No Redemption

By Ilene

(Originally published at Phil’s Stock World. Check back for a follow-up interview in Nov. 2017.)

Interview with Sam Antar

Crazy EddieSam Antar, former CFO of the criminal enterprise “Crazy Eddie,” will tell you all about his crimes while insisting he will burn in Hell. He now teaches accountants, lawyers, and FBI agents about white-collar fraud and how to catch white-collar criminals. I met Sam in Portland, at his seminar for healthcare fraud investigators.

Sam opened his lecture by asking the audience, “Can anyone guess why I’m here?” A man in the audience suggested “because you got caught.” (That was the first correct answer in twelve years.) Sam, who was energetic and seemed to be enjoying himself, spoke of Crazy Eddie, fraud, and the investigators charged with bringing criminals to justice. Below, I’ve posted a summary of Sam’s presentation followed by our interview and some background information.

1. Presentation

About fraud

All fraud is basically the same.  All fraud is personal in nature. It’s done on a one to one basis.  Your humanity, ethics, and sense of fairness are weaknesses that we – white collar criminals – seek to exploit.  We have no morality. The more likable and friendly we are, the easier it is for us to commit our crimes. We build walls of false integrity. You never know who the real person is behind a criminal’s carefully choreographed wall of false integrity. Bernie Madoff had a wall of false integrity around him and the lawyers investigating him at the SEC were enamored by his status. That’s why they didn’t properly follow through on whistleblower Harry Markopolos’s tips about Madoff’s criminal activities.

Punishment does very little to prevent crime. It’s not a great deterrent. Criminals don’t stop because they see other people getting caught. While Bernie Madoff committed his crimes for almost two decades, he saw many other criminal get caught. Did that stop him?

When I cooperated with the government it was only to save my own skin. I only cooperated with the US Attorney’s Office, the FBI, the SEC, and lawyer representing victims of my crimes because I did not want to bend down to pick up a bar of soap and worry about who was going to be my boyfriend.

Fraud Triangle/Diamond

Criminologists have identified three common elements to all white collar crime: incentive, opportunity, and rationalization. It’s known as the fraud triangle. In recent years, capability was added as a common element of white collar crime and the fraud triangle was renamed the fraud diamond.

Incentive – People think white collar crime is primarily motivated by personal profit, and many times it is. However, personal profit is not always the primary reason why white collar criminals commit their crimes. Such crimes, in many cases, are motivated by power and loyalty within the criminal group. Money is important, don’t get me wrong, we’re not communists, but it isn’t everything.

In the family business type of organized fraud, the members of the criminal group share family, religious, ethnic, racial and cultural ties, such as in the Mafia and other organized crime groups. The criminal participants are not just bound together by money, but by their sociology. I was in a group like this. We felt intense family loyalty. This loyalty and quest for status within our tight-knit group was part of my incentive to act criminally.

Opportunity – The textbook answer is that the opportunity to commit white collar crimes is due to lack of internal controls, lack of checks and balances, and lack of effective oversight. What is missing from the standard textbook answer is YOU. Whatever makes you moral and ethical makes white collar criminals effective. Your morality and ethics limits your behavior, while giving the white collar criminal more flexibility and freedom to commit their crimes. The paradox we face is that the more humane our society is, the easier it is for criminals to commit crime.

For example, we don’t profile people in the U.S. No one wants to be accused of being a racist, bigot, or anti-Semite and the criminals know it and exploit society’s political correctness. We’d have to give up too many civil liberties and give the government far more powers to effectively fight white collar crime and the criminals know that too and exploit laws protecting civil liberties.

Capability – Intelligence without morality. For instance, I went to college to become a more effective crook. 95% of white collar criminals have no criminal records. The higher the monetary value of the crime, the less likely it is that the criminal will have a previous record.

Rationalization – Most people think that we have to rationalize our crimes. Not true. We know what we’re doing and simply do not care about our victims.

Question from the audience: “Why didn’t you care?”

I simply didn’t. Rationalization is for sissy criminals. You have to take the moral compass out of the equation to really understand criminal behavior.  Morality doesn’t exist in the criminal world, except it helps us when the other person has morality. We could be sociopaths, we knew what we were doing and didn’t care about hurting anyone. We didn’t have any ethical or moral concerns.

Criminals know that people live on hope and it’s our job to exploit your hopes and dreams.

Question from the audience: “Did you plan this out?”

Of course we planned it out. Criminals control every aspect of the crime scene. We had all ends covered.

Right from the start, Eddie was skimming money, hiring family members and paying them off the books. We only stopped skimming to commit an even bigger crime – securities fraud.

We brought Crazy Eddie public to defraud the public. The entire empire was built on deceit.  Criminals are no different from you in how we plan our moves, except anything goes for us. The Crazy Eddie IPO was at $8 and the stock went up to $80, split adjusted.

In the five years before going public Crazy Eddie’s reported income quadrupled due to our gradual reduction of skimming which increased our reported earnings. So the growth rate looked great for Crazy Eddie’s initial public offering to investors.

Once we went public, it didn’t pay to skim money off the top. Instead we inflated our earnings by such methods as double counting inventory. Inflating earnings increased the market capitalization of Crazy Eddie and allowed our family, which owned most of the company’s stock, to sell shares at inflated prices.

Crazy Eddie wasn’t a discounter like we advertised. We were essentially a bait and switch operation. When we could not switch customers to higher profit margin products, we subsidized discounts by not paying sales taxes. We bought used and damaged merchandise and sold it as brand new. Eddie went to war against the big companies, he brought down fair trade. That made him a hero of the NYC metropolitan area consumer. However, Eddie Antar was no hero. His so-called discounting was a ruse, a wall of false integrity he built around his criminal empire.

Inventory fraud

Why didn’t the auditors count the boxes of inventory we lied about?  Think about it.  They come in wearing expensive suits. They feel too proud to be climbing on stacks of boxes counting inventory.  We knew they wouldn’t. We exploited their self-esteem. To quote Al Pacino playing Satan in the “Devil’s Advocate” movie, ‘Vanity is my favorite sin.’

We hardly ever obstructed our auditors, we just distracted them, like a magician in a magic show. To get the auditors to do what you want, it’s always better to give them things, like consulting work on the side, to corrode their skepticism.


To investigate a criminal enterprise, an investigator has to form alliances with some criminals to catch the bigger criminals – bigger fish. The most effective investigators seem to like the criminals on some level, they have a fascination with crime. If the investigator is repulsed by the criminals, he can’t communicate well with them and get the lower level criminal to help him catch the bigger fish.

A good investigator cannot be judgmental towards cooperating criminal witnesses. It’s a war of wits between the investigator and the cooperating criminal, but there’s also a bonding process that goes on.  I’m on good terms with all the investigators that went after me.


(Later, after the seminar.)

2. Interview

Ilene: Sam, what motivated you, and your family, to engage in the long list of crimes at Crazy Eddie?

Sam: We enjoyed being criminals, and enjoyed the money. We didn’t even need the money, just wanted more.

It started when the company, Crazy Eddie, was a private company in 1969. As a private company, there’s no need to boost income – you want to keep reported income low because you have to pay taxes on it.  So we skimmed money off the top.  If someone paid cash for an item, which was more common back then than it is now, we wouldn’t report it to the IRS.  By not declaring the income, we could avoid the sales tax and the income tax — we’d be way ahead.

As a public company, however, we had to do the opposite.  We wanted earnings so it would appear as though the company was growing quickly.  We wanted fictitious earnings.

Ilene: How do you create fictitious earnings?

Sam: Double counting inventory, overstating inventory, understating accounts payable, money laundering, and other methods.

Ilene: Did your auditors miss your accounting inaccuracies?

Sam: Public accountants that are sent out to audit public companies are typically young kids who do most of the leg work.  In those days, they were mostly guys in their twenties, say 22 years old to 26 years old, perhaps even 30 years old. But basically younger guys.

I was a pimp and matchmaker for these guys, and would set them up with young girls to distract them and keep them busy.  You know, these guys think with their penises, not their heads.

You never tell an auditor they can’t have something. You just agree and don’t follow through.  It wasn’t hard to distract them from their audits by pairing them with girls — these guys are like Pavlov’s dogs – throw women in front of these guys and they are very distractible.

Ilene: Did the girls know what you were up to?

Sam: Some did, some didn’t.

As criminals, we use charm and deceit to get what we want. White collar crime is all about confidence. White collar criminals are con men, they need to gain the confidence of their victim. They do this by smiling and flattering the victims. Here’s a politically incorrect example. How many guys have told you how great you are in order to get favors from you?

Sam Antar and Crazy EddieIlene: I don’t know the number but you mean like romancing the victim?

Sam: Yes. Criminals use the same technique you see when a guy’s trying to pick up a girl. That’s how white collar criminals gain confidence – they’ll use flattery and tell many lies.

There are three “basic tactics” that white collar criminals use. First, we exploit your humanity and good intentions; those are your weaknesses. Second, we build a wall of false integrity around ourselves because we need you to trust us. And, third, we measure our effectiveness by your comfort level.

(Having spoken with Sam several times on the phone, I thought he seemed genuinely remorseful and was feeling comfortable with him, so when he added that by the time he was finished with me, I’d be a paranoid schizophrenic and never trust anyone, I thought he was just trying to shock me.)

I started working from Crazy Eddie when I was 14 years old. I was essentially trained, from day one, to be an effective criminal within the family business.

Ilene: Do you think your criminal nature is genetic or environmental, or a combination?

Sam: I don’t know about the genetics, but there’s certainly environmental factors involved. Members of my family are Sephardic Jews; we were a very cohesive group. My grandparents came to the United States in the early 1920s. They had been highly discriminated against in the past, in Syria, where my family is from.

We had to be insular to cope with the discrimination, and that helped build the culture of cohesion within our family. The same unity helped the community, the culture, survive living in Arab lands.

Likewise, organized crime groups commonly share the same social, ethnic and religious groupings. The members are bound together by religion and stature within the criminal group.

Ilene: Like the Mafia?

Sam:  Yes.

Ilene: But you didn’t kill people.

Sam: No, I didn’t kill people but I was just as brutal and caused just as much harm as if I did.

This was the life that I was brought up to be in, within an otherwise law-abiding community. However, in every tight-knit community there exists a criminal subculture that benefits from the cohesiveness of that community. The same cohesiveness that helped the community survive also helped the small criminal subculture within that community to be more effective and survive, too.

Social cohesion is like higher education, there are good sides of it, but education can be used for bad things, too. College helped me supplement my criminal ways so that I could become a better white collar criminal, with my acquired accounting skills.

Ilene: So your crimes grew progressively worse?

Sam:  Yes. Most mom and pop retailers skim money off the top – we were a family of merchants, and skimming was normal at the time. My cousin Eddie started the company, and in this new business, not declaring income to the IRS, was normal.

Criminals are no different from regular people in that criminal behavior starts small. To understand criminal behavior, you have to take the morality out of the equation.  Most people don’t prepare for failure. Like people don’t plan to go bankrupt, criminals also don’t prepare to get caught.

Skimming profits and cheating the IRS was a first step. Next was insurance fraud. So, for example, if someone stole a truck full of merchandise, we could report more merchandise stolen than was actually stolen to the insurance company. Who is going to believe the thief if he gets caught? Or if there was a flood that damaged some inventory, we could throw all the non-salable goods onto the damage list to increase our insurance proceeds.

Crazy Eddie functioned as a private company from 1969 to 1984. In 1980, we started preparing to go public. Our goal of minimizing profits switched to that of increasing profits and legitimatizing the company, “going legit.” In effect, we committed securities fraud through the process of going legit by gradually reducing our skimming and increasing our reported profits.

Now, we wanted to show growth in earnings. Gradually and fraudulently, we reduced the amount of skimming to zero to inflate our growth rate. When we went public in 1984, our growth rate appeared much greater than it really was. By misrepresenting our growth in profits, we were committing securities fraud in addition to our other sins. We were portraying ourselves as a legitimate public company, until finally it all became unsustainable.

Ilene: What sort of frauds did you add to your list?

Sam: Money laundering to increase revenues and profits (the “Panama Pump”). Inflating inventories through fraudulent asset valuations. Timing differences to increase profits (accounts payable cut-off fraud). Concealing liabilities and expenses to increase profits (debit memo fraud). Improperly changing financial statement disclosures to cover up these crimes.

In effect, we were selling a bill of goods to investors. We didn’t care and didn’t feel badly about it.

Ilene: Do you feel badly about it now?

Sam: Well, I don’t give closure.

Ilene: Are you a sociopath?

Sam: No, but I think Eddie Antar may have been a sociopath.

Ilene: Are you still a criminal?

Sam: Let me give you an example, I’m like a drug addict in recovery.  An addict, even in recovery, is always an addict. Likewise, a convicted felon, like me, always has the same criminal mind, even if I’m not committing a crime.

The most effective drug counselors are addicts in recovery, who are helping other addicts to get off their addictions. I’m no different from a substance abuser. I have the same fascination with crime as I did before. It’s more fun and less risky to talk about crime than do it. But if I were to tell you I wasn’t a criminal today, should you believe me?

(The answer to that question is no, but I didn’t say anything.)


3. Background Information 

Timeline of Crazy Eddie’s evolution in crime:

(1) 1969-1979: Skimming and under reporting of income (tax fraud) prior to planning to go public

(2) 1980-1984: Gradual reduction of skimming to increase profit growth in preparation for initial public offering, known as committing securities fraud by “going legit.”

(3) 1984-1987: As a public company, Crazy Eddie overstated income to help insiders sell stock at inflated prices until the enterprise came crashing down.


Reunion: Crazy Eddie Antar and His CFO/CPA Cousin Sam Antar Meet for first time in 30 Years



In “Straight Talk about Brutality of White Collar Crime from a Convicted Felon” Sam explains, “If you want to truly understand the brutal nature of white collar crime in all of its gory detail, please listen to my videotaped interview below that is featured on the Con Artist Hall of Infamy website.” 


Sam Antar Interview, Part 1: The Rules of Criminality


Sam Antar Interview, Part 2: Humanity, or the lack thereof


Videos courtesy of Becca MacLaren and the Con Artist Hall of Infamy. The Con Artist Hall of Infamy was founded by Warren Hellman and Arthur Rock, “two billionaires with a fascination of white collar crime and a passion dedicated towards educating the public about the cold-blooded brutality of criminality.” 

This interview was originally published at Phil’s Stock World in May, 2010.

Speculative Animal (Hamster) Spirits on the Rise

Here’s an important article for day-traders and day-trader wannabes. In it, Wade Slome points out that 80% of traders lose money, and only 1% are consistently profitable. These are bad odds. And if you think you’re good enough to quit your day job, consider the inherent human tendency to inflate one’s skill set. 

After the market has been handing out gifts for five years and money-losing companies are rewarding gambling by making higher highs, it’s easy to mistake luck for intelligence. Problems start to arise when the market goes down. The financial industry spends millions figuring out how to exploit our greed-seeking tendencies while rigging the system in its favor. So while BTFD has been working well, and may continue to for another five years, nothing lasts forever.

Speculative Animal (Hamster) Spirits on the Rise

Courtesy of Wade of Investing Caffeine


 “Winning is a habit. Unfortunately, so is losing.”

– Vince Lombardi

And one thing is for sure…day traders have a habit of losing. Like a hamster on a spinning wheel, day traders use a lot of energy in creating loads of activity, but end up getting nowhere in the process. This subject is important because the animal (hamster) spirits are on the rise as evidenced by the 22% and 17% increase in average client trades per day reported last month by TD Ameritrade (TD) and Charles Schwab (SCHW), respectively.

The statistics speak for themselves, and the numbers are not pretty. An often cited study by Terrence Odeon (U.C. Berkely) and Brad Barber (U.C. Davis) showed that 80% of active traders lose money. The duo came to this conclusion over six years of research by studying 66,465 accounts. More importantly, they “found that if you were to look at the past performance of these traders, only 1 percent of them could be called predictably profitable.” Uggh!

How can this horrendous performance be? Especially when we are continually bombarded with the endless commercials of talking babies and perpetual software bells & whistles that shamelessly promote and pledge a simple path to prosperity. The answer to why active trading fails for the overwhelming masses is the following:

  • Taxes/Capital Gains
  • Transactions costs/commissions
  • Research costs/software
  • Lack of institutional advantages (speed, beneficial rates, I.T./automation, execution, etc.)
  • Impact costs (buying handicaps returns by pushing purchase prices higher, and selling handicaps returns by pushing sale prices lower)
  • Absence from participation in long-term upward drift in equity prices

After considering the horrible odds stacked against the active trader, the atrocious results are not surprising.

The Blemished Investing Brain

So far, we’ve discussed the mechanics behind the money-losing results of active trading, but the underlying reasons can be further explained by the three-pound, 100,000,000,000 amalgamation of cells located between our ears. Evolution has formed our brains to seek pleasure and avoid pain, and trading stocks can create a rush like no other activity. Similar to the orgasmic emotions triggered by making a quick buck at the blackjack table in Las Vegas or scratching off a winning number on a lottery ticket, buying and selling stocks creates comparable effects.

Through the use of high-powered, multi-million imaging technology (i.e., functional-MRI), Brian Knutson, a professor of neuroscience and psychology at Stanford University discovered that active trading for money impacts the brain in a similar fashion as do sex and drugs. The data is pretty compelling because you can see the pleasure center images of the brain light up dynamically in real time.

To put the results of his human trading experiments in context, Knutson noted:

“We very quickly found out that nothing had an effect on people like money — not naked bodies, not corpses. It got people riled up. Like food provides motivation for dogs, money provides it for people.”

Brokerage firms and casinos have figured out the greed-seeking weakness in human brains and exploited this vulnerability to the maximum. By rigging the system in their favor, mega-billion dollar financial institutions and gaming empires continue to sprawl around the globe.

The emotional high experienced by day traders is one explanation for the excessive trading, but there is another contributing factor. The inherent human cognitive bias that behavioral finance academics call overconfidence (or illusory superiority) helps fuel the destructive behavior. Surveys that ask people if they are above-average drivers highlight the overconfidence phenomenon by showing the mathematical impossibility of having 93% of a population as above-average drivers. Similarly, a study of Stanford MBA students showed 87% of the respondents rating their academic performance above median.

Even, arguably the greatest trader of all-time, Jesse Livermore realized the negative impacts of emotions and active trading when he said, “It was never my thinking that made big money for me. It always was my sitting.” As I’ve written in the past, active trading is hazardous to your long-term wealth. Rather than succumbing to the endless pitfalls of day trading and getting nowhere like a hamster on a spinning wheel, it’s better to use a long-term, objective and unemotional investing process to achieve investment success.

See also: Brain Scans Show Link Between Lust for Sex and Money

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold long positions in certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct discretionary position in TD, SCHW, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

Geopolitical Turmoil Takes Its Toll On ExxonMobil

ExxonMobil had a pretty rotten week. On March 5 it announced that it would reduce capital expenditures this year, after having “peaked” in 2013. Its 2014 spending will hit $39.8 billion, down 6% from $42.5 billion last year. While that may seem like a good thing (cutting costs), investors apparently didn’t like the idea – its stock price dropped 2.7% during midday trading as a result, ending the day as the biggest decline on the Dow Jones Industrial Average. Investors are growing concerned that ExxonMobil may be running out of good projects to invest in. Exxon’s production was down by 1.5% in 2013 from a year earlier, and the firm believes it will only remain flat through this year. Meanwhile Exxon’s costs on a per barrel basis are rising. It cost them $11.48 to produce a barrel of oil equivalent in 2013, sharply up from $9.91 in 2012.

But there troubles didn’t end there. Although great uncertainty remains, ExxonMobil may also suffer some damage from the unfolding Ukrainian crisis. Its biggest non-U.S. oil project is a collaboration with Russia’s Rosneft in the Arctic, where it has billions of dollars of investments at stake. If the U.S. and the EU slap sanctions on Russia for its incursion into Ukraine and its support for the pending referendum in Crimea, Exxon could face restrictions on doing business in Russia. This would imperil its plans to drill later this year. Exxon has the rights to drill on 11.4 million acres in Russia, which represent holdings for the company that are only surpassed by its acreage in Texas, its home state. ExxonMobil CEO Rex Tillerson tried to assuage concerns at its annual meeting with analysts, “There has been no impact on any of our plans or activities at this point, nor would I expect there to be any, barring governments taking steps that are beyond our control.”

In Ukraine too, Exxon has had to pull back. On March 5 company officials stated that their interest in drilling offshore Ukraine for natural gas will be put on hold. Fortunately for Exxon, it hadn’t yet sunk a lot of money in the prospect, but its opportunity there is effectively cut off for the foreseeable future. Ukraine has been eager to see its offshore gas deposits extracted in order to lessen its dependence on Russia. Exxon hoped to tap Ukraine’s Skifska field, which holds an estimated 200-250 billion cubic meters of natural gas.

On March 7, Exxon received another piece of bad news. Kazakhstan announced that it is suing Exxon, and its partners (Royal Dutch Shell, Total, and Eni) for the consortium’s failure to develop the giant Kashagan oilfield in the Caspian Sea. The project, now in its 13th year, has suffered serious delays. The consortium has spent a combined $50 billion on the project. Kashagan is the world’s largest oil discovery in 35 years. Production began in September 2013 but was quickly halted due to pipes leaking natural gas. The consortium began flaring the gas, and the Kazakh government is seeking a $737 million fine from the companies for the pollution. The Kazakh government may not reimburse the consortium for its costs and the latest move to sue may be an attempt by the government to seize a greater share of the project from the private companies.

The string of bad news comes as rising costs and flat output have raised questions about the firm’s trajectory. Exxon’s CEO Tillerson had to answer questions during his presentation about whether or not the firm had become too big for its own good. He tried to reassure investors that Exxon is sufficiently diversified to weather geopolitical storms as well as improve production, but judging by the company’s stock price as of late (down 7% YTD), investors aren’t so sure.

Benefit from the Latest Energy Trends and Investment Opportunities before the mainstream media and investing public are aware they even exist. The Free Energy Intelligence Report gives you this and much more. Click here to find out more.

This Could Be The Future For Uranium


By David Forest of Oil Price 

As I’ve discussed before, the uranium mining business has some unique global challenges.

Namely, that the industry cost curve is much more warped than for any other metal.

Worldwide, there is exactly one low-cost centre for producing primary uranium: Canada’s Athabasca Basin. Looking at some recent numbers, it’s easy to see why this locale beats every other spot on Earth. Last month, developers Fission Energy announced further drilling results from their Patterson Lake South property–showing remarkably high grade uranium intercepts, such as 38 metres grading 13.66% uranium oxide.

That grade is higher by orders of magnitude than for other projects being developed globally. We simply haven’t found another place with the gifted uranium geology that Athabasca enjoys.

So how might this play out from an exploration standpoint? Is there little hope for creating new projects outside Canada?

News last week suggests there may be a potential alternative strategy in sourcing economic uranium mines in places like Africa. By producing uranium along with other metals.

That’s what operators Barrick Gold are moving toward at their Lumwana Mine in Zambia. Where uranium is found in association with copper that is the primary mining target at the site.

Zambia’s Minister of mines and energy has been reporting on development at the new copper project, according to local press. With the Minister noting that potential uranium production here is shaping up–with 5 million tonnes of uranium-bearing ore having been stockpiled so far at the site.

Barrick isn’t yet processing uranium here. The major is reportedly waiting for the Zambian government to provide policy guidance for production of this potentially-controversial metal.

But previous feasibility studies at Lumwana showed that the mine could produce up to 2 million pounds a year of uranium, alongside copper output.
Such a situation might be a winning strategy in addressing the topsy-turvy uranium curve. Production of copper would help pay operating expenses, potentially making Lumwana an affordable uranium producer despite lower grades.

Such “by-product” strategy is what makes big uranium mines like BHP Billiton’s Olympic Dam project work. Given the oddities today in uranium, we may see more such developments popping up.

Here’s to getting it how you can….

Benefit from the Latest Energy Trends and Investment Opportunities before the mainstream media and investing public are aware they even exist. The Free Energy Intelligence Report gives you this and much more. Click here to find out more.

“Stolen Passport” Passenger on Missing Malaysian Airlines Jet Identified


"Stolen Passport" Passenger on Missing Malaysian Airlines Jet Identified

Courtesy of ZeroHedge

One of the two men who used stolen passports to board the missing Malaysia Airlines jet has been identified according to the nation’s inspector general of police. Authorities are not releasing details of his nationality but confirmed he is neither Malaysian nor from Xinjiang, China (the home of the Uighur separatists who have come under suspicion following Taiwanese authorities tip last week warning that terrorists were targeting Beijing’s international airport).

Via LA Times,

Malaysian authorities have identified one of the two men who used stolen passports to board the missing Malaysia Airlines jet, the nation’s inspector general of police told local media Monday, as international search teams continued to look — so far unsuccessfully — for wreckage from the jet.

"I can confirm that he is not a Malaysian, but cannot divulge which country he is from yet," Tan Sri Khalid Abu Bakar told the Star, a major Malaysian newspaper. He added that the man is also not from Xinjiang, China — a northwestern province of the mainland home to minority Uighurs. Uighur separatists have been blamed for a knifing rampage in southwestern China this month that left 29 dead.

Meanwhile, a Taiwanese official said national security officials received an anonymous tip last week warning that terrorists were targeting Beijing’s international airport.

According to the report by Taiwan’s Central News Agency, a man speaking Chinese claimed to have information of planned attacks directed against Beijing’s airport and subway system by the East Turkestan Independence Movement, an Islamic-inspired group seeking independence for the Uighurs. The caller identified himself as a member of a French-based anti-terror network and said he had called Taiwan’s national airline because he couldn’t reach anybody in Beijing.

As of Monday evening in Malaysia, investigators have found no confirmed wreckage of the airliner despite an intensive search by more than 40 ships and nearly three dozen aircraft off the southern coast of Vietnam.

Iron Ore Prices Collapse into Bear Market on China Credit Concerns

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Iron Ore prices have dropped 25% since the end of last year, sending the key steel-making component into a bear market after slumping by over 9% overnight – its biggest daily drop on record. We warned last week this was likely to happen on the heels of Copper prices fell on monetary financing fears as we explained here how Iron Ore replaced copper as the collateral pool for new loans (following China's clampdown on cash-for-copper deals last year) and stockpiles hit record highs. What is further hurting the Iron ore prices are concerns over China's new anti-pollution reforms which are set to close thousands of furnaces.

Iron Ore Stockpiles are at record highs…

The logic is simple: no stockpiles means end demand by steelmakers is brisk and there is no inventory build up which in turns keep Australia, Brazil and other emerging markets happy. Alternatively, large stockpiles indicates something is very wrong with final demand, and hence, the overall economy.

As we warned last week…

And what happened… Iron Ore prices are collapsing as the new monetary metal is delevered…

leading to lower collateral values and a rapid tightening of credit conditions which is simply a vicious circle for China's subprime borrowers (the massively over-supplied and under-demanded steel industry being front and center)

The 99 Cent Non-Recovery: McDonalds US Sales Post Longest Negative Streak In Over A Decade

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Moments ago McDonalds reported its latest monthly comp store sales numbers. Printing at -1.4% for the US, this was a nearly double miss to expectations of a 0.6% decline, and was the 4th consecutive monthly drop in annual sales – the longest such stretch in the past decade and likely longer. Looking at this data, there are two observations: i) Americans, courtesy of record obesity rates, are finally getting serious about their health, and have shunned the infamous 99 cent deep fried meals or ii) courtesy of the Fed's "Fed's recovery", the average American can no longer even afford sub-$1 deep fast food.

There is a third option: that it snowed… In fact it snowed so much, everywhere, and the weather was so harsh around the world, that global store sales declined by 0.3%, far below the modest 0.1% drop expected. Yup. Must have been the snow.

War Talk Roundup: China Has “No Room for Compromise with Japan”; Spotlight on China, Japan, US, Iran, Russia, Ukraine, North Korea

Courtesy of Mish.

The global macro picture is bad enough in and of itself. Simmering feuds between rival nations certainly do not help the picture. Here are a few recent stories that caught my eye.

China has No Room For Compromise with Japan

The New York Times reports China has No Room For Compromise with Japan.

March 8, 2014
The Chinese foreign minister took a strong stand Saturday on China’s growing territorial disputes with neighboring nations, saying that “there is no room for compromise” with Japan and that China would “never accept unreasonable demands from smaller countries,” an apparent reference to Southeast Asian nations.

In the East China Sea, China refuses to accept Japan’s administration of, or its claims to, islands that Japan calls the Senkaku and China calls the Diaoyu.

“On the two issues of principle — history and territory — there is no room for compromise,” Mr. Wang said in answer to a question from a Japanese reporter on the deterioration of China-Japan relations. “If some people in Japan insist on overturning the verdict on its past aggression, I don’t think the international community and all peace-loving people in the world will ever tolerate or condone that.”

Tensions between China and Japan have been playing out in diplomacy around the globe. In January, the Chinese ambassador to Britain and his Japanese counterpart both wrote op-ed articles for The Daily Telegraph in which they equated the other country to Lord Voldemort, the villain in the Harry Potter series. The two ambassadors even refused to sit at the same table during a televised BBC interview. Also in January, Mr. Abe told an audience at the Davos conference in Switzerland that the rivalry between China and Japan was similar to that between Germany and Britain before World War I, meaning their differences could supersede their close trade ties.

In the South China Sea, China has been trying to stake sovereignty to islands and waters that are also claimed by Southeast Asian nations. Vietnam, the Philippines and Malaysia are among the opponents to China’s claims. The United States has said it takes no side on sovereignty issues but will maintain freedom of navigation. More recently, it has asserted that the so-called nine dashes map that some Chinese officials say defines China’s ambitious claims in the South China Sea violates international law because the territorial boundaries are not based on land features.

Japan, U.S. Differ on China in Talks on ‘Grey Zone’ Military Threats

Reuters reports Japan, U.S. Differ on China in Talks on ‘Grey Zone’ Military Threats

Mar 9, 2014
As Japan and the United States start talks on how to respond to armed incidents that fall short of a full-scale attack on Japan, officials in Tokyo worry that their ally is reluctant to send China a strong message of deterrence.

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The Problem with Keynesianism


Thoughts from the Frontline: The Problem with Keynesianism

By John Mauldin

“The belief that wealth subsists not in ideas, attitudes, moral codes, and mental disciplines but in identifiable and static things that can be seized and redistributed is the materialist superstition. It stultified the works of Marx and other prophets of violence and envy. It frustrates every socialist revolutionary who imagines that by seizing the so-called means of production he can capture the crucial capital of an economy. It is the undoing of nearly every conglomerateur who believes he can safely enter new industries by buying rather than by learning them. It confounds every bureaucrat who imagines he can buy the fruits of research and development.

“The cost of capturing technology is mastery of the knowledge embodied in the underlying science. The means of entrepreneurs’ production are not land, labor, or capital but minds and hearts….

“Whatever the inequality of incomes, it is dwarfed by the inequality of contributions to human advancement. As the science fiction writer Robert Heinlein wrote, ‘Throughout history, poverty is the normal condition of man. Advances that permit this norm to be exceeded – here and there, now and then – are the work of an extremely small minority, frequently despised, often condemned, and almost always opposed by all right-thinking people. Whenever this tiny minority is kept from creating, or (as sometimes happens) is driven out of society, the people slip back into abject poverty. This is known as bad luck.’

“President Obama unconsciously confirmed Heinlein’s sardonic view of human nature in a campaign speech in Iowa: ‘We had reversed the recession, avoided depression, got the economy moving again, but over the last six months we’ve had a run of bad luck.’ All progress comes from the creative minority. Even government-financed research and development, outside the results-oriented military, is mostly wasted. Only the contributions of mind, will, and morality are enduring. The most important question for the future of America is how we treat our entrepreneurs. If our government continues to smear, harass, overtax, and oppressively regulate them, we will be dismayed by how swiftly the engines of American prosperity deteriorate. We will be amazed at how quickly American wealth flees to other countries….

“Those most acutely threatened by the abuse of American entrepreneurs are the poor. If the rich are stultified by socialism and crony capitalism, the lower economic classes will suffer the most as the horizons of opportunity close. High tax rates and oppressive regulations do not keep anyone from being rich. They prevent poor people from becoming rich. High tax rates do not redistribute incomes or wealth; they redistribute taxpayers – out of productive investment into overseas tax havens and out of offices and factories into beach resorts and municipal bonds. But if the 1 percent and the 0.1 percent are respected and allowed to risk their wealth – and new rebels are allowed to rise up and challenge them – America will continue to be the land where the last regularly become the first by serving others.”

– George Gilder, Knowledge and Power: The Information Theory of Capitalism

“The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.”

– John Maynard Keynes

“Nothing is more dangerous than a dogmatic worldview – nothing more constraining, more blinding to innovation, more destructive of openness to novelty.”

– Stephen Jay Gould

I think Lord Keynes himself would appreciate the irony that he has become the defunct economist under whose influence the academic and bureaucratic classes now toil, slaves to what has become as much a religious belief system as it is an economic theory. Men and women who display an appropriate amount of skepticism on all manner of other topics indiscriminately funnel a wide assortment of facts and data through the filter of Keynesianism without ever questioning its basic assumptions. And then some of them go on to prescribe government policies that have profound effects upon the citizens of their nations.

And when those policies create the conditions that engender the income inequality they so righteously oppose, they prescribe more of the same bad medicine. Like 18th-century physicians applying leeches to their patients, they take comfort in the fact that all right-minded and economic scientists and philosophers concur with their recommended treatments.

This week, let’s look at the problems with Keynesianism and examine its impact on income inequality.

But first, let me note that Gary Shilling has agreed to come to our Strategic Investment Conference this May 13-16 in San Diego, joining a star-studded lineup of speakers who have already committed. This is really going to be the best conference ever, and you need to figure out how to make it. Early registration pricing goes away at the end of this week. My team at Mauldin Economics has produced a short, fun introductory clip featuring some of the speakers; so enjoy the video, check out the rest of our lineup, and then sign up to join us.

This is the first year we have not had to limit our conference to accredited investors; nor are we limiting attendance from outside the United States. We have a new venue that will allow us to adequately grow the conference over time. But we will not change the format of what many people call the best investment and economic conference in the US. Hope to see you there. And now on to our letter.

Ideas have consequences, and bad ideas have bad consequences. We started a series two weeks ago on income inequality, the current cause célèbre in economic and political circles. What spurred me to undertake this series was a recent paper from two economists (one from the St. Louis Federal Reserve) who are utterly remarkable in their ability to combine more bad economic ideas and research techniques into one paper than anyone else in recent memory.

Their even more remarkable conclusion is that income inequality was the cause of the Great Recession and subsequent lackluster growth. “Redistributive tax policy” is suggested approvingly. If direct redistribution is not politically possible, then other methods should be tried, the authors say. I’m sure that, given more time and data, the researchers could have used their methodology to ascribe the rise in teenage acne to income inequality as well.

So what is this notorious document? It’s “Inequality, the Great Recession, and Slow Recovery,” by Barry Z. Cynamon and Steven M. Fazzari. One could ask whether this is not just one more bad economic paper among many. If so, why should we waste our time on it?

(Let me state for the record that I am sure Messieurs Cynamon and Fazzari are wonderful husbands and fathers, their children love them, and their pets are happy when they come home. In addition, they are probably outstanding citizens who are active in all sorts of good things in their communities. Their friends and colleagues enjoy convivial gatherings with them. I’m sure that if I were to sit down to dinner with them [not likely to happen after this letter], we would have a lively debate and hugely enjoy ourselves. This is not a personal attack. I simply mean to eviscerate as best I can the rather malignant ideas that they are proffering.)

That income inequality stifles growth is not simply the idea of two economists in St. Louis. It is a widely held view that pervades almost the entire academic economics establishment. Nobel prize-winning economist Joseph Stiglitz has been pushing such an idea for some time (along with Paul Krugman, et al.); and a recent IMF paper suggests that slow growth is a direct result of income inequality, simply dismissing any so-called “right-wing” ideas that call into question the authors’ logic or methodology.

The challenge is that the subject of income inequality has now permeated the national dialogue not just in the United States but throughout the developed world. It will shape the coming political contests in the United States. How we describe income inequality and determine its proximate causes will define the boundaries of future economic and social policy. In discussing multiple problems with the Cynamon-Fazzari paper, we have the opportunity to think about how we should actually address income inequality. And hopefully we’ll steer away from simplistic answers that conveniently mesh with our political biases.

I should note that my readers have sent me an overwhelming amount of research on income inequality that I’ve been wading through for the past week. Some of it is quite discomforting, and a great deal is politically incorrect, at least some of which is almost certain to offend my gentle readers. Who knew that income inequality is not due to the greedy rich but to marriage patterns or the size of households or any number of interesting correlated factors? The research will all be thought-provoking, and we’ll will cover it in depth next week; but today let’s stay focused on the ideas of defunct economists.

Why Is Economic Theory Important?

Some readers may say, this is all well and good, but it’s just economic theory. How does that matter to our investment portfolios? The direct answer is that economic theory drives the policies of central banks and determines the price of money, and the price of money is fundamental to the prices of all our assets. What central banks do can be either helpful or harmful. Their actions can dampen volatility in the short term while intensifying pressures that distort prices, forming bubbles – which always end in significant reversals, often quite precipitously. (Note that it is not always high asset values that tumble. It is just as possible for central banks to repress the value of some assets to such low levels that they become a coiled spring.)

As we outlined at length in Code Red, central banks have a very limited set of policy tools with which to address crises. While the tools have all sorts of unlikely names, they are essentially limited to manipulating interest rates (the price of money) and flooding the market with liquidity. (Yes, I know that they can impose changes in a few secondary regulatory issues like margins, reserves, etc., but these are not their primary functions.)

The central banks of the US and England are beginning to wind down their extraordinary monetary policies. But whenever the next recession or crisis hits in the US, England, or Europe, their reaction to the problem – and subsequent monetary policy – are going to be based on Keynesian theory. The central bankers will give us more of the same, but it will be in an environment of already low rates and more than adequate liquidity. You need to understand how the theory they’re working from will express itself in the economy and affect your investment portfolio.

I should point out, however, that central banks are not the primary cause of distorted economic policy. They are reacting to the fiscal policies and political realities of their various countries. Japan’s government ran up the largest government debt-to-equity ratio in modern times; and now, as a result, the Japanese Central Bank is forced to monetize that debt.

Leverage and the distorted price of money have been at the root of almost every bubble in the postwar world. It is tempting to veer off into a soliloquy on the history of the problems leverage creates, but let’s forbear for now and deal with Keynesian thinking about income inequality.

The Problem with Keynesianism

Let’s start with a classic definition of Keynesianism from Wikipedia, so that we can all be comfortable that I’m not coloring the definition with my own bias (and, yes, I admit I have a bias). (Emphasis mine.)

Keynesian economics (or Keynesianism) is the view that in the short run, especially during recessions, economic output is strongly influenced by aggregate demand (total spending in the economy). In the Keynesian view, aggregate demand does not necessarily equal the productive capacity of the economy; instead, it is influenced by a host of factors and sometimes behaves erratically, affecting production, employment, and inflation.

The theories forming the basis of Keynesian economics were first presented by the British economist John Maynard Keynes in his book The General Theory of Employment, Interest and Money, published in 1936, during the Great Depression. Keynes contrasted his approach to the aggregate supply-focused “classical” economics that preceded his book. The interpretations of Keynes that followed are contentious, and several schools of economic thought claim his legacy.

Keynesian economists often argue that private sector decisions sometimes lead to inefficient macroeconomic outcomes which require active policy responses by the public sector, in particular, monetary policy actions by the central bank and fiscal policy actions by the government, in order to stabilize output over the business cycle. Keynesian economics advocates a mixed economy – predominantly private sector, but with a role for government intervention during recessions.

(Before I launch into a critique of Keynesianism, let me point out that I find much to admire in the thinking of John Maynard Keynes. He was a great economist and taught us a great deal. Further, and this is important, my critique is simplistic. A proper examination of the problems with Keynesianism would require a lengthy paper or a book. We are just skimming along the surface and don’t have time for a deep dive.)

Central banks around the world and much of academia have been totally captured by Keynesian thinking. In the current avant-garde world of neo-Keynesianism, consumer demand –consumption – is everything. Federal Reserve monetary policy is clearly driven by the desire to stimulate demand through lower interest rates and easy money.

And Keynesian economists (of all stripes) want fiscal policy (essentially, the budgets of governments) to increase consumer demand. If the consumer can’t do it, the reasoning goes, then the government should step in and fill the breach. This of course requires deficit spending and the borrowing of money (including from your local central bank).

Essentially, when a central bank lowers interest rates, it is trying to make it easier for banks to lend money to businesses and for consumers to borrow money to spend. Economists like to see the government commit to fiscal stimulus at the same time, as well. They point to the numerous recessions that have ended after fiscal stimulus and lower rates were applied. They see the ending of recessions as proof that Keynesian doctrine works.

There are several problems with this line of thinking. First, using leverage (borrowed money) to stimulate spending today must by definition lower consumption in the future. Debt is future consumption denied or future consumption brought forward. Keynesian economists would argue that if you bring just enough future consumption into the present to stimulate positive growth, then that present “good” is worth the future drag on consumption, as long as there is still positive growth. Leverage just evens out the ups and downs. There is a certain logic to this, of course, which is why it is such a widespread belief.

Keynes argued, however, that money borrowed to alleviate recession should be repaid when growth resumes. My reading of Keynes does not suggest that he believed in the continual fiscal stimulus encouraged by his disciples and by the cohort that are called neo-Keynesians.

Secondly, as has been well documented by Ken Rogoff and Carmen Reinhart, there comes a point at which too much leverage on both private and government debt becomes destructive. There is no exact number or way of knowing when that point will be reached. It arrives when lenders, typically in the private sector, decide that the borrowers (whether private or government) might have some difficulty in paying back the debt and therefore begin to ask for more interest to compensate them for their risks. An overleveraged economy can’t afford the increase in interest rates, and economic contraction ensues. Sometimes the contraction is severe, and sometimes it can be absorbed. When it is accompanied by the popping of an economic bubble, it is particularly disastrous and can take a decade or longer to work itself out, as the developed world is finding out now.

Every major “economic miracle” since the end of World War II has been a result of leverage. Often this leverage has been accompanied by stimulative fiscal and monetary policies. Every single “miracle” has ended in tears, with the exception of the current recent runaway expansion in China, which is now being called into question. (And this is why so many eyes in the investment world are laser-focused on China. Forget about a hard landing or a recession, a simple slowdown in China has profound effects on the rest of the world.)

I would argue (along, I think, with the “Austrian” economist Hayek and other economic schools) that recessions are not brought on by insufficient consumption but rather by insufficient income. Fiscal and monetary policy should aim to grow incomes over the entire range of the economy, and that is accomplished by increasing production and making it easier for entrepreneurs and businesspeople to provide goods and services. When businesses increase production, they hire more workers and incomes go up.

Without income there are no tax revenues to redistribute. Without income and production, nothing of any economic significance happens. Keynes was correct when he observed that recessions are periods of reduced consumption, but that is a result and not a cause.

Entrepreneurs must be willing to create a product or offer a service in the hope that there will be sufficient demand for their work. There are no guarantees, and they risk economic peril with their ventures, whether we’re talking about the local bakery or hairdressing shop or Elon Musk trying to compete with the world’s largest automakers. If they are hampered in their efforts by government or central bank policies, then the economy stagnates.

Keynesianism is favored by politicians and academics because it offers a theory by which government actions can become the decisive factor in the economy. It offers a framework whereby governments and central banks can meddle in the economy and feel justified. It allows 12 people sitting in a board room in Washington DC to feel that they are in charge of setting the price of money (interest rates) in a free marketplace and that they know more than the entrepreneurs and businesspeople do who are actually in the market risking their own capital every day.

This is essentially the Platonic philosopher king conceit: the hubristic notion that there is a small group of wise elites that is capable of directing the economic actions of a country, no matter how educated or successful the populace has been on its own. And never mind that the world has multiple clear examples of how central controls eventually slow growth and make things worse over time. It is only when free people are allowed to set their own prices as both buyers and sellers of goods and services and, yes, even interest rates and the price of money, that valid market-clearing prices can be determined. Trying to control those prices results in one group being favored over another.

In today's world, the favored group is almost always bankers and the wealthy class. Savers and entrepreneurs are left to eat the crumbs that fall from the plates of the well-connected crony capitalists and to live off the income from repressed interest rates. The irony of using “cheap money” to try to drive consumer demand is that retirees and savers get less money to spend, and that clearly drives down their consumption. Why is the consumption produced by ballooning debt better than the consumption produced by hard work and savings? This is trickle-down monetary policy, which ironically favors the very large banks and institutions. If you ask Keynesian central bankers if they want to be seen as helping the rich and connected, they will stand back and forcefully tell you “NO!” But that is what happens when you start down the road of financial repression. Someone benefits. So far it has not been Main Street.

And, as we will see as we examine the problems of the economic paper that launched this essay, Keynesianism has given rise to a philosophical framework that justifies the seizure of money from one group of people to give to another group of people. This is a particularly pernicious doctrine, as George Gilder noted in our opening quote:

Those most acutely threatened by the abuse of American entrepreneurs are the poor. If the rich are stultified by socialism and crony capitalism, the lower economic classes will suffer the most as the horizons of opportunity close. High tax rates and oppressive regulations do not keep anyone from being rich. They prevent poor people from becoming rich. High tax rates do not redistribute incomes or wealth; they redistribute taxpayers – out of productive investment into overseas tax havens and out of offices and factories into beach resorts and municipal bonds.

Surprise: You Can’t Spend More Than You Make

First off, let me acknowledge that not everything in the Cynamon-Fazzari paper is wrong. As they analyze the data, they make a number of correct observations. They use a great deal of sophisticated math (seriously) to prove the rather unsurprising conclusion that you can’t spend more than you make. While everyone else in the world had already pretty much assumed that was the case, economists themselves can now rest easy in the knowledge that it’s a mathematical certainty.

The authors demonstrate that there is a disparity in the growth of incomes between the top 5% and the “bottom” 95%. There is not as big a difference as their data suggests, since they don’t take into account the growing percentage of employment benefits and ignore government support programs; but that’s another story, maybe for next week. Nor do they acknowledge that the percentage of people making over $100,000 (in constant dollars) has essentially doubled in the last 30 years. So yes, there are more people who are better off than before. Far more people have somehow slipped into a very comfortable lifestyle despite the fact that those who are even wealthier are making even higher incomes.

But let’s look at some of the authors’ actual wording and conclusions. First off, this gem:

A thread of macroeconomic thinking, going back at least to Michal Kalecki, identifies a basic challenge arising from growing inequality. This approach begins with the assumption that high-income households (usually associated with profit recipients) spend a lower share of their income than others (typically wage earners). In this case, rising inequality creates a drag on demand that can lead to unemployment and even secular stagnation if demand is not generated from other sources.

Read that paragraph again. And then a third time. I acknowledge that this is a well-established strain of economic thinking, but so is Marxism. Both are wrong. The authors of this paper basically start with the proposition that because those dastardly entrepreneurs and businesspeople (whom they call “profit recipients,” as if profit were a dirty word) actually dare to save some of their money rather than spend it, they are harming the economy. How heartless and thoughtless of them. Don’t they know the economy needs their spending?

It is very difficult for me to believe that this passes as acceptable economic thought in any but socialist circles. For those of you who were forced to endure Economics 101, you may remember that Savings = Investment. In any real-world economic system, you have to have savings in order to have investment in order for the economy to grow. Further, it is blatantly flawed logic to assume that savings don’t become investments, through banks or other intermediaries. Generally, savings are actually leveraged to produce more investments (and thus eventual production and consumption) than if the “profit recipients” had simply spent the money themselves.

At the heart of the Keynesian conceit we see the conclusion that consumption is better than savings. Yes, I know, I’ve written many a time about Keynes’s Paradox of Thrift: “It is a good thing for individuals to save, but if everybody saves then there is less consumption.” That seems true on the surface and makes for one of those great sound bites that Keynesians are so good at delivering, but it has an inherent flaw. It assumes that savings don’t become investments that increase productivity, which in turn leads to the production of more goods and services, which ultimately creates income, which then creates more demand.

Without savings, nothing happens. Nothing. There has to be capital of some kind from somewhere in order for economic activity to happen. In the last three years productivity has simply fallen off the charts, down by almost 60% from the average of the previous 60 years. This is a continuation of a trend that began with a decrease in savings. Productivity growth is ultimately a product of savings, and it is productivity growth that will generate an increase in income for the country as a whole. While the topic deserves an entire letter of its own, it may be enough to state here that there are consequences to the fact that savings are close to an all-time low.

A static economy does not produce an increase in either overall income or wealth. It is only an economy that is growing as a result of a healthy level of savings and investment that can produce the results that Keynesian economists want: increased incomes for everyone. (And yes, I acknowledge, as I have in previous letters, that income distribution has been increasingly uneven in recent decades; but I contend that this is the fault of government policy, not the market.)

Your typical Keynesian economist is not willing to wait a reasonable period of time for savings to become investment. Such people, and the politicians they serve, want results today. And the only way to get results today is to get people to spend today, while the process of saving and investing takes time. Neo-Keynesian economists are ultimately teenage children who want the pleasure of spending and consuming today rather than thinking about the future. And I won’t even go into the burden we are placing on future generations by borrowing money to goose our current economy and expecting them to pay that money back so that we can have our party today. We are building toward a future intergenerational war that is going to be very intense once our children learn how we have misspent their future. But that’s yet another letter. Back to our current topic.

Cynamon and Fazzari note that a rising debt-to-income ratio is accompanied by rising asset prices (home values, for instance). According to them,

This evidence shows that the financial choices of the bottom 95 percent in response to the rise in inequality that began in the early 1980s were unsustainable. Balance sheets cannot deteriorate indefinitely; the “Minsky Moment” that marked the end of rising balance sheet fragility occurred on the eve of the Great Recession. Lending was cut off to the bottom 95 percent, home price growth stalled and then declined. The crisis had begun.… This result provides empirical support for the widely held view that, other things equal, rising inequality will create a drag on consumption spending.

Really? On page 6 they state that “U.S. aggregate demand growth was not excessive before the recession,” yet they clearly understand that the spending of the “bottom” 95% was fueled by increasing debt borrowed against rising home values. Still, they decry the fact that “Lending was cut off to the bottom 95 percent, home price growth stalled and then declined.”

Actually, I think the sequence was: home price growth began to falter; it became evident that the mortgage industry was rife with corruption and fraud (from top to bottom with the complicity of the regulators and, even worse, the rating agencies); and then lending was cut off. If memory serves correctly, it was cut off to damn near everyone. There was a reason that significant assets were selling for dimes on the dollar.

Rising inequality did not create a drag on consumer spending. Too much debt and leverage created a bubble in spending that was unsustainable. It was easy-money policies, low interest rates, and regulatory failure that created the problem. The “drag on consumer spending” was the result of too much borrowing and a bubble and not the result of an inability to borrow.

How can one state with a straight face that aggregate demand growth was not excessive before the recession? In what alternative universe were the authors living? It was clearly a bubble and unsustainable. There were numerous authorities – with the exception of economists and the Federal Reserve, of course – who said so. Even someone as generally clueless as your humble analyst (at least that’s my kids’ opinion) said so least a few dozen times in the years preceding the crisis.

This letter is getting to be as long as most of you can deal with, yet there is at least as much to cover in the rest of the Cynamon-Fazzari paper as we’ve dealt with so far; so I think it is reasonable for me to declare that “It’s time to hit the send button.” Next week we’ll examine the authors’ belief that the Great Recession was the result of income inequality and tackle several other equally pernicious ideas.

Argentina, South Africa, Europe, and Rand Paul

I am back home for another 10 ten days, and then a rather aggressive travel agenda confronts me. I will go on a part business trip, part working vacation to Cafayate, Argentina, with my partners at Mauldin Economics and lots of friends. Right now the plan is to go up to Bill Bonner’s hacienda (on a mere 500,000 acres) at 10,000 feet in the Andes, and at that point I may truly be disconnected for a few days. He says he has an internet link, but last year it somehow didn’t work for anybody but him. I think that is when I realized I have an addiction problem. I’m sure there’s a 12-step program out there on the web somewhere.

Then I fly back to Dallas, hang out for eight hours, and journey on to South Africa. Don’t ask. But it makes sense, in a very odd way, to spend three consecutive nights in an airplane. The things your humble analyst has to endure to go to the ends of the earth for research purposes. The fact that I might show up at the Royal Malewene for a few days of what will then be a much-needed vacation is just a pleasant side note to the journey. After that respite I’ll began a rather serious tour of South Africa on behalf of Glacier by Sanlam, a very-full-service financial firm. I am looking forward to that trip.           

Then a trip is shaping up to Amsterdam, Brussels, and Geneva prior to my own Strategic Investment Conference in San Diego. And speaking of that conference, my good friend Kyle Bass of Hayman Capital Advisors will be one of our speakers, as he was last year; but in the runup to the conference Kyle and I are going to engage in an online conversation.

Many readers will recognize Kyle from the media acclaim he garnered when his investment successes were featured in Michael Lewis’s The Big Short. In addition to being one of the most articulate and engaging speakers I know, Kyle is just an all-around nice guy. I truly treasure the times I get to spend with him. They are all too few. Seriously, if you get a chance to listen to him, you should.

If you are a qualified purchaser or a licensed investment adviser qualified to make private placement recommendations, please join me and my partners at Altegris for an exclusive webinar featuring Kyle on Monday, March 31, at 1:00 p.m. EDT / 10:00 a.m. PDT. Be sure to register here ( for this event, as it will be one of the more interesting discussions I engage in this year.

Upon qualification by my partners at Altegris, you will receive an email invitation. I apologize for limiting this discussion to qualified purchasers and investment advisors, but we must follow the rules and regulations. I look forward to having you at this exclusive event. (In this regard, I am president and a registered representative of Millennium Wave Securities, LLC, member FINRA.)

Next week I will offer you an exclusive link to an interview of Janet Yellen that was done a few years ago by my friend Jim Bruce in the process of producing his boffo documentary Money for Nothing. It is rather extraordinary, and I am proud to be able to make it available to my readers.

In the meantime, let me offer you a rather optimistic view of the future. A few months ago there was an enthusiastic group of young men, still in high school, who wanted to interview me about Federal Reserve policy. I kid you not. They put the interview on video, and it became part of a short documentary about the effects of Federal Reserve policies on the younger generation. They submitted the documentary to a contest sponsored by C-SPAN. There were 2,355 total submissions, and their video placed second. The outcome had nothing to do with the adeptness of your humble analyst in handling off-the-cuff remarks, but rather to these kids’ extraordinary talents, which resulted in a high-quality video and a surprisingly in-depth understanding of the topic. You can see the video here. Colleges around the country should be begging for youth like these young men to attend their schools.

Finally, I had a rather extraordinary opportunity to attend a small private dinner with Senator Rand Paul this last Tuesday. Also in attendance were old friends George Gilder and Rob Arnott, new friends Stephen Moore and David Malpass, plus a few others. It is not often I get to be the radical liberal at the table, but there I was. We were there to discuss monetary policy, but the conversation drifted widely more than a few times. The terms of the evening were simple: Chatham House rules (which means we don’t talk about what we discussed without permission), so everyone was free to throw out outlandish ideas for discussion, including ones that were maybe not ready for prime time or even mentionable in polite conversation. Basically, everyone agreed not to get offended when their pet ideas were shot down. Often in flames. (Cue sounds of falling planes and explosions!)

While everyone was polite, there were no shy participants at the table. I don’t think I’m far off in describing the conversation as pleasant, spirited, and entertainingly aggressive. I rather admired the senator, as he was willing to fully engage in the give-and-take and did not take offense (or worse, simply write people off), as some politicians do when you suggest that they’re simply wrong. Rand takes up the challenge and presses you on your thoughts. He has a very sharp intellect that has been well honed in conservative thought from the crib.

This was my first time to meet Rand (although protocol says you have to call him Senator). I couldn’t help but contrast the Senator with his father, Ron Paul, whom I have known for 30 years. They are clearly of a different generation, though the apple has not fallen far from the tree. There is a decided libertarian strain in the son. (Which, you might have gathered if you are longtime reader, is a political stance I am quite comfortable with.) But there is a very different quality and texture to Rand’s version of how that philosophy plays out in the context of organizing a country. (That is different from running a country, which he would contend is not something that politicians should do.) I note that yesterday Senator Rand ran well ahead of the second-place finisher in the rather archly conservative CPAC straw poll. In the past that has not meant very much in the broader political scheme of things, but I think Rand’s rather libertarian thinking may appeal to a broader swath of young people than some of us oldsters might think. We will see.

It was a memorable evening. I think I can speak for the group in saying that it was a learning experience for all of us. I am not sure I will get invited to participate again, but I learned a great deal more than I gave. I live for nights like that.

It truly is time to hit the send button. I almost sheepishly confess that I’m going to see the movie Mr. Peabody & Sherman in a bit. For those of us of a certain age, Rocky and Bullwinkle were fixtures in our lives, and Mr. Peabody was my favorite. Gods, I loved the Wayback Machine! I know it’s just nostalgia, but I am so susceptible at times. Have a great week and try to find a conversation of your own from which everybody walks away with more than they brought to the table.

Your looking way back and thinking way ahead analyst,

John Mauldin, Editor


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The Fat Drug


The Fat Drug

IF you walk into a farm-supply store today, you’re likely to find a bag of antibiotic powder that claims to boost the growth of poultry and livestock. That’s because decades of agricultural research has shown that antibiotics seem to flip a switch in young animals’ bodies, helping them pack on pounds. Manufacturers brag about the miraculous effects of feeding antibiotics to chicks and nursing calves. Dusty agricultural journals attest to the ways in which the drugs can act like a kind of superfood to produce cheap meat.

But what if that meat is us? Recently, a group of medical investigators have begun to wonder whether antibiotics might cause the same growth promotion in humans. New evidence shows that America’s obesity epidemic may be connected to our high consumption of these drugs. But before we get to those findings, it’s helpful to start at the beginning, in 1948, when the wonder drugs were new — and big was beautiful.

That year, a biochemist named Thomas H. Jukes marveled at a pinch of golden powder in a vial. It was a new antibiotic named Aureomycin, and Mr. Jukes and his colleagues at Lederle Laboratories suspected that it would become a blockbuster, lifesaving drug. But they hoped to find other ways to profit from the powder as well. At the time, Lederle scientists had been searching for a food additive for farm animals, and Mr. Jukes believed that Aureomycin could be it. After raising chicks on Aureomycin-laced food and on ordinary mash, he found that the antibiotics did boost the chicks’ growth; some of them grew to weigh twice as much as the ones in the control group.

Mr. Jukes wanted more Aureomycin, but his bosses cut him off because the drug was in such high demand to treat human illnesses. So he hit on a novel solution. He picked through the laboratory’s dump to recover the slurry left over after the manufacture of the drug. He and his colleagues used those leftovers to carry on their experiments, now on pigs, sheep and cows. All of the animals gained weight. Trash, it turned out, could be transformed into meat.

Keep Reading The Fat Drug –

Fukushima Radiation To Reach West Coast Next Month


Fukushima Radiation To Reach West Coast Next Month

Courtesy of ZeroHedge

Over the past three years there has been endless debate over whether the Fukushima radioactive fallout is hitting the US west coast, or if, as the media spin would have it, it is largely isolated, and best to just take their word for it for the simple reason that no federal agency currently samples Pacific Coast seawater for radiation.

The answer may finally be in sight, and it is not a pleasant one: USA Today reports that "very low levels of radiation from the Fukushima nuclear disaster likely will reach ocean waters along the U.S. West Coast next month, scientists are reporting. Current models predict that the radiation will be at extremely low levels that won't harm humans or the environment, said Ken Buesseler, a chemical oceanographer at the Woods Hole Oceanographic Institution who presented research on the issue last week.

Hopefully these "models" are better at forecasting than the Fed's (which are operated by three supercomputers), and the definition of "minimum" hasn't undergone the same material revisions as did "maximum" in the context of the maximum permitted radiation dose falling on Tepco workers in the days when Japan desperately was lying every day about the magnitude of the radioactive disaster. Obviously, it is one thing to make up predictions for the sake of avoiding a panic, it is something entirely different to have empirical data: "I'm not trying to be alarmist," Buesseler said. "We can make predictions, we can do models. But unless you have results, how will we know it's safe?"

As if Buesseler doesn't know that any actual data that reveals alarming results will be seasonally adjusted, and then all excess radiation will be blamed on the "harsh winter weather."

Mockery of economists and other idiots aside, here are the facts on the prevailing models:

There are three competing models of the Fukushima radiation plume, differing in amount and timing. But all predict that the plume will reach the West Coast this summer, and the most commonly cited one estimates an April arrival, Buesseler said.

A report presented last week at a conference of the American Geophysical Union's Ocean Sciences Section showed that some Cesium 134 has already has arrived in Canada, in the Gulf of Alaska area.

Cesium 134 serves as a fingerprint for Fukushima, Buesseler said.

"The models show it will reach north of Seattle first, then move down the coast," Buesseler said.

The good news:

By the time it gets here, the material will be so diluted as to be almost negligible, the models predict. Radiation also decays. Cesium 134, for example, has a half-life of two years, meaning it will have half its original intensity after that period.

Or rather, make that the spin: after all as the paper notes, West Coast states are winding down their tsunami debris response efforts. "Oregon's coastline is seeing less debris from the tsunami this winter than in the past two years, Oregon State Parks spokesman Chris Havel said. If that doesn't change, officials likely will disband a task force that was mobilized to deal with the debris. Last year, Washington suspended its marine debris reporting hotline."

One can be certain that no amount of reality, or radioactivity, will be allowed to spoil the budgeted plans that involve a return to normalcy even as the Fukushima power plant is nowhere near contained today, than it was the day after the historic catastrophe from March 2011.

And in case that is not yet clear, here is exhibit A: a Reuters report on Fukushima children that assigns increasingly abnormal pathologies not on the fallout from the Fukushima explosion but, get this, on their staying indoors!

Some of the smallest children in Koriyama, a short drive from the crippled Fukushima nuclear plant, barely know what it's like to play outside — fear of radiation has kept them in doors for much of their short lives.  Though the strict safety limits for outdoor activity set after multiple meltdowns at the Fukushima Dai-ichi nuclear plant in 2011 have now been eased, parental worries and ingrained habit mean many children still stay inside.

And the impact is now starting to show, with children experiencing falling strength, lack of coordination, some cannot even ride a bicycle, and emotional issues like shorter tempers, officials and educators say.

"There are children who are very fearful. They ask before they eat anything, 'does this have radiation in it?' and we have to tell them it's okay to eat," said Mitsuhiro Hiraguri, director of the Emporium Kindergarten in Koriyama, some 55 km (35 miles) west of the Fukushima nuclear plant. "But some really, really want to play outside. They say they want to play in the sandbox and make mud pies. We have to tell them no, I'm sorry. Play in the sandbox inside instead."

You see, the falling strength, the lack of coordination, and the behavioral changes three years after the explosion, are all due to children not being allowed to play in Fukushima's spilling over radioactive cooling water, where as of a month ago, record amounts of Cesium were recorded. Nothing to do at all with slightly "abnormal" levels of alpha, beta and gamma radiation in the air.

This continues:

"Compared to before the disaster, you can certainly see a fall in the results of physical strength and ability tests – things like grip strength, running and throwing balls," said Toshiaki Yabe, an official with the Koriyama city government.

Hiraguri said that stress was showing up in an increase of scuffles, arguments and even sudden nosebleeds among the children, as well as more subtle effects.

"There's a lot more children who aren't all that alert in their response to things. They aren't motivated to do anything," he said.

Yes: the nosebleeds and the lack of alertness too are not due to the radiation, but all entirely due to being kept away from it. We suppose the proper advice here is: to avoid sudden nosebleeds, short tempers, and falling strength, let you children run like the wind, if possible into the Third reactor's cooling tanks.

One really can't make this pathetic, deadly BS up.

So keeping in the theme of this lunacy, and coming soon to a Orwellian banana dictatorship near you: the poor will be taxed more, because it is their fault they did not invest the money they don't have, in Glorious Bernank's attempt to make everything better for everyone. Remember: the Chairsatan was just paid in one hour more than in one full year at the Fed to reveal that "his natural inclination would be to try to help the average person."

Of Bonds and Bitchiness

Of Bonds and Bitchiness

Courtesy of 
“Alyssa, I’m sorry I called you a gap-toothed bitch. It’s not your fault you’re so gap-toothed.”

– Mean Girls

One of the biggest stories of the week was the ongoing fallout from the Mohamed El-Erian / Bill Gross break-up at PIMCO. In the wake of Greg Zuckerman’s incredible story at the Wall Street Journal, it had become the talk of the industry, forcing many investors to think twice about their allocations to the firm’s products.

My friend Jenn Ablan, a Reuters reporter who covers all the Bond Kings for Reuters came away from a call with Gross that contained some wild accusations about the Zuckerman article and the whole thing just blew wide open the other day.

The question for investors everywhere is whether or not PIMCO is in disarray or if its vaunted decision-making process can be trusted anymore. Institutions, individual investors, professional advisers and money managers of all kinds have allocated hundreds of billions to the firm. The now-public issues about Gross’s ego and monomania have led to a public discussion to this effect.

My own take is that we will never know about all of the dynamics between Gross and El-Erian – both of whom I have a great deal of respect for as investors and thinkers – but that we probably shouldn’t rush to judgment over a few errant quotes and comments during an emotionally charged time for both of them. Also, as others have posited, bull markets don’t end pleasantly – especially bond bull markets that had run on for thirty years. The aftermath at PIMCO could never have been congenial after three decades of downhill marathoning. 

Below are some of the better musings on the topic:

Exclusive: Pimco’s Gross declares El-Erian is ‘trying to undermine me’ (Reuters)

It’s time for Bill Gross to retire (Reuters)

Conflicting claims worry Pimco investors (FT)

PIMCO’s Got Bigger Problems Than The Tabloid Drama We’ve Been Reading About Lately (BusinessInsider)

BTW, Barry and I have promised our employees and ourselves not to split so acrimoniously if, heaven forbid, we ever felt the need to (we don’t, I’m writing this blog post wrapped in his arms at our getaway cottage in New England).

Abenomics Crucified With Lowest GDP Since Abe, Worst Current Account Deficit On Record


Abenomics Crucified With Lowest GDP Since Abe, Worst Current Account Deficit On Record

Courtesy of ZeroHedge

"It's the weather" That's all Abe has left to pretend that 'recovery' is right around the corner. Japan just printed its worst current account deficit on record and its worst GDP growth since Abenomics was unveiled – both missing by the proverbial garden mile and both confirming that all is not well in Asia. As for the perpetual hope of a J-curve (or miracle hockey-stick reversal)? There won't be one! As Patrick Barron noted, "monetary debasement does not result in an economic recovery, because no nation can force another to pay for its recovery." 

Worst current account deficit ever – and a chart that shows absolutely no hope of a turn anytime soon…


and the worst GDP growth since Abenomics was unveiled and 2nd quarter missed in a row…


On the terrible missing J-Curve (via Patrick Barron of the Ludwig von Mises Institute of Canada):

Perhaps I can shed some light on Japanese Prime Minister Abe’s missing J-curve; i.e., why Japan’s trade deficit seems to be increasing rather than decreasing after massive monetary intervention to reduce the purchasing power of the yen. Monetary debasement does NOT result in an economic recovery, because no nation can force another to pay for its recovery.

Monetary debasement transfers wealth within an economy by subsidizing exports at the expense of the entire economy, but this effect is delayed as the new money works it way from first receivers of the new money to later receivers. The BOJ gives more yen to buyers using dollars, euros, and other currencies, as the article states, but this is nothing more than a gift to foreigners that is funneled through exporters. Because exporters are the first receivers of the new money, they buy resources at existing prices and make large profits. As most have noted, exporters have seen a surge in their share prices, but this is exactly what one should expect when government taxes all to give to the few.

Eventually the monetary debasement raises all costs and this initial benefit to exporters vanishes. Then the country is left with a depleted capital base and a higher price level. What a great policy!

The good news is that Japan does know how to rebuild its economy. It did it the old-fashioned way seventy years ago–hard work and savings.

And the latest joke from Asian trading floors: "when asked what he thought of the recovery, Shinzo Abe responded "Depends!""

The result of all this total and utter disaster for the Japanese economy – a melt-up in JPY crosses (i.e. JPY weakness with USDJPY back over 103) supporting US equity futures into the green… because what do you do when Chinese credit markets are collapsing, the Japanese economy is imploding, and the fate of Germany (and therefore Europe's) economy lies with Russia… you BTFATH…


Scientists: Test West Coast for Fukushima radiation


Scientists: Test West Coast for Fukushima radiation

SALEM, Ore. — Very low levels of radiation from the Fukushima nuclear disaster likely will reach ocean waters along the U.S. West Coast next month, scientists are reporting.

Current models predict that the radiation will be at extremely low levels that won't harm humans or the environment, said Ken Buesseler, a chemical oceanographer at the Woods Hole Oceanographic Institution who presented research on the issue last week.

But Buesseler and other scientists are calling for more monitoring. No federal agency currently samples Pacific Coast seawater for radiation, he said.

"I'm not trying to be alarmist," Buesseler said. "We can make predictions, we can do models. But unless you have results, how will we know it's safe?"

Keep reading Scientists: Test West Coast for Fukushima radiation.

String Theory Genius Explains The Coming Breakthroughs That Will Change Life As We Know It

String Theory Genius Explains The Coming Breakthroughs That Will Change Life As We Know It

Courtesy of  of Business Insider

String field theory co-founder Michio Kaku did not even try to explain his controversial yet undeniably brilliant cosmological theory of everything during his interview on Reddit, beyond this analogy:

"In string theory, all particles are vibrations on a tiny rubber band; physics is the harmonies on the string; chemistry is the melodies we play on vibrating strings; the universe is a symphony of strings, and the 'Mind of God' is cosmic music resonating in 11 dimensional hyperspace."

(The "Mind of God" is what Stephen Hawking said we would understand once we completed a theory of everything.)

While Kaku's cursory approach annoyed some Redditors (the top-voted response brings up problems with string field theory like its lack of testable theses that he did not address), it allowed him to respond to a wide array of fascinating scientific questions.

Kaku's media tour is meant to promote his new book, "The Future Of The Mind." Some highlights from Reddit:

On coming breakthroughs:

"Time travel and teleportation will have to wait. It may take centuries to master these technology. But within the coming decades, we will understand dark matter, perhaps test string theory, find planets which can harbor life, and maybe have Brain 2.0, i.e. our consciousness on a disk which will survive even after we die.

"I think, in the coming years, we will have a brain pacemaker that can stimulate the memory of people with Alzheimer's disease. They will be able to upload simple memories of who they are and where they live. Beyond that, we will be able to use electronics to upload vacations we never had, perhaps. And the internet itself will be a brain-net of emotions and memories.

"The 20 century was the century of physics, with computers, lasers, TV, radio, GPS, the internet, etc. Physics, in turn, has made possible that can probe biology. So I think the 21st century will be the century of physics and biology, esp. biology that can be explored via physics. So the future belongs to nanotech, biotech, AI, and quantum physics."

On "Her":

"I have not seen the movie, but I think it's only a matter of time. Today, it is still easy to tell if you are talking to a computer. Computers have no sense of self-awareness, and cannot master common sense very well. But this is a technical question, so I think that, in the coming decades, we will have something like Her."

On colonizing another planet:

"I agree, along with Carl Sagan, that we should eventually become a two planet species. Life is too precious to place on a single planet. But I also think we should explore new ways to drive down the cost of space travel. instead of costly booster rockets, maybe we should think of laser/microwave driven rockets, or space elevators. Until then, the cost of space exploration will limit our ability to explore the universe.

"I think a colony in space will take much longer than sci fiction writers think. It costs $10,000 to put a pound of anything into near earth orbit. That is your weight in gold. It costs about $100,000 a pound to put you on the moon. And it costs $1,000,000 a pound to put you on Mars."

On the birth of the universe:

"The modern thinking is that time did not start with the big bang, and that there was a multiverse even before the big bang. In the inflation theory, and in string theory, there were universes before our big bang, and that big bangs are happening all the time. Universes are formed when bubbles collide or fission into smaller bubbles."

On politics:

"One problem with politics is that it is a zero sum game, i.e. politicians argue how to cut the pie smaller and smaller, by reshuffling pieces of the pie. I think this is destructive. Instead, we should be creating a bigger pie, i.e. funding the science that is the source of all our prosperity. Science is not a zero sum game."

On learning:

"Some advice. Keep the flame of curiosity and wonderment alive, even when studying for boring exams. That is the well from which we scientists draw our nourishment and energy. And also, learn the math. Math is the language of nature, so we have to learn this language.

"When I was a kid, I had two role models. The first was Einstein, whose futile search for a theory of everything fascinated me. But I also watched the old Flash Gordon series on TV. I was hooked by all that I saw, e.g. starships, aliens, ray guns, etc. Eventually, I realized that what was driving the entire series was physics. So I saw that my two loves as a child were really the same thing."

Read the full interview at Reddit and check out his new book.

Spain Modifies Bankruptcy Laws to Prevent Corporate Liquidations; 65,000 Companies, 1.3 Trillion Euro Delinquencies in Play

Courtesy of Mish.

In the name of saving jobs, the Spanish government has decided to change the rules as to whether or not a business is viable.

In bankruptcy proceedings, companies will no longer be free to decide whether they prefer to liquidate the company.

Instead, corporations will be obliged to accept debt restructuring offerings from creditors on creditor-proposed terms centered around debt-to-equity conversions.

Via translation from El Economista.

According to various judicial, legal and bankruptcy administration sources consulted by elEconomista, companies will no longer be free to decide whether they prefer to liquidate the company.

New rules favor foreign financial institutions including the vulture funds, to take over companies. The decree aims to end the massive liquidation of companies in bankruptcy.

Followup post by el Economista

The Ministry of Economy approved the bankruptcy reform legislation to save viable businesses including a provision that transforms debt into equity.

If creditors representing at least 60% of the financial liability agree, forced conversion of loans into equity may last up to five years. If creditors representing at least 75% of the financial liability agree, forced conversion of loans into equity may last ten years.

Dissenting creditors may choose a haircut equivalent to the nominal amount of the shares that would correspond subscribe or take and, where appropriate, the corresponding premium or assumption.

Judges may override the 60% threshold to as low as 51%.

1.3 Trillion Euro Delinquencies in Play

Via translation Libre Mercado discusses the number of potential forced debt-to-equity conversions.

Deputy Prime Minister Soraya Saenz de Santamaria, said that the new law completes a package of measures that are aimed at companies that, despite their high debt, "can continue to run their business while maintaining their employment."

In Spain, 90% of companies that enter bankruptcy end up in liquidation. At first, this may seem logical and even reasonable: if a company is not viable, what is best for everyone to pay the maximum of their debts, creditors save everything and these goods are reallocated to more productive tasks. The problem is that, perhaps, not every business in competition (and even more in preconcursal phase) should close. …


Continue Here


Pro-Russia Troops Install Minefields, Border Markers in Crimea; Gazprom Ups Price of Natural Gas 37%, Calls in $2 Billion Gas Debt

Courtesy of Mish.

The takeover of Crimea by Russia is nearly complete. All that remains is the final vote on March 16. There would not be a vote if the outcome was uncertain.

Troops Install Minefields, Border Markers in Crimea

Bloomberg reports Pro-Russia Forces Occupy Ukraine as Separatist Vote Looms.

Pro-Russian forces advanced in Ukraine’s Crimean peninsula, ignoring Western calls to halt a military takeover before the region’s separatist referendum. The U.S. estimates Russia now has 20,000 troops confronting a smaller Ukrainian force there. Ukraine has stepped up its eastern border defenses in the worst standoff between it and the West since the Cold War.

Pro-Russian units planted minefields in the Kherson region, north of Crimea on Ukraine’s mainland, and began to install border markers between the two regions, news website Khersonskie Vesti reported today. Ukraine’s border control service said Russian forces now control 13 border bases as well as the ferry crossing across the Kerch Strait to Russia, preventing guards from inspecting trucks arriving in Crimea.

Authorities on the peninsula ordered an anti-aircraft regiment in the city of Yevpatoriya to lay down its arms or its base would be taken over, news service Interfax reported.

The peninsula, where Russian speakers comprise a majority, will join Russia once parliament in Moscow passes the necessary legislation and there’s nothing the West can do, according to Sergei Tsekov, the deputy speaker of Crimea’s parliament.

“There’s no comeback, and the U.S. or Europe can’t impede us,” Tsekov said by phone on March 7 from Moscow, where he met Russian officials to discuss the region’s future. “Crimea won’t be part of Ukraine anymore. There are no more options.”

The U.S. and European allies will impose sanctions if there isn’t a quick resolution, Obama said at the White House on March 6.

Russia Calls in $2 Billion Gas Debt, Gazprom Ups Price of Natural Gas 37%.

A Bloomberg video claims Russia Calls in $2 Billion Gas Debt. In addition, Ukraine Sees Gazprom Charging 37% More for Gas in Second Quarter.

Ukraine faces a 37 percent increase in the price it pays for Russian natural gas after OAO Gazprom canceled a discount and threatened to cut supplies, Ukrainian Energy Minister Yuri Prodan told reporters today.

Ukraine will pay about $368.50 per 1,000 cubic meters of the fuel in the second quarter, Prodan said. Russia agreed last year to cut the price it charges Ukraine to $268.50. Gazprom rescinded the discount last week and said Ukraine risks a repeat of 2009, when the Moscow-based company reduced shipments during a pricing dispute.

Continue Here

The Bitcoin Middle Ground That Nobody Wants To Hear

The Bitcoin Middle Ground That Nobody Wants To Hear

Courtesy of  at Business Insider

Bitcoin is very polarizing.

Believers in the "digital currency" frequently talk about how it has the potential to uproot the existing financial system, and replace the dollar and the Federal Reserve.

Skeptics think it's a sham, a la tulip bubbles.

A series of tweets from Nouriel Roubini capture the "anti" side quite well.

But there is a middle ground between the True Believers and the Roubinis.

That middle ground is that Bitcoin has a lot of potential as a payment system for non-mainstream services.

For example, if you're in China, and you want to get money out of the country, you have to deal with capital controls that limit cross-border flows. Bitcoin is a good technology to do that. If you want to send remittances from one country to another, Bitcoin may be a good way to do so if you want to avoid exorbitant fees. And yes, if you want to buy commit illegal acts online, Bitcoin is probably a better bet than dealing with a bank.

Kevin Roose, writing recently at New York, nicely characterized Bitcoin as a "disintermediated money wire." Essentially its a way of sending someone money without going through a centralized company like PayPal or a bank. It's probably not suitable for most people, because it's difficult to use, unregulated, and massively prone to theft. Traditional finance has theft too, but there are all kinds of layers of security and guarantees built into the current system, so that if someone steals your credit card, you don't have to worry about being on the hook.

Bitcoin advocates say that various security features could be built on top of the existing system to ease fraud concerns, but the additional fees that these would involve would likely obviate Bitcoin's benefits. It's hard to see anytime soon why the standard mode by which most people pay for things (going to the grocery store, etc.) would be made better if it were based on Bitcoin.

Bitcoin doesn't have to change the world or be adopted by everyone for it to be a success. There are a lot of transactions for which the existing system isn't well-suited. On the other hand, it clearly solves more problems than the people who scream "tulips" or "ponzi" are inclined to admit. Unfortunately, in the battle between zealots and detractors, not many people are eager to pick up the banner of the middle ground.


Debt Rattle Mar 9 2014: Big Oil and Gas Wars

Courtesy of The Automatic Earth.

Jack Delano for OWI Female Gas Attendant, Philadelphia, PA June 1943

Forests and trees. We live in a world built on such an overkill of 24/7 propaganda and misinformation that some of it easily slips by. At that point you need to rely on the little man inside to raise a warning sign. That’s about how I felt when I read yesterday about EU plans to deliver gas to Ukraine by reversing the flow through existing pipelines. That made me wonder things like: ‘How would that work in practice?’ and: ‘Which gas?’ While the little man simply said: ‘I don’t believe a word of this’.

And before you know it, you spend many hours trying to get a clearer picture. Here’s an idea of how that went for me. First, the Guardian on the initial report:

EU leaders draw up plans to send gas to Ukraine if Russia cuts off supply (Guardian)

EU leaders are rapidly drawing up plans to send some of their stocks of Russian gas back to Ukraine and other eastern European countries that need it, if Vladimir Putin reacts to western sanctions over the Crimea crisis by starving the continent of energy.

Gazprom provides Ukraine with around half its gas, and other countries in eastern and southern Europe, including Poland and Greece, reportedly have low stocks of gas. Although Gazprom said the threat to Kiev would not affect the supply to the rest of Europe, western leaders are steeling themselves for a possible battle with Moscow over energy supplies. [..]

“Either Ukraine makes good on its debt and pays for current supplies, or there is risk of returning to the situation of early 2009,” Gazprom CEO Alexei Miller said on Friday, adding that Ukraine now owed $1.89 billion in unpaid bills. [..] Although it is the largest producer of natural gas, the US does not currently export its supplies, and the construction of a handful of export terminals will not be completed until at least 2015. [..]

In Brussels on Thursday, European leaders engaged in detailed discussions about the feasibility of switching the flow of gas in eastern Europe’s pipelines. Storage reserves in Europe, particularly Germany and Hungary, which have ample supplies, could be used to pump gas back towards Ukraine. José Manuel Barroso, the president of European Commission, said energy security was an early priority for Ukraine, adding: “We are looking in the short term at the gas transmission network to ensure that reverse flows with the European Union are fully operational.”

A project to modernise Ukraine’s gas transmission infrastructure forms part of the EU’s $15 billion promised aid package to Kiev, with an initial loan possible in the near future.

A European Commission memorandum specifically states it will seek to enable “reverse flows” of gas to Ukraine, ensuring they can be “operationalised as soon as possible”. [..]

What I get from that: Europe is drawing up all sorts of plans before there is any real threat to its supplies. That gives me the idea that it’s overplaying the Ukraine threat card on purpose, but that’s just my little man inside. There’s also a lot more to that than either Ukraine or EU are saying, and that makes me suspicious. As does the line about “part” of the promised aid being set aside for “modernizing” Ukraine’s gas transmission infrastructure. What does that mean? That Shell and BP are going to come in to make sure that get control, and push aside Gazprom? What else could it be? Who else has the know how?

What is clear is that Ukraine has a horrible history of paying Gazprom for gas deliveries through the past 20 years. And Barroso et al are not urging Kiev to finally pay the bills, they intend to help them get gas without paying Russia for past delivery. But still, you could argue that these things are open to interpretation, though I think western coverage of delivery and payment has been very one-sided for a long time.

So let’s try another angle. My first question about reverse gas flows was: ‘How would that work in practice?’. Here’s what the article says about this:

… European officials and energy experts concede there are doubts over whether it would be technically possible to transfer sufficient gas through the continent, west to east, if Russia decided to restrict its supplies for a significant period of time. While short-term assistance through the summer months could help, western Europe would not have the capacity to supply neighbours in the east for an extended period of time.

Speaking on the condition of anonymity, one senior executive said reversing gas flows would be an extremely complex move. “This is not easy to do. Certainly the Gazprom export pipeline is built to move gas only in one direction, and it would involve a lot of time and money to reconfigure for imports ,” the executive said. “You would also have to get the agreement of dozens of commercial and other organisations. It is not going to happen.”

That’s pretty clear, though they have only the lone anonymous industry voice (you can’t exactly speak freely on this if you work for Big Oil of course, far too many conflicting interests). It seems obvious even to the layman that there are lots of pumps along the hundreds of miles of pipeline, and they’re all configured for one way flow. Logistically, this is a potential nightmare, and administratively too. There are plans these days to reverse flow in a Canadian pipeline from Montréal to Sarnia ON, and that’s hard enough. Doing that across multiple borders with dozens of interested parties and legal entities is quite another thing again.

Europe imported 155 billion cubic metres (bcm) of gas from Russia in 2013, about 30% of its overall gas demand, according to Wood Mackenzie, an Edinburgh-based energy consultancy. Ukraine is the key transit route for Russian gas to Europe, with around 50% piped through the country in 2013. [..]

In Washington, there is a growing appetite to retaliate against Russia with a long-term, strategic acceleration in energy exports. [..] Republicans, backed by gas producers such as ExxonMobil, have for years been pushing to dramatically increase gas production to enable export trade, and are using the crisis in Crimea to argue for swift action by the Obama administration.

I’ll get to the “retaliate against Russia with a long-term, strategic acceleration in energy exports” bit in a bit. First, the money quote from the article, one that puts on a very bleak light what madness al these ideas are based on:

US gas production is projected to rise 44% by 2040, according to the US Energy Information Administration, and producers have been pressing the Obama administration to expand exports of natural gas. [..]

A senior US official said the State Department was supportive of introducing substantial gas exports abroad as a move to counteract Russia’s influence. Carlos Pascual, a former American ambassador to Ukraine, who leads the State Department’s Bureau of Energy Resources, told the New York Times that opening global markets to US exports “sends a clear signal that the global gas market is changing, that there is the prospect of much greater supply coming from other parts of the world”.

The EIA is an organization of overpaid cheerleaders that haven’t had one prediction right in forever and a day. It’s perhaps because they have no track record to defend that they issue such double or nothing claims; it’s hardly interesting anymore. That claim that US gas production will be 44% more in 26 years than it is today is simply bonkers, and not supported by anything other than industry interests, loud as they may be.

The train of “thinking” behind it is what’s good to keep in mind: We’ve seen how Shell and BP and Exxon all see their production and reserves and investments fall. These are arguably the world’s most powerful corporations outside of Wall Street, and they’re on the brink of becoming irrelevant. That they, in their present predicament, would seek to go to “war without soldiers” with Gazprom and Putin, is no surprise, it’s desperation.

As we see also in an article by Nafeez Ahmed for the Guardian:

Ukraine Crisis Is About Great Power Oil, Gas Pipeline Rivalry (Guardian)

Just one month before Nuland’s speech at the National Press Club [in Dec 2013], Ukraine signed a $10 billion shale gas deal with US energy giant Chevron “that the ex-Soviet nation hopes could end its energy dependence on Russia by 2020.” The agreement would allow “Chevron to explore the Olesky deposit in western Ukraine that Kiev estimates can hold 2.98 trillion cubic meters of gas.” Similar deals had been struck already with Shell and ExxonMobil.

The move coincided with Ukraine’s efforts to “cement closer relations with the European Union at Russia’s expense”, through a prospective trade deal that would be a step closer to Ukraine’s ambitions to achieve EU integration. But Yanukovych’s decision to abandon the EU agreement in favour of Putin’s sudden offer of a 30% cheaper gas bill and a $15 billion aid package provoked the protests.

To be sure, the violent rioting was triggered by frustration with Yanukovych’s rejection of the EU deal, along with rocketing energy, food and other consumer bills, linked to Ukraine’s domestic gas woes and abject dependence on Russia. Police brutality to suppress what began as peaceful demonstrations was the last straw.

But while Russia’s imperial aggression is clearly a central factor, the US effort to rollback Russia’s sphere of influence in Ukraine by other means in pursuit of its own geopolitical and strategic interests raises awkward questions. As the pipeline map demonstrates, US oil and gas majors like Chevron and Exxon are increasingly encroaching on Gazprom’s regional monopoly, undermining Russia’s energy hegemony over Europe.

We’ve already seen that US agents have been heavily involved in regime change in Kiev. Now the picture emerges of the (for now let’s say potential) involvement of Big Oil behind the scenes. They want to break Gazprom’s power monopoly and replace it with their own.

For additional juicy tidbits, let’s take a look at this March 5 piece from Bloomberg.

Ukraine Plans to Cut Russian Gas Imports, Raise EU Supply (Bloomberg)

Ukraine, the subject of a struggle for influence between Russia and the West, plans to cut natural-gas imports from its eastern neighbor and fill the gap with supplies from Europe to reduce dependence on Gazprom. Ukraine will need to import about 30 billion cubic meters of gas this year, of which a third may come through Slovakian pipelines, Energy Minister Yuri Prodan said today in Kiev.

Prodan’s remarks follow a decision by Moscow-based Gazprom, which accounts for most of Ukraine’s gas imports, not to extend a price discount beyond April, citing unpaid debts for supply. Tensions between Russia and Europe and the U.S. have escalated since President Vladimir Putin sent troops into Crimea in a bid to regain influence over Ukraine following the overthrow of Kremlin-backed President Viktor Yanukovych last month.

Ukraine has reached a preliminary agreement with Slovakia to import 10 billion cubic meters of gas a year from various European Union countries through Slovakian pipelines, Prodan told reporters. It also has signed a deal with German utility RWE AG for 5 billion cubic meters a year, he said, without giving a start date for supply. RWE Chief Financial Officer Bernhard Guenther said this week that the Essen-based utility may be able to supply Ukraine in the event of a shortage.

The EU will help Ukraine diversify its imports and provide funding to upgrade its pipelines, the bloc’s regulatory arm said today in a statement. The European Commission also backs the use of “reverse-flow corridors” via Bulgaria, Romania and Croatia, whereby pipes that send gas west switch direction, or some fuel earmarked for those countries is sent directly to Ukraine.

Note the timeline: On March 5, Ukraine says it plans to cut gas imports form Russia. A bold enough statement to begin with if you still owe $2 billion worth of the stuff (I think I’ll go buy somewhere else now …), but that aside. I’m thinking it’s perhaps not the whole truth and nothing but the truth, because 8 days before, on February 25, Reuters reported this:

Ukraine’s Naftogaz Slashes Russian Gas Imports In February (Reuters Feb 25)

Ukraine’s state oil and gas company, Naftogaz, has slashed gas imports from Russia’s Gazprom to 28 million cubic meters per day as of February 24 from 147 million , two Russian industry sources told Reuters on Tuesday. They said Naftogaz had gradually reduced its imports from 147 million cubic meters as of February 1 , but did not offer a reason for the cuts. [..]

In December, Russia agreed to reduce the gas price for Kiev to $268.50 per 1,000 cubic meters, a cut of about one third from around $400 which Ukraine had paid since 2009. Under the deal, gas prices are revised quarterly.

Yanukovych was ousted on February 22. Two days later, Ukraine’s state oil and gas company announces it’s cut imports from Gazprom by over 80% (to be replaced with?!). What’s more, it started cutting on February 1, weeks before the Yanukovych ouster. We can probably only guess as to the reasons behind that, but it’s certainly a noteworthy event. Not least of all because the December deal with Russia that cut prices by a third was still valid and not up for revision by at least another month.

So where is the gas coming from for Ukraine today, and where will it come from in the future? Perhaps this from The Voice of Russia lifts part of the veil:

US tries to calm Europe as Russian gas shortage looming over Ukraine crisis

To be on the safe side, last week, the European Union made a decision to increase the volume of the gas purchased from Russia by 15%. In response, Josh Earnest, who is the US White House Special Assistant to the President and Principal Deputy Press Secretary, hurried to calm Europeans. He says that the American government has no information that would make it possible to conclude that Europe may face any lacks of natural gas in the foreseeable future. However, if such lacks do take place, the US would help Europe with its own liquefied gas, although it would be able to start deliveries of this gas to Europe not earlier than from the very end of 2015.

That is so funny you’d think April Fool’s Day is near. Not that the entire reverse flow story is not, but hey … The EU plans to buy 15% more gas from Russia, which they intend to use to – pretty openly – undermine Russian interests. Through some far-fetched reverse flow scheme it wants to take gas that has been pumped through Ukrainian pipelines, back to Ukraine, which can then continue to refuse to pay its past bills to Gazprom. And if Russia in turn would refuse to go along with such a scheme – and cut supplies – , they can all simply blame Putin.

And even then … :

EU Gas Flows To Ukraine Too Small To Cope With Russian Disruption (Reuters)

Directing natural gas from the European Union to Ukraine if Russia stops supplying its western neighbour would fail to keep up with demand for long as capacity between the EU and Ukraine is too small, analysts said on Thursday. Ukraine last year imported around 28 billion cubic metres (bcm) of natural gas from Russia [..]

One of the EU’s key plans to support Kiev in case of a supply cut by Russia is to use reverse flows to send gas to Ukraine, but at the moment the capacity to do so is limited. Ukraine began importing gas through reverse flows from Poland and Hungary in 2012 but analysts said the amounts so far have been equivalent to a mere 2 bcm a year. According to consulting group Wood Mackenzie, Poland has a reverse capacity of 1.5 bcm to Ukraine while Hungary is able to send 3.5 bcm. Romania has the potential for 1.8 bcm but there has been no firm agreement on its use, the consultancy said.

The real issue, however, might not be Ukraine but Europe itself. Wood Mackenzie estimated Europe would need more than 160 bcm of Russian gas in 2014. While Russia has enough gas and can reroute some flows from Ukraine to the Yamal Europe and Nord Stream pipelines, which supply Germany, the consultancy said these alternatives would still leave Europe needing more than 30 bcm of gas via Ukraine.

And we’re not done yet. There are more – and more grotesque – plans in the offing. US House Leader John Boehner apparently buys into the “US gas production is projected to rise 44% by 2040″ number from the EIA (what does he know), and wrote in the WSJ this week that America should build LNG terminals: “The ability to turn the tables and put the Russian leader in check lies right beneath our feet, in the form of vast supplies of natural energy… ”

The Department of Energy has approved for terminals to export liquefied gas, 5 in Texas and Louisiana, and one in Maryland. A further 24 applications are pending and Boehner et al want Obama to speed up the process. It’s of little concern to them in their ignorance that building these terminals (and the LNG tankers required for transport) is very costly and takes years, on both the supply and the delivery side, and that LNG tankers are floating bombs and thus easy targets.

Much of the entire Ukraine story seems to be made up of a different sort of easy targets, those in the western media. We are good and they are bad. It’s almost cartoon like. And so are the “solutions” that sprout from the brains of politicians who are mostly singularly clueless when it comes to the intricacies of the energy industry, and shout out whatever some industry paid spin doctor will feed them.

The reverse flow of gas to the Ukraine is not going to happen (but we won’t know that till much later), because os technical issues, administrative and legal issues, and because Putin and Alexei Miller won’t volunteer for western leaders to make fools of them. Russia may not go to war of Crimea, but it will over control of the pipelines it has longstanding legal rights over. It’s perhaps the most pressing issue today, but that’s not how it’s presented.

Since the American and European political systems have been bought and paid for, we need to ask ourselves every step of the way where in words uttered and events ongoing we can see the footprints and fingerprints of the major shareholders of western financial and energy corporations, who would all kill their grandmas and sell their granddaughters just to pry away control over Russian and Asian oil and gas reserves and revenues from Putin’s cold dead fingers. It may all be presented as bringing freedom and democracy to Ukraine, but come on, who believes that anymore?

The only way the west can gain control over what it’s after, over Ukraine and the pipelines, and Russia and its oil and gas reserves, is to oust Putin. Are you willing to sacrifice your children over that? If not, keep paying attention. Follow the money. Of the most endangered of corporate species, Big Oil. At this point in time, they still have the clout to move governments into war. In 5 years time, that may be over.

Is Bitcoin Legal? Illegal? a Currency? a Commodity?

Courtesy of Mish.

Regulators in various countries are grappling with bitcoin. What the hell is it? It's a good question and answers vary widely.

Bloomberg reports Japan Says Bitcoin Not Currency Amid Calls for Regulation.

Japan’s government said Bitcoin isn’t a currency amid calls for its regulation a week after the bankruptcy of Mt. Gox, the Tokyo-based exchange that was once the world’s biggest.

There is no law to define Bitcoin and relevant ministries are gathering information on it, Prime Minister Shinzo Abe’s cabinet said in a statement in response to questions from an opposition party lawmaker. Bitcoin transactions can be taxed, according to the statement obtained by Bloomberg News.

Japan isn’t the only country grappling with the regulation of Bitcoin amid reports of hacking into exchanges including Mt. Gox and concern that the virtual currency can be used for money laundering. In the U.S., states are wrestling with how digital-currency businesses could be regulated as money transmitters, while Russia has said Bitcoin is illegal under current law and Finland plans to treat it as a commodity.

The Japanese banking law doesn’t allow lenders to broker Bitcoin transactions or set up accounts for customers to store the digital assets, according to the statement. At the same time, current rules don’t prevent brokerages and asset managers from managing clients’ Bitcoins, it said.

“Japan’s government is falling behind the curve as Bitcoin grew rapidly over the past five years,” said Weizhou Yang, an analyst at Mizuho Securities Co. in Tokyo. “Banks shouldn’t take risks to dabble in Bitcoin business. On the other hand, getting Bitcoin into funds may broaden the investment product base.”
DPJ’s Okubo

Democratic Party of Japan lawmaker Tsutomu Okubo, a former vice finance minister, called on the government to rectify the lack of regulation last week. Officials from the Finance Ministry, Financial Services Agency and Bank of Japan have said they’re not in a position to oversee Bitcoin.

“The authorities’ stance that they don’t have responsibility is disgraceful,” Okubo, who also used to work at Morgan Stanley, said in a telephone interview on Feb. 26. “We need to establish a legal system.”

Finance Minister Taro Aso said today that the government hasn’t decided whether to regulate Bitcoin. Earlier this week Aso, who also oversees the banking regulator, said it wasn’t clear yet whether Mt. Gox’s failure was a crime.

Singapore’s finance minister said last month that the central bank didn’t recognize Bitcoin as legal tender. China has stopped financial institutions from dealing in it, even as trading continues. Danish regulators are drafting a proposal for lawmakers in an effort to protect consumers and businesses from losses.

The answer to my question is yes, no, don't know, and it depends (dependent on what country you are in).

Continue Here


China Exports Decline Unexpectedly, Trade Balance Negative

Courtesy of Mish.

In yet another downside surprise, China February Exports Tumble Unexpectedly.

China’s exports unexpectedly tumbled in February, swinging the trade balance into deficit and adding to fears of a slowdown in the world’s second-largest economy despite the Lunar New Year holidays being blamed for the slide.

The sharp drop in exports follows a series of factory surveys since the start of 2014 that point to weakness in economic activity as demand falters at home and abroad.

Exports in February fell 18.1 percent from a year earlier, following a 10.6 percent jump in January, the General Administration of Customs said on Saturday.

Imports rose 10.1 percent, yielding a trade deficit of $23 billion for the month versus a surplus of $32 billion in January.

That compares with market expectations in a Reuters poll of a rise of 6.8 percent in exports, an 8 percent rise in imports and a trade surplus of $14.5 billion.

Analysts cautioned against reading too much into single-month figures for January or February, given possible distortions caused by the long Lunar New Year holiday, which began on January 31 and covered early February. Many plants and offices shut for extended periods during the festival.

Still, combined exports in January and February fell 1.6 percent from the same period a year earlier, versus a 7.9 percent full-year rise in 2013. Imports rose 10 percent year-on-year in the first two months, compared with a 7.3 percent rise in 2013.

Exports to the United States edged up 1.3 percent in the first two months from a year earlier, while sales to the European Union rose 4.6 percent, according to official data.


China’s trade outlook is widely expected to be rosier this year in line with a recovery in developed countries. Minsheng Securities’ Li said he expected exports to pick up in March.

Expect More Downward Surprises

Why everyone expects a rosy global economic forecast led by the US, Europe, and developed countries in general is a mystery. I expect more downward surprises of all sorts….

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Mission Accomplished

Mission Accomplished

Courtesy of 

Who says QE is ineffective? If you’re an owner of real estate or financial assets, it’s pretty darn f*cking effective.

From the Wall Street Journal:

The net worth of U.S. households and nonprofit organizations rose 14% last year, or almost $10 trillion, to $80.7 trillion, the highest on record, according to a Federal Reserve report released Thursday. Even adjusted for inflation using the Fed’s preferred gauge of prices, U.S. household net worth—the value of homes, stocks and other assets minus debts and other liabilities—hit a fresh record.



Everything is awesome.

Mission Accomplished.

So why is no one happy about it? Oh right, because this gain mostly accrued to those who needed it least. Well, Capitalism is the worst economic system possible, except for all the others.


U.S. Household Net Worth Hits Record High (WSJ)

Obama And Putin Are Trapped In A Macho Game Of “Chicken” And The Whole World Could Pay The Price

Courtesy of Michael Snyder

Barack Obama Vladimir PutinThe U.S. government and the Russian government have both been forced into positions where neither one of them can afford to back down.  If Barack Obama backs down, he will be greatly criticized for being "weak" and for having been beaten by Vladimir Putin once again. If Putin backs down, he will be greatly criticized for being "weak" and for abandoning the Russians that live in Crimea.  In essence, Obama and Putin find themselves trapped in a macho game of "chicken" and critics on both sides stand ready to pounce on the one who backs down.  But this is not just an innocent game of "chicken" from a fifties movie. This is the real deal, and if nobody backs down the entire world will pay the price.

Leaving aside who is to blame for a moment, it is really frightening to think that we may be approaching the tensest moment in U.S.-Russian relations since the Cuban missile crisis.

There has been much talk about Obama's "red lines", but the truth is that Crimea (and in particular the naval base at Sevastopol) is a "red line" for Russia.

There is nothing that Obama could ever do that could force the Russians out of Sevastopol.  They will never, ever willingly give up that naval base.

So what in the world does Obama expect to accomplish by imposing sanctions on Russia?  By treaty, Russia is allowed to have 25,000 troops in Crimea and Russia has not sent troops into the rest of Ukraine.

Economic sanctions are not going to cause Putin to back down.  Instead, they will just cause the Russians to retaliate.

In a letter that he sent to Congress this week, Obama claimed that the Ukrainian crisis is an "unusual and extraordinary threat to the national security and foreign policy of the United States."

Language like that is going to make it even more difficult for Obama to back down.

On Thursday, Obama announced "visa restrictions" on "those Russians and Ukrainians responsible for the Russian move into Ukraine's Crimean Peninsula", and a House panel passed a "symbolic resolution" that condemned Russia for its "occupation" of Crimea.

But those moves are fairly meaningless.  Leaders from both political parties are now pushing for very strong economic sanctions against Russia, and there does not appear to be many members of Congress that intend to stand in the way.

If the U.S. does hit Russia with harsh economic sanctions, what is going to happen?

Is Russia going to back down?

No way.

So let's just play out the coming moves like a game of chess for a moment…

-The U.S. slaps economic sanctions on Russia.

-Russia seizes the assets of U.S. companies that are doing business in Russia.

-The U.S. seizes Russian assets.

-The Russians refuse to pay their debts to U.S. banks.

-The U.S. government hits Russia with even stronger sanctions.

-Russia starts dumping U.S. debt and encourages other nations to start doing the same.

-The U.S. gets Europe to also hit Russia with economic sanctions.

-Russia cuts off the natural gas to Europe.  As I noted the other day, Russia supplies more than half the natural gas to a bunch of countries in Europe.

-The United States moves troops into western Ukraine.

-Russia starts selling oil for gold or for Russian rubles and encourages other nations to start abandoning the U.S. dollar in international trade.

Of course the order of many of these moves could ultimately turn out to be different, but I think that you can see the nightmare that this game of "chicken" could turn out to be.

And what would be the final result?

Nothing would be resolved, but the global economy would greatlysuffer.

What makes all of this even more complicated is that about 60 percent of the people living in Crimea are actually ethnic Russians, and a majority of the population appears to want to leave Ukraine and be reunited with Russia.  The following comes from a Reuters article

Crimea's parliament voted to join Russia on Thursday and its Moscow-backed government set a referendum on the decision in 10 days' time in a dramatic escalation of the crisis over the Ukrainian Black Sea peninsula.

The sudden acceleration of moves to bring Crimea, which has an ethnic Russian majority and has effectively been seized by Russian forces, formally under Moscow's rule came as European Union leaders held an emergency summit groping for ways to pressure Russia to back down and accept mediation.

The Obama administration is calling the upcoming referendum "illegal" and says that it will not respect the will of the Crimean people no matter how the vote turns out.

But the people of Crimea are very serious about this, and of course they never would be pushing for reunification with Russia if they had not gotten approval from Putin…

The decision, which diplomats said could not have been made without Putin's approval, raised the stakes in the most serious east-west confrontation since the end of the Cold War.

The vice premier of Crimea, home to Russia's Black Sea Fleet in Sevastopol, said a referendum on the status would take place on March 16. All state property would be "nationalized", the Russian ruble adopted and Ukrainian troops treated as occupiers and forced to surrender or leave, he said.

There is no way that the U.S. government is going to accept Crimea becoming part of Russia, and there is no way in the world that Russia is going to back down at this point.  Just consider what geopolitical expert Ian Bremmer of the Eurasia Group recently had to say

"Russia is not going to back down from Crimea, irrespective of U.S. pressure. Which means if the U.S. wants to find any resolution here, they’re going to have to find a way to come to terms with that. Now that the Crimean parliament has voted — clearly with Russian assent — we’ll have a referendum … and then further militarization of the peninsula by the Russians."

What we need is someone with extraordinary diplomatic skills to defuse this situation before it spirals out of control.

Unfortunately, we have Barack Obama, Valerie Jarrett and John Kerry running things. What a mess.

So why is Ukraine such a big deal anyway?

In a recent article, Peter Farmer explained succinctly why Ukraine is so incredibly important…

The Ukraine is strategically-important for a number of reasons. It sits astride enormous petroleum and natural gas deposits found in the Black Sea region. The nation is also home to an extensive network of liquid natural gas pipelines which crisscross it; control the Ukraine and you control its pipelines – and thus the flow of energy into the hugely-lucrative European market. Western energy firms such as Exxon-Mobil, BP-Amoco and Chevron are locked in competition with the Russian energy giant Gazprom – for control/exploitation of as-yet-undeveloped petroleum deposits not only in the Ukraine, but in neighboring Poland and Romania. Fracking technologies and other new extraction methods have only added urgency to the competition. Income from fossil fuels development is the lifeblood of the new Russian economy. Threats to the regional hegemony of Gazprom are likely to be treated by Putin and Russia with the utmost urgency and seriousness.

The Crimean Peninsula is also home to the Black Sea fleet of the Russian navy, which leases its base at Sevastopol from the Ukrainian government. Since the Black Sea – via the Dardanelles – provides the only warm-water base with access to the Mediterranean Sea – it is of enormous importance to Russia. Its loss would be a crippling blow to the Russian fleet.

Finally, the Ukraine – once known as the "bread basket of Europe" – is home to arguably the finest temperate agricultural region in the world. Its topsoil is widely-acknowledged by agronomists to be among the world's best. Control the Ukraine and you control the grainery of Europe – and can exert tremendous leverage upon worldwide grain agricultural commodities prices.

If the U.S. insists on playing a game of brinksmanship over Ukraine, the consequences could be disastrous.

For one thing, as I mentioned above, the status of the petrodollar could be greatly threatened.  The following is how Jim Willie is analyzing the situation…

If the Kremlin demands Gold bullion (or even Russian Rubles) for oil payments, then the interventions to subvert the Ruble currency by the London and Wall Street houses will backfire and blow up in the bankster faces. Expect any surplus Rubles would be converted quickly to Gold bullion. If the Chinese demand that they are permitted to pay for oil shipments in Yuan currency, then the entire Petro-Dollar platform will be subjected to sledge hammers and wrecking balls. The new Petro-Yuan defacto standard will have been launched from the Shanghai outpost. If the Saudis curry favor to the Russians and Chinese by accepting non-USDollar payments for oil shipments, then the Petro-Dollar is dead and buried.

In addition, if Russia starts dumping U.S. debt and gets other nations (such as China) to start doing the same, that could create a nightmare scenario for the U.S. financial system very rapidly.

So let us hope and pray that cooler heads prevail.

In my recent article entitled "The Top 12 Signs That The U.S. Economy Is Heading Toward Another Recession", I discussed how the U.S. economy appears to be hurtling toward another major downturn.

And on Thursday, we learned that office supplies giant Staples has just announced that it is going to close 225 stores.

Even without this major international crisis, the U.S. economy would still be deeply troubled.

But if the United States and Russia do declare "economic war" on each other, all hell could start breaking loose.

Unfortunately, there does not appear to be much hope of anyone backing down at this point.  In an editorial for the Washington Post, Henry Kissinger stated that it "is incompatible with the rules of the existing world order for Russia to annex Crimea."

Very interesting word choice.

So this is the situation we are facing…

-The U.S. government seems absolutely determined to "punish" Russia until it leaves Crimea.

-Russia is never going to leave Crimea, and has promised to "respond" harshly to any sanctions.

Most Americans are not paying much attention to what is going on in Ukraine, but this is a very, very big deal.

In the end, it could potentially affect the lives of virtually every man, woman and child on the planet.

Hopefully You Weren’t Russian to Sell

Because by Friday, Ukraine was Old News

By Paul Price of Market Shadows

No BS  - imageLast weekend brought dire market predictions that were self-fulfilling early on Monday.

By the end of the week, the Russian fatigue factor had set in. Most Americans didn't care to hear any more bs about how events in the Ukraine would torpedo their U.S. portfolios. The DJIA closed higher by about 0.8%. The SPY was up 1.0% and the NASDAQ up 0.7%.

Our Virtual Value Portfolio was not left behind. Our original $100,000 stake has grown to $142,932 since our October 26, 2012 starting date. That's our highest closing level so far.

 New Records for the SPY & VVP   as of Mar. 7, 2014

Market Shadows’ readers who took our advice have annualized at a very acceptable 31.53% since inception by following our plain vanilla (no leverage, no options) value strategy.

Check out details on all closed-out and presently held positions by clicking here.

We like to sell ‘put’ options too. Our exploits in that arena can be tracked in Market Shadows’ separate Virtual Put Writing Portfolio.

Our  track record with option sales has been excellent. We collect money by selling puts but we cannot know our final result until the option expires, is exercised, or we buy it back in closing transactions. Our closed-out list tallies up the results of all fully completed positions. Open trades can be followed in the list of current positions, all of which are short sales of puts. 

As long as the 'if put' price is below the present quote our position is in profitable territory. This is because if we get exercised, we could immediately sell the shares for more than our net cost basis. The vast majority of our open option trades fall into this category right now. 


 Keep your options open - image