Archives for June 2015

I Fear The Greeks, Even When They Bring Gifts

Courtesy of The Automatic Earth.


Harris&Ewing Red Cross Motor Corps, Washington, DC 1917

Just another normal morning at the Automatic Earth. Shaking off the local drink – when in Rome.. – and perusing a thousand views and pieces, many on the inevitable topic of ‘Da Referendum’. And I got to say, I can’t even tell whether it’s just me, but there is this huge divide between what a simple vote can and should be, and how it is perceived and presented.

And no, it’s not my ouzo-riddled stupor, it’s what common sense I have left that has me wondering what causes the divide. Case in point, Bloomberg has a piece called “Tsipras Asking Grandma to Figure Out If Greek Debt Deal Is Fair”. The implied connotation being that asking grandma about anything other than knitting patterns and souvlaki recipes is asking for trouble. What does she know? Politics should be decided by politicians. Well, and bankers of course. And Bloomberg editors. Did I mention economists?

Tsipras Asking Grandma to Figure Out If Greek Debt Deal Is Fair

Economists with PhDs and hedge-fund traders can barely stay on top of the vagaries of Greece’s spiraling debt crisis. Now, try getting grandma to vote on it. That’s what Prime Minister Alexis Tsipras is doing by calling a snap referendum for July 5 on the latest bailout package from creditors.

The 68-word ballot question namechecks four international institutions and asks voters for their opinion on two highly technical documents that weren’t made public before the referendum call and were only translated into Greek on Saturday. Worse, they may no longer be on the table. IMF chief Christine Lagarde told the BBC late on Saturday that “legally speaking, the referendum will relate to proposals and arrangements which are no longer valid.”

Tsipras’s decision means everyone from fishermen to taxi-drivers and factory workers will have to form an opinion on the package, with their country’s economic future hanging in the balance. A rejection of the bailout terms could lead to an exit from the euro area and economic calamity; accepting them would probably keep Greece in the euro, but with more austerity.

“Usually in democracies, it’s the technocrats and the politicians who take care of the details, while voters are asked about broader issues and principles,” said Philip Shaw, the chief economist in London at asset manager Investec. “This is a transfer of responsibility from parliament to the voters.”

Now, we all know that when and where democracy was born, and I’m quite literally at a stone’s throw from the very spot it was, as I write this, grandma had precious little say. But grandpa did, and repeatedly, the idea was that people would vote on all big decisions to be made, instead of having them decided by some power-happy individual.

We all, or most of us, think to this day that that was a good, and indeed world-changing, initiative. We talk about democracy all the time like it’s a good thing. So where does Bloomberg come from belittling the concept to the point where they put the word ‘Grandma’ in their headline, in an obvious attempt at making the entire thing look ridiculous?

They could instead have said ‘grandpa’ (big difference already) or ‘cab driver’ or ‘unemployed person’ or, get ready for this, ‘the people’. “Tsipras Asking The People to Figure Out If Greek Debt Deal Is Fair”. Sounds completely different, doesn’t it? Really, we cannot talk about democracy anymore without trying to ridicule it, Bloomberg?

Greece’s own Mr Piggy, Evangelos Venizelos, who bears a lot of blame for what Greece goes through today from his stint as finance minister, and is still PASOK’s go-to guy, though they were almost voted out of existence in January, tried a nice take. He claimed that the referendum was unconstitutional, something to do with fiscal matters not being allowed to be out before the people.

As if Syriza were too stupid to have read the law before letting Tsipras call the July 5 vote.

I’m thinking there’s not a shade of doubt that we will see the craziest claims and reports and theories. From Greek opposition parties, from ‘respectable media’, from US and European spin doctors offering ‘help’ to the likes of Venizelos and Samaras et al.

But that Bloomberg thing sure sets the tone. We have lost even the most basic principle and notion of what democracy means: a vote by the people on matters that concern the people. As Yanis Varoufakis tweeted yesterday:

Democracy deserved a boost in euro-related matters. We just delivered it. Let the people decide. (Funny how radical this concept sounds!)

What else can we say? Let’s keep it at this: we’ve come a long way. We can’t even talk about democracy anymore without ridiculing it.

Oh, and the title of this piece? Blame Virgil, Roman poet, well over 2000 years ago.

On Monday, It’s China Versus Greece

Courtesy of John Rubino.

Fear and greed are both getting a serious workout lately, but Monday will be even more fun than usual because of two big stories that hit over the weekend. First, Greece decided to put the draconian demands of its European creditors to a popular vote, to which the creditors responded by cutting Greece off from any more bailout money. Greek citizens, now staring down the barrel of capital controls and/or bank failures, are busily emptying their bank accounts:

Greeks Line Up at Banks and Drain ATMs as Tsipras Calls Vote

Greece’s banks may need an injection of fresh emergency funds to operate Monday as people rushed to pull out money after Prime Minister Alexis Tsipras called a referendum that could decide his country’s fate in the euro.

Two senior Greek retail bank executives said as many as 500 of the country’s more than 7,000 ATMs had run out of cash as of Saturday morning, and that some lenders may not be able to open on Monday unless there was an emergency liquidity injection from the Bank of Greece. An official with Greece’s Capital Markets Commission, the markets’ regulator, also warned that the Athens Stock Exchange may be unable to operate on Monday without a cash injection into the banking system. A Greek central bank spokesman said it was making efforts to supply money.

The European Central Bank’s governing council was expected to hold a conference call on Sunday to review the banks’ liquidity condition, said a Greek official, who asked not to be named in line with policy. The Frankfurt-based central bank said in a twitter post that it’s closely monitoring developments and would review the situation “in due course.”

Some banks were placing limits in daily cash transactions. Yiota Kardogianni, a manager at a branch of Piraeus Bank SA, said cash withdrawals were limited at 3,000 euros ($3,350) daily and ATM withdrawals at 600 euros. Alpha Bank AE had set a daily limit of 5,000 euros for most of its branches since last week.

After withdrawing more than 30 billion euros as the anti-austerity Coalition of the Radical Left, or Syriza, took power, depositors are now reacting to the latest twist in the five-month standoff with European leaders and creditors. One banker said 110 million euros had been withdrawn from his institution as of 11:30 a.m. Athens time on Saturday.

Capital Controls
“Greek legislation allows either the Bank of Greece governor or the finance ministry to impose capital restrictions,” George Saravelos, foreign exchange strategist at Deutsche Bank AG, wrote in a note to clients. “The extent to which this materializes will depend on the ECB decision over the next 48 hours as well as depositor behavior.”

Some branches of Alpha Bank in central Athens that normally open for business on Saturdays remained shut and one carried a sign that it wouldn’t open. Only a few banks near central shopping and tourist areas are usually open on Saturdays.

That’s the fear side of the story. China, meanwhile, has had an epic stock market bubble over the past few months which, inevitably, seems to be bursting. In response the government is cutting interest rates and lowering reserve requirements in an effort to pump enough liquidity back into the system to support stock prices. Markets love easy money and usually respond to such policy changes with panic buying. This, then, is the greed:

China Cuts Interest Rates to a Record Low After Stocks Slump

China’s central bank cut its benchmark lending rate to a record low and lowered reserve-requirement ratios for some lenders after stocks plunged and local government bond sales drained liquidity.

In the fourth reduction since November, the one-year lending rate will be reduced by 25 basis points to 4.85 percent effective June 28, the People’s Bank of China said on its website Saturday. The one-year deposit rate will fall by 25 basis points to 2 percent, while reserve ratios for some lenders including city commercial and rural commercial banks will be cut by 50 basis points, according to the statement.

The easing follows the biggest two-week plunge in the stock market since December 1996 and a four-week rise in money-market rates as lenders hoard cash. While industrial production and retail sales stabilized in May, investment slowed further — a sign of weakness in infrastructure spending that policy makers are keen to reverse.

“The central bank doesn’t want a panic caused by the stock rout to spread,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “That would lead to financial instability.”

These stories are related in a number of ways, the most important being that they’re examples of governments messing with markets that they don’t understand and therefore have no business trying to manipulate. Greece would be fine (or what passes for fine for a Mediterranean country) if it had kept its own currency and managed its own affairs. Instead it joined a currency union dominated by Germany (!) and now, surprise, can’t function in that environment. But rather than letting market forces sort out the value of various pieces of sovereign debt, a bunch of bureaucrats in Brussels are making things up as they go along, piling mistake onto mistake and bringing the global markets to the brink of crisis over a country that could literally be bought out with a couple of years of ECB quantitative easing funds.

China, meanwhile, has spent the past couple of decades directing an infrastructure build-out that in retrospect was maybe twice as big as ideal and is now fiddling with all kinds of imperfectly-understood fiscal and monetary levers, trying to maintain a 7% growth rate that is looking more and more fictitious. Here again, the best way to deal with a bubble is to not let it happen in the first place. The second best way is to let it pop and allow the market to clean up the mess. The absolute wrong way to manage a bubble is to intervene from the top to keep it going. Look where that has gotten Japan and the US.

Anyhow, Monday will be interesting because Greece is scary and China is exciting, and traders will have to decide which to fixate on. This has meaning beyond the market open because most news is neutral, in the sense that it can be interpreted in various ways. So the real story is not the event but how the markets respond to it. When investors and traders are optimistic they interpret everything as a reason to buy, and vice versa when they’re pessimistic. Monday’s open will therefore say more about market psychology (and the direction of asset prices in the next few years) than about whether Greece or China are doing the right things.

Visit John’s Dollar Collapse blog here

China’s $370 Billion Margin Call

Courtesy of EconMatters

China’s stock markets tumbled on Friday to near bear territory further deepening the sell-off that started two weeks ago.  The Shanghai Composite, down 7.4% on the day, has fallen 19% from its June 12 high wiping out $1.25 trillion in market cap. The smaller Shenzhen and ChiNet indices also has plunged 20% from its recent peak.

Margin Lending Blessed by Beijing

Even with recent declines, the Shanghai Composite Index has surged nearly 30% year-to-date. Authorities have allowed local investors to borrow tons of money from brokers to speculate in the stock market  (i.e., Margin Lending), while the central bank PBOC has cut interest rates three times since November.  Beijing also introduced new easing measures in the past couple of days: a proposal to remove a cap on banks’ loan-to-deposit ratio and injecting cash into the financial system.

Margin Debt Soared to $370 Billion

Investors have poured into the market, opening 33 million new brokerage accounts between the start of January and the end of May.  According to Macquarie Research, Chinese margin debt has risen 123% year-to-date, reaching a new record of 2.3 trillion yuan ($370 billion) on June 18.

Margin debt in China has reached 8.5% of the value of China’s tradable shares (For comparison purpose, that ratio was only at 4.6% during the peak of the Taiwan Stock Market Bubble back in the late 80's).

 

Margin Debt Could Get Even Worse

It gets even better from there.  Macquarie believed that the brokers should have enough capital available to push margin lending higher from here as reported by Bloomberg:

"We think that the peak should be somewhere around RMB 3 trillion and at the current run rate (ie +16% month-on-month) the market would reach that level around September."

Analysts Cutting Price Target

Investors have started to pull out of the market on concerns the government could be looking to rein in this debt-fueled rally.  Meanwhile, more and more analysts are also sounding louder alarms about the over-heated China market.  For example, citing concerns like valuations and high margin debt, Morgan Stanley just lowered its price target for the Shanghai benchmark in a report Thursday.

Plunge Leaves State Media Speechless

The usually quick-tongued state media like Xinhua are staying unusually quiet not giving out clues about the government's view on the current market sell-off.

Reuters quoted Zhang Xiaojun, a spokesman for the China Securities Regulatory Commission on Friday:

"It's a self-adjustment of the market after earlier excessive gains… Recently, there has been more volatility in the stock market. That requires all sides to treat it rationally." 

Chinese authorities are already trying to discourage speculative bets on the highest-flying stocks. So these rare public comments from the Regulatory Commission seem to suggest authorities are 'comfortable' with the declines.

$370 Billion in Margin Trades

A stock market collapse would be devastating to China with slowing economy and during a difficult transition from a manufacturing-based economy to private-business-and-consumer-supported.

People are already freaking out that Greece is just days away from defaulting on a $1.72 billion loan payment.  Just wait till the margin call on the $370 billion margin debt in China's stock markets should Beijing decide to take a page from Saudi Arabia's oil book.   

Read also: Chinese Stocks: "How to Think Like a Billionaire Investor" & China Easing to Combat The 'Darkest Period'

OXI

Courtesy of The Automatic Earth.


Harris&Ewing Woodward & Lothrop dept. store trucks, Washington DC 1912

While many voices will be seeking to define the precise terms of the referendum announced last night by Alexis Tsipras for July 5, I think perhaps the general gist is more important. It’ll be a vote between being governed by Tsipras, and Greeks in general, on the one hand, and being governed by Germany, the ECB and IMF on the other. “Who do you want to decide your future?”

And the Greek population will have to understand that voting to go with the latter, voting yes to the troika proposals, will mean there will be no getting out of the stranglehold of the institutions, there will be no more sovereignty, and there will be far more severe austerity, all for years to come. All that must be caught in the exact wording of the referendum question, but what lies underneath is what really counts.

In a similar vein, I don’t think it’s all that interesting to go through the precise text and numbers of the latest troika proposal, the one Tsipras labeled ‘blackmail’ and which led to the referendum announcement. This is not about those numbers. It never was.

It’s about two things: the battle for power in Europe, all of Europe, and the refusal by the troika members to admit to their past failures. I see the word ‘failures’ as fundamentally different from ‘mistakes’, because the latter indicates a lack of intent, and I am very hesitant to suggest there was no intent involved in the handling of the crisis over the past 5 years.

I would also suggest that unless one or more troika members admit to past failures, and honestly and openly work to correct them retroactively, there will never be a solution to the Greek issue that does not involve huge defaults and political fall-out. They should not want that, but their notion of the battle for power seems to have them too entrenched to get out.

Still, for the neutral observer, there is no way not to realize that the troika has to a large extent been responsible for creating the Greek problem. Which is a whole other problem all by itself, since the troika consists of three entirely different institutions, who often don’t agree. If just one of the three would admit to past failures, and look at and propose ways to correct these failures, the entire Greek issue could be resolved in no time.

I said a while ago that the IMF could be the one to break the chains, (How The IMF Can Save Greece And Itself), by insisting on ‘retroactive debt restructuring’, an applying the losses and write-offs for French, Dutch and German banks that should have been applied in 2010. But the IMF sits a lot closer to those banks than it does to the people of Greece.

The problem with that is that it makes the Fund’s position a political one, and it should stay away from politics at all costs. It ostensibly is part of the troika only because it has more experience in restructurings than the ECB and EU. But the so-called restructuring that has taken place in 2010 and 2012 could just as well have been done by the other two members. It’s what Varoufakis called the difference between a meat cleaver and surgery.

Still, the IMF did sign off on what happened, and that means a large risk to its credibility and the trust it can expect to encounter in subsequent cases. There are elections in Spain and Portugal later this year, and people there have duly noted how Greece has been handled even just so far.

Lagarde and her staff may still think they’re above everyone else on the planet, that they’re even more omnipotent than central banks, but the cracks are showing. The Fund’s own researchers have recently issued quite a few reports critical of the course set in recent events, and the Asian Infrastructure Investment Bank looms on the horizon as an IMF alternative. The IMF’s position, and future, may be much better served by opening up on its failures than by digging in. But hubris is a powerful incentive.

As for the ECB and EU and their ability and willingness to eat their hats and their crows, there is little hope. The ECB, like the IMF, has veered far too deep into political territory, blindly following the example set by the Fed and other central banks. And as long as Goldmanites like Mario Draghi lead the dance, there’ll be no moving away from power politics. It’s what these people feed on.

This has put the ECB into a place where the more political power it seeks, the less independent it becomes. Draghi wouldn’t dream of doing anything that might upset Berlin and Paris, for example. But that’s exactly what he should do, and should have done. Granted, Draghi didn’t get his seat until late 2011, but he could and should have turned things around, and insisted on a -much- better deal for Greece, and a worse one for French and German banks. He did nothing of the kind.

Karl Whelan came with an interesting scenario yesterday that describes what could have happened, had the troika made the right choices in dealing with the Greek crisis. That is hasn’t speaks volumes about the political agendas of the three-headed beast:

An Alternative Version Of How The Greek Crisis Could Have Played Out

The Grexit scenario relies crucially on the Eurozone not having a proper lender of last resort or a functioning banking union. It is easy to imagine an alternative scenario to the current one. Consider the following alternative version of how the Greek crisis could have played out.

  1. As tension builds up in Greece prior to the Greek election in early 2015, Mario Draghi assures depositors in Greece that the ECB has fully tested the Greek banks and they do not have capital shortfalls. For this reason, their money is safe.
  2. Draghi announces that the ECB will thus provide full support to the Greek banks even if the government defaults on its debts, subject to those banks remaining solvent.
  3. Eurozone governments agree that, should Greek banks require recapitalisation to maintain solvency, the European Stabilisation Mechanism (ESM) will provide the capital in return for an ownership stake in the banks.
  4. Provided with assurances of liquidity and solvency support, there is no bank run as Greek citizens believe there banking system is safe even if the government’s negotiations with creditors go badly. The ECB stays out of the negotiations for a new creditor deal for Greece (because they are not a political organisation and are not involved in directly loaning money to the government) and its officials assure everyone that the integrity of the common currency is in no way at stake.

There are no legal impediments to this scenario. Despite the constant blather from ECB officials about how it is constantly constrained by its own persnikety rules, it is well known that the ECB can stretch these rules pretty much as far as it likes. Supporting banks that you have deemed solvent is pretty standard central banking practice. So Draghi’s ECB could have provided full and unequivocal support to the Greek banks if they wished. They just chose not to.

Similarly, procedures are in place for the ESM to invest directly in banks so a credible assurance of solvency could have been offered. Why did this not happen? Politics. European governments did not feel like providing assurances to Greek citizens about their banking system at the same time as their government was openly discussing the possibility of not paying back existing loans from European governments. Indeed, the ability to unleash the bank-driven Grexit mechanism has been the ace in the creditors’ pack all along.

Faced with massive political opposition in Germany and other Northern European countries to their existing monetary policy programmes, Mario Draghi and the ECB Governing Council have decided it is better for them to play along with the creditor country squeeze on Greece than to stabilise the Greek banking system. Imagine the hue and cry in Germany now if the ECB were refusing to threaten cutting off credit to Greek banks, thus undermining Angela Merkel’s leverage in negotiations.

This is what could have been done. That it hasn’t tells you all you need to know about the motives behind the troika’s stance.

The more I look at it, the more it seems that the Greeks on July 5 will vote not only on their own position and their own sovereignty, dignity and independence, they will also cast a vote on the future of the troika members. And that makes this a dangerous ‘experiment’, because the three will not give up without a fight.

The propaganda showered over Greece in the next week will be an exercise in absurdism. Attemps at instigating bank runs are a certainty. If the ECB wants to get even more political, it could cause one with the flick of a switch. But what credibility and trust it has left would fly out the window with that same flick.

There are already comments I see that miss the boat by a mile. :

Greeks will be voting under “extremely difficult conditions of national division and extreme economic conditions,” said Nicholas Economides, an economics professor at New York University’s Stern School of Business. “Tsipras is gambling with the future of Greece.”

I’m sorry, but that’s just dumb. It’s the ‘partners’ in the negotiations that gamble with that future. The only thing Tsipras has done is to refuse to get on his knees with his pants down his ankles. In what setting do we call that a gamble?

Something Tyler Durden (with whom I agree in 99% of cases) said on the Zero Hedge page today also struck me as worthy of a comment:

Greek PM Tsipras just delivered the biggest Friday night bomb in recent European history: he stunned the Troika and his peers in Europe with the biggest shocker of all – a referendum announcement, aka the Greek “nuclear option”, something which cost his predecessor George Papandreou his job. At this point there is no turning back, and the Greeks – of which 80% want to stay in the Euro even as 80% want an end to austerity – will get to choose their own fate. Whatever choice they make, they will now only have only themselves to blame.

You know, that makes me think of a schoolyard bully giving his victim the choice between a punch in the stomach or a blow to the head. However that would play out, can the victim be saddled with the blame for it?

It’s not as if the Greeks volunteered for their current misery. It was imposed upon them. And it’s not as if Syriza didn’t offer substantial concessions in the troika talks, they only said ‘there are limits to what we’ll do, imposed upon us by our mandate’.

I don’t think we can get away from a broader, pretty unforbidding, perspective such as that offered by Paul Craig Roberts in an article I read earlier this week, and which I think must be a part of the entire discussion.

Greek Democracy Is Failing

The Greek debt is unpayable. It is simply too large to be repaid. The austerity that the EU and IMF have imposed on Greece has worsened the problem by driving down the Greek economy, thus making the burden of the debt even heavier. Despite the obvious fact that the EU’s austerity policy is a failure and cannot succeed, the Greek “debt crisis” drama continues.

A solution was possible at the beginning of the “crisis” prior to the economy being driven down by austerity. The debt should have been written down to the amount that the Greek economy could service or pay. This traditional solution was unacceptable to creditors, to the EU, and to the ECB.

[..] the EU and the ECB have agendas unrelated to Greece’s ability to pay. The creditors are determined to establish the principle that they can over-lend to a country and force the country to pay by selling public assets and cutting pensions and social services of citizens. The creditor banks then profit by financing the privatization of public assets to favored customers.

The agenda of the EU and the central bank is to terminate the fiscal independence of EU member states by turning tax and budget policy over to the EU itself.

In other words, the Greek “sovereign debt crisis” is being used to create a precedent that will apply to every EU member government. The member states will cease to exist as sovereign states. Sovereignty will rest in the EU. The measures that Germany and France are supporting will in the end terminate their own sovereignty, very little of which actually remains as they do not have their own currency and their foreign policy is subservient to Washington.

Default and a turn to Russia is the only possible way out for Greece. The entire world would benefit from this course of action as Greece’s departure from the EU and NATO would begin the unraveling of NATO, Washington’s principal mechanism for creating conflict with Russia. In the end, all of Europe and the rest of the world would thank Greece for derailing the violence that will result from Washington’s effort to assert hegemony over Russia.

As a Greek default and a turn to the East is the only workable solution for Greece, the EU’s agents inside Greece have launched a huge campaign against a Greek turn to the East.

I fear that the Greek people are too brainwashed to be able to avail themselves of the opportunity to rescue themselves from the clutches of the One Percent, who will drive the Greek population into the ground. The Greek voters did not have sufficient judgment to give their current government a large enough percentage of the vote for the government to have any credibility with the EU and Greece’s creditors. What we are witnessing in Greece is the failure of democracy due to the people themselves.

I don’t agree with Roberts’ conclusion, or let me put it this way: we’re not there yet. I would tend to be more worried about what awaits the Greeks if they support Tsipras and Syriza on July 5, through a big fat OXI (no!). But they haven’t given in yet.

And perhaps unfortunately from them, their decision will have a much wider impact than only in Greece, politically, economically, and even morally. The way Europe is presently structured is certain, over time, to take ever more powers away from people, and the people they elect to represent them, and centralize them in the hands of far-away, only semi-elected, career politicians in Brussels and bankers in Frankfurt and Washington.

Nobody should choose that last option. It can only lead to disaster.

Some Jurassic Reminders

Courtesy of Joshua Brown  

jurassic

I took the kids to see Jurassic World last weekend and I absolutely flipped for the movie, it was so good on so many levels. I also took a few lessons / reminders away from the film about investing that I thought were interesting. I wrote it up for Fortune and it just hit the site today. Enjoy!

The new film Jurassic World shattered a global box office record earlier this month when it became the first movie in history to bring in over $500 million in its opening weekend. It has also become the fastest film to cross the billion-dollar mark, grossing nine figures in just 14 days according to Variety.

There’s a good reason for these amazing milestones: the film is excellent, among the most entertaining and exciting movies I’ve seen this decade. And it’s loaded with reminders for the investor class that are as universal as they are timeless. I share a few below, with some mild spoilers:

Keep reading:

Jurassic World: 7 reminders for investors (Fortune)

 

Four Things the Stock Market Has Taught Me

Morgan Housel shares four important lessons that he learned from investing and which are relevant to investing plus in other areas as well. Briefly: (1) everyone has a flawed point of view; (2) we have an urge to overcomplicate things; 3) we're all contrarians, except we're not; and (4) we hear what we want to hear. To read the entire article, plug the title into the Google search bar and click on the headlines in your search results.

Four Things the Stock Market Has Taught Me

By Morgan Housel at the WSJ

Investing is a great way to learn about human behavior—and about yourself

Excerpt:

We have an urge to overcomplicate things.

Live below your means. Save the difference. Invest in a low-cost, diversified portfolio. Have a long-term outlook and be patient as compound interest works its magic. Successful investing isn’t terribly complicated.

But investing is one of the few industries where people believe success must be more difficult than it is.

There is a tendency to think the stock market is like physics—something that works in predictable ways, where measuring something now will explain with precision what will happen next.

If you think stocks are like physics, you believe there must be smart people who can measure exactly where the Dow Jones Industrial Average will be in five months, just as smart people can measure exactly when the sun will rise in five months.

So investors complicate things. They trade, they fiddle, they buy this and sell that—all with the hope of achieving a higher return than can be earned sitting still and letting the market work for you.

But the evidence is overwhelming: The odds that you will achieve long-term success by actively trading or timing the market round to zero.

Picture via Geralt at Pixabay. 

 

Tsipras Calls July 5 Referendum on Creditors’ Demands; Merkel Says No Alternative to Creditor’s “Generous” Offer

Courtesy of Mish.

In a surprise move that’s sure to deflate the nannycrat’s hope of early elections that could force prime minister Alexis Tsipras out of power, Greece’s Tsipras Calls July 5 Referendum on Creditors’ Demands.

Greek Prime Minister Alexis Tsipras called a referendum on whether he should accept the latest demands of the country’s creditors, the most dramatic move yet in a debt crisis that started five years ago.

Greek ministers, including the defense chief, joined the fray, urging the country of 11 million people to vote “no.” 

In a nationally televised address after midnight in Athens, Tsipras said the vote will take place on July 5 and excoriated a take it-or-leave it offer as a violation of European Union rules and “common decency.” A Greek official, speaking on condition of anonymity, said the government has no plans to impose capital controls and banks will stay open on Monday.

“After five months of tough negotiations, our partners unfortunately resorted to a proposal-ultimatum to the Greek people,” Tsipras said. “I call on the Greek people to rule on the blackmailing ultimatum asking us to accept a strict and humiliating austerity without end and without prospect.”

The surprise development throws into turmoil planned talks Saturday among euro-area finance ministers on their latest proposal, which would unlock 15.5 billion euros ($17.3 billion) and extend Greece’s program through November, in return for a commitment to pension cuts and higher taxes that Tsipras opposes.

No Alternative Says Merkel

Amusingly, Merkel Tells Tsipras No Alternative to Creditors’ Offer.

Chancellor Angela Merkel on Friday pleaded with Greek premier Alexis Tsipras to accept an “extraordinarily generous offer” from international creditors, making clear there was no alternative and that she would not intervene directly to broker a compromise.

But Mr Tsipras rejected the creditors’ offer, saying Greece would not be threatened with “blackmail and ultimatums”.

Clear Alternative

Clearly there is an alternative, that being to tell the Troika to go to hell. Tsipras was smart putting this to a vote. July 5 is interesting in that Greece will default before the vote.

What’s the ECB to do now? Shut off the ELA, or keep it going 10 more days?

Instead of discussing “Plan B” on Saturday, the eurozone ministers are faced with “Plan C” .

Continue Here

5 Things To Ponder: While We Wait On Greece

Courtesy of Lance Roberts via STA Wealth Management

Another week has come and gone, and there is still no resolution on Greece. Germany's Angela Merkel has firmly stated to the EU party members on Thursday that a deal on Greece must be on the table before the markets open on Monday. She also stated that "we won't be blackmailed."

Not only has the entire Greek "drama" to the point of boredom in the media, it is Greece who should realize that they are under no obligation to do anything. It is the EU banks who have absorbed the Greek debt in massive tranches to garner higher yields with the belief that the EU will always bail them out. However, as the old saying goes:

"If you owe your banker $100,000 it is your problem. If you owe the bank $1 million, it is the bank's problem."

With primarily banks and hedge funds owning the bulk of the Greek debt currently, each bailout of Greece so far has only benefitted the owners of those bonds as the bailouts passed directly through Greece to those portfolios. It seems that this is a "bank problem" rather than a "Greek problem." And if that is indeed the case, it will be the ECB and the EU giving into a deal for Greece sooner rather than later.  

In the meantime, as we await the final capitulation by the ECB, EU and IMF to provide Greece another bailout, I have assembled a list of reading for you that has ABSOLUTELY NOTHING to do with Greece.


1) What To Expect In Second Quarter GDP by Elizabeth MacDonald via Fox Business

"While blame is placed on the cold weather and the west coast port strikes, Stephanie Pomboy at MacroMavens notes a weird anomaly that may explain why growth continues to flatten.

Consumer spending growth is key to the U.S. economy. But spending slowed just as job growth stepped up, as the U.S. economy continues to muddle through in its seventh year of the weakest recovery in the postwar era. Since President Obama took office in January 2009, GDP has grown at an average annual rate of 1.8%.

"'It should be patently clear that something isn't what it purports to be on the surface,'" Pomboy says. Something else is trimming away at consumer wallets, besides glacial job and wage growth."

Read Also: Harsh Winter/ObamaCare Boosted Economy In Q1 by Tyler Durden via ZeroHedge

Personal-Consumption-Q1-2015-2

2) Pants On Fire: 10 Lies In The Financial Services Industry by Robert Seawright via Above The Market

"We all lie, especially to and about ourselves. Sometimes the lies are overt. Sometimes they are unintentional. Sometimes they are sales puffery. And sometimes they are devious. What follows are ten great lies in the financial services industry. The first three are propagated primarily by academic finance. The fourth is within the province of the academics but is a bigger problem amongst the professionals – advisors and money managers alike. The next three are predominantly professional lies. Number eight is asserted most often by the professional class and believed by consumers while the last two are universal but play out most unfortunately amongst consumer investors. I'm sure there are more. Do you have others to suggest?"

RPSeawright-Efficient-market

Read Also: Predicting The Future Is Difficult by Streettalklive.com

3) Still Waiting For A Breakout by Lawrence McMillan via MarketWatch

"On the upside, the S&P 500 is eyeing record highs. Unfortunately, we don't see the confirming buy signals that one would normally expect if another major upleg was about to unfold.

Equity-only put-call ratios are meandering sideways. They are stuck in neutral. Technically, the standard ratio is creeping slightly downward, and thus would be in a bullish mode. The weighted ratio, conversely, is edging higher and is thus in a bearish mode. But neither is trending strongly, so in reality neither is giving a tradable signal at this time.

Market breadth is an indicator that we closely follow — especially on upside breakouts. When the S&P 500 rose to record highs a month ago, breadth was mediocre at best.

The desired combination is to see the market breaking out to the upside and breadth expanding rapidly — becoming overbought while the market breaks out. That combination is usually a strong one and indicates that the breakout is strong and broad. However, that didn't happen in May, and given recent mediocre breadth figures, it's doubtful if there would be upside confirmation from breadth in the near future, even if SPX does mange to claw its way to new record highs.

MW-DO618 spxJPG 20150623111202 NS

Read Also: Fear And Greed Collide In The Stock Market by John Kimelman via Barron's 

Read Also: Don't Fight The Market by Joe Calhoun via Alhambra Partners

4) How The Federal Reserve Has Distorted The Economy And Markets by Doug Kass via Kass' Korner

"The Federal Reserve's extended six-year policy of injecting massive amounts of system liquidity and stabilizing interest rates at near zero has been a powerful force on our capital markets and on stimulating rate-sensitive economic sectors (e.g., housing and autos). But, in maintaining monetary indulgence for such a lengthy period of time, our central bank has now distorted and screwed up our economy and our markets – perhaps for some time to come."

622Kass

Read Also: How The Reach For Yield Ends by Charlie Bilello via Pension Partners

5) The Hegelian Dialectic by Cam Hui via Humble Student Of The Markets

"Regular readers know that I have been cautious on the US equity market for several months. Instead of re-hashing the same points over and over again, I thought that I would try something different this week. I will re-examine the bull and bear case for stocks in the framework of the Hegelian Dialectic of 'thesis, antithesis and synthesis', otherwise known as 'thinking outside the box.'"

hegeldialectic

Read Also:  The Worst Case Of Investing In A Hot Stock Market via CNN Money


OTHER STUFF THAT'S NOT ABOUT GREECE

The New American Dream Under Obama: Renting by Andrew Malcom via IBD

To Boost Freedom, End The Free Lunch by Jeffrey Dorfman via Real Clear Markets

It's No Time For Bulls To Get Complacent by Avi Gilburt via MarketWatch

CNBC Demystified via Doug Litowitz via TheAlphaPages


"You're cruisin' for a bruisin'." – Kenickie, Quote From "Grease"

Have a great weekend.

 

Supreme Court Legalizes Gay Marriage Nationwide In 5:4 Decision

Courtesy of ZeroHedge. View original post here.

Following yesterday's historic 6:3 Supreme Court decision enshrining the tax known as Obamacare, there was little surprise moments ago when in one of its last remaining decisions in re: Obergefell v. Hodges, the most liberal Supreme Court since 1960 just declared gay marriage legal nationwide. The decision, supported by all the women on the SCOTUS, came down in a 5:4 vote with Ginsburg, Sotomayor, Kagan, Breyer and Kenedy voting for, while Roberts, Scalia, Thomas and Alito dissented.

As always, the most interesting contents are in the dissent, which today was, ironically, written by Roberts who in the past 48 hours has made many friends and maybe even more enemies. Some of the key remarks:

… this Court is not a legislature. Whether same-sex marriage is a good idea should be of no concern to us. Under the Constitution, judges have power to say what the law is, not what it should be. The people who ratified the Constitution authorized courts to exercise “neither force nor will but merely judgment.”

Although the policy arguments for extending marriage to same-sex couples may be compelling, the legal arguments for requiring such an extension are not. The fundamental right to marry does not include a right to make a State change its definition of marriage. And a State’s decision to maintain the meaning of marriage that has persisted in every culture throughout human history can hardly be called irrational. In short, our Constitution does not enact any one theory of marriage. The people of a State are free to expand marriage to include same-sex couples, or to retain the historic definition.

Today, however, the Court takes the extraordinary step of ordering every State to license and recognize same-sex marriage. Many people will rejoice at this decision, and I begrudge none their celebration. But for those who believe in a government of laws, not of men, the majority’s approach is deeply disheartening. Supporters of same-sex marriage have achieved considerable success persuading their fellow citizens—through the democratic process—to adopt their view. That ends today. Five lawyers have closed the debate and enacted their own vision of marriage as a matter of constitutional law. Stealing this issue from the people will for many cast a cloud over same-sex marriage, making a dramatic social change that much more difficult to accept.

The majority’s decision is an act of will, not legal judgment. The right it announces has no basis in the Constitution or this Court’s precedent. The majority expressly disclaims judicial “caution” and omits even a pretense of humility, openly relying on its desire to remake society according to its own “new insight” into the “nature of injustice.” As a result, the Court invalidates the marriage laws of more than half the States and orders the transformation of a social institution that has formed the basis of human society for millennia, for the Kalahari Bushmen and the Han Chinese, the Carthaginians and the Aztecs. Just who do we think we are?

Understand well what this dissent is about: It is not about whether, in my judgment, the institution of marriage should be changed to include same-sex couples. It is instead about whether, in our democratic republic, that decision should rest with the people acting through their elected representatives, or with five lawyers who happen to hold commissions authorizing them to resolve legaldisputes according to law. The Constitution leaves no doubt about the answer.

As for the president's immediate response…

… it is not to be confused with his pre flip-flop take from several years ago:

… as a candidate for president, Obama told Rick Warren’s Saddleback Church that marriage could only extend to heterosexual couples. “I believe that marriage is the union between a man and a woman,” Obama said at the time. “Now, for me as a Christian — for me — for me as a Christian, it is also a sacred union. God’s in the mix.

And here's Mike Huckabee's different 'perspective'…

Former Arkansas governor and 2016 Republican presidential candidate Mike Huckabee made the following statement in response to the Supreme Court's ruling on Obergefell v. Hodges.

"The Supreme Court has spoken with a very divided voice on something only the Supreme Being can do-redefine marriage. I will not acquiesce to an imperial court any more than our Founders acquiesced to an imperial British monarch. We must resist and reject judicial tyranny, not retreat.

"This ruling is not about marriage equality, it's about marriage redefinition. This irrational, unconstitutional rejection of the expressed will of the people in over 30 states will prove to be one of the court's most disastrous decisions, and they have had many. The only outcome worse than this flawed, failed decision would be for the President and Congress, two co-equal branches of government, to surrender in the face of this out-of-control act of unconstitutional, judicial tyranny."

"The Supreme Court can no more repeal the laws of nature and nature's God on marriage than it can the law of gravity.
Under our Constitution, the court cannot write a law, even though some cowardly politicians will wave the white flag and accept it without realizing that they are failing their sworn duty to reject abuses from the court. If accepted by Congress and this President, this decision will be a serious blow to religious liberty, which is the heart of the First Amendment."

Full decision and dissent (pdf)

BitGold Now Available in US! Why BitGold?

Courtesy of Mish.

BitGold USA

Effective today, BitGold Announces Platform Launch in the United States.

BitGold, a platform for savings and payments in gold, is pleased to announce the launch of the BitGold platform for residents of the US and US territories. As of today, US residents can sign up on the BitGold platform and buy, sell, or redeem gold using BitGold’s Aurum payment and settlement technology. US residents will also have access to the BitGold mobile app and a prepaid card when these features launch over the coming weeks. Send and receive gold payment features are not initially available in the US.

About BitGold

BitGold’s mission is to make gold accessible and useful in secure savings. The BitGold platform provides innovative solutions to the challenge of transacting with fully allocated and securely vaulted gold. BitGold accounts are free and convenient to open by anyone, anywhere* in just minutes. BitGold provides users with a secure vault account to purchase gold using a variety of electronic payment methods. All physical gold acquired through the platform is owned by the customer, stored in vaults administered by The Brink’s Company, acting through Brink’s Global Vault Services International, Inc. (“Brink’s”), which insures gold through third party insurance providers.

First Ever Debit Card Backed by Gold in Real Time

I explain below what the buyout of GoldMoney by BitGold means, but first let's start with a look at details of the announcement of the first ever debit card backed by gold in real time.

  • First Transactional Gold Account – Gold can be used in payments in addition to savings.
  • First Gold Merchant Platform – Process Credit/Debit Cards and earn gold!
  • First "Real" Gold Card
  • BitGold is an online bank account that is backed by gold as opposed to currency
  • Gold can be redeemed in as little as 10 gram increments (approximately $370 at today's price)
  • Publicly Traded, Audited by PwC, Insured, Backed by Strong Investors

Unlike other cards that sell gold at a premium then issue a debit card, BitGold is a gold-based settlement system in real time. It is also the first gold-based card of any kind available in the US.

BitGold Signup

I encourage everyone to Sign Up for a BitGold Account. I have done so myself.

Promote gold!

Transactions in gold and settlement in gold, in real time are now possible.

Continue Here

 

Greece Bank Deposits Drop to 11-Year Low; Creditors Offer 6 Month’s Financing; Round One of Saga Nearly Over

Courtesy of Mish.

Delay Game

If anyone has blinked, it now appears to be Germany and France, rather than Greece. The latest proposal does not include any new money, but it will free up enough cash until December. The game today is to continue the talks forever, or until Greece finally says OK.

It is already a couple days past midnight, and the creditors, despite the harsh talk from Germany, seem to be the ones who really want a deal.

Financing Dangle

Please consider Merkel, Hollande Dangle Financing Before Greece’s Tsipras.

The leaders of Germany and France offered to release billions in frozen aid on Friday in a last-minute push to talk Greek Prime Minister Alexis Tsipras into contentious pension reforms in exchange for filling Athens’ empty coffers until November.

The leftist premier’s response, according to a Greek official, was that he could not understand why his country’s creditors were seeking to impose such harsh conditions in return for money to avert imminent default and damage to the euro zone.

The creditors laid out terms in a document that went to Greece on Thursday and was seen by Reuters on Friday. It said Greece could have 15.5 billion euros in EU and IMF funding in four installments to see it through to the end of November, including 1.8 billion euros by Tuesday as soon as the Athens parliament approved the plan.

The total is slightly more than Greece needs to service its debts over the next six months but contains no new money.

“PLAN B”

If Greece refuses, the ministers will move on to discussing a “Plan B” on preparing to limit the damage from a Greek default to Greek banks and other euro zone countries and markets, the official said.

However, Merkel and Hollande have refused to talk publicly about a “Plan B”, saying their efforts are focused on getting an agreement to keep Greece in the euro zone.

Greece Says No

Continue Here

The People Must Be Overthrown

Courtesy of The Automatic Earth.


NPC O Street Market, Washington DC 1925

Perhaps I should apologize for writing about Greece all the time. Thing is, not only have I just arrived in Athens last night (and been duly showered in ouzo), but Greece is the proverbial early harbinger of everything that’s wrong with the world (not to worry, I know that’s a hyperbole), and of everything that could be done about it.

That places a responsibility on the shoulders of Syriza leader Alexis Tsipras and his team that maybe they don’t want, and for all I know don’t deserve either. But they’re all we have, and besides, they’re all their own people have. In that sense, this is not about everything that’s wrong with the world, other than that’s the same as everything that’s wrong with Greece.

I was struck last night, talking to people here in Athens, by how much their appreciation of Tsipras, his overall composure and the way he handles the Troika talks, has increased over the past five months. They were doubtful about him before the Syriza election win; they no longer are.

Still, the negotiations are nice and all, but they’re not going anywhere, and they never will. The Troika side of the table is interested in one thing only: to humiliate Athens and force it into ultimate submission, along the lines of those photographs we’ve come to know of Abu Graibh.

Yanis Varoufakis labeled the Troika policies vis-a-vis Greece ‘fiscal waterboarding’ when he started out as finance minister, and here’s thinking he should have stuck with that image in a much more persistent and a much louder fashion.

Yes, we know, Syriza doesn’t have the mandate to take the country out of the eurozone. A daily dose of fear tactics in the domestic and international media still have Greeks, even Syriza voters, scared stiff about going it alone.

It’s time for Tsipras to turn to his people, on national TV, and say look, whatever we can discuss with the Troika, and whatever compromise we may be able to reach, there is no option on or off the table that would allow for you, the people of Greece, to not be debt slaves for the rest of your lives.

The European Union is merely a crude modern version of a feudal society (but without the debt jubilee older versions had), that’s all the morals that Brussels and Berlin can muster. And, Tsipras should say, if that is what you want, if you want to be slaves instead of a free people, tell me so. I will draw my conclusions from that.

But this is getting painful. We have an entire team of Greece’s brightest drawing up plan after plan, most of which are never even discussed by the Troika. It all comes down to you, the people, and we, your representatives, being rudely insulted every minute of the day by people whose only interest is their own personal careers and agendas.

I, Alexis Tsipras, think I deserve better than that, and much more importantly, I think my people deserve better than that. But in these negotiations, no matter how long they last, we will never get what we deserve. The Troika seeks to humiliate us, and force us on our knees with our pants down our ankles and a hood over our faces..

This will take courage on the part of Tsipras; it may well end his political career. But such courage is exactly what the Greek people need to see. They need a leader who is willing to put it all on the line, or else why would they themselves?

The threat of Armageddon following an exit from the euro is an abstract and unknown phenomenon akin to various bogeymen used to keep children in check, akin to the threat of drowning that makes waterboarding such an inhumane experience.

But whatever may or will happen, there is nothing that says or guarantees that a euro-less Greece will be worse off than it is now. Not even from a purely financial point of view (other than for an initial short period of time).

What the Greeks are sure to gain, though, is their independence, their dignity, their pride. Why on earth would they, once they understand the predicament, vote to stay on and pay their odious debts and kowtow to the five families in Brussels and Berlin for the rest of their lives?

It makes no sense at all, and it makes no sense for Tsipras and his team to keep on negotiating for a deal that will never do anything but humiliate them, and shackle the people who voted for them. There is no other possible option on the table, and there won’t be in the future.

As I was writing this in the early Athens morning, I saw an article by my dear friend Steve Keen come in, and I’m very pleased to see Steve think along the same lines I do, at the same time.

Bureaucrazies Versus Democracy

This belief that economists know better than politicians how to run an economy was enshrined in the Maastricht Treaty itself, which limited government deficits to 3% of GDP and government debt to 60% of GDP. It was a set of rules designed to shackle political freedom, so that the economy could flourish under the incorruptible leadership of experts.

Some experts. Firstly they designed a system which would only work if capitalism never had crises. Secondly, when a crisis hit, rather than backpedalling on their flawed rules, they doubled up on them. Then, when the people had the temerity to elect a government which opposed their agenda… Well it’s obvious, isn’t it? The people must be overthrown.

I know from personal conversations with Varoufakis and his advisors, as well as from the public record, that Syriza is willing to do almost anything to stay within the Euro. As Yanis put it at the INET conference in Paris in April, the Euro is a bit like the Hotel California: you should never check into it in the first place, but if you do, you can never leave.

But the conditions the IMF, EU and ECB are insisting upon here are so extreme, and their behaviour so counter to the very concept of democracy, that maybe the Greeks would do better to show them what a democratic government can do. Maybe they should leave the Euro, and default on all their debts—especially those to the Troika. The financial stimulus from throwing off the yoke of debt may counterbalance the initial chaos from re-instituting a national currency in a seriously damaged society.

It may also teach the bureaucrazies -and no, that is not a misprint- a lesson about the limits of bureaucratic power.

You know, it’s true that maybe it’s too much for outsiders such as Steve Keen and myself to ask of Alexis Tsipras, and the people of Greece, to jump into a big unknown. But it’s also too much to bear to watch the inane piece of theater being played out by quasi elected B movie protagonists.

And no, none of us get a free pass on this one. Your voice is long overdue. Because no matter where you are or who you are, whether you’re American or European, it’s still your government, acting in your name, that supports and magnifies the craziness unloaded upon the cradle of democracy.

All the Greek people know until now is that Europe and the IMF are attempting to strangle them. Still, so many among us don’t agree with that at all. Thing is, it’s time to let that be known. To the people of Greece, and to our own ‘leaders’ who if we don’t get vocal will continue to do as they please. Just because the people you’ve elected don’t have any morals doesn’t mean you don’t have to either.

I shouldn’t forget of course: you can start showing your support for Greece and justice right now by donating to the AE for Athens fund, just go to the Paypal widget, top of the left side bar. Make sure you end the amount you donate with $.99, so I know it’s for Greece. I’ll be seeking out foodbanks and clinics momentarilly.

Volatility Is Set To Increase

Urban made a great call on the VIX on Tuesday, June 23. Here's a screenshot of the chart from Yahoo:

….So what do you do the next time you see the VIX closing below its lower Bollinger Band?

Volatility Is Set To Increase

Courtesy of Urban Carmel, The Fat Pitch

Summary: On Tuesday, VIX closed below its lower Bollinger Band for the first time in a year. In the past, this has very often led to at least a 5-10% increase in VIX in the weeks ahead. But the affect on SPY has been mixed; just over half of instances were followed by a decline of at least 1% in the week ahead.  

* * *

VIX measures the market's expectations for volatility over the next month. A low VIX implies that expectations are for little volatility looking ahead. Today's VIX is near 12, one of the lowest levels in the past year. Given the small daily and weekly movements in the SPY over the past several months, it is not surprising that VIX is low.

Bollinger Bands measure the movement of price around its mean. Using the most common set up, a movement outside of the upper or lower Bollinger Band is equal to 2 standard deviations from a 20-day moving average. Price should only fall outside of the upper or lower Bollinger Band only about 5% of the time so when this occurs, it is noteworthy.

On Tuesday, VIX closed below its lower Bollinger Band for the first time in more than a year. In the past 5 years, this happened only 15 times.

What happens next?

VIX itself has a strong tendency to rise in the days and weeks ahead. In 14 of the 15 instances, VIX increased by at least 5% and it increased by more than 10% in more than half of all instances.

Normally, SPY moves opposite to VIX; so an increase in VIX would typically lead to a decline in SPY. But that's not always the case and in the 15 cases where VIX closed below its lower Bollinger Band, SPY fell more than 1% only about 60% of the time. Stocks have a natural tendency to rise, so the likelihood of a decline is slightly elevated, but the edge is not significant.

The charts below show every instance where VIX closed below its lower Bollinger Band since 2010 (vertical lines). SPY is in the top panel and VIX is in the lower panel. A rise of more than 1% in SPY is highlighted in green, a decline in yellow. The same applies to VIX, except the threshold is a rise or fall of more than 5%.

In 2014, there were 3 instances when VIX closed below its lower Bollinger Band. VIX rose every time, once by more than 10% (lower panel). SPY fell by more than 1% twice but rose unabated once. The overall uptrend in SPY was not affected.
 


In 2013, there were only 2 instances and VIX rose by more than 10% both times. SPY fell both times and struggled in the weeks ahead.
 

 

In 2012, there were 4 instances, including one where VIX continued to fall and one where VIX rose by more than 10%. The affect on SPY was split 50/50.

 

 

In 2011, there were 3 instances, including 2 were VIX rose more than 10%. Of note is SPY rose in the week ahead twice but both times were significant market tops (May and July).
 

 

In 2010, there were 3 instances, with SPY falling twice and rising once. The one rise, however, led to the worst gains going forward, as SPY fell significantly in the following month (May).

 

 

Of the 15 cases, 4 occurred within a few weeks of more than a 5% fall in SPY (yellow). 3 of these falls were more than 10%. The last one was in mid-2012. In most cases, SPY continued higher unabated.
 

 

In general, when VIX closed under its lower Bollinger Band, volatility rose by at least a 5-10% in the weeks ahead. But the effect on SPY has been mixed.  On its own, this is not a warning to expect a dramatic fall in equities in the weeks ahead.

 

How Much Is $160 Of Silver Worth To The Average American? (Hint: Less Than $10)

 

Watch Mark Dice fail to practically give away a 10oz bar of silver while standing right in front of a coin shop. Passersby were either too lazy or too dismissive of the silver's worth to even get the bar appraised. As Phil writes, if you think that "hoarding physical metals (gold, silver) will keep you safe in a market collapse, let this be your valuable lesson for the weekend. This is why I crack up when people tell me they keep a supply of gold coins or silver in a safe 'just in case.' If paper money becomes worthless, I advise people to have a stockpile of water filters instead."

If you can't trade a $160 bar of silver for a half drunk latte or bowl of noodles now, wait until the end of the world is really upon us.  

How Much Is $160 Of Silver Worth To The Average American? (Hint: Less Than $10)

Courtesy of ZeroHedge

Seemingly confirming the national new normal, dumbing-down-ness, the following clip shows Americans have absolutely no idea about the value of precious metals. When asked if they would like to purchase a 10oz silver bar (worth $160) for just ten bucks, every single one refused… one even refused to handover a half-drunk Starbucks coffee for the silver bar.

Mark Dice does it again…

Exposing the staggering ignorance of the average American even more, the clip was filmed right in front of a  coin shop.

We wonder what the same interviews would be like in China or India or Russia?

3 Things: Trend, Ceiling & Rates

Courtesy of Lance Roberts via STA Wealth Management

The Long Term Trend

Yesterday, I posted an article discussing the lack of ability by investors to accurately predict the future:

But it is precisely this conversation that leads to a litany of articles promoting "buy and hold" investing. While "buy and hold" investing will indeed work over extremely long periods, investor success is primarily a function time frames and valuation at the beginning of the period. Considering that most investors have about a 20-year time horizon until the reach retirement, the "when" becomes a critical component of future success."

SP500-20-Year-Real-Returns-062415

Importantly, when valuations have been elevated, forward returns over the next 20-years have been rather disappointing.

That discussion prompted my colleague and technician "extraordinaire," Walter Murphy, to send the following analysis of the long-term trend of the market.

Murphy-LongTerm

There are a couple of interesting points to note about this chart. First, on an inflation-adjusted basis, the market is pushing a level of resistance that was only previously, and briefly, exceeded by the "dot.com" exuberance. Secondly, as shown in the RSI chart at the bottom, the market is currently at levels that have coincided with market peaks in the past.

Importantly, this is a monthly data chart that is very slow to develop. Therefore, this analysis does NOT suggest that a massive market correction is set to occur by the time you finish reading this article. It does suggest, however, that there is likely not a lot of relative reward currently remaining in the markets relative to the "risk" required to extract it.

Despite plenty of historical precedent and statistical evidence, the reality is the investors are consistently swept up by the short-term psychosis of "greed" and "fear" which obfuscate more logical decision-making processes. But that is the reality of market dynamics and why outcomes have never been "different this time."

Has The Market Finally Reached It's Ceiling?

Despite the ongoing bullish parade of commentary that the markets could, and should, only go higher from current levels, it is worth noting that there has seemed to be a somewhat invisible barrier to the markets advance since the beginning of this year.

As shown in the chart below, the flatlining of the market's advance is something that hasn't been witnessed since Bernanke's launch of "QE 3" in December of 2012. However, these periods of increased volatility with little, or no, overall advance combined with very "overbought" conditions have historically been less "bullish" than most of the media suggests.

SP500-Market-Ceiling-062515

With levels of investors complacency at extremely high levels, it is a currently "fact" that little can go wrong. There is no recession in sight; the earnings decline was all primarily related to energy companies and most importantly, global Central Banks are continuing to support the financial markets.

Of course, maybe it is the last point that should be questioned. If the economy is doing so well, then why are Central Banks still needing to intervene to support the growth? This is equivalent of saying the "the patient is cured, as long as we don't take him off of life support."

Interest Rates Aren't Going Higher

Despite the recent uptick in interest rates as of late, which has been a short-covering bounce following the sharp decline at the beginning of this year, I remain bullish on bonds longer term. The reason is not because there is going to be a phenomenal return out of bonds in coming years as there is little gain left with rates currently at 2.4% on the 10-year Treasury. But rather because bonds will likely remain stuck at current levels for close to the next decade and will provide a buffer to weaker equity markets in the future.

This was a point I made recently in questioning the logic that "Interest Rates Have Nowhere To Go But Up?"

"The chart below is a history of long-term interest rates going back to 1857. The dashed black line is the median interest rate during the entire period."

Interest-Rate-LongTerm-30yr-120914-2

"Interest rates are a function of strong, organic, economic growth that leads to a rising demand for capital over time. There have been two previous periods in history that have had the necessary ingredients to support rising interest rates. The first was during the turn of the previous century as the country became more accessible via railroads and automobiles, production ramped up for World War I and America began the shift from an agricultural to industrial economy.

The second period occurred post-World War II as America became the "last man standing" as France, England, Russia, Germany, Poland, Japan and others were left devastated. It was here that America found its strongest run of economic growth in it history as the "boys of war" returned home to start rebuilding the countries that they had just destroyed.

Currently, the U.S. is no longer the manufacturing powerhouse it once was and globalization has sent jobs to the cheapest sources of labor. Technological advances continue to reduce the need for human labor and suppress wages as productivity increases. Today, the number of workers between the ages of 16 and 54 is at the lowest level relative to that age group since 1976. As discussed recently, this is a structural problem that continues to drag on economic growth as nearly 1/4th of the American population is now dependent on some form of governmental assistance."

It is worth noting that we are currently only a little more than 4-years into the current low-level interest rate environment. Both previous periods in the U.S. have averaged 40-years.

As stated above, interest rates are a function of strong economic growth which continues to elude policy makers in Washington. Despite annual hopes of stronger economic growth, it has yet to materialize as consumers, which make up 2/3rds of that growth, remain hamstrung by somewhat stagnant wage growth consumed by spiraling healthcare costs.

This was a point made by Stephanie Pomboy in an article entitled "What To Expect In The Q2 GDP Number" by Elizabeth MacDonald.

"Spending on healthcare (insurance and services) has increased $232 billion over the last twelve months. That increase accounts for a big 'two-thirds' of the $353 billion in consumer spending and one-third of the $666 billion growth in total GDP over the stretch.

And wage gains are being wiped out by rising health costs. 'The increase in healthcare outlays over the last year is roughly equal to the $284 billion in wage gains for households during that time.'"

Spending on rising healthcare costs, primarily premiums, does not boost economic growth. In fact, it deters it as it saps spending from other areas that actually do contribute to overall growth. As shown in the chart from ZeroHedge, Q1 GDP growth was primarily supported by rising healthcare and utility costs.

Personal-Consumption-Q1-2015-2

Those expenditures to incite the type of economic growth needed to spur higher borrowing rates. Not now, and not likely any time in the foreseeable future. 

So, yes, the "Great Bond Bull Market" is likely over. However, just take a look at Japan and you can start guessing about how long the "Great Bond Bear" will likely remain in hibernation.

How Companies Are Using PIP To Humiliate and Get Rid of Workers

Courtesy of EconMatters

 

Graphic Source: http://www.polyp.org.uk/

In my last two posts, I talked about why hiring now takes longer and how some companies use interview to score free consult from job applicants, today I'd like to discuss the increasing popularity of PIP.  This is not your forex trading pip, PIP in the corporate lingo means Performance Improvement Plan.

What's in PIP? 

Any Human Resource (HR) person would preach that PIP is a performance management tool designed to facilitate "constructive discussion" between a staff member and his or her supervisor and to "clarify the work performance to be improved".  PIP typically consists of a summary of an employee's 'guilt' and a list of tasks and milestones to rectify the 'guilty behavior' requiring at least weekly check-in with HR and manager to report progress.  Although a non-public process between employee, manager and HR, PIP is quite humiliating and a definite morale killer.

PIP or Quit? 

PIP is very ineffective in actually 'improving performance'.  Employees (particularly the ones that are highly skilled and experienced) on PIP most likely would quit before the completion of PIP thus defeating the entire purpose (I personally would think twice retaining somebody who's willing to go through PIP and stay).  Since PIP is an official and formal HR process (i.e. included in employee record), it is typically rarely used.  In fact, most mangers understand or should have the IQ to know that if you put an employee on PIP, be prepared for him or her to quit (leaving all the work to the manager or other team members, not to mention disrupting the team product delivery project plan).    

New Love of PIP

Up until about five years ago, managers usually had favored the more informal approach such as a good long sit-down talk, followed up by more short discussions for feedback. Nevertheless, my observation is that in recent years, PIP seems to have become a popular tool to the new generation middle managers for the purpose of a "homogeneous team".  That is, PIP has become an acceptable and common practice to get rid of the "black horse" employee that is typically high-skilled and highly productive, thus at odds with a team of mostly mediocre members (including the manager).

Highly Subjective 

The loophole is that there's not a clear definition of behavior or performance that warrants a PIP.  Let me just cite one example.  

Throughout the years, I have maintained a small network of friends (around 8 people in various fields including IT, Marketing, and Finance) with 10-30 years of professional experience.  We usually feel safe discussing things such as work projects and politics with each other.  Within this small 8-person network, all of a sudden, four got put on PIP within the past 3 years for some highly subjective and vague "violation" like "unprofessional conduct". These four all have something in common:

  1. A newly-promoted Gen X or Y direct manager that's less experienced 
  2. All four have the most company seniority within their respective teams outranking even their manager
  3. All four are highly skilled and have a proven track record of high performance and high productivity    

I don't think this is a coincidence or some random occurrence.  For a professional with 20 years of experience, going through PIP is like a slap on the face.  Needless to say, all of them quickly got the message and landed a new job shortly after the PIP started.  Of course, their managers are not all too shy about calling and asking for work-related things long after they quit.      

Why New Gen Managers Love PIP

I'm not sure how corporations are training managers these days, but I find it very peculiar that any manager with half a brain could think PIP is actually an effective managerial tool and used so often. So here is what I think happening in Corporate America (otherwise, it means companies are now run by real morons).        

As we noted before, the post-boomer new generation middle managers tend to rely on tools favoring standardization in the decision-making or project delivering process.  They tend to be ruthless ('relationship' means very little), and like to band together and act like a "Fraternity Group".  PIP, in essence a group-decision-make tool without clear boundaries and definitions, is perfect for them to use getting rid of an otherwise hard-to-terminate high-performance employee.  

Start of Decay?

I think the worst part in it all is that this is taking place with blessings from the corporate higher-up. These people are brain-washed by the almost two-decade-long propaganda to give special consideration to Gen X and Y — 'The Hope of Corporate America after Boomers'.  In most corporations, the higher-up is still mostly the boomer generation with Gen X or Y kids, so letting the new generation managers do whatever including losing valuable employees is like giving their kids a break (on a psychological level).

The U.S. has long worried about China taking over America in talent, economy, military, etc.  What I've observed in Corporate America, this may not be an idle threat.

Read also: Getting Hired Now Takes Longer & How Some Companies Are Scamming Job Applicants

 

Nature Rebounds

 

‘The Legend of Giants’ by Natalia Rak | © Sergio Rdgz/Flickr

‘The Legend of Giants’ by Natalia Rak | © Sergio Rdgz/Flickr (source)

Outside the Box: Nature Rebounds

By John Mauldin

The common meme in today’s world is that we are slowly (or perhaps even rapidly in some instances) destroying our global environment. Not just by way of global warming, but pollution, over-farming, water usage, and increasing use of all sorts of resources taken from the ground. Post-apocalyptic movies and books are the rage, showing us living in a world where man has ravaged his environment and our lives have been degraded if not destroyed. Our failure to deal with global warming and the destruction of the environment are key components of the mantra repeated by the mainstream media, pundits, and politicians.

Technology is supposed to somehow save us from our dystopian future by creating new ways to clean the environment, feed us, and help us become more thrifty and less wasteful. But when? When will we see those breakthroughs, that light at the end of the tunnel?

A few years ago I met Jesse Ausubel, who ran a two-week-long think tank for the US Department of Defense at the Naval War College, tasked with thinking about the challenges of the next 20 years. The Office of Net Assessment brought in 15 futurists from a number of disciplines and personnel from each branch of the military who were the heads of future-scenario planning for their respective branches. We sat for over a week, 10-12 hours a day plus dinners, thinking through the issues we might have to face. Andrew Marshall, who was 93 and had been running that department since he was appointed by Nixon in 1974, gathered this group of nonconsensus thinkers each summer to think about long-range issues. I was fortunate enough to be part of the group for two years.

Jesse corralled this herd of cats into a cogent work group and kept us on track. The experience was exhausting but exhilarating. It was soon clear that Jesse was not only capable of organizing a group of eclectic minds, he was also a first-rate thinker himself, knowledgeable on a wide variety of topics, a true Renaissance man.

Jesse is Director and Senior Research Associate of the Program for the Human Environment at Rockefeller University, a pure-research institution with more Nobel laureates than any other university. The work they do is astounding in its breadth. I recently spent an afternoon with Jesse talking over a number of topics and especially a paper he recently published which lays out serious research in an accessible way on the subject of how things in our beleaguered world might actually be getting better. It is called “Nature Rebounds,” and it’s today’s Outside the Box.

To get the import of this paper, you may need to know more about who Jesse is. You can read his wiki bio, which is extensive; but the short version is that he was integral to setting up the first (and then subsequent) conferences on climate change in Geneva in 1979. Later, he led the Climate Task of the Resources and Environment Program of the International Institute for Applied Systems Analysis, near Vienna, Austria, an East-West think tank created by the US and Soviet academies of sciences. Beginning with a 1989 book called Technology and Environment, Jesse was one of the founders of the field of industrial ecology. He also co-developed the concepts of decarbonization and dematerialization. He has more serious science attached to his name than most climate and ecological scientists do, and he has the awards and honors to prove it.

And what Jesse tells us is that for much of the world, in many ways, things are getting better. Nature is winning. Not everywhere, of course, and he documents the downside as well, notably the serious devastation of our oceans and fishing. There is still a lot to do, but the trends are positive (except, notably, for the oceans). He shows us that the effort to clean up the environment and expand the areas that are allowed to return to a more natural state has been worth it. This is a great summer read. The entire paper is included in today’s OTB, but if you would like to read it in its original format, you can download a PDF here.

I was recently in the wilds of New Hampshire and Vermont. I spent the weekend at the fabulous retreat compound of Gary Bahre, where some 15 people involved in his investments and businesses listened to Mark Faber, David Rosenberg, Ed Yardeni, Danny (David) Blanchflower, Peter Boockvar, Gary Shilling, and your humble analyst present and debate a series of economic topics. Trish Regan, now with Fox Business, moderated, kept things moving along, and displayed a very wide breadth of knowledge in her questioning. Those who know the characters involved will know that the event was, of course, cordial but also rather highly spirited. The theme song should have been “Hit Me With Your Best Shot!” I don’t get to be in many small group sessions like that, and I thoroughly enjoyed myself. My special thanks to Gary for being such a fabulous host. The place is now for sale, and I wish him the best, although I really would like to be a part of another conference like that again.

I have now moved to my temporary home base in the NoHo neighborhood of NYC, where I’ll be through mid-July, in an apartment provided courtesy of AirBnB (I think). I have a business reason to be here, but on a personal level I have always wanted to spend an extended time in NYC. There is just so much to do and so many friends here. Randomly, I find myself in the same building with Nouriel Roubini. We’ve already scheduled to meet up in the next few days.

You have a great week.

Your happy to see the world getting better analyst,

John Mauldin, Editor
Outside the Box 
subscribers@mauldineconomics.com

Nature Rebounds

Jesse H. Ausubel
Director, Program for the Human Environment
The Rockefeller University

Long Now Foundation Seminar
13 January 2015
San Francisco

Trends in America may portend a global restoration of nature, a rebound. To understand, let’s go into the woods, not in a far-off kingdom, but only about 45 miles northwest of New York City in New Jersey, where a scary side-effect illustrates the American trend to expand nature. In September 2014 a bear killed Darsh Patel, 22, a senior at Rutgers University majoring in information technology, while hiking with friends. Patel’s death in the Apshawa Preserve was the first fatal bear attack recorded in New Jersey in 150 years. Five friends were hiking when they came across the bear, which they photographed and filmed before running in different directions. After regrouping, they noticed one was missing. State authorities found and euthanized the bear, which had human remains in its stomach and esophagus, and human blood and tissue below its claws.

Five years earlier, the state of New Jersey had restored its bear hunt. In 2010 wildlife ecologists estimated that 3,400 bears were living in New Jersey. After five years of hunting, the experts now estimate the population has fallen to 2,500. During the six-day 2014 season, hunters killed 267 bears. Protesters have picketed and petitioned to stop the annual hunt.

Should the re-wilding of New Jersey shock us? I answer “no,” because about 1970 a great reversal began in America’s use of resources. Contrary to the expectations of many professors and preachers, America began to spare more resources for the rest of nature, first in relative and more recently in absolute amounts. A series of decouplings is occurring, so that our economy no longer advances in tandem with exploitation of land, forests, water, and minerals. American use of almost everything except information seems to be peaking, not because the resources are exhausted, but because consumers changed consumption and producers changed production. Changes in behavior and technology liberate the environment.

Farms

Consider first land. Agriculture has always been the greatest raper of nature, stripping and simplifying and regimenting it, and reducing acreage left. Then, in America, in about 1940 acreage and yield decoupled (Figure 1). Since about 1940 American farmers have quintupled corn while using the same or even less land. Corn matters because it towers over other crops, totaling more tons than wheat, soy, rice, and potatoes together (Figure 2).

Figure 1. Decoupling of US corn production from area farmed.
Data source: US Census Bureau (1975, 2012).

Figure 2. Domination by corn of US crops and meats produced in 2011.
Data sources: USDA; US Census Bureau.

Crucially, rising yields have not required more tons of fertilizer or other inputs. The inputs to agriculture have plateaued and then fallen, not just cropland but nitrogen, phosphates, potash, and even water (Figure 3). A recent meta-analysis by Wilhelm Klümper and Matin Qaim of 147 original studies of recent trends in high-yield farming for soy, maize, and cotton, funded by the German government and the European Union, found a 37 percent decline in chemical pesticide use while crop yields rose 22 percent. The story is precision agriculture, in which we use more bits, not more kilowatts or gallons.

Importantly, the average yield of American farmers is nowhere near a ceiling. In 2013, David Hula, a farmer in Virginia, not Iowa or Illinois, grew a US and probably world record 454 bushels of corn per acre, three times the average yield in Iowa. His tractor cab is instrumented like the office of a high-speed Wall Street trader. In 2014 famer Hula’s harvest rose 5 percent higher to 476 bushels, while Randy Dowdy, who farms near Valdosta, Georgia, busted the 500 bushel wall with a yield of 503 bushels per acre and won the National Corn Growers Contest.

Figure 3. The transition to precision agriculture. Absolute US consumption of five agricultural inputs.
Data source: USGS2013.

Now one can ask if Americans need all that corn. We eat only a small fraction of corn on the cob or creamed or as tortillas or polenta. Most corn becomes beef or pork, and increasingly we feed it to cars (see Figure 4). An area the size of Iowa or Alabama grows corn to fuel vehicles.

Figure 4. US uses of corn. *Note: Includes production of high-fructose corn syrup,
glucose and dextrose, starch, alcohol for beverages and manufacturing,
seed, cereals, and other products.
Data source: USDA Economic Research Service.

Unlike corn that becomes beef or soybeans that become chicken, potatoes stay potatoes, and they conserve the scarce input of water in Idaho or California’s Kern County around Bakersfield. Ponder the rewards of success for the potato grower (Figure 5). Potato growers have also lifted yields, but their markets are saturated, so they remove land from production. This sparing of land—and water— is a gift for other plants and animals.

Figure 5. Sparing of land by potato growers: US potato yield, production,
and harvested area.
Data source: USDA 2013.

Steadily, the conversion of crops, mostly corn, to meat, has also decoupled, because the meat game is also one in which efficiency matters. From humanity’s point of view, cattle, pigs, and chickens are machines to make meat. A steer gets about 12 miles per gallon, a pig 40, and a chicken 60. Statistics for America and the world show that poultry, land’s efficient meat machines, are winning (Figure 6).

Figure 6. Chicken wins market share in US meat consumption.
Data source: USDA.

High grain and cereal yields and efficient meat machines combine to spare land for nature. In fact, we have argued that both the USA and the world are at peak farmland, not because of exhaustion of arable land, but because farmers are wildly successful in producing protein and calories. To prosper, farmers have allowed or forced Americans to eat hamburgers and chicken tenders, drink bourbon, and drive with ethanol, and they have still exported massive tonnages abroad.

Wasted food is not decoupled from acreage. When we consider the horror of food waste, not to mention obesity, then we further appreciate that huge amounts of land can be released from agriculture with no damage to human diet. Every year 1.3 billion tons of food are thrown away globally, according to a 2013 report of the Food and Agriculture Organization of the UN. That equates to one-third of the world’s food being wasted.

Some food waste results from carelessness, but laws and rules regulating food distribution also cause it. Germany, the UK, and other countries are changing rules to reduce food waste. In California the website Food Cowboy uses mobile technology to route surplus food from wholesalers and restaurants to food banks and soup kitchens instead of to landfills, and CropMobster tries to spread news about local food excess and surplus from any supplier in the food chain and prevent food waste. The 800 million or so hungry humans worldwide are not hungry because of inadequate production.

If we keep lifting average yields toward the demonstrated levels of David Hula and Randy Dowdy, stop feeding corn to cars, restrain our diets lightly, and reduce waste, then an area the size of India or the USA east of the Mississippi could be released globally from agriculture over the next 50 years or so (Figure 7).

Figure 7. Peak farmland? Global arable land 1961– 2009 and projections to 2060.
In the alternative scenario, the several favors (rising yields, diet, waste reduction,
cessation of using land to fuel cars) sum to a higher total.

Rebound is already happening. Abandonment of marginal agricultural lands in the former Soviet Union and Eastern Europe has released at least 30 million hectares and possibly as much as 60 million hectares to return to nature according to careful studies by geographer Florian Schierhorn and his colleagues. Thirty million hectares is the size of Poland or Italy. The great reversal of land use that I am describing is not only a forecast, it is a present reality in Russia and Poland as well as Pennsylvania and Michigan. I will discuss some consequences of this reversal later.

In America alone the total amount of corn fed to cars grows on an area equal to Iowa or Alabama, as mentioned. Think of organizations like the Long Now Foundation turning all those lands that are now pasture for cars into refuges for wildlife, carbon orchards, and parks. The area is about twice the area of all the US national parks outside Alaska.

Forests

Let’s now turn from farms to forests. Foresters refer to a “forest transition” when a nation goes from losing to gaining forested area. France recorded the first forest transition, about 1830. Since that time French forests have doubled while the French population has also doubled. Forest loss decoupled from population.

Measured by growing stock, the USA enjoyed its forest transition around 1950, and measured by area, about 1990. In the USA, the forest transition began around 1900, when states such as Connecticut had almost no forest, and now encompasses dozens of states. The thick green cover of New England, Pennsylvania, and New York today would be unrecognizable to Teddy Roosevelt, who knew them as wheat fields, pastures mown by sheep, and hillsides denuded by logging.

The forest transition, like peak farmland, involves forces of both supply and demand. Foresters manage the supply better through smarter harvesting and replanting. Simply shifting from harvesting in cool slow-growing forests to warmer faster-growing ones can make a difference. A hectare of cool US forest adds about 3.6 cubic meters of wood per year, while a hectare of warm US forest adds 7.4. A shift in the USA harvest between 1976 and 2001 from cool regions to the warm Southeast decreased logged area from 17.8 to 14.7 million hectares, a decrease of 3.1 million hectares, far more than either the 0.9 million hectares of Yellowstone Park or 1.3 million of Connecticut.

Like farmed meat, forest plantations also produce wood more efficiently than unmanaged forests, and forest plantations meet a growing fraction of demand, predictably, and spare other forests for biodiversity and other benefits. The growth in plantations versus natural forests provides even greater contrast than the warm versus cool forests. Brazilian eucalyptus plantations annually provide 40 cubic meters of timber per hectare, about five times the production of a warm natural forest and almost 10 times that of a cool northern forest. In recent times about a third of wood production comes from plantations. If that were to rise to 75 percent, the logged area of natural forests could drop by half. It is easy to appreciate that if plantations merely grow twice as fast as natural forests, harvesting one hectare of plantation spares two hectares of natural forest.

An equally important story unfolds on the demand side. We once used wood to heat our homes and for almost forgotten uses such as railroad ties. The Iron Horse was actually a wooden horse—its rails rested on countless trees that made the ties and trestles. The trains themselves were wooden carriages. As president of the Southern Pacific and Central Pacific railroads in their largest expansion, Leland Stanford was probably one of the greatest deforesters in world history. It is not surprising that he publicly advocated for conservation of forests because he knew how railroads cut them. The US Forest Service originated around 1900 in large part owing to an expected timber famine caused by expansion of railroads.

Fortunately for nature the length of the rail system saturated, creosote preserved timber longer, and concrete replaced it. Charting the three major uses of wood—fuel, construction, and paper—shows how wood for fuel and building has lost importance since 1960 (Figure 8). World production has also saturated (Figure 9). Paper had been gliding upward but, after decades of wrong forecasts of the paperless society, we must now credit West Coast tycoons Steve Jobs and Jeff Bezos for e-readers and tablets, which have caused the market for pulp and paper, the last strong sector of wood products, to crumple. Where are the newsstands and stationers of yesteryear? Many paper products, such as steno pads and even fanfold computer paper, are artifacts for the technology museums. E-mail has collapsed snail mail. US first-class mail fell a quarter in just the five years between 2007 and 2012 (Figure 10). As a Rockefeller University employee, I like to point out that John D. Rockefeller saved whales by replacing sperm oil with petroleum. ARPANET and the innovators of e-mail merit a medal for forest rebound.

Figure 8. Declining favor of wood products:
Global forest products consumed per dollar of GDP.
Data sources: FAO 2013; World Bank 2012.

Figure 9. Saturation of world production of forest products, in tons; 1961 = 100%.
Data source: UN FAOSTAT.

Figure 10. Dematerialization in action: Falling US mail volume.
Data source: US Postal Service.

Global greening

So far I have described bottom-up forces relating to farms and forests that spare land. Top-down forces are also at work, and together the forces are causing global greening, the most important ecological trend on Earth today. The biosphere on land is getting bigger, year by year, by 2 billion tons or even more.

Researchers are reporting the evidence weekly in papers ranging from arid Australia and Africa to moist Germany and the northernmost woods (see text box, below). Probably the most obvious reason is the increase of the greenhouse gas carbon dioxide in the atmosphere. In fact, farmers pump CO2 into greenhouses to make plants grow better. Carbon dioxide is what many plants inhale to feel good. It also enables plants to grow more while using the same or less water.

Californians David Keeling and Ralph Keeling have kept superfine measurements of CO2 since 1958. The increasing size of the seasonal cycle from winter when the biosphere releases CO2 to the summer when it absorbs the gas proves there is greater growth on average each year. The increased CO2 is a global phenomenon, potentially enlarging the biosphere in many regions.

In some areas, especially the high latitudes of the Northern Hemisphere, the growing season has lengthened, attributed to global warming. The longer growing season is also causing more plant growth, demonstrated most convincingly in Finland. Some regions, including sub-Saharan Africa, report more rain and more growth.

More nitrogen here and there in the environment may also be causing global greening. A group of us led by Pekka Kauppi of Finland is trying to dissect the shares attributable to the various factors.

In any case, the numbers are huge, and satellite comparisons of the biosphere in 1982 and 2011 by Ranga Myneni and his colleagues show little browning and vast green expanses of greater vegetation (Figure 11). I repeat that global greening is the most important ecological phenomenon on land today.

Figure 11. Global greening: Corroborating satellite images, models simulate greening
1990–2011 with growing net primary production spanning tropical, temperate,
and boreal regions and all vegetation types but also of course some areas with losses.
Trend is measured in grams of carbon per square meter per year.
Source: Sitch et al. 2015, fig. 6.

Materials

In speaking about land, I have occasionally mentioned materials such as nitrogen and water. Let me now suggest that in addition to peak farmland and peak timber, America may also be experiencing peak use of many other resources. Back in the 1970s, we thought America’s growing appetite might exhaust Earth’s crust of just about every metal and mineral. But a surprising thing happened, even as our population kept growing. The intensity of use of the resources began to fall. For each new dollar in the economy, we used less copper and steel than we had used before. Figure 12 shows not just the relative but the absolute use of nine basic commodities, flat or falling for about 20 years. In the 1967 film The Graduate, a successful businessman tells the new college graduate played by Dustin Hoffman, “I just want to say one word to you. Just one word. Plastics” (https://www.youtube.com/watch?v=PSxihhBzCjk). About 1990, Americans began even to use less plastic. America has started to dematerialize.

The reversal in use of some of the materials so surprised me that Iddo Wernick, Paul Waggoner, and I undertook a detailed study of the use of 100 commodities in the USA from 1900 to 2010. One hundred commodities span just about everything from arsenic and asbestos to water and zinc. The soaring use of many up to about 1970 makes it easy to understand why Americans started Earth Day in that year. I marched.

Figure 12. Use of nine basic commodities, US 1900–2010.
Note: Uses five-year moving average; legend is ordered top- down by value in 2010.
Data source: USGS National Minerals Information Center 2013.

Of the 100 commodities, we found that 36 have peaked in absolute use; Figure 13 shows a selection of these. Good riddance to asbestos and cadmium. Figure 14 shows some of the 53 commodities we consider poised to fall. These include not only cropland and nitrogen, which I have discussed, but even electricity and water, about which more soon.

Figure 13. Absolute use of peaked commodities, US 1900–2010.
Note: Uses five-year moving average; legend is ordered top-down by value in 2010.
Data source: USGS National Minerals Information Center 2013.

Figure 14. Absolute use of likely peaking commodities, US 1900–2010.
Note: Uses five-year moving average; legend is ordered top- down by value in 2010.
Data source: USGS National Minerals Information Center 2013.

Only 11 of the 100 commodities are still growing in both relative and absolute use in America. These include chickens, the winning form of meat. Several others are elemental vitamins, like the gallium and indium used to dope or alloy other bulk materials and make them smarter. We have titled our forthcoming report “Chickens and Gallium.”

Dematerialization is no surprise to San Franciscans, who make the devices that replace the big old clumsy hunks of metal and blobs of plastic pictured on the right in Figure 15.

Figure 15. The smart phone as dematerializer, one small device replacing many larger ones.
Credit: M. Tupy 2012.

Even Californians economizing on water in the midst of a drought may be surprised at what has happened to water withdrawals in America since 1970. Expert projections made in the 1970s sprayed rising water use to the year 2000, but what actually happened was a leveling off. While America added 80 million people, the population of Turkey, American water use stayed flat. In fact, as Figure 16 reports, data through 2010 just released by the US Geological Survey shows water use has now declined below the level of 1970, while production of corn, for example, has tripled. The largest reasons are more efficient water use in farming and power generation.

Figure 16. Total US water withdrawals: absolute (ABS) and relative to GDP (IOU).
Withdrawals have been flat since about 1975 while production of corn
and soybeans has grown 300%, wheat 60%, potatoes 25%.
Data sources: USGS 2013; Williamson 2014.

In the land of Lyft and Uber, I must speak about petroleum and mobility too. Until about 1970, per American petroleum use rose alarmingly. Most experts worried about further rises, but Figure 17 shows what actually happened—plateau and then fall. Partly vehicles have become more efficient. But partly, travel in personal vehicles seems to have saturated. America may be at peak car travel. If you buy an extra car, it is probably for fashion or flexibility. You won’t spend more minutes per day driving or drive more miles.

Figure 17. Rise, saturation, and decline of US per capita petroleum consumption,
1900– 2012.

Unlike the car companies, I would not bet on selling a lot more cars either. The beginning of a plateau in the population of cars and light trucks on US roads suggests we are approaching peak car. The reason may be that drone taxis will win. The average personal vehicle motors about an hour per day, while a car shared like a Zip Car gets used eight or nine hours per day, and a taxi even more. As venture capitalists here know, driverless cars can work tirelessly and safely and accomplish the present mileage with fewer vehicles. The manufacturers won’t like it, but markets do simply fade away, whether for typewriters or newsprint.

Moreover, new forms of transport can enter the game. According to our studies, the best bet is on magnetically levitated systems, or maglevs, “trains” with magnetic suspension and propulsion. Elon Musk has proposed a variant called the hyperloop that would speed between LA and San Francisco at about 1000 kilometers per hour, accomplishing the trip in about 35 minutes and thus comfortably allowing daily round trips, if the local arrangements are also quick.

The maglev is a vehicle without wings, wheels, and motor, and thus without combustibles aboard. Suspended magnetically between two guard rails that resemble an open stator of an electric motor, it can be propelled by a magnetic field that, let’s say, runs in front and drags it.

Hard limits to the possible speed of maglevs do not exist, above all if the maglev runs in an evacuated tunnel or surface tube. Evacuated means simulating the low pressure that an airplane encounters at 30–50 thousand feet of altitude. Tunnels solve the problem of permanent landscape disturbance, but tubes mounted above existing rights of way of roads or rails might prove easier and cheaper to build and maintain.

Spared a motor and the belly fat called fuel, the maglev could break the “rule of the ton,” the weight rule that has burdened mobility. The weight of a horse and its gear, a train per passenger, an auto that on average carries little more than one passenger, and a jumbo jet at takeoff all average about one ton of vehicle per passenger. The maglev could slim to 300 kilograms, dropping directly and drastically the cost of energy transport.

Will maglevs make us sprawl? This is a legitimate fear. In Europe, since 1950 the tripling of the average speed of travel has extended personal area tenfold, and so Europe begins to resemble Los Angeles. In contrast to the car, maglevs may offer the alternative of a bimodal or “virtual” city with pedestrian islands and fast connections between them. Maglevs can function as national and continental-scale metros, at jet speed.

Looking far into the 21st century, we can imagine a system as wondrous to today’s innovators as our full realization of cars and paved roads would seem to the maker of the Stutz Bearcat. Because the maglev system is a set of magnetic bubbles moving under the control of a central computer, what we put inside is immaterial. It could be a personal or small collective vehicle, starting as an elevator in a skyscraper, becoming a taxi in the maglev network, and again becoming an elevator in another skyscraper. The entire bazaar could be run as a videogame where shuffling and rerouting would lead the vehicle to its destination swiftly, following the model of the Internet. In the end, a maglev system is a common carrier or highway, meaning private as well as mass vehicles can shoot through it.

The city air can be clean, too, if the source of electricity is clean. In fact, Americans have been doing a good job of decoupling growth and air quality. We already see not only decoupling but absolute falls in pollution. Emissions of sulfur dioxide (Figure 18), a classic air pollutant, peaked about 1970 because of a blend of factors including better technology and stronger regulation. The arc of sulfur dioxide forms a classic curve in which pollution grew for a while as Americans grew richer but then fell as Americans grew richer still and preferred clean air.

Figure 18. Decoupling of US economic growth and sulfur dioxide emissions.
Note: the orange Environmental Kuznets Curve of sulfur emissions,
which peaked in 1970,contrasts with the blue straight line of growth of GDP.
Economic slumps as in 1929 and 1944 reverse growth for 5–10 years
but do not affect the longer-term trends for GDP or emissions.
Data source: EPA. Credit: Waggoner and Ausubel 2009.

American emissions of carbon dioxide (Figure 19) now similarly appear to be peaking. The data in the figure go through only 2007 while emissions have dropped since then to 1990 levels. These trajectories seem preset, not created by public policy or politicians. As the German politician Bismarck said in a speech in 1895, a statesman does not create the stream, he floats on it and tries to steer. In California terms, the best politicians are surfers, winning attention for riding waves.

Figure 19. Decoupling of US economy and carbon dioxide emissions.
2013 emissions were 10% below 2007. Carbon emissions seem around their peak,
especially by analogy with sulfur emissions.
Data sources: Carbon Dioxide Information Analysis Center, EPA. Credit: Waggoner and Ausubel 2009.

Population

I have spoken about farms, forests, materials including water, and mobility. Let me report briefly on human population as well. The US fertility rate declined six years in a row beginning in 2008, falling to 1.86 births per woman in 2013, well below the replacement level of 2.1. Immigration will continue to keep the US population growing, but globally it appears that Earth is passing peak child (Figure 20). Swedish statistician and physician Hans Rosling estimates that the absolute number of humans born reached about 130 million in 1990 and has stayed around that number since then. With fertility declining all over the world, the number of newcomers should soon fall. While momentum and greater longevity will keep the total population growing, technical progress can counter the likely mouths. A 2 percent annual gain in efficiency can dominate a growth of population at 1 percent or even less.

Figure 20. Peak child? Population growth slowing at all levels of development.
Source: The European Financial Review 2013.

Oceans

If only everything were trending in the right direction. I explore and observe the oceans a lot, and ocean life is getting a raw deal. Let’s think a bit about the form of meat called fish. Consider the change in the catch of a charter boat out of Key West between 1958 and 2007—no more large groupers (Figure 21). Or take a trip to the Tokyo fish market. Sea life is astonishingly delicious, and tastier and more varied in markets than ever, owing to improved storage and transport. An octopus from Mauretania ends in Japan.

Figure 21. Recreational fishing on the Greyhound charter boat,
Key West, in 1958 (left) and in 2007 (right).
Source: Census of Marine Life, History of Marine Animal Populations, and Loren E. McClenachan.

Before the advent of refrigeration, fresh sushi was a delicacy for the emperor of Japan. In January 2013 a 489-pound bluefin sold for $1.76 million. We may say that the democratization of sushi has changed everything for sea life.

Fish biomass in intensively exploited fisheries appears to be about one-tenth the level of the fish in those seas a few decades or hundred years ago. Diverse observations support this estimate. For example, the total population of cod off Cape Cod today probably weighs only about 3 percent of all the cod in 1815. The average swordfish harpooned off New England dropped in size from about 500 pounds in 1860 to about 200 pounds in 1930. To survive wild in the ocean, an unprotected species needs to enjoy juvenile sex and spawn before capture.

Earlier I spoke about land meat. How does world consumption of fish that depletes the oceans compare with the 800 million tons of animal products humanity eats? Fish meat is about one-fifth of land meat. In 2012 about 90 million tons of fish were taken wild from salt and fresh water and a fast-growing 66 million tons from fish farms and ranches.

Americans in fact eat relatively little sea life, only about 7 kilograms per person in a year. Much of that 7 kilograms, however, is taken from the wild schools of the sea, and that fraction of total diet, though small, depletes the oceans. The ancient sparing of land animals by farming shows us how to spare the fish in the sea. If we want to eat sea life, we need to increase the share we farm and decrease the share we catch.

Fish farming does not require invention. It has been around for a long time. The Chinese have been doing very nicely raising herbivores, such as carp, for centuries. Following the Chinese example, one feeds crops grown on land by farmers to herbivorous fish in ponds. Much aquaculture of catfish near the Gulf Coast of the US and of carp and tilapia in Southeast Asia and the Philippines takes this form. The fish grown in ponds spare fish from the ocean. Like poultry, fish efficiently convert protein in feed to protein in meat. And because the fish do not have to stand, they convert calories in feed into meat even more efficiently than poultry. Let’s say 80 miles per gallon.

All the improvements such as breeding and disease control that have made poultry production more efficient can be and have been applied to aquaculture, improving the conversion of feed to meat and sparing wild fish. In most of today’s ranching of salmon, for example, the salmon effectively graze the oceans, as the razorback hogs of a primitive farmer would graze the oak woods. Such aquaculture consists of catching small wild fish, such as menhaden, anchovies, and sardines, or their oil to feed to our herds, such as salmon in pens. We change the form of the fish, adding economic value, but do not address the fundamental question of the tons of stocks. A shift from this ocean ranching and grazing to true farming of parts of the ocean can spare others from the present, ongoing depletion. So would persuading salmon and other carnivores to eat tofu, which should happen very soon.

Cobia, sometimes called kingfish, widespread in the Caribbean and other warm waters, grow up to two meters and 80 kilograms favoring a diet of crab, squid, and smaller fish. Recently, Aaron Watson and other researchers at the University of Maryland Institute of Marine and Environmental Technology turned this carnivore into a vegetarian. A mixture of plant-based proteins, fatty acids, and an amino acid-like substance found in energy drinks pleased the cobia as well as another popular fish, gilt-head bream. Conversion of these carnivorous fish to a completely vegetarian diet breaks the cycle in which fish ranchers plunder the ocean’s small fish to provide feed for the big fish.

I have described fish farming in ponds, and much the same applies for the filter feeders, the oysters, clams, and mussels. With due care for effluents, pathogens, and other concerns, this model can multiply sea meat many times in tonnage. Eventually we might grow fish in closed silos at high density, feeding them proteins made by microorganisms grown on hydrogen, nitrogen, and carbon. The fish could be sturgeon filled with caviar. In fact, much caviar now sold in Moscow comes from sturgeon farmed in tanks in northern Italy.

The point is that the high levels of harvest of wild fishes and destruction of marine habitat to capture them need not continue. The 40 percent of seafood already raised by aquaculture signals the potential for reversal. With smart aquaculture, life in the oceans can rebound while feeding humanity and restoring nature.

The vegan extreme

Because California is the world capital of experimentation in cuisine, let me offer an alternative more radical than vegetarian salmon.

We can understand that in a world of 7 billion human mouths aquaculture must largely replace hunting of the wild animals for many, maybe all forms of marine life. We are accustomed to the reality that even vast America does not produce enough wild ducks or wild blueberries to satisfy our appetite.

Back to basics, we depend on the hydrogen produced by the chlorophyll of plants. As my colleague Cesare Marchetti has pointed out, once you have hydrogen, produced for example by means of nuclear energy, a plethora of microorganisms are capable of cooking it into the variety of substances in our kitchens. Researchers for decades have been producing food conceived for astronauts on the way to Mars by cultivating hydrogenomonas on a diet of hydrogen, carbon dioxide, and a little oxygen. They make proteins that taste like hazelnut.

A person consumes around 100 watts. California’s Diablo Canyon nuclear power park operates two 1,100-megawatt electric power plants on about 900 acres, or 1.5 square miles. The power of Diablo Canyon, a couple of gigawatts, is enough to supply food for a few million people, more than 2000 per acre, more than ten times what David Hula and Randy Dowdy achieve with corn.

A single spherical fermenter of 100 yards diameter could produce the primary food for the 30 million inhabitants of Mexico City. The foods would, of course, be formatted before arriving at the consumer. Grimacing gourmets should observe that our most sophisticated foods, such as cheese and wine, are the product of sophisticated elaboration by microorganisms of simple feedstocks such as milk and grape juice.

Globally, such a food system would allow humanity to release 90 percent of the land and sea now exploited for food. In Petaluma and Eureka, humanity might maintain artisanal farming and fishing to provide supreme flavorings for bulk tofu.

Conclusion

I do not expect 90 percent of exploited nature to be spared. But I do think that humanity is moving toward landless agriculture, progressively using less land for food, and that we should aim to release for nature an area the size of India by 2050. Overall I think the next decades present an enormous opportunity for what Stewart Brand and Ryan Phelan call Revive and Restore.

People will object that I have spoken little about China and India and Africa. I respond with a remark from Gertrude Stein, who came from Oakland. Stein said about 1930 that America is the oldest country in the world because it had been in the 20th century longer than any other country. In fact, as early as 1873 America became the world’s largest economy, and since then a disproportionate share of the products and habits that diffuse throughout the world have come from America, particularly California. My view is that the patterns described are not exceptional to the US and that within a few decades, the same patterns, already evident in Europe and Japan, will be evident in many more places.

Now, rebound is not without challenges. We considered the black bear and the college student to begin. Later in the Long Now seminar series you will discuss the challenges of a woolly mammoth. But consider the fox (back cover photos). Fox experts now estimate that about 10,000 foxes roam the city of London, more than the double decker buses. Foxes ride the London Underground for free. The mayor of London, Boris Johnson, became enraged when his cat appeared to be mauled by a fox, and perhaps because of the fare beating too. English snipers charge $120 to shoot a fox in your city garden (http://www.nytimes.com/2014/12/07/world/forget-the-hounds-as-foxes-creep-in-britons-call-the-sniper.html).

Meanwhile in rural England, badgers are causing an uncivil war between farmers and animal protection groups. You know more about bobcats in California than I. So we have a new round of what journalist Jim Sterba has chronicled in a great book titled Nature Wars: The Incredible Story of How Wildlife Comebacks Turned Backyards into Battlegrounds.

I want to end not with complications but with inspiration, with examples of why we want rebound, re-wilding, why we want a rapprochement with nature, why the achievements of farmers David Hula and Randy Dowdy and aquaculturist Aaron Watson and their counterparts in forestry and water resources matter.

The incipient re-wilding of Europe is thrilling. Salmon have returned to the Seine and Rhine, lynx to several countries, and wolves to Italy. Reindeer herds have rebounded in Scandinavia. In Eastern Europe bison have multiplied in Poland. The French film producer Jacques Perrin, who made the films Winged Migration about birds and Microcosmos about insects, is working on a film about re-wilding. The new film, The Seasons, scheduled for release in December 2015, will open millions of eyes to Europe’s re-wilding.

As thrilling as Jacques Perrin’s films are, I propose the image of a humpback whale in New York Bight with the Empire State Building in the background as the most significant environmental image of 2014. Humpback whales and other cetaceans, perhaps even blue whales, are returning in large numbers to New York Bight. Recall the whale despair of the 1970s and consider that the Bronx Zoo has just announced a program together with the Woods Hole Oceanographic Institution to monitor whale numbers and movements in sight of New York City. Many decades without hunting and improved Hudson River water quality have made a difference.

Whether into the woods or sea, the way is clear, the light is good, the time is now. A large, prosperous, innovative humanity, producing and consuming wisely, might share the planet with many more companions, as nature rebounds.

For further information and references, please see:

Ausubel, J.H. 2000. “The great reversal: Nature’s chance to restore land and sea.” Technology in Society 22: 289–302.

Ausubel, J.H. 2004. “Will the rest of the world live like America?” (PDF). Technology in Society 26(2004): 343–360.

Ausubel, J.H. 2014. “Cars and civilization.” William & Myrtle Harris Distinguished Lectureship in Science and Civilization, California Institute of Technology, 30 April 2014. Revised 18 May 2014. http://phe.rockefeller.edu/docs/Cars and Civilization.pdf.

Ausubel, J.H. 2014. “Meat and potatoes and the American Landscape.” Sheriff’s Meadow Foundation lecture, Old Whaling Church, Edgartown, Mass. 8 July 2014. http://phe.rockefeller.edu/docs/Meat&Potatoes_100514.pdf

Ausubel, J.H., and C. Marchetti. 2001.“The evolution of transport” (PDF). The Industrial Physicist 7(2): 20–24.

Ausubel, J.H., and P.E. Waggoner. 2007. “Quandaries of forest area, volume, biomass, and carbon explored with the forest identity.” Connecticut Agricultural Experiment Station Bulletin 1011: 1–3.

Ausubel, J.H., D.T. Crist, and P.E. Waggoner, eds. 2010. First Census of Marine Life 2010: Highlights of a Decade of Discovery.

Food and Agriculture Organization (FAO). 2013. Food wastage footprint: Impacts on natural resources, Summary Report, 63 pp., ISBN 978 92 5 107752 8. http://www.fao.org/docrep/018/i3347e/i3347e.pdf.

Kauppi, P.E., J.H. Ausubel, J.-Y. Fang, A.S. Mather, R.A. Sedjo, and P.E. Waggoner. 2006. “Returning forests analyzed with the forest identity.” Proc Natl Acad Sci USA 103: 17574– 17579, 2006. doi: 10.1073/pnas.0608343103.

Klümper, W., and M. Qaim. 2014. “A meta-analysis of the impacts of genetically modified crops.” PLoS ONE 9(11): e111629. doi:10.1371/journal.pone.0111629.

Rautiainen, A., I. Wernick, P.E. Waggoner, J.H. Ausubel, and P.E. Kauppi. 2011. “A national and international analysis of changing forest density.” PLoS ONE 6(5): 2011.

Rosling, H. 2012. “Religions and babies.” May 2012. http://www.ted.com/talks/hans_rosling_ religions_and_babies.

Schierhorn, F., D. Müller, T. Beringer, A.V. Prishchepov, T. Kuemmerle, and A. Balmann. 2013. Post-Soviet cropland abandonment and carbon sequestration in European Russia, Ukraine, and Belarus, Global Biogeochem. Cycles, 27, 1175–1185. doi:10.1002/2013GB004654.

Sitch, S., et al. 2015. “Recent trends and drivers of regional sources and sinks of carbon dioxide.” Biogeosciences 12:653–679. http://www.biogeosciences.net/12/653/2015/ doi:10.5194/bg-12-653-2015.

Waggoner, P.E., and J.H. Ausubel. 2009. See http://phe.rockefeller.edu/news/archives/707. Williamson, S.H. 2014. “What was the U.S. GDP then?” MeasuringWorth.

http://measuringworth.org/usgdp.

Back cover photos
Fox in the wild (photo: Galatee Films)
Foxes in London, Underground (photo: Kate Arkless Gray) and near St. Paul’s (photo: Carine Thomas)

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The article Outside the Box: Nature Rebounds was originally published at mauldineconomics.com.
 
[Street art pictures added by Ilene]
 

What Would A Saudi-Russian Partnership Mean For World Energy?

Courtesy of ZeroHedge. View original post here.

As we recently noted, Russia and Saudi Arabia appear oddly allied in recent weeks. What happens when two nations, that together account for more than fourth quarter of global oil production, begin collaborating on future energy projects?

OilPrice.com's Gaurav Agnihotri explains…

Russian President Vladimir Putin met Saudi Prince Mohammad in St. Petersburg on June 18 at a meeting in which Saudi Arabia and Russia, the world’s leading two oil giants, decided to form a working group for joint energy projects.

“At the end of the year, in October, we will summon a meeting of the intergovernmental commission, which hasn’t operated for five years,” Russia’s Energy Minister Aleksandr Novak said recently at the St Petersburg economic forum. He further clarified that his country was not looking to replace its existing oil and gas partners but wanted to create newer ones. “There are no specific projects in the energy field yet, we only have an agreement to create a working group between our ministry and the Saudi Arabian oil ministry, which, together our companies will work on specific projects,the Energy Minister told reporters.

 

Image Source: Forbes

What are these ‘specific’ projects that Russia is talking about? Why are the two biggest producers of oil in the world now cooperating? Is this a natural response to the U.S. and EU sanctions that have targeted Russia’s oil and gas industry, specifically its arctic exploration and unconventional drilling sector?

(Click to enlarge)

Russia – Hedging its risk and shifting its focus towards Asia

In May, Russia’s oil output reached a record 10.78 million barrels a day, which was very close to the Soviet era production of 1987. “Russian output has proven to be pretty resilient to the fall in prices, and they will not have a problem keeping production up for the next year or two,” said James Henderson of Oxford Institute of Energy Studies. Russia’s economy is heavily dependent on oil and gas revenues as they account for more than 50% of the federal budget. The U.S. and European Union sanctions after the Ukraine crisis have affected Russia’s energy sector and the sustained drop in oil prices has made the situation even more challenging for the Kremlin. Following the recent announcement by OPEC to maintain its production level of 30 million barrels per day, Russia has no choice but to produce more oil in order to maintain its own market share. "We are losing around $40 billion per year due to geopolitical sanctions and we are losing some $90 billion to $100 billion per year due to oil prices falling 30 percent," Russian Finance Minister Anton Siluanov said in November 2014.

(Click to enlarge)

Image Source: Forbes

With a focus on partnering with rising Asian economies that have a huge domestic demand for oil and gas, Russia’s biggest oil company Rosneft has been signing new crude oil supply deals with Chinese and Indian companies, in an effort to form long-term strategic partnerships.

Saudi Arabia’s future energy plans – Does Russia fit in?

The desert kingdom is in the process of restructuring its biggest National Oil Company, Saudi Aramco, by separating it from the country’s powerful and influential oil ministry. With nearly 16 percent of the world’s proven oil reserves and a massive sovereign wealth fund, Saudi Arabia has enough cash reserves to weather the slump in oil prices.

(Click to enlarge)

Saudi Arabia’s budget is insulated from oil price movements

Saudi Arabia is all set to go aggressive in its spending on new exploration projects. “[t]he bulk of this spending (exploration and production) will be in our upstream activities to ensure we maintain adequate spare crude oil production capacity to help stabilize the world oil market whenever disruptions occur,” the 2014 Aramco annual report stated.

The report goes on to state that Asia would be an important growth area for Aramco’s future investments. However, the report does not reference any future collaboration with Russia. In fact, Russia and Saudi Arabia have, in the past, opposed each other on issues such as Saudi Arabia’s attack on Yemen, OPEC’s production policy and the Syrian war. However, a lot has changed since Putin and Prince Mohammad met in St. Petersburg.

A joint nuclear agreement which included building new nuclear power reactors was one of the six co-operation documents signed by Russia and Saudi Arabia during the meeting. Currently, Saudi Arabia does not have any industrial nuclear power plants.

What could be the scale of a potential Russia- Saudi Arabia relationship?

Saudi Arabia has a high rate of domestic consumption of oil to satisfy its electricity needs. The desert kingdom is planning to build around 20 nuclear reactors which would provide it with around 15 percent of total power in the next 20 years. If Saudi Arabia takes Russian assistance in developing its nuclear energy program, the quantum of investments could be in the range of $30 to $40 billion. On the other hand, Saudi Arabia might be interested in investing in Russia’s unconventional shale assets and deep water exploration. 

(Click to enlarge)

Given that U.S. and EU sanctions limit the transfer of new oil and gas technology to Russian state oil firms, the logical conclusion would be that Russia would seek Saudi technology related to enhanced oil and gas recovery and advanced drilling, especially for use in the older fields in West Siberia. With a growing list of global research centers in Beijing, Houston, Aberdeen, Massachusetts and others, Saudi Arabia’s national oil company Aramco is the biggest global investor in new oil and gas technologies.

Russia and Saudi Arabia have met multiple times over the past year to discuss oil production and exporting strategies. While the two sides have been unable to agree to coordination, owing to Russia’s unwillingness to cut production, the latest meeting suggests both countries see a strategic opportunity in some sort of cooperation. We will have to wait and see what they have in store.

More Top Reads From Oilprice.com:

 

Another Week, Another Chinese Gold Mine

Courtesy of John Rubino

Though the true amounts are debatable, it’s generally conceded that China is importing a lot of gold.

What’s not included in this calculation — but should be — are the deposits its mining companies are acquiring overseas. This gold-in-the-ground is just as much a national monetary asset as is metal accumulated by Chinese investors and — to the extent that the mining companies sell their output to the government — can be expected to add to Chinese central bank gold holdings over time.

Most recently, China’s Zijin Mining Group not only made another Australian acquisition but raised $1.6 billion to keep the M&A binge going:

China’s Zijin targets Australian gold miner in M&A spree

SYDNEY: Zijin Mining Group has launched a bid for Australian gold explorer Phoenix Gold, the Chinese company’s third planned acquisition of a foreign mining asset in less than a month.

Long-dormant merger and acquisition (M&A) activity in Australia and other mining-intensive countries is showing signs of a rebirth, with Zijin the most acquisitive to date and with the deepest pockets.

“The company is open to opportunities around the world,” Zijin executive director and vice-president George Fang told Reuters. “It is a goal to find more gold or other assets.” In May Zijin announced it was issuing shares to raise 10 billion yuan (US$1.61bil) for acquisitions.

Before launching its A$47mil (US$36.55mil) offer for Phoenix, it accumulated a 17.9% interest in the company.

Zijin, one of China’s largest gold mining companies, unveiled two acquisitions in May for more than US$700mil, one in Papua New Guinea and one in Congo.

Zijin already mines gold next door to a Phoenix deposit after paying A$240mil for another Australian miner, Norton.

“Gold is our game,” Fang said. “Our team has the experience in gold mining.”

Apparently it’s just getting started:

Zijin Eyes Decade-Long Global Gold Hunt After $1 Billion Spree

(Bloomberg) – Zijin Mining Group Co. aims to keep buying gold and copper assets outside China for the next decade, kickstarted by making almost $1 billion in acquisitions in the past year.

The world’s biggest gold producer by market value last month announced plans to buystakes in Barrick Gold Corp.’s Porgera mine in Papua New Guinea and Ivanhoe Mines Ltd.’s Kamoa copper project in Congo.

“One of our strategies for the next 10 years is globalization, we are trying to make a wide portfolio of assets,” Executive Director and Vice President George Fang said in a phone interview. “In terms of business development and the corporate development, of course we are open for potential opportunities.”

Zijin said Monday it will make a takeover offer for Phoenix Gold Ltd. valuing the Australian explorer at $36 million. It’s competing with BHP Billiton Ltd. and Teck Resources Ltd. for Barrick’s Zaldivar copper mine in Chile, according to people familiarwith the matter.

Chinese producers are seeking to take advantage as global mine asset valuations tumble amid a commodity rout and as large competitors work to trim portfolios to lower costs and cut debt.

In the past year, Zijin has announced or completed deals and investments valued at about $992 million, making it the industry’s most acquisitive company, according to data compiled by Bloomberg.

“Gold and copper is our major activity in the mining industry,” Fang said Tuesday in the interview. “For our next move, we will focus on our major sector.”

This is encouraging for gold on two levels. First, it means that China is accumulating even more metal than it’s currently importing, maybe a lot more. So any calculation of Chinese monetary gold reserves should, on some level, take this growing mine portfolio into account.

Second, it helps to put a floor under the market values of good-quality miners. If Zijin is throwing this kind of money around it’s a safe bet that other Chinese entities are doing similar things. And anyone who’s paying attention to real estate in Vancouver BC or London knows what happens when Chinese money fixates on a small, illiquid asset class.

Visit John's Dollar Collapse blog here

 

Treasury Now Has Color-Coded Financial Terror Alerts

Courtesy of Pam Martens.

OFR Financial Stability Monitor

Remember when the Department of Homeland Security was issuing those color-coded terrorist alerts? Well, they don’t do that anymore.  They’re back to using plain ole black-and-white words to describe threats.

Apparently, however, the U.S. Treasury’s Office of Financial Research (OFR) thought it was such a cool idea that they’ve started color-coding threats to our financial security from the denizens on Wall Street: the gang that brought our country to its knees in 2008 while the most expensive military in the world was hunting down robed cave-dwellers in the Middle East.

OFR’s color-threat alert is called the Financial Stability Monitor. The monitor is based on approximately 60 indicators and organized as a heat map: The closer an indicator is to the red end, the more elevated the risks; the closer an indicator is to the green end of the spectrum, the lower the risks. The Monitor, released yesterday, says that “financial stability risks remain moderate.” Unfortunately, when we studied the accompanying chart, we found that it’s based on first quarter data, meaning it’s almost three months old. (Imagine Homeland Security issuing a terrorist alert, then telling you it might not be all that reliable because it’s based on stale intelligence.)

Nonetheless, there’s some very interesting takeaways from the Monitor. First, even though the OFR has characterized the financial stability threat as “moderate,” a close reading of the report suggests a heightened threat. These are some key points from the report:

  • Financial and economic risks have further decoupled, with financial risk-taking occurring against the backdrop of a tepid growth recovery.
  • Global monetary policies and economic growth continue to diverge. Central banks in some advanced economies, led by the European Central Bank and the Bank of Japan, are conducting highly expansionary monetary policies, while in the United States, the Federal Reserve is closer to embarking on a tightening cycle.
  • Foreign risks have increased, including intensified government financing risks in Greece and weakening economic fundamentals in key emerging markets.
  •  After a lengthy period of unusually low yields, long-term government bond yields in advanced economies have risen abruptly since April. The speed and volatility of the correction have been significant, demonstrating the fragility of market liquidity and the vulnerability of markets to shocks during periods of low volatility and extended bond duration…
  • Although low volatility previously contributed to excessive risk-taking, the recent increase in volatility has not been accompanied by a proportionate decline in risk-taking.
  • The migration of risks from banks to less-regulated sectors is a continuing concern. For example, non-bank institutions continue to increase their share of highly leveraged syndicated loans.
  • Some market liquidity measures — the ability of market participants to sell assets with limited price impact and low transaction costs — signal a deterioration in liquidity. These changes have occurred along with a decline in the provision of liquidity by primary dealers, which could potentially reduce their willingness to buffer intense selling pressure.

Reduced liquidity, migration of risks from banks to less-regulated sectors, and rising interest rates sound to us like the perfect financial storm potentially in the making.

Indeed, the one area flashing red on the chart is interest rate risk. Gary Cohn, President and COO of Goldman Sachs, took to the radio last week to share his two cents on what’s likely to happen when the Federal Reserve finally hikes interest rates (after talking about it since what feels like the Paleozoic era).

Continue Here

 

Consumers Come to Life in May

Courtesy of Mish.

Consumer Spending, Income Surge in May

Consumers came to life in May, as expected by the Bloomberg Econoday Consensus Estimate.

Autos, Gasoline Lead the Way

Reports on personal income, consumer spending, PCE, and core PCE come out today. Economists got all of them correct, actually being a bit pessimistic on spending. Once again though, autos lead the way.
 

The consumer came to life in May, boosted by a 0.5 percent rise in personal income and helping to support a 0.9 percent surge in personal outlays that reflects heavy spending on autos and retail goods. And gains are not inflationary, at least yet, based on the very closely watched core PCE price index which edged only 0.1 tenth higher in May and is at a very benign 1.2 percent year-on-year rate which is actually down a tenth from an upward revised April.

 

Components on the income side are very solid with wages & salaries up 0.5 percent in the month. Both proprietors' income and rental income show especially strong gains. Spending components show special strength for durables, again tied especially to autos, and also strong gains for non-durables, here tied to higher pump prices. Spending on services once again shows an incremental gain.

Turning back to PCE prices, the overall price index looks a little hot in May at plus 0.3 percent but the year-on-year rate is unchanged at only 0.1 percent. That's right, that's the year-on-year rate at only the most incremental level of inflation. And the 1.2 percent year-on-year core appears to be moving in reverse, down 1 tenth in each of the last two reports and further away from the Fed's 2 percent target.

Consumers, in an expression of their confidence, dipped into their savings to spend, with the savings rate down 3 tenths to 5.1 percent. This is a good report for the bulls, showing a strong non-inflationary bounce for the second quarter. This report won't be keeping the doves up at night and does not move forward the Fed's coming rate hike.

For those who wish to view the actual report, here is a link to the BEA news release on Personal Income and Outlays for May 2015.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com 

 

Creditors Issue “Final” Ultimatum; ECB Keeps ELA Lifeline, Bundesbank Protests

Courtesy of Mish.

Air of Finality?

I cannot possibly count the number of "final" offers nor count how many times the clock hit midnight only to have it move back to 11:58 PM.

Today, however, there finally appears to be an air of finality. We will see soon enough.

Ultimatum From Creditors

The Financial Times reports Creditors Issue Ultimatum to Greece

Greece’s creditors have presented Athens with a last-ditch offer for a deal to unlock €7.2bn in desperately needed rescue aid after marathon talks failed to narrow the differences between the two sides.

Bailout monitors presented their final offer — with terms much closer to those demanded from Athens earlier this month — after Greek prime minister Alexis Tsipras failed to meet an earlier deadline to come up with acceptable concessions of his own.

Arriving for the meeting, German finance minister Wolfgang Schäuble, was gloomy about the prospects for a deal. He said there had been “not much progress” and a “big difference” remained between Greece and its creditors. It was up to the Greeks to move, he warned.

“The Greeks didn’t move at all,” said one senior official of the talks on Wednesday and earlier Thursday between Mr Tsipras and the heads of the European Commission, International Monetary Fund and European Central Bank.

“The level of frustration is so high. I don’t see a deal,” the official added. “It’s looking pretty grim right now.”

ECB Keeps ELA Lifeline, Bundesbank Protests

Reuters reports ECB Holds Athens Lifeline Unchanged as Bundesbank Protests.

The European Central Bank held a crucial cash lifeline for Greece unchanged on Thursday, a person familiar with the discussion said, as the head of the Bundesbank objected to the way Greek banks are being funded.

Continue Here

Picture via Zero Hedge.

 

Off to Greece, and an Update on our Athens Fund

Courtesy of The Automatic Earth.


NPC KKK parade on Pennsylvania Avenue, Washington DC 1925

Today I fly to Athens, and boy, does time seem to fly along with me. I’ll be arriving in Athens apparently just in time for a big demo in Syntagma square (got a mail minutes ago saying people are on their way there as early as 9 AM local time). Something tells me there’ll be quite a few more of those during my stay. And I don’t think there’s any guarantee of all of them being peaceful as time goes on.

The negotiations, if they still warrant that title, are going nowhere, and even if they would, they’d be going nowhere good. So during my -provisional- 3 week stay, I wouldn’t be surprised to see capital controls, closed banks, empty ATMs, and quite a bit more.

But I am lucky enough to have a strong contingent of Automatic Earth readers in the city, who’ve been kind enough to not only offer me accommodation, but to also introduce me to a plethora of organizations and individuals, so much so that I’m going to have to be careful about claiming the time it takes to do the daily Automatic Earth posts.

If there’s a day or two when I can’t do a Debt Rattle or essay, please know that it won’t be for a lack of trying, but for an overabundance of gracious yet impoverished Greeks. Hey, in times of hardship people remember how to be people again. Most Americans and Germans are long overdue for a taste of that.

There’s that Seneca quote I used somewhere before, which captures it to a T:

We become wiser by adversity; prosperity destroys our appreciation of the right.

I’ve been feeling smothered here in Holland, and in Australia and New Zealand earlier this year, and in all the European countries save for Italy and the Czech Republic that we’ve visited over the past five years and change, smothered by the denial and techno-happy thinking that seems to be everywhere you go. People don’t seem to do wealth well. It blunts their senses: “prosperity destroys our appreciation of the right”.

Italy gets it. Maybe not in the major cities, but when we visited Beppe Grillo in late 2011, it was obvious that Italians saw the writing on the wall. Slovakia was in the eurozone and was just starting to receive all those big EU loans that are now haunting the PIIGS, who got them years earlier.

On the other hand, the Czech Republic, which had split from Bratislava only a few years before, but decided to keep the koruna, seemed fine, though with less new black top and fewer flashy government buildings. The big difference was that the euro had lifted prices in Slovakia much higher than those in Prague etc. Today, if you look behind the numbers, the Czech Republic is in a much better spot than Slovakia.

Anyway, different parts of Europe have had a different view of life for years. And of course Greece had been going down with a vengeance for a long time. I’m just trying to say that Europe is not one big happy entity with Greece as a black sheep.

But they’re all still, or seem to be, ganging up on Athens. That’s all just the effects of propaganda, and everyone should learn to see through that thin veil. But it’s so tempting, isn’t it, to think you’re superior to someone else, to ignore that you’re the same.

And that it’s beyond brainless to drive your brand new Beamer on the Autobahn at 200 miles an hour blabbing about them Greeks who deserve to be flogged for refusing to pay you back what they stole from you.

This cannot and will not ever be repaired. Europe is not a union. Which is fine, as long as no-one tries to make it one. The very moment anyone tries, you end up with where Greece is today.

Long story short, let’s talk about that Fund For Athens I innocently started recently. Last time I mentioned it, on June 19, it was already at an amazing $2217, much more than I ever could have dreamed.

Well, you guys are something else. Because the fund now stands at $5534.47. Can you believe it? I sure can’t. Seeing the amount go up has been, and hopefully will continue to be, very humbling, your generosity has made me feel small. Who am I to trigger this kind of kindness?

Please, please, keep the donations coming, and I’ll make sure, along with the TAE readers in Athens, that we get the money where it is needed most. Solid promise.

For the how and why, please refer to The Automatic Earth Moves To Athens and Update: Automatic Earth for Athens Fund.

I’m thinking the Greeks need all the help they can get, more than ever, more every single day. I find it deeply concerning to read just now that both ex-PM Samaras and To Potami leader Theodorakis were spotted talking to the troika yesterday. That reeks of regime change. Not surprising given the EU MO, but at the same time: not good.

Soft Tyranny in Albuquerque: The Politics Of Better Call Saul!

Courtesy of Paul A. Cantor via The Mises Institute

In Breaking Bad, Vince Gilligan created one of the best shows in television history. He has followed it with a prequel, Better Call Saul!, which traces how the ethically-challenged lawyer featured in the earlier show — Saul Goodman — developed out of a perennial loser named Jimmy McGill. Breaking Bad fans are overjoyed that Gilligan has struck gold twice, and Better Call Saul! looks to become another television classic. And, although the show is not overtly libertarian, libertarians can learn from it.

With only its first season completed, I’m sure the show has many surprises in store. But one thing is already clear: Gilligan continues to be the champion of the little guy against the establishment, and the poet of the shabbiness of ordinary existence in twenty-first-century America. He captures all the frustration, humiliation, and despair of living in the administered world of the modern state.

Jimmy McGill is a bottom feeder in the swamp of government regulation that now covers the American landscape. As a rookie lawyer, Jimmy becomes a creature of the court system, trying to exploit it even as it exploits him. As the series opens, Jimmy is working as a public defender. In a heavily credentialed society, he is at a huge disadvantage — his law degree is from the University of American Samoa.

Forced to beg for cases from an officious clerk, Jimmy is a parasite on society. If it weren’t for a myriad of government rules and regulations and a multitude of misfits who violate them, Jimmy would be out of work. Scratch beneath the surface of his world, and it’s government regulation all the way down.

In only ten episodes, Jimmy has already run the whole gamut of modern bureaucracy. While struggling with the court system, he is also constantly interacting — and fighting — with a large, high-powered law firm that epitomizes the impersonality and coldness of modern office life. Jimmy has also run up against an uncaring hospital bureaucracy, which tries to commit his brother against his will to psychiatric treatment.

As a named partner in the big law firm, Jimmy’s older brother Chuck might seem to represent the establishment himself. But he has developed a psychosomatic ailment, and thus joins the ranks of all the loners in Better Call Saul! who do not fit into society’s categories and thus incur its bureaucratic wrath.

Another loner who runs afoul of the law in Better Call Saul! is Mike Ehrmantraut, Saul Goodman’s fixer and cleaner in Breaking Bad. When we learn his backstory in episode 6, we discover that he is a basically good man, who has turned to crime only because of his involvement with a corrupt police precinct in Philadelphia.

In the final plot arc of the season, Jimmy develops a specialty in elder law, which takes him into the figurative bowels (and the literal dumpster) of an assisted living facility. In his efforts to help the old folks, Jimmy runs up against a new pack of lawyers, who swamp him with demands for paper work. The mounting cartons of case files Jimmy is continually dragging around symbolize the insane demands for documentation that bureaucracy imposes.

Jimmy is fighting back against these bureaucratic forces, but only by turning his class action lawsuit into a RICO case, which will triple the damage award. Legal eagle Jimmy would have no talons without a federal statute originally intended to combat organized crime, but now routinely applied to white collar crime. In the end, the paperwork demands of the case force Jimmy to turn it over to the large law firm he despises. With all its complex rules, the state makes it impossible for a little guy like Jimmy to do business on his own.

Libertarians tend to concentrate on the classic forms of government intervention: taxation, the monetary system, economic regulations. Better Call Saul! reminds us that government tyranny is actually more insidious and pervasive than might at first appear. When he was working on The X-Files, Gilligan had already explored the modern state’s panoptical regime, as analyzed by French philosopher Michel Foucault — a world rife with institutions, like schools, clinics, and prisons, that are not, strictly speaking, part of the government but nevertheless keep tabs on us and monitor our lives for the government’s purposes.

A theme that unites Breaking Bad and Better Call Saul! (inherited from The X- Files) is that we live in a surveillance state and our government records can mark us for life. Jimmy is haunted by a single trumped-up sex crime charge.

In order to regulate every aspect of our lives, the government cannot go it alone — it works through a web of intermediaries. Many of these institutions purport to take care of us, but in the process they chip away at our freedom. Better Call Saul! brilliantly portrays the interlocking directorate of modern government, quasi-governmental institutions, and all their satellites. The courts, the law firms, the police, the corporations, the hospitals, the assisted living facilities — they all work together to constrain our freedom — and they all operate within the state’s regulatory apparatus.

Jimmy McGill is a contemporary Everyman, crushed by the soft tyranny Alexis de Tocqueville predicted for the United States in his Democracy in America. No wonder Jimmy is already embracing his dark, con-man side, and we can see him morphing into Saul Goodman.