Archives for February 2015

Another Reason To Worry About The Stock Market

Courtesy of John Rubino.

The world is full of “carry trades” these days, and that’s a really bad thing.

In general terms, a carry trade involves someone borrowing money cheaply in one currency or market and investing the proceeds in something else that offers a higher yield. The strategy is profitable as long as the currency being borrowed doesn’t rise by more than the spread between the cost of the loan and the income from the investment.

The yen carry trade, in which institutions borrowed Japanese yen for next to nothing and bought emerging market bonds yielding quite a bit more, was the dominant version for most of the past decade. It paid off nicely when the yen plunged in value last year. Then the dollar carry trade took over, with about US$9 trillion being borrowed worldwide and invested in everything from Brazilian bonds to Chinese infrastructure. That hasn’t worked out so well, since the dollar is up lately by more than enough to offset the income from those investments. The impact of this tidal wave of negative cash flow will be felt going forward and could be serious, since $9 trillion is about the size of the Chinese economy.

But the really interesting — and potentially even more dangerous — carry trade is happening here at home, where public companies are issuing low-interest-rate debt and using the proceeds to buy back their shares. When the bond interest is lower than the dividends on the stock that’s being purchased and retired, this is a cash flow positive trade — with the added benefit of pushing up the share price and therefore company execs’ year-end bonuses. Check out the following two charts for a sense of the magnitude of this trade:

Share buybacks Apple and IBM

Share buybacks

So what happens if US equities have the kind of bear market that usually follows their recent spike to record levels? Well, the companies that have borrowed heavily will still owe interest on their bonds, but the shares they’ve bought will be worth 20%-30% less. This negative change in their net worth (real if not in terms of financial reporting) might make their shares even less attractive and put extra downward pressure on them, and so on, until a garden-variety bear market turns into something nastier.

This in turn will throw the “wealth effect” (in which higher share prices lead to higher consumer spending) into reverse, possibly turning a manageable slowdown into another Great Recession.

That’s of course unacceptable for the people running today’s governments, for whom rising asset prices are now up there with the war on terror and lobbyist pay scales in terms of untouchability. So lately even minor stock price corrections have been met with an army of Fed, Treasury and congressional talking heads promising fast action to keep the gravy train going.

All of which makes current speculation about Fed interest rate policy seem a bit silly. The truth of the matter is that interest rates, monetary policy in general and pretty much every other government policy is now dictated by the need to keep the asset bubble from bursting.

Visit John’s Dollar Collapse blog here >

Ukraine Hyperinflation; Currency Plunges 44% in One Week! Actual Black Market Rates; Poroshenko Gives “Ultimatum” to Central Bank to Fix Exchange Rate

Courtesy of Mish.

I hear various reports of what the hryvnia actually trades for on the black market in Ukraine. I believe the reports, but they come in piece-mail.

Today, I have an actual black market link to share thanks to reader Oleg from Crimea.

In response to Ukrainian Currency Comparison: Budget Rate vs. Official Rate vs. Interbank Rate vs. Street Rate reader Oleg Writes …

Hello Mish!

There’s more to the black exchange rate than meets the eye in Ukraine.

First of all if you use the “legal” currency exchange places you can only exchange up to 3000 hryvnias per day. Then there is an extra tax on the exchange.

None of that applies at the black market of course. Often black market outfits operate from the same official currency exchange kiosks, you just need how an what to ask for.

A number of “online exchanges for people” sprang up where people say how much of what they have and what they ask for it. Of course, such sites are subject to manipulation.

I am from the Crimea originally, and I am grateful it’s no longer at the top of the news.

Oleg

Currency Limits

The official foreign exchange limit is 3000 hryvnias per day, down from 15,000 a year ago. That’s less than $100 a day. That limit is posted in Changes in Currency Control Rules (in English).

The Exchange Tax, not in English, is up from 0.5% to 2.0%. …

Continue Here

How Far Is It From Kiev To Athens?

Courtesy of The Automatic Earth.


Gordon Parks “New York, New York. Scene in Harlem area.” 1943

Riddle me this, Batman. I don’t think I get it, and I definitely don’t get why nobody is asking any questions. The IMF and EU make a lot of noise – through the Eurogroup – about all the conditions Greece has to address to get even a mild extension of support, while the same IMF and EU keep on handing out cash to Ukraine without as much as a whisper – at least publicly.

The Kiev government, which has been ceaselessly and ruthlessly attacking its own people, is now portrayed as needing – monetary and military – western help in order to be able to ‘defend’ itself. From the people it’s been attacking, presumably. And hardly a soul in the west asks what that is all about.

Why did Kiev kill 5000 of its own citizens? Because there are people in East Ukraine who had – and still have – the guts to say they don’t want to be ruled by a regime willing to murder them for saying they don’t want to be ruled by it. And just in case there’s any confusion left about this, yes, that is the regime we are actively supporting, in undoubtedly many more ways than are made public. All the doubts about the western narrative are swept aside with one move: blame Putin.

Of the two countries, Greece, despite its humanitarian issues, is by far the luckiest one. Ukraine is quite a few steps further down the hill. One can be forgiven for contemplating that the west, aided by President Poroshenko and the Yats regime in Kiev, is dead set on obliterating the entire nation.

There are again peace talks under way, with no – direct – Anglo-Saxon involvement, but as the Foreign Ministers of Russia, Ukraine, France and Germany meet, Britain announces it’s sending military personnel into Ukraine and Poroshenko buys weapons from UAE, which is the same as saying from America. Where does he get the money? Chocolate sales? 

Baltic states reinforce their armies (Lithuania just launched conscription), as NATO expands its presence there. The constantly repeated message is that Putin will attack them. It’s a made-up story. Poroshenko says he wants Crimea back, even as he knows full well that’s not going to happen.

What part of the fresh round of IMF/EU loans will go towards arms purchases? Can Brussels please supply a run-down ASAP? Don’t Europeans have a right to know where their money goes?

To start with, here’s a partial overview of loans from Constantin Gurdgiev:

IMF Package for Ukraine: Some Pesky Macros

Ukraine package of funding from the IMF and other lenders remains still largely unspecified, but it is worth recapping what we do know and what we don’t.Total package is USD40 billion. Of which, USD17.5 billion will come from the IMF and USD22.5 billion will come from the EU. The US seemed to have avoided being drawn into the financial singularity they helped (directly or not) to create. We have no idea as to the distribution of the USD22.5 billion across the individual EU states, but it is pretty safe to assume that countries like Greece won’t be too keen contributing.

Cyprus probably as well. Ireland, Portugal, Spain, Italy – all struggling with debts of their own also need this new ‘commitment’ like a hole in the head. Belgium might cheerfully pony up (with distinctly Belgian cheer that is genuinely overwhelming to those in Belgium). But what about the countries like the Baltics and those of the Southern EU? Does Bulgaria have spare hundreds of million floating around? Hungary clearly can’t expect much of good will from Kiev, given its tango with Moscow, so it is not exactly likely to cheer on the funding plans… Who will?

Austria and Germany and France, though France is never too keen on parting with cash, unless it gets more cash in return through some other doors. In Poland, farmers are protesting about EUR100 million that the country lent to Ukraine. Wait till they get the bill for their share of the USD22.5 billion coming due.

Recall that in April 2014, IMF has already provided USD17 billion to Ukraine and has paid up USD4.5 billion to-date. In addition, Ukraine received USD2 billion in credit guarantees (not even funds) from the US, EUR1.8 billion in funding from the EU and another EUR1.6 billion in pre-April loans from the same source. Germany sent bilateral EUR500 million and Poland sent EUR100 million, with Japan lending USD300 million.

Here’s a kicker. With all this ‘help’ Ukrainian debt/GDP ratio is racing beyond sustainability bounds. Under pre-February ‘deal’ scenario, IMF expected Ukrainian debt to peak at USD109 billion in 2017. Now, with the new ‘deal’ we are looking at debt (assuming no write down in a major restructuring) reaching for USD149 billion through 2018 and continuing to head North from there.

In other words, the loans are only and exclusively making Ukraine’s position worse. The Greeks may feel like debt slaves, but Ukrainians face a far darker feudal situation. They’re going to be debt-prisoners in their own country. And that has nothing to do with Putin, it’s the ultimate shock doctrine. The country will be turned into a testing ground for NATO and western military industries. Which is why ‘we’ have been so intent on engaging Russia in the Ukraine conflict.

But back to the loans first:

The point is that the situation in the Ukrainian economy is so grave, that lending Kiev money cannot be an answer to the problems of stabilising the economy and getting economic recovery on a sustainable footing. With all of this, the IMF ‘plan’ begs three questions:

  1. Least important: Where’s the European money coming from?
  2. More important: Why would anyone lend funds to a country with fundamentals that make Greece look like Norway?
  3. Most important: How on earth can this be a sustainable package for the country that really needs at least 50% of the total funding in the form of grants, not loans? That needs real investment, not debt? That needs serious reconstruction and such deep reforms, it should reasonably be given a decade to put them in place, not 4 years that IMF is prepared to hold off on repayment of debts owed to it under the new programme?

Why indeed? One thing seems certain: reconstruction is not in the cards. All assets will be sold for scrap, and most citizens ‘encouraged’ to cross one of many borders Ukraine has. Britain is next up in the escalation process. Again, as German/French talks with Russia continue.

Britain To Send Military Advisers To Ukraine, Announces Cameron

Britain was pulled closer towards a renewed cold war with Russia when David Cameron announced UK military trainers are to be deployed to help Ukraine forces stave off further Russian backed incursions into sovereign Ukraine territory. The decision – announced on Tuesday but under consideration by the UK national security council since before Christmas – represents the first deployment of British troops to the country since the near civil war in eastern Ukraine began more than a year ago. Downing Street said the deployment was not just a practical bilateral response to a request for support, but a signal to the Russians that Britain will not countenance further large scale annexations of towns in Ukraine.

The prime minister said Britain would be “the strongest pole in the tent”, and argued for tougher sanctions against Moscow if Russian-backed militias in eastern Ukraine failed to observe the provisions of a ceasefire agreement reached this month with the Ukrainian president, Petro Poroshenko. Downing Street said some personnel would be leaving this week as part of the training mission. Initially 30 trainers will be despatched to Kiev with 25 providing advice on medical training, logistics, intelligence analysis and infantry training. A bigger programme of infantry training is expected to follow soon after taking the total number of trainers to 75.

That’s simply war-mongering, and precious little else. We may wonder about the timing, but not the intention. Cameron goes on to make some really bizarre statements:

He said there was no doubt about Russian support for the rebels. “What we are seeing is Russian-backed aggression, often these are Russian troops, they are Russian tanks, they are Russian Grad missiles. You can’t buy these things on eBay, they are coming from Russia, people shouldn’t be in any doubt about that. “We have got the intelligence, we have got the pictures and the world knows that. Sometimes people don’t want to see that but that is the fact.”

No, Mr. Cameron, the problem is, the world does not know that, because it has never been shown either the intelligence or the pictures. Why not provide them? Because you don’t have them, is the only reason I can think of after a full year full of alleged activity of which there is not one shred of proof, but a million tons of accusations and innuendo. It’s literally a propaganda war, with the other side hardly firing back at all. And then there’s this from RT:

East Ukraine Artillery Withdrawal In Focus – As Poroshenko Buys UAE Weapons

While the foreign ministers of France, Germany, Russia and Ukraine were meeting in Paris to talk about the Eastern Ukraine peace settlement, it was revealed that the Ukrainian president has struck a deal on arms supplies from the UAE. The four ministers agreed on the need for the ceasefire to be respected, as well as on the need to extend the OSCE mission in Eastern Ukraine, reinforcing it with more funding, personnel and equipment. It’s important for Kiev troops and the rebels to start withdrawing heavy weapons right now, without waiting for the time “when not a single shot is fired,” Russian Foreign Minister Sergey Lavrov said after the meeting.

He added that his German and French counterparts thought it a positive development that the Donetsk and the Lugansk rebels had started to pull their artillery back. “The situation has significantly improved, that was acknowledged by my partners,” Lavrov said. “However, sporadic violations are being registered by the OSCE observers.” The withdrawal of heavy weaponry by Kiev troops and the rebels is part of the ceasefire deal struck in Minsk earlier in February. The Donetsk militia has announced it is complying.

Ukrainian President Petro Poroshenko has meanwhile reached an agreement on weapons supplies from the United Arab Emirates. That’s according to a Facebook post by advisor to Ukrainian Interior Minister, Anton Gerashchenko. The deal was struck with the Crown Prince of Abu Dhabi and deputy supreme commander of the UAE Armed Forces, Mohammed bin Zayed bin Sultan Al Nahyan. “It’s worth emphasizing that unlike Europeans and Americans, the Arabs aren’t afraid of Putin’s threats of a third world war starting in case of arms and ammunition supplies to Ukraine,” Gerashchenko wrote. He also said he believed the UAE blamed Russia for the drop in oil prices. “So, this is going to be their little revenge,” the adviser said.

Curious. Now it’s the Russians who are to blame for the oil price plunge? Weren’t they supposed to be the major victims? And when did Putin threaten with WWIII? There’s more to this:

[..].. former US diplomat James Jatras told RT: “This discussion in Washington about supplying weapons has been going on for some time. Usually that indicates that some kind of a covert program is already in operation and that we already are supplying some weapons directly,” he said. Jatras added that it is hard to believe that UAE would sell these weapons to Ukraine “without a green light from Washington.”

I would think the same thing: plenty forces in Washington who want nothing more than to supply weapons to Kiev, and there’s always a way. Note that Germany and France, the western partners in the peace talks, have so far managed to prevent direct arms supplies. They’ve now been blindsided, or so it would seem. Maybe it’s time for Merkel to pull her weight here, and a bit less on Greece. Germany doesn’t want an escalating warzone on its doorstep.

Meanwhile, the gas delivery issue is heating up again (pun intended). Ukraine continues to provoke Russia, but it will have to pay eventually. Unless escalation is the real goal, and freezing Eastern Europeans will be deemed a justifiable sacrifice.

Kiev Cash-For-Gas Fail Could Cost EU Its Supply (In 2 Days) – Gazprom

Russia will completely cut Ukraine off gas supplies in two days if Kiev fails to pay for deliveries, which will create transit risks for Europe, Gazprom has said. Ukraine has not paid for March deliveries and is extracting all it can from the current paid supply, seriously risking an early termination of the advance settlement and a supply cutoff, Gazprom’s CEO Alexey Miller told journalists. The prepaid gas volumes now stand at 219 million cubic meters. “It takes about two days to get payment from Naftogaz deposited to a Gazprom account. That’s why a delivery to Ukraine of 114 million cubic meters will lead to a complete termination of Russian gas supplies as early as in two days, which creates serious risks for the transit to Europe,” Miller said.

Earlier this month, Russian Energy Minister Aleksandr Novak estimated Ukraine’s debt to Russian energy giant Gazprom at $2.3 billion. In the end of 2014, Kiev’s massive gas debt that stood above $5 billion, forced Moscow to suspend gas deliveries to Ukraine for nearly six months. On December 9, Russia resumed its supplies under the so-called winter package deal, which expires on April 1, 2015. [..] On Monday, Ukrainian state energy company Naftogaz accused Gazprom of failing to deliver gas that Kiev had paid for in advance. Naftogaz says Russia has broken an agreement to deliver 114 million of cubic meters of natural gas to Ukraine by delivering only 47 million cubic meters.

During a meeting with President Vladimir Putin on February 20, Russian Prime Minister Dmitry Medvedev expressed concern about an increase in daily applications by Ukraine for the supply of gas, TASS reports. He noted that “Ukraine’s consumers have requested a larger supply; the volume has increased by 2.5 times. This means that the prepaid volumes left are enough for no more than two to three days.”

Overall, there seems to be little left that can be done to de-escalate the situation. The Donbass rebels may retreat some heavy weapons, but they won’t want to risk being defeated by a freshly replenished Ukraine/US/UK army. The make-up of which is ever harder to envision, since a few hundred thousand potential soldiers have already fled the country. Unless they extend the draft to 12- to 80-year-old women, what Ukrainians will be left to fight? And who will want to? Except for the private battallions of questionable make-up, that is.

Ukraine will at some point be so impoverished that a new Maidan type revolution may be inevitable. There should really be elections in the country as soon as possible, but that doesn’t look likely to happen. Why Yatsenyuk is still PM should be a mystery, he was elected by a parliament at gunpoint. And he’s a US puppet, who’s recently invited three US citizens into key positions in his cabinet. Ukrainians may be scared to speak up, but if they don’t, things could get much worse real fast.

It’s once again time for the people to take to the streets. But that risks turning into an awful bloodbath that could make Kiev look like the Dresden. Unless all international parties retreat from Ukraine, there doesn’t seem to be a solution that would benefit the people.

In Search of the Magic Wand: Career Change at Age 45 Possible?

Courtesy of Mish.

Reader Mark has a career question. Mark writes …

Hi Mish: I am 45 years old. I have worked in the grocery business for 20 years. I am starting to have back problems. I would like to move on. Do you have any suggestions as to a suitable career for someone my age. I do read your blog, and I can relate to the money business. Thanks, Mark

Formal Education is No Magic Wand

Hi Mark

Unfortunately, and in spite of what the education industry would like you to believe, I present a  sobering reality: A career change at age 45 or even 55 is possible, but extremely difficult.

Traditional education is highly unlikely to give you the skills you need. Occasionally someone hits the jackpot, but most likely you would waste money, and lots of it trying. Don't believe hype from places like the University of Phoenix.

From information technology (IT), to banking, to writing, to market analysis, to dog catching, corporations will want experience. Even college interns have difficulty finding jobs.

In IT, there are hundreds of thousands of skilled workers out of a job and competing with programmers in India or Russia.

In banking or finance (if not everything), my honest assessment is that someone would look at your age and experience and pass you over for someone younger, someone with more experience, or both.

Your safest plan is to make an effort without spending much, if any money. I suggest some free courses at the Khan Academy, Coursera or elsewhere. That would put something on your resume of relevance, and more importantly would show prudent motivation.

Instead, if you drain your savings on training, the most likely thing is you will be exactly where you are, but without your savings.

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What Dodd-Frank Didn’t Fix: The Worst Conflicts on Wall Street

Courtesy of Pam Martens.

Mary Jo White, Testifying at Her Confirmation Hearing for SEC Chair on March 12, 2013; Her Husband, John W. White, Partner at Cravath, Swaine & Moore, Sits to Her Left

Mary Jo White, Testifying at Her Confirmation Hearing for SEC Chair on March 12, 2013; Her Husband, John W. White, Partner at Cravath, Swaine & Moore, Sits to Her Left

Two major stories have broken this week showing how little has actually changed under the much heralded financial reform legislation known as Dodd-Frank. That legislation was enacted in 2010 with the promise of ending the unchecked corruption, conflicts of interest and casino capitalism that crashed the U.S. financial system in 2008, leading to the largest taxpayer bailout in the nation’s history.

Yesterday, in a front page article, the New York Times used data to back up the withering conflicts of interests of SEC Chair Mary Jo White – the same conflicts that Wall Street On Parade reported two years ago. (See related articles below.)

The Times reported that because Mary Jo White had worked for a major Wall Street powerhouse law firm immediately preceding her term at the SEC, representing major Wall Street firms like JPMorgan Chase, she had recused herself at least 48 times on cases involving either her former law firm or clients she directly represented.

Then comes the less than credible part of the Times story. The reporters write: “But in a surprising twist, Ms. White will have to keep sitting out cases that involve her husband’s firm, Cravath, Swaine & Moore. So far, she has had to recuse herself from at least 10 investigations into clients of Cravath, interviews and records show, including some that came before Ms. White joined the agency and at least four that involved Mr. White himself.”

“Surprising twist”? This is what Wall Street On Parade reported in 2013:

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Kimble Charts: Coal

Kimble Charts: Coal

Chris Kimble’s chart for KOL shows a recently beaten down ETF struggling to pull itself up from the ashes. As the chart shows, KOL has recently drifted down to levels not seen since the financial crisis of 2008-9.

KOL (1)

Bouncing or recovering with energy in general, coal prices appear to have stabilized in the short-term. Reflecting coal prices, KOL has traded between $13.45 and $19.75 during the past year. Bouncing off lows, KOL traded around 2% higher yesterday from $14.26 to $14.48 on high volume. It traded another 3.6% higher in after hours to $15, possibly related to Obama’s veto of the Keystone XL bill allowing construction of the Keystone XL oil pipeline. KOL’s back to around $14.56 now.

The chart below is of the NYMEX Central Appalachian coal futures near-month contract final settlement price history from Jan. 2008 to Dec. 2014. After running up rapidly in early 2008, coal prices fell quickly during the financial crisis. Coal traded in a narrower range since the 2008 spike. KOL’s prices have behaved similarly. (Source.)

Screen Shot 2015-02-25 at 7.51.52 AM

Chris’s chart analysis suggests that KOL might be ready to stage a breakout to higher levels. Chris likes buying KOL with a stop loss at about $13.87.

For free alerts from Chris on other interesting chart patterns, visit his website and sign up at the top right.

For an in-depth analysis of the coal industry, Market Realist provides A must-know overview of the US thermal coal industry for investors. The Realist notes, “There are six main publicly traded companies that operate coal mines in the U.S., which are also part of the Market Vectors Coal ETF (KOL). These are Arch Coal (ACI), Alpha Natural Resource (ANR), Peabody Energy Corporation (BTU), Cloud Peak Energy (CLD), Consol Energy (CNX), and Walter Energy, Inc. (WLT), in order of production. In 2013, the top four publicly traded companies’ U.S. assets made up about a half of the U.S.’ annual coal supply.” KOL’s top holdings are listed here.

See also: Kimble Charts: Soybeans, 2-23-15.

Emails From Kiev: Free Speech Vanishes, Total Media Thought Control; US Radar System Falls Into Rebel Hands?

Courtesy of Mish.

Free Speech Vanishes – Total Media Thought Control

I have a couple emails from Ukraine to share, one from two days ago, one from yesterday. Both are from "Ellen" who lives in Kiev (name changed).

Two Days Ago From Ellen

As you know, the Debaltsevo pocket situation is resolved. It's not as bad as it could have been in terms of casualties. However, this was a crashing defeat of Poroshenko's generals.

I don't know how many more losses our society can take, but people are very angry. Currency keep plunging every day. Today it takes 30 hryvnias to buy one US dollar. It seems we have default without official announcement of it.

There is a new problem: total media thought control. In Ukraine we used to have free speech, but not any longer. War propaganda is everywhere and if someone doubts official policy, the journalist will be cast out or put in prison.

It is worse now than under Yanukovych. There is an atmosphere of fear everywhere. Today, a new law was passed, and now the president can switch off any TV news channel, any paper.
 
Total mobilization is underway. Anyone who refuses to join the army will go to jail.

Putin opened the border for Ukrainians who don't want to join the army. Millions of men from Ukraine went to Russia. Not many want to go to war. One defeat after another discourages people.

Many think Debaltsevo was breaking point. Some say separatists will take new areas with less resistance from Ukrainian army. Hard to say. Many think Mariupol, a city of 400,000 people is next. If separatists storm Mariupol it will be a bloody mess world haven't seen for long time.

Ellen

UAE Sells Arms to Ukraine, Currency Plunges More

Yesterday From Ellen ….

News today is Ukraine will buy arms from UAE, perhaps arms that Americans previously sold to UAE. Poroshenko signed the contract, but we do not know what exactly Ukraine is buying.

Continue Here

 

War of Terror: “Disappeared in Chicago”; Illegal Detention by Chicago Police Without Charges; Beatings and Death

Courtesy of Mish.

Meet the “Nato Three”

Brian Jacob Church, Jared Chase and Brent Vincent Betterly, known as the ‘Nato Three’. Photograph: AP/Cook County sheriff’s office.

All were arrested, put in an “off-the-books” interrogation compound in Chicago and denied access to lawyers. This goes on every day. People are beaten and threatened.

It’s all part of the alleged war on terror. I prefer to call it “War of Terror“.

War of Terror

Please consider the Guardian report “The Disappeared”: Chicago Police Detain Americans at Abuse-Laden ‘Black Site’

The Chicago police department operates an off-the-books interrogation compound, rendering Americans unable to be found by family or attorneys while locked inside what lawyers say is the domestic equivalent of a CIA black site.

The facility, a nondescript warehouse on Chicago’s west side known as Homan Square, has long been the scene of secretive work by special police units. Interviews with local attorneys and one protester who spent the better part of a day shackled in Homan Square describe operations that deny access to basic constitutional rights.

Alleged police practices at Homan Square, according to those familiar with the facility who spoke out to the Guardian after its investigation into Chicago police abuse, include:

Keeping arrestees out of official booking databases.
Beating by police, resulting in head wounds.
Shackling for prolonged periods….

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Debt Be Not Proud

Thoughts from the Frontline: Debt Be Not Proud

By John Mauldin

Some things never change. Here is Eugen von Böhm-Bawerk, one of the founding intellectuals of the Austrian school of economics, writing in January 1914, lambasting politicians for their complicity in the corruption of monetary policy:

We have seen innumerable variations of the vexing game of trying to generate political contentment through material concessions. If formerly the Parliaments were the guardians of thrift, they are today far more like its sworn enemies. Nowadays the political and nationalist parties … are in the habit of cultivating a greed of all kinds of benefits for their co-nationals or constituencies that they regard as a veritable duty, and should the political situation be correspondingly favorable, that is to say correspondingly unfavorable for the Government, then political pressure will produce what is wanted. Often enough, though, because of the carefully calculated rivalry and jealousy between parties, what has been granted to one has also to be conceded to others — from a single costly concession springs a whole bundle of costly concessions. [emphasis mine]

That last sentence is a key to understanding the crisis that is unfolding in Europe. Normally, you would look at a country like Greece – with 175% debt-to-GDP, mired in a depression marked by -25% growth of GDP (you can’t call what they’re going through a mere recession), with 25% unemployment (50% among youth), bank deposits fleeing the country, and a political system in (to use a polite term) a state of confusion – and realize it must be given debt relief.

But the rest of Europe calculates that if they make concessions to Greece they will have to make them to everybody else, and that prospect is truly untenable. So they have told the poor Greeks to suck it up and continue to toil under a mountain of debt that is beyond Sisyphean, without any potential significant relief from a central bank. This will mean that Greece remains in almost permanent depression, with continued massive unemployment. While I can see a path for Greece to recover, it would require a series of significant political and market reforms that would be socially and economically wrenching, almost none of which would be acceptable to any other country in Europe.

Sidebar: Japan would still be mired in a depressionary deflation if its central bank were not able to monetize the country’s debt. As Eurozone members the Greeks have no such option .

However, the rest of Europe is not without its own rationale. To grant Greece the debt relief it needs without imposing market reforms would mean that eventually the same relief would be required for every peripheral nation, ultimately including France. Anyone who thinks that Europe can survive economically without significant market reforms has no understanding of how markets work. Relief without reforms would be as economically devastating to the entirety of Europe as it would be to Greece alone. Ultimately, for the euro to survive as a currency, there must be a total mutualization of Eurozone debt, a concept that is not politically sellable to a majority of Europeans. (The European Union can survive quite handily as a free trade zone without the euro and would likely function much better than it does now.)

Kicking the debt relief can down the road is going to require a great deal of dexterity. The Greeks haven’t helped their cause with their abysmal record of avoiding taxes and their rampant, all-too-easily-observed government corruption, including significant public overemployment.

In this week’s letter we will take a close look at the problem that is at the core of Europe’s ongoing struggle: too much debt. But to simply say that such and such a percentage of debt to GDP is too much doesn’t begin to help you understand why debt is such a problem. Why can Japan have 250% debt-to-GDP and seemingly thrive, while other countries with only 70 or 80% debt-to-GDP run into a wall?

Debt is at the center of every major macroeconomic issue facing the world today, not just in Europe and Japan but also in the US, China, and the emerging markets. Debt (which must include future entitlement promises) is a conundrum not just for governments; it is also significantly impacting corporations and individuals. By closely examining the nature and uses of debt, I think we can come to understand what we will have to do in order to overcome our current macroeconomic problems.

But first, two announcements. At the end of the letter is a link to the website for my 2015 Strategic Investment Conference in San Diego, April 29 – May 2. There is a terrific lineup, and you can sign up now and get the early-bird discount through the end of the month. Ours is simply the best speaker lineup at any conference in the country that discusses economics and investing. You really should make an effort to attend.

And I’m pleased to announce the launch of Mauldin Pro, our new service for professional investors. We’ve been working on this for months. You’ll likely remember a few Outside the Box editions featuring a brilliant young global macro investor by the name of Jawad Mian. Jawad has brought his excellent Stray Reflections letter to Mauldin Economics as part of our Pro service. In addition, we have Over My Shoulder and World Money Analyst, an interview series called Mauldin Conversations, and – perhaps the best part – our Pro Sessions. These will be a traveling series of seminars with SIC-level speakers, but in a more intimate setting. We’ll get together for a few hours of intense discussion and then relax with a drink and get to know each other. Our first session is being organized now and will be held in New York City. If you are a financial advisor, portfolio manager, or other type of investment professional, this service is for you. Check it out here.

Now let’s think about debt.

Debt Be Not Proud

Debt is future consumption brought forward, as von Böhm-Bawerk taught us. It is hard for me to overemphasize how important that proposition is. If you borrow money to purchase something today, that money will have to be paid back over time and will not be available for other purchases. Debt moves future consumption into the present. Sometimes this is a good thing, and sometimes it is merely stealing from the future.

This is a central concept in proper economic thinking but one that is all too often ignored. Let’s tease out a few ideas from this concept. Please note that this letter is trying to simply introduce the (large) topic of debt. It’s a letter, not a book. In this section we’ll deal with some of the basics, for new readers.

First off, debt is a necessary part of any society that has advanced beyond barter or cash and carry. Debt, along with various forms of insurance, has made global finance and trade possible. Debt fuels growth and allows for idle savings accrued by one person to be turned into useful productive activities by another. But too much debt, especially of the wrong kind, can also be a drag upon economic activity and, if it increases too much, can morph into a powerful force of destruction.

Debt can be used in many productive ways. The first and foremost is to use debt to purchase the means of its own repayment. You can borrow in order to buy tools that give you the ability to earn higher income than you can make without them. You can buy on credit a business (or start one) that will produce enough income over time to pay off the debt. You get the idea.

Governments can use debt to build roads, schools, and other infrastructure that are needed to help grow the society and enhance the economy, thereby increasing the ability of the government to pay down that debt.

Properly used, debt can be your friend, a powerful tool for growing the economy and improving the lives of everyone around you.

Debt can be created in several ways. You can loan money to your brother-in-law directly from your savings. A corporation can borrow money (sell bonds) to individuals and funds, backed by its assets. No new money needs to be created, as the debt is created from savings. Such lending almost always involves the risk of loss of some or all of the loan amount. Typically, the higher the risk, the more interest or return on the loan is required.

Banks, on the other hand, can create new money through the alchemy of fractional reserve banking. A bank assumes that not all of its customers will need the immediate use of all of the money they have deposited in their accounts. The bank can loan out the deposits in excess of the fraction they are required to hold for depositors who do want their cash. This lets them make a spread over what they pay depositors and what they charge for loans. The loans they make are redeposited in their bank or another one and can be used to create more loans. One dollar of base money from a central bank (sometimes called high-powered money) can over time transform itself into $8-10 of actual cash.

A government can create debt either directly or indirectly, by borrowing money from its citizens (through the sale of bonds) or by directing its central bank to “print” or create money. The money that a central bank creates is typically referred to as the monetary base.

Debt can be a substitute for time. If I want a new car today, I can borrow the money and pay for the car (which is a depreciating asset) over time. Or I can borrow money to purchase a home and use the money I was previously paying in rent to offset some or all of the cost of the mortgage, thereby slowly building up equity in that home (assuming the value of my home goes up).

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best-selling author, and Chairman of Mauldin Economics – please click here.

Important Disclosures

The article Thoughts from the Frontline: Debt Be Not Proud was originally published at mauldineconomics.com.

14 Signs That Most Americans Are Flat Broke And Totally Unprepared For The Coming Economic Crisis

Courtesy of Michael Snyder at The Economic Collapse

When the coming economic crisis strikes, more than half the country is going to be financially wiped out within weeks.  At this point, more than 60 percent of all Americans are living paycheck to paycheck, and a whopping 24 percent of the country has more credit card debt than emergency savings.  One of the primary principles that any of these “financial experts” that you see on television will teach you is to have a cushion to fall back on.  At the very least, you never know when unexpected expenses like major car repairs or medical bills will come along. 

And in the event of a major economic collapse, if you do not have any financial cushion at all you will be a sitting duck. There are millions upon millions of families out there that are just trying to scrape by from month to month. I hear from people that are deeply struggling in this economy all the time. So I don’t blame them for not being able to save lots of money. But if you are in a position to build up an emergency fund, you need to do so.  We have been experiencing an extended period of relative economic stability but it will not last. In fact, the time for getting prepared for the next great economic downturn is rapidly running out, and most Americans are not ready for it.

The following are 14 signs that most Americans are broke and unprepared for the coming economic crisis…

#1 According to a survey that was just released, 24 percent of all Americans have more credit card debt than emergency savings.

#2 That same survey discovered that an additional 13 percent of all Americans do not have any credit card debt, but they do not have a single penny of emergency savings either.

#3 At this point, approximately 62 percent of all Americans are living paycheck to paycheck.

#4 Adults under the age of 35 in the United States currently have a savings rate of negative 2 percent.

#5 More than half of all students in U.S. public schools come from families that are poor enough to qualify for school lunch subsidies.

#6 A study that was conducted last year found that more than one out of every three adults in the United States has an unpaid debt that is “in collections“.

#7 One survey discovered that 52 percent of all Americans really cannot even financially afford the homes that they are living in right now.

#8 According to research conducted by Atif Mian of Princeton University and Amir Sufi of the University of Chicago Booth School of Business, 40 percent of Americans could not come up with $2000 right now without borrowing it.

#9 That same study found that 60 percent of Americans could not say yes to the following question… “Do you have 3 months emergency funds to cover expenses in case of sickness, job loss, economic downturn?”

#10 A different study discovered that less than one out of every four Americans has enough money stored away to cover six months of expenses.

#11 Today, the average American household is carrying a grand total of 203,163 dollars of debt.

#12 It is estimated that less than 10 percent of the entire U.S. population owns any gold or silver for investment purposes.

#13 48 percent of all Americans do not have any emergency supplies in their homes whatsoever.

#14 53 percent of all Americans do not even have a minimum three day supply of nonperishable food and water in their homes.

Perhaps none of this concerns you.

Perhaps you think that this bubble economy can persist indefinitely.

Well, if you won’t listen to the more than 1200 articles that set out the case for the coming economic collapse on my website, perhaps you will listen to former Federal Reserve Chairman Alan Greenspan.  The following is what he recently told one interviewer

We asked him where he thought the gold price will be in five years and he said “measurably higher.”

In private conversation I asked him about the outstanding debts… and that the debt load in the U.S. had gotten so great that there has to be some monetary depreciation. Specially he said that the era of quantitative easing and zero-interest rate policies by the Fed… we really cannot exit this without some significant market event… By that I interpret it being either a stock market crash or a prolonged recession, which would then engender another round of monetary reflation by the Fed.

He thinks something big is going to happen that we can’t get out of this era of money printing without some repercussions – and pretty severe ones – that gold will benefit from.

And as I have stressed so frequently, the signs that the next crisis is almost here are all around us.

For example, the Baltic Dry Index has just plunged to a fresh record low, and things have already gotten so bad that some global shippers are now filing for bankruptcy

The unintended consequences of a money-printed, credit-fueled, mal-investment-boom in commodities (prices – as opposed to physical demand per se) and the downstream signals that sent to any and all industries are starting to bite. The Baltic Dry Index has plunged once again to new record lows and the collapse of the non-financialized ‘clean’ indicator of the imbalances between global trade demand and freight transport supply has the real-world effects are starting to be felt, as Reuters reports the third dry-bulk shipper this month has filed for bankruptcy… in what shippers call “the worst market conditions since the ’80s.”

Perhaps you do see things coming.

Perhaps you do want to get prepared.

If you are new to all of this, and you don’t quite know how to get started preparing, please see my previous article entitled “89 Tips That Will Help You Prepare For The Coming Economic Depression“.  It will give you some basic tips that you can start implementing right away.

And of course one of the most important things is something that I talked about at the top of this article.

If at all possible, you have got to have an emergency fund.  When the coming economic storm strikes, your family is going to need something to fall back on.

If you are trusting in the government to save you when things fall apart, you will be severely disappointed.

Cash for Gas: Russia Threatens to Shut Off Gas in Two Days for Lack of Payment; Meter Maid Called In

Courtesy of Mish.

Meter Maid Called to Resolve Dispute

Last year, Russia shut off gas deliveries to Ukraine for lack of payment. Most of the flow through Ukraine goes to Europe, but Russia accused Ukraine of siphoning off gas without paying for it.

In December, Ukraine agreed to prepay for gas. The flows resumed, but a major dispute has recently arisen.

Gas Dispute

  1. Yesterday, Ukraine complained it has not received gas it paid for.
  2. Today, Russia complains it has not been paid for gas delivered.

I have called in the meter maid to investigate these claims and counterclaims.

Shutoff in Two Days

RT reports Kiev Cash-for-Gas Failure Could Cost EU its Supply.

Russia will completely cut Ukraine off gas supplies in two days if Kiev fails to pay for deliveries, which will create transit risks for Europe, Gazprom has said.

Ukraine has not paid for March deliveries and is extracting all it can from the current paid supply, seriously risking an early termination of the advance settlement and a supply cutoff, Gazprom’s CEO Alexey Miller told journalists. The prepaid gas volumes now stand at 219 million cubic meters.

It takes about two days to get payment from Naftogaz deposited to a Gazprom account. That’s why a delivery to Ukraine of 114 million cubic meters will lead to a complete termination of Russian gas supplies as early as in two days, which creates serious risks for the transit to Europe,” Miller said.

Last week, Russian Prime Minister Dmitry Medvedev ordered the energy minister and the head of Gazprom to prepare proposals on fuel deliveries to the self-proclaimed Republics of Donetsk and Lugansk (DPR and LPR) after Kiev had cut off the delivery pipeline into the southeastern regions. Ukraine’s Naftogaz said it had halted gas supplies to eastern regions due to broken pipelines.

Russian Gas to Europe

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Ukrainian Currency Comparison: Budget Rate vs. Official Rate vs. Interbank Rate vs. Street Rate

Courtesy of Mish.

Last Friday, reader John told me the “street rate” for currency in Ukraine was not the reported 28 Hryvnias per US$ but rather on the order of 32 per US$.

I asked John where he got his information. He replied, “from my sister who lives in Lviv“.

Lviv is a beautiful city in Western Ukraine.

John did not know what the “street rate” was yesterday, but he informed me the “interbank rate” was 31.50 to 32.50. The interbank rate is higher still today.

Meanwhile, Investing.Com shows a jump today to 32.487 today from 28 yesterday.

click on chart for sharper image

Interbank Rate is 33.5/USD

The above chart is closer, but still not correct.

On February 14, a researcher from Johns Hopkins Institute asked me where I got my rates from. I did not have an official source then, but today I have one.

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The Easy Oil Is Gone So Where Do We Look Now?

The Easy Oil Is Gone So Where Do We Look Now? 

By Andrew Topf of Oilprice.com 

In 2008, Canadian economist Jeff Rubin stunned the oil market with a bold prediction: With the world economy growing at 5 percent a year, oil demand would grow with it, outpacing supply, thus lifting the oil price from $147 to over $200 a barrel. 

The former chief economist at CIBC World Markets was so convinced of his thesis, he wrote a book about it. "Why the World is About to Get a Whole Lot Smaller" forecast a sea change in the global economy, all driven by unsustainably high oil prices, where domestic manufacturing is reinvigorated at the expense of seaborne trade and people's choices become driven by the ever-increasing prices of fossil fuels. 

In the book, Rubin dedicates an entire chapter to the changing oil supply picture, with his main argument being that oil companies "have their hands between the cushions" looking for new oil, since all the easily recoverable oil is either gone or continues to be depleted – at the rate of around 6.7% a year (IEA figures). "Even if the depletion rate stops rising, we must find nearly 20 million barrels a day of new production over the next five years simply to keep global production at its current level," Rubin wrote, adding that the new oil will match the same level of consumption in 2015, as five years earlier in 2010. In other words, new oil supplies can't keep up with demand. 

Of course, Rubin at the time was talking about conventional oil – land-based and undersea oil – as well as unconventional oil sands. The shale oil "revolution" in the United States that took off soon after the publication of his book has certainly changed the supply picture, and the recent collapse in oil prices has forced Rubin to eat his words. With U.S. shale oil production soaring from 600,000 barrels a day in 2008 to 3.5 million barrels a day in 2014, the United States over the past few years has flooded the market with new oil from its shale formations, including the Eagle Ford in South Texas and the Bakken in North Dakota. According to the Energy Information Administration (EIA), total U.S. production (conventional and unconventional) will increase to 9.3 million barrels a day this year, the most since 1972. 

While some observers, including oil giant BP, are now predicting a slowdown in U.S. shale oil production as wells are depleted at a faster rate, to be replaced by Middle Eastern output that has lost ground to U.S. shale, the thesis posed by Jeff Rubin in 2008, that the world is running out of oil, seems to have changed to: Is the world swimming in oil? 

In this continuing climate of abundant oil production, Oilprice.com sought to find out where the new oil will be found. The data could be used in a further analysis to determine whether an oversupplied market will continue to depress oil prices into the future – or whether a price correction is likely given a tightening of the market on the supply side. 

According to a 2013 report by Wood Mackenzie, the world holds 1.4 trillion barrels of oil equivalent oil and gas reserves, with the Middle East, Latin America, North America and Africa identified as the key regions for future oil plays. 

Of course, many of the new fields are uneconomic at current prices, so it is instructive to look at the largest oil fields to see where oil producers are likely to keep pumping, even though many of these fields are in decline. 

They include Ghawar and Safaniya in Saudi Arabia, Burgan in Kuwait, and Rumalia and West Qurna-2 in Iraq. These five fields were named the most important by Oilprice.com in an article last June. Ghawar, the world's largest field, has an estimated 70 billion barrels of remaining reserves, more than all but seven other countries, according to the EIA. In production since the 1950s, it continues to produce at 5 million barrels a day. 

If you noticed the dominance of the Middle East in this list, you'd be right. Current estimates have over 80 percent of the world's proven oil reserves located in OPEC member countries, with Middle Eastern reserves comprising 65 percent of the OPEC total. 

Adding to the Oilprice.com list, Forbes named Majnoon in Iraq, Khuzestan (also the name of a province) in Iran, Kashagan in the Caspian Sea, Khurais in Saudi Arabia, the Tupi field offshore Brazil, Carabobo in Venezuela's Orinoco heavy oil belt, and the North Slope of Alaska among its top 10 fields of the future. 

Fortune places the Orinoco belt in Venezuela among its six largest untapped fields, at an eye-watering 513 billion barrels of recoverable crude. In comparison the Chicontapec Basin in Mexico, also on the list, is a Lilliputian at 10 billion barrels. Others include the Santos and Campos Basins in offshore Brazil, at 123 billion barrels, the Supergiant field in the southwest desert of Iraq, at between 45 and 100 billion barrels, and the Jubilee Field in Ghana, estimated to contain 1.8 billion barrels of recoverable crude. 

The Canadian oil sands should of course also be included in the matrix of future oil supply. Despite the difficulty and higher-cost, compared to conventional sources, of stripping the bitumen from the oil sands and processing it into heavy oil, the vastness of the reserves contained in the sands of northern Alberta cannot be underestimated. According to the Alberta government the oil sands has proven reserves of about 168 billion barrels, the third largest proven crude oil reserve in the world, after Saudi Arabia and Venezuela. Canadian oil sands production is forecasted to grow from about 2 million barrels per day to 3.7 million barrels per day by 2020 and 5.2 million barrels per day by 2030, according to Alberta Energy. 

Many have pointed to the Arctic as the answer to the depletion of existing oil and gas fields. The region, which crosses Russia, Alaska, Norway and Greenland, is estimated to hold 166 billion barrels of oil equivalent, more oil and gas than Iran and enough to meet the world's entire consumption of crude oil for five years, reported The Daily Telegraph. 

Drilling down a bit further, the US Geological Survey estimates that over 87% of the Arctic's oil and gas resources are located in seven Arctic basin provinces: Arctic Alaska Basin, East Barents Basin, East Greenland Basin, West Greenland East Canada Basin, East Greenland Rift Basin, West Siberian Basin and the Yenisey-Khatang Basin. 

The Prudhoe Bay field in Alaska, which has been pumping oil since 1977, is the largest oil field in North America, at about 25 billion barrels. Around 16 percent of the Arctic's undiscovered oil and gas is located on land, with the remaining potential either locked in continental shelves or underwater at depths over 500 meters. 

Of the seven basins outlined by the USGS, the most abundant is Arctic Alaska, at 29.36 billion barrels of crude oil, followed by the Amerasia Basin, at 9.72 billon, and the East Greenland Rift Basin at 8.90 billion, according to Geology.com. 

Among the oil majors eyeing the Arctic prize, Shell has been drilling off the coast of Alaska for decades, Statoil is active in the Norwegian Arctic, and ExxonMobil is exploring with Russia's Rosneft in the Russian far north. Last year Rosneft/ ExxonMobil discovered a field that could hold up to 730 million barrels of oil, but for the time being, exploration looks thin. With low oil prices, most oil companies are reining in capital costs, and exploration expenditures are a high-priority line item. Statoil and Chevron have both put their Arctic plans on ice, and the ExxonMobil partnership with Rosneft could be in trouble due to Western sanctions against Russia. Shell is currently the only company sinking any capital into the Arctic, with the Anglo-Dutch firm announcing at the end of January that it plans to proceed with a $1-billion Arctic drilling this summer. 

And what of the shale oil reserves that have propelled the United States to becoming close to energy-independent and threaten to knock Saudi Arabia off its pedestal as the world's top oil producer? In 2013, the EIA conducted the first-ever U.S. analysis of global shale oil reserves. It estimated "technically recoverable" (as opposed to economically recoverable) shale oil resources of 345 billion barrels in 42 countries, the equivalent of 10 percent of global crude oil supplies – and enough to cover over a decade of oil consumption. 

According to the EIA, Russia and the United States have the largest shale oil resources, at a respective 75 billion barrels and 58 billion barrels, followed by China, Argentina and Libya. The other countries on the top 10 list of countries with technically recoverable shale include Australia, Venezuela, Mexico, Pakistan and Canada. 

The EIA report also shows a marked increase in the number of prospective shale deposits globally compared to an earlier 2011 report. That report listed 32 countries with shale versus 41 in 2013, 48 basins versus 95, and half the number of formations, at 69 in 2011 versus 137 in 2013. 

Special Reports from OilPrice.com

8 Mega Trends How to profit from the eight mega trends: Here's what our 400 global energy assets are telling us to be prepared for right now.

LNG Technology The "FLOATING REFINERY" company's tanker technology could eliminate many of the world's offshore pipelines.

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JP Morgan to charge big clients fees on deposits

Emily Glazer at the Wall Street Journal reports on JP Morgan's move to reduce large deposits, worth about $390 billion, down to about half of that. The fees will presumably force the clients into switching to other ways of holding their money and/or other less liquid investments. The stock market likes the news, shares are up about 2.5%.

To read the full WSJ articles, paste the title into Google's search bar and click, then click on the article from the WSJ in Google's list.

J.P. Morgan to Start Charging Big Clients Fees on Some Deposits

New deposit fees likely to reduce deposits by billions

J.P. Morgan Chase & Co. is preparing to charge large institutional customers for some deposits, citing new rules that make holding money for the clients too costly, according to a memo reviewed by The Wall Street Journal and people familiar with the plan.

The largest U.S. bank by assets is aiming to reduce the affected deposits by up to $100 billion by the end of 2015, according to a bank presentation Tuesday morning.

J.P. Morgan to Reduce Up to $100 Billion in Certain Deposits

Plan comes as bank seeks to discourage certain deposits amid new regulations, low interest rates

The plan won’t affect the bank’s retail customers, but some corporate clients and especially an array of financial firms, including hedge funds, private-equity firms and foreign banks, will feel the impact, according to an internal bank memo reviewed by The Wall Street Journal. The bank is focusing on around $200 billion of certain “excess” deposits from financial institutions out of a total $390 billion of financial-institution deposits, according to the presentation.

J.P. Morgan is making the moves because certain deposits are less profitable to handle than they used to be. New federal rules essentially penalize banks for holding deposits viewed as prone to fleeing during a crisis or a stressed environment.

[…]

The Wall Street Journal reported in early December that J.P. Morgan and several other banks, including Citigroup Inc., HSBC Holdings PLC, Deutsche Bank AG and Bank of America Corp. , had spoken privately with clients in recent months to inform them that new regulations are making some deposits less profitable, in some cases telling clients they would charge fees or work to find alternatives for some of the deposits. The moves have thrown into question a cornerstone of banking, in which deposits have been seen as one of the industry’s most attractive forms of funding.

Lowest Interest Rates EVER

Courtesy of John Rubino.

Business Insider’s Myles Udland just posted a chart, drawn from research by the Bank of England, showing interest rates for the past 3,000 years. And for all those who’ve been feeling like today’s “new normal” is actually profoundly abnormal, here’s your proof. It turns out that interest rates, both long and short-term, are lower than they’ve ever been. Not lower than in this cycle, or post-war or in the past century, but ever, going back to the earliest days of markets.

Interest rates 3000 years

And they’re still falling in most of the world. Central banks are cutting rates on a daily basis (Turkey was today’s announcement), in some cases to less than zero. Something like $2 trillion of sovereign and corporate debt now trades with negative yields.

Virtually the only major entity considering raising rates is the US, and the incongruity of this threat has traders balking. See Bloomberg’s Traders still don’t believe the Fed is ready to raise rates .

If this is indeed uncharted territory and we’re going further in before we’re done, what are the implications for markets and, well, everything? A couple of thoughts:

The insurance industry, pension funds and money market funds all depend on positive yields to operate. A life insurance company, for instance, can keep premiums low because it can invest that cash for years before having to pay out on the policy. What happens if the bonds it buys start yielding nothing (or less than nothing)? What about a money market fund that can no longer find investment grade corporate paper yielding much more than zero? Pension funds, meanwhile, have generally promised 7%-8% returns to their members, but now have to get all of those profits from the equity and real estate sides of their portfolios.

For any of these entities to stay in business they now have to act like hedge funds, taking on extra risk, rolling the dice and hoping that the good years outweigh the bad ones. In other words, these formerly safest-of-the-safe investment vehicles become just as risky as the typical eTrade account.

Then there’s the impact of negative rates on the market’s price signaling mechanism for the rest of us. Interest rates are the price of money, and as such they tell investors, entrepreneurs and consumers what to do. Low interest rates generally say “buy, build, consume, take risks” while high rates say “save, sell, conserve, wait.” But zero or negative rates? Are they just an extreme version of low rates or is there a qualitative difference? Everyone has a theory about this but in the absence of historical precedent, we’ll have to wait and see.

Anyhow, the coming negative interest rate world will provide plenty of thrills, chills and blog post material. For now it’s enough to note that we’ve never, through depressions, world wars, bubbles and famines, seen anything like today’s economy.

Visit John’s Dollar Collapse blog here >

Is Oil Returning To $100 Or Dropping To $10?

Is Oil Returning To $100 Or Dropping To $10?

Courtesy of Martin Tillier via OilPrice.com

If you have been following the price of oil over the last few months, the chances are you’re a little confused. On the one hand you have Gary Shilling who, in this Bloomberg article, loudly trumpets the prospect of oil at $10/Barrel, and on the other there is T. Boone Pickens, who, at the end of last year was predicting a return to $100 within 12-18 months. Pickens prediction has moderated somewhat as WTI and Brent crude have continued to fall, but in January he was still saying that oil would return to $70 or $80/barrel in the near future. So, who is correct?

The answer is neither one. As with most things in life it is unlikely that the truth lies at either extreme. Pickens, and Shilling and other commentators suggesting that oil will fall to levels not seen since 1998, purport to have sound reasons for saying what they do, but the real reasons for such comments are most likely the two oldest human motivations in the book, greed and hubris. “Talking your book” is nothing new in financial markets and, while Pickens has an insider’s knowledge of the oil business, he also has a massive stake in driving oil higher however he can. Shilling is in the business of garnering eyeballs and clicks, hence the competition for the most outrageous prediction among the bears.

LNG TechnologyI know it isn’t sexy and it probably breaks some unwritten rule of internet hackery to say it, but the most likely scenario is that WTI futures will bounce around current levels for a while before gradually recovering to the $60-$70/Barrel level. It could even reach Pickens’ revised $70 or $80 level before too long, but we are unlikely to see $100 in the near future without some major external influences.

Now that the dust has settled somewhat, the reasons for the big drop are becoming clearer, and it is clear that supply was not the only factor. It was obvious for a while that as fracking unlocked oil deposits in shale and sand that had previously been thought unreachable, supply, particularly in the U.S. would grow considerably. That wasn’t seen as too much of a problem by the market, though, until questions about slowing global economic growth and a rapidly appreciating Dollar were added to the mix in the middle of last year. Once that happened and OPEC made it clear that they would not immediately cut supply and hand power to the upstart U.S. shale producers, the collapse began.

The drop halted at a logical level. In 2008 and 2009 when a complete global economic collapse looked on the cards oil was trading in the mid $40s and that is where support was eventually found. According to EIA data, global oil production in 2008 was an average 74.016 million barrels per day and in the first 10 months of 2014 averaged 77.427 million barrels, an increase of around 5%. Consumption in 2008 was 86.045 million barrels per day and in 2014 was 92.13 million, an increase of 1.2%.

Put simply, supply has increased faster than demand, so a rapid return to oil over $100/Barrel looks extremely unlikely. That said though, in order to believe that the price will fall much further you have to believe that the economic outlook today is worse than it was at the beginning of the deepest recession since 1929. That too seems like a bit of a stretch.

The only logical conclusion then is that in the near term oil will trade in an approximate range of $50-$70. Incidentally, the bottom end of that range represents the inflation adjusted 100 year average price, according to one Morgan Stanley analyst quoted in another Bloomberg article. We shouldn’t, therefore, be shocked that oil is here any more than we should be shocked that publicity-hungry columnists and heavily invested oilmen are predicting further wild swings.

****

Special Reports from OilPrice.com

8 Mega Trends How to profit from the eight mega trends: Here's what our 400 global energy assets are telling us to be prepared for right now.

LNG Technology The "FLOATING REFINERY" company's tanker technology could eliminate many of the world's offshore pipelines.

Subsea Production THE END OF OFFSHORE DRILLING? This disruptive market will grow 84% to 270% over the next five years: Discover six equipment suppliers set to profit.

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Crash Course in Free Market Economics and Income Inequality

Courtesy of Mish.

On February 19 Doug McMillon, President & CEO, Walmart, announced higher pay in a Letter to Associates.

Bloomberg columnist Barry Ritholtz, a higher minimum wage advocate, pounced on the news, calling the wage hike Wal-Mart’s Crash Course in Labor Economics

Last week, we learned that Wal-Mart was giving the lowest paid of its hourly employees a raise. In a blog post, Wal-Mart Chief Executive Officer Doug McMillon said that as of April, the company will pay a minimum of $9 an hour. That is $1.75 more than the federal minimum wage of $7.25, which has been unchanged for almost six years. Next February, Wal-Mart’s lowest hourly rate will rise to $10. All told, about a half-million Wal-Mart workers in the U.S. will be affected.

In the years since the last federal minimum-wage increase, many of Wal-Mart’s employees had fallen below the poverty level and the strengthening economy has made it harder to attract and retain employees.

Although many factors contributed to the move, the simple reason for the increase is because Wal-Mart has stopped growing. Same-store sales have been little changed or declining for some time now. When we look at the underlying causes, the company’s workforce, and how it is managed, are the prime suspects.

Cutting on salary and benefits, however, didn’t necessarily lower costs. About 44 percent of Wal-Mart’s hourly staff turns over each year. That’s a lot of people, because the company employs 2.2 million workers worldwide. Hiring replacements is a costly and time consuming process.

Consider competitors such as Costco: It has average hourly wages of $20 and a turnover rate of “17% overall and just 6% after one year’s employment,” according to the Harvard Business Review.

Staff Turnover

Barry goes on and on with some things I agree with and many other things I don’t. However, I believe we can all reasonably assume that that staff turnover was a major factor in Wal-Mart’s decision.

If so, what does that say?

It says that the free market wage for Wal-Mart employees is $10.00 an hour, not $9.53, not $12.28, not $15.00, not any pulled out of the hat government mandate.

Wal-Mart decided on its own accord it could not attract the quality of people it needs at $7.25. That says nothing about Costco or McDonald’s.

Simply put, the free market worked, not pressure from protesters, not whining from Obama….

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Revolt In Athens: Syriza Central Committee Member Says “Leadership Strategy Has Failed Miserably”

Courtesy of ZeroHedge. View original post here.

Not everybody is ignoring that fact that just days after the new Prime Minister promised the Greek population on prime time TV that the loathed bailout program wouldn't be extended and that Greece would have a fresh start – i.e., the mandate it was elected on – one without austerity, Greece folded on virtually every demand, to the point where the European Commission may itself have drafted the "reform agreement" that the Greek finance minister was said to have created.

One person who may be starting a splinter revolt within Syriza itself is Stathis Kouvelakis, a member of the central committee of the leftist organization, a teacher of political theory at King's College, and the latest to demonstrate that the Syriza facade of cohesive acceptance of the past week's "negotiations", is starting to crumble.

From his post "The Alternative In Greece", translated by Wayne Hall, and appearing first in Jacobinmag.

The strategy of Syriza’s leadership has failed miserably. But it’s not too late to avert total defeat.

Let us begin with what should be indisputable: the Eurogroup agreement that the Greek government was dragged into on Friday amounts to a headlong retreat.

The memorandum regime is to be extended, the loan agreement and the totality of debt recognized, “supervision,” another word for troika rule, is to be continued under another name, and there is now little chance Syriza’s program can be implemented.

Such a thorough failure is not, and cannot be, a matter of chance, or the product of an ill-devised tactical maneuver. It represents the defeat of a specific political line that has underlain the government’s current approach.

Friday’s Agreement

In the spirit of the popular mandate for a break with the memorandum regime and liberation from debt, the Greek side entered negotiations rejecting the extension of the current “program,” agreed to by the Samaras government, along with the €7 billion tranche, with the exception of the €1.9 billion return on Greek bonds to which it was entitled.

Not consenting to any supervisory or assessment procedures, it requested a four-month transitional “bridge program,” without austerity measures, to secure liquidity and implement at least part of its program within balanced budgets. It also asked that lenders recognize the non-viability of the debt and the need for an immediate new round of across-the-board negotiations.

But the final agreement amounts to a point-by-point rejection of all these demands. Furthermore, it entails another set of measures aimed at tying the hands of the government and thwarting any measure that might signify a break with memorandum policies.

In the Eurogroup’s Friday statement, the existing program is referred to as an “arrangement,” but this changes absolutely nothing essential. The “extension” that the Greek side is now requesting (under the “Master Financial Assistance Facility Agreement”) is to be enacted “in the framework of the existing arrangement” and aims at “successful completion of the review on the basis of the conditions in the current arrangement.”

It is also clearly stated that

only approval of the conclusion of the review of the extended arrangement by the institutions … will allow for any disbursement of the outstanding tranche of the current EFSF programme and the transfer of the 2014 SMP profits [these are the 1.9 billion of profits out of Greek bonds to which Greece is entitled]. Both are again subject to approval by the Eurogroup.

So Greece will be receiving the tranche it had initially refused, but on the condition of sticking to the commitments of its predecessors.

What we have then is a reaffirmation of the typical German stance of imposing — as a precondition for any agreement and any future disbursement of funding — completion of the “assessment” procedure by the tripartite mechanism (whether this is called “troika” or “institutions”) for supervision of every past and future agreement.

Moreover, to make it abundantly clear that the use of the term “institutions” instead of the term “troika” is window-dressing, the text specifically reaffirms the tripartite composition of the supervisory mechanism, emphasizing that the “institutions” include the ECB (“against this background we recall the independence of the European Central Bank”) and the International Monetary Fund (“we also agreed that the IMF would continue to play its role”).

As regards the debt, the text mentions that “the Greek authorities reiterate their unequivocal commitment to honour their financial obligations to all their creditors fully and timely.” In other words forget any discussion of “haircuts,” “debt reduction,” let alone “writing off of the greater part of the debt,” as is Syriza’s programmatic commitment.

Any future “debt relief” is possible only on the basis of what was proposed in the November 2012 Eurogroup decision, that is to say a reduction in interest rates and a rescheduling, which as is well-known makes little difference to the burden of servicing debt, affecting only payment of interest that is already very low.

But this is not all, because for repayment of debt the Greek side is now fully accepting the same framework of Eurogroup decisions of November 2012, at the time of the three-party government of Antonis Samaras. It included the following commitments: 4.5% primary surpluses from 2016, accelerated privatizations, and the establishment of a special account for servicing the debt — to which the Greek public sector was to transfer all the income from the privatizations, the primary surpluses, and 30% of any excess surpluses.

It was for this reason too that Friday’s text mentioned not only surpluses but also “financing proceeds.” In any case, the heart of the memorandum heist, namely the accomplishment of outrageous primary surpluses and the selling-off of public property for the exclusive purpose of lining lenders’ pockets, remains intact. The sole hint of relaxation of pressure is a vague assurance that “the institutions will, for the 2015 primary surplus target, take the economic circumstances in 2015 into account.”

But it was not enough that the Europeans should reject all the Greek demands. They had, in every way, to bind the Syriza government hand and foot in order to demonstrate in practice that whatever the electoral result and the political profile of the government that might emerge, no reversal of austerity is feasible within the existing European framework. As European Commission President Jean-Claude Juncker stated, “there can be no democratic choice against the European treaties.”

And the provision for this is to take place in two ways. Firstly, as indicated in the text: “The Greek authorities commit to refrain from any rollback of measures and unilateral changes to the policies and structural reforms that would negatively impact fiscal targets, economic recovery or financial stability, as assessed by the institutions.”

So no dismantling of the memorandum regime either (“rollback of measures”), and no “unilateral changes,” and indeed not only as regards measures with a budgetary cost (such as abolition of taxes, raising of the tax-free threshold, increases in pensions, and “humanitarian” assistance) as had been stated initially, but in a much more wide-ranging sense, including anything that could have a “negative impact” on “economic recovery or financial stability,” always in accordance with the decisive judgment of the “institutions.”

Needless to say this is relevant not only to the reintroduction of a minimum wage and the reestablishment of the labor legislation that has been dismantled these last years, but also to changes in the banking system that might strengthen public control (not a word, of course, about “public property” as outlined in Syriza’s founding declaration).

Moreover, the agreement specifies that

the funds so far available in the Hellenic Financial Stability Fund (HFSF) buffer should be held by European Financial Stability Facility (EFSF), free of third party rights for the duration of the MFFA extension. The funds continue to be available for the duration of the MFFA extension and can only be used for bank recapitalisation and resolution costs. They will only be released on request by the ECB/SSM.

This clause shows how it has not escaped the attention of the Europeans that Syriza’s Thessaloniki program stated that “seed money for the public sector and an intermediary body and seed money for the establishment of special purpose banks, amounting to a total in the order of €3 billion, will be provided through the HFSF’s so-called ‘cushion’ of around €11 billion for the banks.”

In other words, goodbye to any thought of using HFSF funds for growth-oriented objectives. Whatever illusions still existed regarding the possibility of using European funds for purposes outside of the straitjacket of those for which they had been earmarked — and even more that they should be placed under the Greek government’s jurisdiction — have thus been dispelled.

Defeat of the “Good Euro” Strategy

Can the Greek side possibly believe that it has achieved something beyond the impressive verbal inventiveness of the text? Theoretically yes, insofar as there are no longer any explicit references to austerity measures, and the “structural changes” mentioned (administrative reforms and a clampdown on tax evasion) do not pertain to this category, a modification which of course needs cross-checking against the list of measures that can be expected to emerge in the coming days.

But given that the target of the outrageous budgetary surpluses has been retained, along with the totality of the troika machinery of supervision and assessment, any notion of relaxation of austerity appears out of touch with reality. New measures, and of course stabilization of the existing “memorandum acquis” are a one-way street as long as the present regime prevails, is renamed, and is perpetuated.

It is clear from the above that in the course of the “negotiations,” with the revolver of the ECB up against its head and resultant panic in the banks, the Greek positions underwent near-total collapse. This helps to explain the verbal innovations (“institutions” instead of “troika,” “current arrangements” instead of “current program,” “Master Financial Assistance Facility Agreement” instead of “Memorandum,” etc.). Symbolic consolation or further trickery, depending on how you look at it.

The question that emerges, of course, is how we landed in this quandary. How is it possible that, only a few weeks after the historic result of January 25, we have this countermanding of the popular mandate for the overthrow of the memorandum?

The answer is simple: what collapsed in the last two weeks is a specific strategic option that has underlaid the entire approach of SYRIZA, particularly after 2012: the strategy that excluded “unilateral moves” such as suspension of payments and, even more so, exit from the euro, and argued that:

  • On the issue of the debt, a favorable solution for the debtor can be found with the concurrence of the lender, following the model of the London agreements of 1953 for the debts of Germany — ignoring of course the fact that the reasons the Allies behaved generously towards Germany do not in any way apply to the Europeans today vis à vis the Greek debt, and more generally the public debt of the over-indebted states of today’s EU.
  • Overthrow of the memoranda, expulsion of the troika, and a different model of economic policy (in other words implementation of the Thessaloniki program) could be implemented irrespective of the outcome of debt negotiations and, above all, without triggering any real reaction from the Europeans, above and beyond the initial threats, which were dismissed as bluffing. Indeed, half of the funding for the Thessaloniki program was envisaged as coming from European resources. In other words, not only would the Europeans not have reacted, but they would have generously funded the opposite policies they had been imposing for the last five years.
  • Finally, the “good euro” scenario presupposed the existence of allies of some significance at the level of governments and/or institutions (the reference here is not to the support from social movements or other leftist forces). The governments of France and Italy, the German social democrats, and finally, in a veritable frenzy of fantasy, Mario Draghi himself were from time to time invoked as such potential allies.

All of this came crashing down within the space of a few days. On February 4 the ECB announced the suspension of the main source of liquidity to Greek banks. The outflow that had already started rapidly acquired uncontrollable dimensions, while the Greek authorities, fearing that such a reaction would mark the commencement of the Grexit, didn’t take the slightest “unilateral” measure (such as imposition of capital controls).

The words “writing-off” of debt and even “haircut” were rejected in the most categorical manner possible by lenders who became enraged even hearing them (with the result that they were almost immediately withdrawn from circulation). Instead of their overthrow, it turned out that the only “non-negotiable” element was that of keeping the memoranda and supervision by the troika. Not a single country supported the Greek positions, above and beyond some diplomatic courtesies from those who wanted the Greek government to be able, marginally, to save face.

Fearing the Grexit more than it feared its interlocutors, entirely unprepared in the face of the absolutely predictable contingency of bank destabilization (the system’s classical weapon internationally for almost a century when faced by leftist governments), the Greek side was essentially left without any bargaining tools whatsoever. It found itself with its back to the wall and with only bad options at its disposal. Friday’s defeat was inevitable and marks the end of the strategy of “a positive solution inside the euro,” or to be more accurate “a positive solution at all costs inside the euro.”

How to Avert Total Defeat

Rarely has a strategy been confuted so unequivocally and so rapidly. Syriza’s Manolis Glezos was therefore right to speak of “illusion” and, rising to the occasion, apologize to the people for having contributed to cultivating it. Precisely for the same reason, but conversely, and with the assistance of some of the local media, the government has attempted to represent this devastating outcome as a “negotiating success,” confirming that “Europe is an arena for negotiation,” that it is “leaving behind the Troika and the Memoranda” and other similar assertions.

Afraid to do what Glezos has dared to do — i.e. acknowledge the failure of its entire strategy — the leadership is attempting a cover-up, “passing off meat as fish,” to cite the popular Greek saying.

But to present a defeat as a success is perhaps worse than the defeat itself. On the one hand it turns governmental discourse into cant, into a string of clichés and platitudes that is simply summoned up to legitimate any decision retrospectively, turning black into white; and on the other because it prepares the ground, ineluctably, for the next, more definitive, defeats, because it dissolves the criteria by which success can be distinguished from retreat.

To make the point through recourse to a historical precedent well-known to leftists, if the Treaty of Brest-Litovsk, under which Soviet Russia secured peace with Germany, accepting huge territorial losses, had been proclaimed a “victory,” there is no doubt that the October Revolution would have been defeated.

If, therefore, we wish to avert a second, and this time decisive, defeat — which would put an end to the Greek leftist experiment, with incalculable consequences for society and for the Left inside and outside this country — we must look reality in the face and speak the language of honesty. The debate on strategy must finally recommence, without taboos and on the basis of the congress resolutions of Syriza, which for some time now have been turned into innocuous icons.

If Syriza still has a reason for existing as a political subject, a force for the elaboration of emancipatory politics, and for contribution to the struggles of the subordinated classes, it must be a part of this effort to initiate an in-depth analysis of the present situation and the means of overcoming it.

“The truth is revolutionary,” to cite the words of a famous leader who knew what he was talking about. And only the truth is revolutionary, we may now add, with the historical experience we have since acquired.

Chart Of The Day: The Run For Nasdaq All-Time Highs

Courtesy of Lance Roberts via STA Wealth Management

Throw Your Grandma Under The Bus

Courtesy of The Automatic Earth.


Dorothea Lange “Men on ‘Skid Row’, Modesto, California” 1937

Before we get news in a few hours on the new proposals Greece is required to hand to its slavemasters today, Monday Feb 23, it seems relevant to point out one more time that what is happening to Greece is the result of political, not economic, decisions and points of view. One could argue that Greece is being thrown under the bus because it’s not – yet – deeply enough entangled and enmeshed in the global financial matrix. Just think back to a point Gordon Kerr of Cobden Partners made a few days ago on Bloomberg:

They [Greece] don’t have systemically important financial institutions dragging down their economy ..

In other words, Greek banks are not too big to fail. They could therefore be restructured – by the Greek government itself – without global contagion, certainly theoretically (it’s hard to pinpoint how this would turn out in practice, there are too many variables involved). And that is a major potential threat to other – European -banks, who A) could then also face calls for restructuring, and B) still have money invested in Greece. Just not that much anymore…

Bloomberg’s Mark Whitehouse showed in a piece over the weekend to what extent Germany’s banks pulled out of Greece since 2010. Thanks to the same bailouts that are now being used to try and force Greece into ever more austerity, budget cuts, depleted services and shy high unemployment.

I said it before: the decision to not restructure banks is purely political. It’s not an economic decision, though you will see everyone pretend it is, and claim the banking system(s) would collapse in case of debt restructuring and defaults on wagers. It was decided early on, 2007, that bank debts would, instead of being restructured, be transferred to public coffers. But that’s just a choice, not a necessity.

Moreover, it’s the by far worst choice, if only because it rewards gambling addicts for their behavior, at the cost of everyday people simply trying to make ends meet – and failing -. And this is self-reinforcing: the world today is firmly ruled by gambling addicts and their enablers, because they have managed to get their hands in the till. And they’re not just not planning to let go, they want more.

Here’s what happened to German bank debt in Greece:

Why Germany Might Not Be Bluffing in Greece

As Europe’s high-stakes debt negotiations with Greece reach an impasse, Germany has appeared surprisingly willing to drive the country out of the euro, regardless of the potentially dire repercussions for Italy, Portugal, Spain and the entire currency union. One possible explanation for Germany’s brinkmanship: Its banks have a lot less to lose than they once did. When the European debt crisis first flared up in 2010, Germany’s finances were closely linked to those of the euro area’s more economically fragile members. Its banks’ claims on Greece, Italy, Portugal and Spain – including money lent to governments and companies – amounted to more than €350 billion, about equal to all the capital in the German banking system.

If the periphery countries had forced losses on private creditors, which they arguably should have done, Germany would have had to recapitalize its banks or face an immediate meltdown.

The picture is very different now. The ECB, the IMF and other taxpayer-backed creditors have pumped hundreds of billions of euros of loans into the periphery countries, making it possible for German banks to extract themselves with minimal damage.

Thanks in part to this back-door rescue, the banks have also been able to raise some capital. As a result, they are in much better shape to withstand a Greek disaster. As of September 2014, their claims on Greece, Italy, Portugal and Spain had declined to about €216 billion, or 46% of capital. The upshot: Greece is left with more debt than it can pay, and Germany – with its banks effectively bailed out – has one less pressing reason to give Greece a break. Hardly the right incentives for a happy ending.

 



 

Merkel and Schäuble decided to save Wall Street mogul and derivatives behemoth Deutsche Bank at the cost of the Greek people. Not for economic reasons, but because Deutsche has much more political power inside the European Union than the entire Greek nation. Now you know what’s so inherently wrong in that union. Same story for France, where BNP, SocGen and Crédit Agricole had humongous amounts of debt outstanding in Athens. Where’s all that debt now, where’s it gone? Well, check your wallet.

When the decision came to throw either their own biggest banks, or the grandmas of a co-member nation of the currency union under the bus, I don’t think they even hesitated; they probably only went looking for the most efficient way to do it. And they have control over the perfect vehicle for such tasks: the ECB. A allegedly neutral institution that in reality peddles political influence in a way that guarantees the poorer countries will always wind up footing the bill.

And now that the systemic risk that Greece still might have been is effectively gone, and the debt has been transferred to the union’s bottom dwellers, Merkel and Schäuble can talk tough to Greece. Even if it wasn’t the Greeks that created this mess, it was Merkel and the Frankfurt bank CEO’s she confers with on a daily basis.

Banks are more important than people, certainly grandmas. That’s true on Wall Street, and it‘s true all over Europe. But it’s still just a political decision. And one that could be reversed as easily as it was taken. Which it what the paymasters find so scary about Syriza.

For those of you who don’t want to wake up one day to find their own grandmas crushed under the same bus the Greek yiayia’s are under as we speak, it would be beneficial to ponder how perverse this all is, not just the isolated events but the entire underlying system that produces them. And you support this perversity. And don’t fool yourself into thinking that the system won’t come for your grandma too. If you think that, you simply don’t understand how it works.

JPMorgan, Still On 2-Year Probation, Under Scrutiny in Gold Fixing Probe

Courtesy of Pam Martens.

Gold BarsThe financial press is reporting this morning that the U.S. Justice Department is investigating at least 10 of the biggest U.S. and foreign banks for potentially rigging the gold market and other precious metals markets. That investigation comes while ongoing investigations continue into the potential rigging by big banks of the setting of interest-rate benchmarks and foreign currency.

Cartel activity in every facet of U.S. and London financial markets now seems to be the norm with regulators typically five to ten years too late in sniffing out the illegal conduct.

JPMorgan Chase was named by the Wall Street Journal as one of the banks under scrutiny in the precious metals probe. That could pose a particularly difficult situation for JPMorgan as it is under an effective two-year probation with the U.S. Justice Department for its role in the Bernard Madoff fraud. The probation stems from a deferred prosecution agreement, signed on January 6, 2014, requiring that for the next two years, JPMorgan had to bring to the attention of Federal prosecutors any knowledge of wrongdoing inside the bank, cooperate fully and in good faith, and agree to “commit no crimes under the federal laws of the United States subsequent to the execution of this agreement…” If JPMorgan did not live up to its end of the bargain, it could be prosecuted for new crimes as well as for the two felony counts related to the Madoff matter.

JPMorgan has already had to own up to a criminal investigation involving its foreign currency trading business. On November 24 of last year, when the bank filed its quarterly report with the SEC (known as the 10Q), it reported the following:

“DOJ is conducting a criminal investigation, and various regulatory and civil enforcement authorities, including U.S. banking regulators, the Commodity Futures Trading Commission (‘CFTC’), the U.K. Financial Conduct Authority (the ‘FCA’) and other foreign government authorities, are conducting civil investigations, regarding the Firm’s foreign exchange (‘FX’) trading business.

“These investigations are focused on the Firm’s spot FX trading activities as well as controls applicable to those activities. The Firm continues to cooperate with these investigations and is currently engaged in discussions with DOJ, and various regulatory and civil enforcement authorities, about resolving their respective investigations with respect to the Firm. There is no assurance that such discussions will result in settlements.”

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Uneven Housing Recovery in Pictures: Florida, Arizona, Illinois the Worst Large-Population Performers

Courtesy of Mish.

The latest Black Knight HPI report shows what I call the “Uneven Housing Recovery“.

Nationally, prices are up 4.5% from a year ago, and down 0.1% from last month. Variances are wide.

A few pictures will explain what I mean. 

Biggest Movers This Month

Biggest Metro Movers This Month

Think Florida looks good?

Then let’s take a look at the largest 20 states in alphabetical order.

Performance of Largest 20 States


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Too Many Houses, Not Enough Jobs

Courtesy of John Rubino.

Today’s existing home sales report was down another 4.9% to an annual rate of 4.82 million units, the lowest in nearly a year. And this, remember, is in the sixth year of a recovery with reported unemployment below 6% and the Fed preparing to raise interest rates to head off incipient overheating.

Existing home sales 2015

Mortgage rates can’t be the problem, since they’re down lately to less than 4% on a 30-year fixed loan. That’s amazingly cheap, especially to people of a certain age who remember when 7% was a really good deal. In normal times a rate this low would set off a buying frenzy. This year it can’t even keep demand steady.

Mortgage rate 2015

The real problem has nothing to do with housing per se and everything to do with that fraudulently false unemployment number. The truth of the labor market is that 1) most of the new jobs being created are either part-time or low-wage or both and therefore can’t support a mortgage, and 2) most of the improvement in unemployment comes from people dropping out of the workfore and no longer being counted as unemployed. These people also generally can’t get or don’t want mortgages. Meanwhile, the relative handful of Americans who do qualify for loans seem to be choosing cars and college degrees over houses.

Labor force participation rate

And the US, remember, is the global success story. We monetized our debt first and fastest and are now reaping the rewards. But with the rest of the world flat-lining or worse (result: falling profits for US multinationals), the oil sector contracting (result: layoffs in once-booming Texas and the Dakotas), and now housing a net negative with no recovery in sight (result: layoffs of highly-paid appraisers and mortgage bankers), the odds of the Fed raising rates anytime soon are becoming more and more remote.

Much more likely is the US joining the race to negative rates. Somewhere down there must be a mortgage rate (1%…-1%?) that gets us buying again.

Visit John’s Dollar Collapse blog here >

Union Group Mobilizes “Against” Pay Hike

Courtesy of Mish.

In what may be a first (otherwise an extreme rarity), a substantial force within a union has mobilized against a pay hike to $9.00 per hour from essentially nothing.

“Nothing” you say? Yes, it happens in small non-profit theaters that pay aspiring actors $7 to $15 per performance. Rehearsal time does not count.

Curiously, but rightfully so, the aspiring actors realize there will be no work at all if they have to get paid $9.00 an hour for acting and rehearsals.

Reader Richard, who works in the film industry writes …

Hi Mish

Actor Equity (the union of stage actors) wants to force small theaters in Los Angeles “to pay the legally mandated minimum wage.” There is no doubt this move will decimate local theater and goes against the vast majority of their LA member’s wishes.

We have a few theater districts in the city which have sprouted restaurants that depend on the theater traffic to survive. Whole areas such as North Hollywood have transformed themselves as the NoHo Arts District [a play off the SoHo Arts District in New York City] all because of the theaters in the area. 

Many actors have vowed to withdraw from the union. I myself work almost exclusively in the film and television these days, but I started my career in theater and benefited from the contracts negotiated by Actors Equity.

But Los Angeles theater is a completely different animal from New York theater and includes many actor run companies with national and international reputations. The economics of LA theater just do not support the model Actors Equity wants to foist on the theater community and will result in the closing of dozens of very well regarded theaters.

Anyway I thought it was an interesting twist on unions. Actors Equity has a vote is planned for March 25th but the result is only advisory and the union leadership will them do what they want.

Hope you are well. Keep up the good work.

Cheers, …

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