machines.

A new system called Sedasys, made by Johnson & Johnson, would automate the sedation of many patients undergoing colon-cancer screenings called colonoscopies. That could take anesthesiologists out of the room, eliminating a big source of income for the doctors. More than $1 billion is spent each year sedating patients undergoing otherwise painful colonoscopies, according to a RAND Corp. study that J&J sponsored.

An anesthesiologist’s involvement typically adds $600 to $2,000 to the procedure’s cost, according to a research letter published online by JAMA Internal Medicine in July.

By contrast, Sedasys would cost about $150 a procedure, according to people familiar with J&J’s pricing plans. Hospitals and clinics won’t buy the machines, instead paying a fee each time they use the device, these people say. The $150 would cover maintenance and all the costs of performing the procedure except the sedating drug used, which would add a few dollars, one of the people says.

As J&J prepares for a limited rollout, many anesthesiologists are sounding the alarm. They say the machine could endanger some patients because it uses a powerful drug known as propofol that could be used improperly. They also worry that if the anesthesiologist isn’t in the room, he might not be able to get to an emergency fast enough to prevent harm.

During testing, none of the 1,700 patients sedated by Sedasys required rescuing, says Steven Shafer, editor in chief of the medical journal Anesthesia & Analgesia, who helped J&J develop the machine. He says that the machine’s use is limited to healthy patients who aren’t at risk for problems and that the machine has mechanisms to monitor patients and make rapid adjustments, such as boosting oxygen.

“These are all things an anesthesiologist would do,” says Dr. Shafer, a professor of anesthesiology at Stanford University.

J&J is also developing a device that could cut anesthesiologists out of another popular procedure: surgery to insert tubes into the ears of children seeking relief from infections. J&J hopes that ear, nose and throat doctors will be able to insert its device with the push of a button, avoiding having to put the kids under anesthesia in a hospital.

Meet Sedasys – Your New Anesthesiologist

The median annual salary of Anesthesiologists is $286,000. That is ninth among all physicians and third among nonsurgeons surveyed by, a salary data and software firm.

Those costs are about to change. Here is a picture of Sedasys, who bills at $150 per use….

Continue Here

The “Right Value” of the Indian Rupee

Courtesy of Mish.

Reader Manish, from India, pinged me today regarding a statement made by India’s Finance Minister that the Right Value of Rupee is 59-60 to a Dollar

Asserting that the right value of rupee is 59-60 to a dollar, Finance Minister P Chidambaram today said that government will make all efforts, including extending priority sector status to export credit, to boost shipments. “We think that based on the REER (real effective exchange rate) value, that (59-60) is the right level of the rupee and it should not overshoot its mark.

Manish writes …

Hello Mish

The Indian Govt knows the ‘right’ value of the rupee. How? Maybe it’s because the Indian Prime Minister is one of the world’s foremost economists. Perhaps it’s because our brilliant Harvard educated Finance Minister threw a dart on a board.

Anyway, I thought the idea was funny and thought you would too.


The “Right” Value in Pictures

Foolish Proclamations

Bureaucratic fools make proclamations based along the lines of what they want to see, even though they have no idea of the economic forces in play.

The notion that India’s Finance Minister knows the true value of the Rupee is idiotic, and Manish knew in advance that I would agree.

Here’s the deal: If governments worldwide would stop printing money and stop manipulating interest rates, we would find out in a flash what the true exchange rates should be.

Mike “Mish” Shedlock

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Smart City and Energy Harvesting, An Infographic

Courtesy of

By EconMatters Staff

As part of the global sustainability initiative, countries (and cities) around the world are shifting into high gear working towards becoming part of the “smart cities”.  For example, on 10 July 2012, the European Commission launched the Smart Cities and Communities European Innovation Partnership.  The partnership proposes to pool resources to support the demonstration of energy, transport and information and communication technologies in urban areas.

In Asia, Japan is also taking steps to make its cities smarter with research taking place in Yokohama on demand response for large commercial buildings, and other energy harvesting technologies.

In the U.S., San Diego is taking a major step in a similar program.  According to Energy Collective, the city is focusing its efforts on educating consumers on how to monitor and manage their energy usage, thus helping California to meet its renewable energy goal of 33% by 2020, and automating the electric grid with two-way communication.

The same article from Energy Collective also cited a report by Pike Research that the number of people living in cities will grow from 3.6 billion to 6.3 billion by 2050. With such a change, major cities must start developing ways to improve efficiency and profitability in all areas from energy consumption to transportation.

The Pike report also predicts that the smart city technology market will increase from $6.1 billion annually to $20.2 billion by 2020.  This is certainly something interesting and exciting to look forward to in the future, and the infographic below gives a sneak peek of the future smart city.

Welcome To Energy Harvesting
Graphic Source: Sagentia

The views and opinions expressed herein are the author’s own, and do not necessarily reflect those of EconMatters.

Please click here to read more articles at EconMatters.

Guest on Main Street Out Loud Today at 6PM

Courtesy of Larry Doyle.

RudiI welcome the opportunity to return to Main Street Out Loud this afternoon at 6pm.

MAIN STREET OUT LOUD is hosted by Rudi.  In his own words:“The show covers political issues, local, national and international.  We also cover the daily issues that concern each of us on Main Street, whether resident or business owner.  

Rudi is a resident of the metro Phoenix, Arizona area, and is passionately patriotic. An ardent supporter of our troops, he is a definite conservative in his politics. Nonetheless, he is open to other opinions. As he puts it, “If it touches you, it touches me.” He invites all callers, whether agreeing or disagreeing, to participate in this radio program which is by, for, and about Main Street Americans.

Be sure to listen in every Saturday starting at 3:00 pm (MST/Arizona time).

Listen to Main Street Out Loud on your radio:
KKNT conservative talk radio: 960 on your AM dial.

To hear the show LIVE on the Internet: Just click this “Listen Live” link.

Just phone 602-508-0960 or toll free (888) 960-9696 during the program.

Larry Doyle

I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

Government Shutdown is a Fantastic Idea

Courtesy of Mish.

Looking for a reason to support a government shutdown? If so, please consider Obama Stripped to Skeleton Staff in a Government Shutdown.

A U.S. government shutdown means President Barack Obama will have fewer people to cook meals, do the laundry, clean the floors or change the light bulbs, according to a White House contingency plan.

About three-fourths of president’s 1,701-person staff would be sent home. The national security team would be cut back, fewer economists would be tracking the economy and there wouldn’t be as many budget officials to track spending.

Of the total, 438 people work directly for the president. Under a shutdown, 129 could continue working, according to the contingency plan.

Biden, who has a staff of 24, would have had to make do with 12.

Obama’s national security staff of 66 would be cut to 42. Similar staff cuts would be imposed at the White House Office of Management and Budget, the Council on Environmental Quality, the Council of Economic Advisers and the Office of National Drug Control Policy, which are all part of the president’s executive office.

Fantastic Idea

If you think that a government shutdown is a fantastic idea (I sure do), then please contact your elected representatives and let them know.

Mike “Mish” Shedlock

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Don’t Cry For Me, Ben Bernanke

Courtesy of ZeroHedge. View original post here.

By Simon Johnson, originally posted at Project Syndicate

Financial volatility since Federal Reserve Chairman Ben Bernanke’s announcement in May that the Fed would “taper” its monthly purchases of long-term assets has raised a global cry: “Please, Mr. Bernanke, consider conditions in our (non-US) economies when you determine when to end your quantitative-easing policy.”

That is not going to happen. The Fed will decide on monetary policy for the United States based primarily on US conditions. Economic policymakers elsewhere should understand this and get ready.

It is true that, in recent years, the Fed has shown more concern about financial conditions in other parts of the world. In the fall of 1998, then-Fed Chairman Alan Greenspan favored lowering interest rates, in part because of the emerging-markets crisis in Asia and Russia. For those efforts, he got his picture on the cover of Time magazine as part of the so-called “committee to save the world.”

More recently, the Fed extended credit – known as “swap lines” – to a select number of emerging markets and, most importantly, to the European Central Bank. The problem in the eurozone from 2007 on was that some of Europe’s largest banks had borrowed heavily in dollars and, when credit conditions tightened, could not easily obtain the dollars needed to continue funding their operations. Without question, the Fed has greatly helped the European banking system to stay afloat.

But this is not the same thing as setting monetary policy based on economic conditions abroad. By statute, the Fed is responsible for keeping US unemployment and inflation low…

Keep reading >


Mirror, Mirror

The Epicurean Dealmaker discusses the Twitter phenomenon. I'm not a big fan of Twitter and only check it out occasionally, usually when a little bit tired and bored. 

Mirror, Mirror

Courtesy of The Epicurean Dealmaker

What do you see?
La belle et la bête (1946) – Jean Cocteau

“You’ve never seen death? Look in the mirror every day and you will see it like bees working in a glass hive.”

— Jean Cocteau

Much of an investment banker’s(1) life, O Dearly Beloved, consists of spurts of feverish activity interspersed with agonizing stretches of boredom, an activity often characterized as hurry up and wait. We get called by potential clients to come present our credentials for their pissant deals on scandalously short notice, we mobilize a small army of overworked child laborers to produce voluminous pitch materials of ludicrous length and specificity, and we cram ourselves into economy class cattle cars to East Bumfuck, Nowhere, where we subsequently cram ourselves into plywood-paneled boardrooms decorated in early J.R. Ewing or late Bernie Madoff style—along with several other small armies of supplicants from our competition—to simper and grovel and polish the shoes of our would-be client millionaires with our Hermes ties. Then we wait anywhere from 48 hours to four weeks to hear whether we have won the assignment, at which point—assuming the answer is yes—we have to scramble back out to the weeds to kick off the real work with an organizational meeting.

The situation does not improve in the midst of a deal, either. Investment bankers are always scrambling to pull together materials for somebody or other—client, counterparty, or our own internal counterparts in capital markets or leveraged finance—which always seem to be due immediately and which are invariably returned, commented on, or revised by said somebody or other at a noticeably more leisurely pace while we sit counting ceiling tiles with our thumbs up our asses. It’s just the nature of an episodic, project-centered, client service job. Of course, we always hope to have more than one iron in the fire at a time, and we hope even more that all our active deals don’t decide to heat up at once and require our immediate, in-person attendance in Sacramento, Atlanta, Minneapolis, Dallas, and Düsseldorf this coming Saturday at 10:00 am local time. Failing that, I suppose I should be thinking clever thoughts about the next stunningly original M&A deal or financing technique I can spring upon an unsuspecting client base, or figuring out ways to wheedle my way into favor with the firms I don’t already do business with. But even after all that, and after I have rearranged my snowglobe collection for the sixth time into reverse alphabetical order based on the last letter of their purchase location, there are occasionally dead spots in my job where there is. Absolutely. Nothing. To do.

And that is when I check Twitter.

* * *

Which led me today, as it so happens, to an article by one Michelle Goldberg entitled “In Defense of Jonathan Franzen,” in which Ms Goldberg defends said literary lion’s rambling and apparently much maligned attack(2) on social media and the internet by claiming, in a phrase, that Twitter Is Horrible. Well this, I said to myself, said I, is interesting. Because I couldn’t disagree more.

Ms Goldberg did not hedge her condemnation of the social medium in question, either:

In his essay, Franzen compares Twitter to cigarettes. This is inaccurate. Twitter is like doing cut-rate cocaine at a boring party where a lot of the guests dislike you. (As I said, I lived in San Francisco in the ’90s.) You’re not having any fun, but it’s really hard to stop.

And this:

Twitter began to seem like a machine that runs on rage. You see something that disgusts or infuriates you. Tweeting about it provides momentary relief, followed by the brief validation of the retweet. As you scan your feed, you take in other little microbursts of nastiness. So you get angry all over again and respond, perpetuating the cycle.

As I read these choice nuggets, my first thought was not that Ms Goldberg sounds like she had a pretty shitty time in San Francisco in the 1990s, which she apparently did, or that her description of Twitter and its uses sounds remotely like the one I’m familiar with, which it does not. No, my first thought was how thankful I was that I do not follow Ms Goldberg on Twitter. Or even, were I to be completely honest, have to interact with her regularly in real life at cocktail parties. Because I mean, what?

Ms Goldberg has fallen into the trap—common to many with an unreflective view on life—of damning an entire cultural phenomenon on the basis of her own, particular, idiosyncratic relationship with it. Telling me that you believe Twitter runs on rage tells me much more about you—that you are likely to be a person full of rage or very susceptible to feelings of rage—than it does anything useful or universal about Twitter. It is also empirically untrue. My Twitter stream and experience does not run on rage, and I am observant and interested enough in other peoples’ use and experience of Twitter to know that it does not run on rage for many, many others either. From what I can tell, while admittedly not being a Twitter expert, I would venture to guess there are as many uses and forms of Twitter as there are types of people, personalities, and imaginable uses: Cat Pic Twitter, Celebrity Stalking Twitter, Sports Twitter, Investing Twitter, etc., etc., ad infinitum/nauseam.

This is not to say that I and many others do not occasionally fall into the trap of becoming enraged by something we see on Twitter—or, more broadly and correctly, the Internet—and spiraling into an anger-soaked argument or tirade on some issue or other. I certainly do (and usually regret it afterward). But this does not mean such a relationship with this medium is either inevitable or necessary, as Ms Goldberg seems to imply it is for her. This is too bad, but it is easily remedied. If you are following people who enrage you regularly, stop following them. If certain people troll you or constantly try to engage you in energy-sapping arguments, block them.Nowhere is it written that you have to listen to or engage with angry people. Not even on Twitter. If Ms Goldberg is in fact trapped in Rage Twitter, perhaps it would not be presumptuous of me to suggest she try following some different people. Or try to find something in her experience and use of the medium other than rage.

* * *

What is generally true—given that its members choose whom they follow and, to a certain extent, whom they allow to follow them—is that Twitter can easily become an echo chamber, reflecting and repeating back to you what you expect and want to hear. This is a well understood weakness of human nature, which has long pre-dated the internet or any of its more recent excrescences. I work hard to curate(3) the list of people I follow on Twitter to exclude those who, like Ms Goldberg, seem to approach the universe in a permanent state of rage, or those who distract or annoy me with information or opinions that I have little interest in or use for. This does not mean that I want to follow only people with whom (I think) I already agree. I like having my opinions and preconceptions challenged. But when I find people who can engage in back and forth argument and edification without making bile rise in my throat, I cultivate them. Sometimes I persuade them to my point of view; sometimes they persuade me to theirs. I like to use Twitter to engage with people I would otherwise have little ability to engage. I also use Twitter to learn things, to have fun, and to occasionally make an ass of myself. From my personal perspective, this seems like a much more wholesome way to approach a trivial social media app than the Relentless Pursuit of and Flight from Towering Rage. But hey, that’s just me.

In any event, Twitter is nothing more than a silly messaging service. You are not required by God, Capitalism, or the Powers That Be to participate. Therefore, if Twitter is reflecting something unpleasant back to you (like rage), perhaps you should log off and do a little self-reflection instead. As someone I often engage with but do not follow on Twitter said,

“Twitter is a mirror disguised as a window.”

Just don’t ask me where (s)he got it from.

Happy tweeting.

1 I speak here, as is often my wont, of my form of investment banking: capital raising and mergers and acquisitions advisory, which center around intermittent projects for various and sundry clients. I do not speak of sales and trading, or capital markets, which tends to be a more uniformly frenzied activity (at least during market hours) interspersed with agonizing stretches of wining and dining counterparties. These are crude caricatures, but I trust regular readers of this forum know to expect such and have done with it. You novices can go sob quietly in the corner (or try to figure out the details from my back catalogue).
2 Yeah, I started reading it a while back. As the cool kids say: TL;DR. No link.
3 Sorry, I’ve been told I must use this word when discussing social media. Who told me, you might ask? The cool kids, of course.

© 2013 The Epicurean Dealmaker. All rights reserved.

Barry Ritholtz posts the Top 10 Bank Fines since Meltdown

Who should pay for the legal violations? Shareholders? Tax-Payers? Management? Should the Federal Government take back the bonuses? 

Top 10 Bank Fines (Post 2008-09 Crisis)

By Barry Ritholtz 

Fines here, fines there, fines everywhere!

The Wall Street Journal discusses the proposed $11 billion dollar JPM fine, but buries the good stuff in this morning’s article on Jamie Dimon (This Generation’s Greatest Banker! ®)

We have been tracking JPM’s fines, but if you want an industry overview, try this collection: Here is a quick [look]:

Top 10 Bank Fines

$25 Billion for Foreclosure processing abuses.
Five Banks: Wells Fargo & Co., J.P. Morgan Chase & Co., Citigroup Inc., Bank of America Corp., Ally Financial Inc.
Regulators: U.S. Department of Housing and Urban Development, U.S. Department of Justice and 49 state attorneys general (2012)

$9.3 Billion for Foreclosure abuses.
Thirteen Banks: Bank of America Corp., Wells Fargo & Co., J.P. Morgan Chase & Co. and 10 others
Regulators: Office of the Comptroller of the Currency and Federal Reserve (2013)

$1.9 Billion for Money-laundering
HSBC Holdings
Regulators: U.S. Department of Justice, Treasury and others (2012)

$1.5 Billion for Manipulating Libor rates.
Regulators: Commodity Futures Trading Commission, former U.K. Financial Services Authority, Swiss Financial Market Supervisory Authority, U.S. Department of Justice (2012)

$920 Million for Lack of oversight of giant bets by ‘London whale.’ (poor internal controls).
J.P. Morgan Chase & Co.
Regulators: Securities and Exchange Commission, Office of the Comptroller of the Currency, Federal Reserve and U.K.’s Financial Conduct Authority (2013)….

Keep reading: Top 10 Bank Fines (Post 2008-09 Crisis)


Bank Robbers and Middle-Class Tax Hikes

Courtesy of Mish.

When asked why he robbed banks, William “Willie” Sutton allegedly replied “because that’s where the money is.” The story, however, is false.

Although he stole an estimated $2 million over his forty-year career, Horton denied ever saying that. A journalist made it up. His life was quite interesting though, including a stint of commercials for MasterCard, after his parole in 1969.

For further reading, please see some amusing Willie Sutton commentary on Snopes.

For the connection between bank robbery and middle class tax hikes, please consider Congress Dawdles on America’s Unsustainable Path by Bloomberg writer Caroline Baum.

Economist Herbert Stein once said, “If something cannot go on forever, it will stop.” We’re still waiting. As Congress debates yet another short-term continuing resolution to avert a federal government shutdown down on Oct. 1, a grand bargain isn’t even on the agenda. The debate that relates to the budget is over the automatic spending cuts to discretionary programs implemented in March. Spending on everything except health-care programs, Social Security and interest on the debt is on track shrink to 7 percent of GDP — the smallest share since the late 1930s — from a 40-year average of 11 percent, Elmendorf said. The number of people eligible for Social Security will rise by a third in the next 10 years. 

Neither party wants to face reality: Middle-class taxes will have to go up because that’s where the revenue is.

The Third Rail

The problem is Republicans refuse to cut defense spending, and Democrats refuse to cut entitlements. Little else matters except scrapping entire programs and neither Democrats nor Republicans seem willing.

Touching social security is considered to be the “third rail” by both parties. In case you do not understand the term, the “third rail” on Chicago’s elevated “L” line (and no doubt other electric lines) is the hot one. Touch it and you will be electrocuted.

Republicans had a wonderful chance right before the last presidential election to hold Obama to his pledge to make “tough choices”. Instead, they wasted the opportunity with absurd bluffs on shutting down the government.

The only reason we see trivial reductions in increases (not actual cuts), is because of sequestration. Even then, Republicans objected to miniscule cutbacks in the rate of increases in military spending.

Congress vs. Willie Horton

This brings us back to the beginning. What can’t go on won’t, but “we’re still waiting”. Yet, I see no reason to believe Republicans will give in on defense cuts and no reason to believe Democrats will cut entitlements.

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The Big-Picture Economy, Part 5: The State, Taxes And The Shredding Social Contract

Courtesy of Charles Hugh-Smith of OfTwoMinds

The social contract is fraying as those paying most of the income taxes are being squeezed from above and below.

The government–known as the state in political science circles–is fundamentally a social contract between the governed and the governing Elites. The governed agree to cede control and power to the state, and pay taxes for its maintenance and programs, in exchange for security and services that can best be rendered (or can only be rendered) by the state.

These traditionally include law enforcement, a judicial system, national defense, and since the early 20th century, education and social income-security programs.

I have long held that America is a The Three-and-a-Half Class Society (October 22, 2012): the "entrenched incumbents" on top (the "half class"), the high-earners who pay most of the taxes (the first class), the working poor who pay Social Security payroll taxes (the second class), and State dependents who pay no payroll or income taxes (the third class).

This class structure has political ramifications. In effect, those paying most of the tax are in a pressure cooker: the lid is sealed by the "entrenched incumbents" on top, and the fire beneath is the state's insatiable need for more tax revenues to support the entrenched incumbents and its growing army of dependents.

Let's start our analysis of the three-and-a-half-class society by noting that the top 25% pay most of the Federal income tax, and within that "middle class" the top 10% pay the lion's share of all taxes.

The top 25% of taxpayers–34 million workers out of a workforce of 160 million and 140 million wage earners–pay almost 90% of all Federal income taxes. The top 10% of households paid fully 72.7% of all Federal income tax, the top 5% paid 60.7%, and the top 1% paid 38.8%.


The second class is made up of the working poor: 38 Million Workers Made Less Than $10,000 in 2010— Equal to California's Population (The Atlantic magazine)

2011 real median household income was 8.1 percent lower than in 2007.

After including earned-income tax credits, the bottom 60% of households paid less than 1% of all Federal income taxes, and the households between 60% and 80% paid 13%.


My conclusion: by heavily taxing earned income, the system extracts the highest taxes from the most productive citizens, leaving the less-productive with essentially no income taxes and the super-wealthy with the huge tax break offered to capital gains and other unearned income.

As I noted in Tyranny of the Majority, Corporate Welfare and Complicity (April 9, 2010):



In essence, this is a vote-buying scheme by the Status Quo: the top 1% control the policies of the State in alliance with the State's own Elites, and together they buy the complicity of the bottom 60% to passively accept their dominance.

In other words, the bottom 60% pay relatively modest taxes or are recipients of State transfer payments and the top 1% who own the political process limit their taxes by favoring unearned income (what they collect from sales of securities, stock options, rents, etc.) and various tax breaks purchased with political contributions.

It's a partnership of "Tyranny of the Majority" and "entrenched incumbent Elites." If the political Status Quo alienates the majority by making them pay more taxes, they risk losing power in the next election. If they alienate the top .5% who fund their multi-million-dollar campaigns, then they will also lose power. So they heap the tax burden on what remains of the middle class.

This creates an unstable economy, political order and social contract. Those paying most of the taxes understandably see their taxes supporting leeches above (the financier and political-apparatchik classes) and below (guys with wallets bulging with black-market cash using food stamps at Wal-Mart, the not-disabled gaming the system to extract lifetime disability payments, etc.)

Bernanke's Neofeudal Rentier Economy (May 7, 2013)

America's Four Socioeconomic Classes (January 30, 2013)

Bifurcation Nation (June 24, 2013)

The Overworked and the Idle (July 15, 2013)

The Trick to Suppressing Revolution: Keeping Debt/Tax Serfdom Bearable (May 16, 2013)

All this has led me to ask Is America's Social Contract Broken? (July 17, 2013)

The Social Contract is broken not by wealth inequality per se but by the illegitimate process of wealth acquisition, i.e. the state has tipped the scales in favor of the few behind closed doors and routinely ignores or bypasses the intent of the law.

By this definition, the Social Contract in America has been completely shredded. One sector after another is dominated by cartel-state partnerships that are forged and enforced in obscure legislation written by lobbyists. Once the laws have been riddled with loopholes and the regulators have been corrupted, "no one is above the law" has lost all meaning.

Those who violate the intent of the law while managing to conjure an apparent compliance with the letter of the law are shysters, scammers and thieves who exploit the intricate loopholes of the system. In this way, the judicial system becomes part of the illegitimate process of wealth accumulation.

This is the norm in banana republics, whose ledgers are loaded with thousands of codes and regulations that are routinely ignored by those in power. In the Banana Republic of America, financial crimes go uninvestigated, unindicted and unpunished: banks and their management are essentially immune to prosecution because the crimes are complex (tsk, tsk, it's really too much trouble to investigate) and they're "too big to prosecute."

The rot has seeped from the financial-political Aristocracy to the lower reaches of the social order. The fury of those still working and paying substantial taxes is grounded in a simple, obvious truth: America is now dominated by scammers, cheaters, grifters and those gaming the system, large and small, to increase their share of the swag.

Formidable armies of scammers and their enablers (attorneys and doctors) are pillaging workers compensation and Social Security Disability (the lifetime kind, your claim and condition are never monitored after your claim is approved), not to mention Medicare fraud and those gaming the wide array of welfare programs.

The honest taxpayer is a chump, a mark who foolishly ponies up the swag that's looted by the smart operators. Everyone knows that the vast majority of wealth accumulation in America flows not from transparent effort on a level playing field, but from persuading the State (the Federal government and the Federal Reserve) to enforce cartels and grant monopolistic favors.

When scammers large and small live better than those creating value in the real economy, the Social Contract has frayed beyond repair. When the illegitimate process of wealth acquisition–a rigged playing field, a bought-off referee, and an Elite that's above the law by every practical measure–dominates the economy and the political structure, the Social Contract has been shredded, regardless of how much welfare largesse is distributed to buy the complicity of state dependents.

Once the chumps and marks realize there is no way they can ever escape their role of exploited tax donkeys and debt-serfs, the scammers, cheats and grifters large and small will be at risk of losing their perquisites. The fantasy in America is that legitimate wealth creation is still possible despite the visible dominance of a corrupt, self-serving, parasitic, predatory financial-political Aristocracy. Once that fantasy dies, so will the marks' support of the Aristocracy.

As Voltaire observed, "No snowflake in an avalanche ever feels responsible": every phony disability claim and every political favor purchased is "fair and legal," of course. This is precisely how social orders collapse: no one is responsible for anything but maximizing their personal share of the state swag.

For those who prefer charts, let's look at the state's rising share of the national income. Here is GDP:

State and local government spending:

Add in Federal spending and you get about $6 trillion, or about 40% of GDP:

Here is Federal debt "owed to the public," i.e. external debt that accrues interest and must be rolled over in Treasury auctions:

And last but not least, total credit market debt, public and private. This does not include an estimated $200 trillion in unfunded liabilities, i.e. future obligations that will have to be paid with either taxes or more borrowing.

As the state borrows trillions of dollars to support its Aristocracy and dependents, its debt skyrockets. The political Aristocracy expects the tax donkeys will carry a heavier burden without revolting, and the 60% "tyranny of the majority" who pay little but collect enough to get by will be wary of risking their benefits by resisting the existing political-financial kleptocracy.

In terms of democracy, the tax donkeys are trapped; they can't match the tens of millions in political contributions of the top .5%, and the 60% below them will support the status quo out of fear that the alternative could be even worse.

Politically, the system is unbreakable. Financially, it is unsustainable.

IMF Proposes Eurozone Fiscal Union, Banking Union, Harmonized Employment, Common Unemployment Scheme, Firewall Tax

Courtesy of Mish.

In the biggest nannycrat proposal ever, the IMF announced it’s vision for the United States of Europe (without using that name to describe the proposal).

Via translation from El Pais, please consider IMF suggests common unemployment benefits for the eurozone.

The IMF proposes more discipline, more fiscal integration, and the creation of a common unemployment benefit and risk sharing scheme to help the club of countries that have experienced damage in this crisis currency.

Fund staff argues that ommon fiscal governance, along with the banking union, are necessary to offset the “weaknesses in the architecture” of the eurozone, reinforce the club of 17 to future crises. In addition, the study argues that the most urgent step to acquire banking union goes through a firewall overall tax.

The pillars of a fiscal union , according to IMF staff, go through a series of mechanisms to pool the risks and avoid further costly bailouts, always subject to greater fiscal discipline. The tighter control over public finances of each country, which occur revenues and expenditures, is the condition of these forward-looking statements, both from the point of view of the IMF and Brussels.

Obedience and monitoring standards would allow the creation of a liquidity fund for troubled countries including a common unemployment benefit or “rainy day fund”.

This fund would be nurtured with an amount equivalent to between 1.5% and 2% of the GDP of member countries, which is in line for a fund with Germany for its most troubled regions.

Harmonisation of Employment

But there is much work ahead for something like a common shutdown could crystallize into a eurozone labor markets as diverse. “A common insurance scheme would require a minimum of harmonization in taxation of employment plus pension rights, which would be a positive step towards a single labor market,” the report warns.

The fiscal integration also requires a kind of Eurobonds or form of joint financing, led by the center of power and backed by global revenue, which would be possible once common tax structure is already underway.

A single monitoring mechanism should complement a firm commitment to establish a strong firewall ” to anchor confidence in the banking system. ” And this will require common money too: “While some insurance against banking fiascos be funded by the industry itself, a common fund for recapitalization, liquidation and deposit guarantee would reduce the risk of infection.”

The True Vision – A United State of Europe

That is the most comprehensive vision for the United States of Europe we have seen yet. And I propose an immediate up-or-down vote, right now, in all of the 17 member countries. …

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More Housing Data Says Bubble Will Rage On, Fed Will Never Learn

Courtesy of Lee Adler of the Wall Street Examiner

The Case Chiller Index reported earlier this week that the median US house sale price in July was up 12.4% year over year. This severely lagged and smoothed index actually represents the 3 month average contract price of repeat sales only, with a time mid point of mid April. Are you interested in where the 3 month moving average of the Dow was in mid April? Do you doubt the usefulness of the real time Dow even though it just replaced 3 components or the S&P even though it regularly replaces components? I didn’t think so. You want to know the price of the market today, right now, as shown by as representative and broad an index as possible.  Case Shiller’s methodology is preposterous in this regard.

Earlier this month, electronic real estate broker Redfin released current contract data for August for the 19 US metro markets it covers. This includes all contracts reported to the regional MLS’s for those markets. The 19 markets are mostly in the Northeast and on the West Coast, with only four markets in the US interior hinterlands, but it’s broad enough to give us a reasonably good idea of where the market stood and was headed a month ago based on contracts signed in August.

It seems abundantly clear from that data that the US housing market is in a bubble and is a lot hotter than Case Shiller says. According to Redfin, home prices per square foot were down 0.4% month to month but were 17.7% higher than August 2012 in those markets.  Based on the typical US home with 3 bedrooms, 2 to 2 1/2 baths and 1,600 to 2,000 square feet, prices rose 15.5% year to year.  The total gain from the 2011 low is 31%. Annual gains ranged from a low of 2.7% in Lawn Geyeland, NY to 38% in Lost Wages, NV and 37.8% in Sacramento, CA.

Home Sales Prices from Click to enlarge

Home Sales Prices from Click to enlarge

The chart suggests that price gains got a little too hot by July and entered a correction in August. This is a typical seasonal pattern.

Last year, the market was so hot coming off the lows that it merely paused in the second half. It will be interesting to see how much of a second half pullback happens this year.  Real time listing prices from suggest not much. Listing prices have routinely been consistent with subsequently reported sales data plus a normal margin. Therefore they are a reliable indicator of the market’s trend in real time.  Sellers are apparently still willing to raise prices because the market feedback they get from their agents is that inventories remain tight, with strong demand for good quality, well located properties.

The volume of current sales contracts has come off from recently red hot levels but is still strong year to year. Redfin reported that August sales volume fell by 4.3% from July but is up 6.2% versus August 2012 when mortgage rates were much lower.

Redfin also collects and reports data on the number of offers it submits and the number of house showings it conducts. Showings were down 13.9% in the week ended August 31 versus 4 weeks before but still up 19% year over year. Offers were down 13.4% versus 4 weeks prior, but up 13% versus August 2012. Activity is still much stronger this year than last year in spite of higher mortgage rates.  Rising rates and prices push buyers off the fence to buy now rather than wait. This is typical inflationary behavior that the Fed pretends not to see by ignoring housing inflation.

The chart below shows the massive demand bulge that started early in 2013 as mortgage rates began to rise. The seasonal decline that began in mid year is larger than normal, but the uptrend is intact, showing no sign of slowing. The pullback in demand appears to be giveback following a period of overheated and unsustainable demand.

House Showings and Offers Submitted from Click to enlarge

House Showings and Offers Submitted from Click to enlarge


Another service that provides closed sale data on a real time basis shows similar gains. publishes closed sales for 98 of the 100 largest US metros from public record data, each week. It aggregates the data on a rolling 4 week basis. Typically, recorded sales in most locales lag the closing dates by about 3 weeks. The most recent data would therefore tend to represent sales closed in August and early September, with contracts typically reached in June and July.

Dataquick US Home Sales and Prices - Click to enlarge

Dataquick US Home Sales and Prices – Click to enlarge

Dataquick shows that as of September 26, the latest 4 weeks of reported closed sales rose 16.2% in price over the prior year period.  That is the same as the gain of 16.2% as of August 22, and better than the 15.9% gain as of August 29. The rate of price gain is steady. The total gain since the cycle low in March 2012 was 36.1%.

Dataquick reported sales volume of 256,733 properties as of the 30 days ended September 26, for an annual increase in sales volume of 17%, a minimal slowing from the 18.3% reported a month earlier.

Redfin reports that supply shrank in August, as is seasonally normal, with active MLS listings in the 19 markets down 2.6% from July and down 18.2% from August 2012. which collects listings data from the 55 largest US metros showed real time listings still rising through July, then leveling off in August and September, with a month to month increase of 0.3% as of September 23, but that was still 2.7% below September 2012′s extremely tight level. Normally listing inventories decline from August through January. This data includes a broader sampling of US heartland and Southern markets than does Redfin. The data shows that supply remains tighter for this time of year than at any time in the past 7 years since first reported the data.

Total Listings 55 Large US Metros – Click to enlarge

Restricted supply appears to be the primary driver of the house price bubble. At some point, higher prices should bring forth a torrent of supply, but part of the problem is that ZIRP also  restricts supply because it renders too much of a penalty for cashing out equity. Millions of baby boomers reaching retirement age with substantial equity in their properties either opt not to sell, or if they do sell, to remain in the market as purchasers rather than renting and investing cash elsewhere. This is one reason why the percentage of all cash sales remains so high. Boomers are essentially swapping properties with one another rather than buying bank CDs and moving to Costa Rica. ZIRP not only inflates demand, it restricts supply.

This supply constraint will only be alleviated if interest rates are allowed to rise to an attractive enough level to motivate property owners to cash out. Otherwise older owners will continue to opt to hold property rather than liquidate. ZIRP eliminates the incentive for them to do so.

As a result, I expect supply to remain tight for the foreseeable future. Given the tight supply, demand is still sufficient to continue to put upward pressure on prices. The first signs that the price rise is coming to an end will be a drop in sales volume or a material increase in supply, or both.

That would require not just higher mortgage rates. It would also require the end of the suppression of short term rates that subsidizes the banks while penalizing the elderly who have already cashed out and have been forced to consume the principal of their life savings. ZIRP is not only immoral but also counterproductive economically, unless you believe that housing bubbles are good for the economy. Fed policy makers should have figured that one out by now, but apparently they are incapable of learning.

Get regular updates the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Click this link to try WSE’s Professional Edition risk free for 30 days!

Copyright © 2012 The Wall Street Examiner. All Rights Reserved. The above may be reposted with attribution and a prominent link to the Wall Street Examiner.

BOJ’s aggressive QE finally brought down JGB yields

BOJ's aggressive QE finally brought down JGB yields

Courtesy of Sober Look

The Bank of Japan was able to lower Japanese government bond yields after an unexpected spike earlier this year (see post). The 10yr JGB is now yielding around 70bp, corresponding to about minus one percent of real yield.

The central bank continues to control this market, accelerating bond purchases since the new governor took the helm. Sooner or later that forces yields lower.

The goal is to make cash and government bonds so unattractive (negative real yield) that investors do something else with their money – hopefully stimulating growth in the process. The effectiveness of this program however is yet to be demonstrated. The recent economic gains were mostly the result of a weaker yen instead of more spending and investment. And the type of inflation generated by BOJ's policy is hardly what the central bank had in mind (see post).

Home Sales Contracts Slow, But Strongest August Since 2006 As Supplies Tighten

Courtesy of Lee Adler of the Wall Street Examiner

The NAR reported a decline in the number of contracts to purchase existing homes in August, with a seasonally adjusted decline of 1.6%. That was better than economists’ consensus expectations of -2.3%. Fooled again! Too pessimistic again. Economists don’t seem to be able to get a handle on the nature of housing bubbles.

If you have been reading these pages for any amount of time, you recognize that the seasonally adjusted headline number may or may not represent reality. It isn’t the actual number, and depending on the seasonal adjustment factor, the headlines are all too often misleading.

The actual number of contracts fell 1.3% in August on a month to month basis, which is roughly equivalent to 1,500 units. Since this is an unadjusted number, in order to judge whether this represents strength or weakness we must compare it with past Augusts. The average change for August over the prior 10 years was an increase of 1.2%. This August was weaker than average and much weaker than the August 2012 gain of +4.1%.

Contracts To Purchase Existing Homes- Click to enlarge

Contracts To Purchase Existing Homes- Click to enlarge

Whether this was a result of weaker demand due to higher rates or the fact that many buyers were stymied by tighter than ever inventories is debatable. In fact, contracts were up 2.9% over August 2012 when mortgage rates were far lower than they were this August. We could reasonably conclude from that that higher rates have not materially suppressed demand, and that tight inventories are playing a role in suppressing sales. In my 40 years in or analyzing the housing business, I have noted that rising rates have always stimulated demand until they became so high as to make prices unaffordable.

The only time I saw that dynamic was in 1981-92. For the most part, rising rates have stoked an inflationary psychology in housing, motivating people to buy now to beat both rising prices and rising interest rates. That psychology is certainly at work now with prices rising nationally on average at the rate of 16-18% annually.

Tight inventories continue to impact the market, driving the price bubble and possibly restricting the number of sales. With demand still in an uptrend, a larger increase in inventories would be required to put a lid on the price gains.

Existing Home Inventory/Contracts Ratio- Click to enlarge

Existing Home Inventory/Contracts Ratio- Click to enlarge

The inventory to contracts ratio stood at 4.85 in August, up only slightly from 4.77 in July, and up a bit more versus the seasonal low of 3.95 in March. This is a 7 year record low for the month of August, down from 5.32 in August 2012 and a peak of 10.28 in August 2007. While a normal seasonal rise in this ratio is under way, the downtrend has not yet reversed. Prices are likely to continue rising until the trend of this ratio turns materially higher.

Earlier I reported that Housing Recovery Is An Illusion While Housing Inflation Rages. Current data from several other sources contradicts the idea promoted by the mainstream media that the housing bubble is slowing due to the rise in mortgage rates. The risk of an approaching Housing Crash II is still growing as house prices gain at the rate of 16-18% per year nationally, and far faster in the hottest bubble markets.

Get regular updates the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Click this link to try WSE’s Professional Edition risk free for 30 days!

Copyright © 2012 The Wall Street Examiner. All Rights Reserved. The above may be reposted with attribution and a prominent link to the Wall Street Examiner.

Housing Recovery Is An Illusion While Housing Inflation Rages

Courtesy of Lee Adler of the Wall Street Examiner

The new home sales industry remains extremely depressed, with activity near historical lows in spite of the biggest August sales increase in 7 years. Housing may not be a drag on the economy, but the idea that it’s making a positive contribution is not supported.  Meanwhile housing inflation rages, with new home prices above the levels at the top of the bubble in 2006. If that was a bubble, what’s this?

New Home Sales and Traffic - Click to enlarge

New Home Sales and Traffic – Click to enlarge

The Commerce Department reported a headline number of 421,000 new home sales in August. The consensus of economists’ guesses was for 415,000.  The median sale price was $254,600. That compares with $253,200 a year ago, and $243,900 in August 2006 near the peak of the bubble. The median price has risen 22.9% since August 2009, near the bottom of the crash.

The actual number (not seasonally adjusted)  of units sold in August was 35,000, up 1,000 from July and up 4,000 or 13% since August 2012. Back in the halcyon days of the bubble August sales were in the 100,000 range.

Apparently, higher mortgage rates aren’t crushing demand. My experience of 40 years either in or analyzing the real estate industry has been that demand increases when rates rise, until it doesn’t. Seeing rising rates and prices, potential buyers get off the fence. At some point that process stops when monthly carrying costs become unaffordable for most buyers, but we’re not there yet.

The monthly gain for this month was better than the typical August over the past 9 years, which usually had a decline.  The average monthly decline for the month over the previous 9 years was -5.3%. Last year the drop was -6.1%. This year, August sales rose by 2.9%, the best showing since the peak of the bubble in August 2006. This was a rebound from the biggest July drop of the past 9 years.

Buyers who stepped aside in July changed their minds and came back in August. This was consistent with the NAHB builders survey for August as reported here last month:

Conversely, the NAHB builder’s survey data for August, taken in early August, indicated that more builders were seeing better business in August. The July drop shown in the Commerce Department data may be transitory. The initial Commerce Department release is based on a tiny sample survey and subsequent monthly revisions are often substantial. We won’t know for certain if the sales uptrend is actually broken for several more months, and perhaps until the usual seasonal trough in January and February.

Apparently the uptrend is still intact. But it’s important to keep this in perspective. In the context of historical norms, this is not a recovery. Sales remain extremely depressed relative to the normal levels of the past couple of decades. Construction employment remains extremely depressed. Furthermore single family starts are outpacing sales.  If this continues, it will lead to a cutback in construction and the housing industry would again be an economic drag.

Housing Inflation Not Housing Recovery - Click to enlarge

Housing Inflation Not Housing Recovery – Click to enlarge

While housing activity remains moribund, housing inflation is raging. We may not have a recovery, but in terms of prices, we do have a bubble. New house prices recently hit all time records and remain at a record August level even with the usual second half seasonal pullback under way.  If 2006 was a bubble, and prices are even higher today, then this must be a bubble too.

New house inventories have been rising over the past year, but they remain historically low and the inventory to sales ratio remains tight. Prices are likely to rise until inventories increase more or sales drop. It’s a distorted market. There’s little evidence that that will change anytime soon.

New House Sales and Inventories - Click to enlarge

New House Sales and Inventories – Click to enlarge

Get regular updates the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Click this link to try WSE’s Professional Edition risk free for 30 days!

Copyright © 2012 The Wall Street Examiner. All Rights Reserved. The above may be reposted with attribution and a prominent link to the Wall Street Examiner.