Socialism & The Battle Of Ideas

Authored by Ludwig von Mises via The Mises Institute,

[This article is excerpted from Socialism: An Economic and Sociological Analysis]

It is a mistake to think that the lack of success of experiments in Socialism that have been made can help to overcome Socialism. Facts per se can neither prove nor refute anything. Everything is decided by the interpretation and explanation of the facts, by the ideas and the theories.

The man who clings to Socialism will continue to ascribe all the world's evil to private property and to expect salvation from Socialism. Socialists ascribe the failures of Russian Bolshevism to every circumstance except the inadequacy of the system. From the socialist point of view, Capitalism alone is responsible for all the misery the world has had to endure in recent years. Socialists see only what they want to see and are blind to anything that might contradict their theory.

Only ideas can overcome ideas and it is only the ideas of Capitalism and of [Classical] Liberalism that can overcome Socialism. Only by a battle of ideas can a decision be reached.

Liberalism and Capitalism address themselves to the cool, well-balanced mind. They proceed by strict logic, eliminating any appeal to the emotions. Socialism, on the contrary, works on the emotions, tries to violate logical considerations by rousing a sense of personal interest and to stifle the voice of reason by awakening primitive instincts.

Even with those of intellectually higher standing, with the few capable of independent reflection, this seems to give Socialism an advantage. With the others, the great masses who are unable to think, the Socialist position is considered unshakable. A speaker who inflames the passions of the masses is supposed to have a better chance of success than one who appeals to their reason. Thus the prospects of Liberalism in the fight with Socialism are accounted very poor.

This pessimistic point of view is completely mistaken in its estimate of the influence which rational and quiet reflection can exercise on the masses. It also exaggerates enormously the importance of the part played by the masses, and consequently mass-psychological elements, in creating and forming the predominant ideas of an epoch.

It is true that the masses do not think. But just for this reason they follow those who do think. The intellectual guidance of humanity belongs to the very few who think for themselves. At first they influence the circle of those capable of grasping and understanding what others have thought; through these intermediaries their ideas reach the masses and there condense themselves into the public opinion of the time. Socialism has not become the ruling idea of our period because the masses first thought out the idea of the socialization of the means of production and then transmitted it to the intellectually higher classes. Even the materialistic conception of history, haunted as it is by "the psyche of the people" as conceived by Romanticism and the historical school of jurisprudence does not risk such an assertion. Of itself the mass psyche has never produced anything but mass crime, devastation, and destruction. Admittedly the idea of Socialism is also in its effects nothing more than destruction, but it is nevertheless an idea. It had to be thought out, and this could only be the work of individual thinkers. Like every other great thought, it has penetrated to the masses only through the intellectual middle class. Neither the people nor the masses were the first socialists. Even today they are agrarian socialist and syndicalist rather than socialist.

The first socialists were the intellectuals; they and not the masses are the backbone of Socialism. The power of Socialism too, is like any other power ultimately spiritual; and it finds its support in ideas proceeding from the intellectual leaders, who give them to the people. If the intelligentsia abandoned Socialism its power would end. In the long run the masses cannot withstand the ideas of the leaders. True, individual demagogues may be ready, for the sake of a career and against their better knowledge, to instil into the people ideas which flatter their baser instincts and which are therefore sure to be well received. But in the end, prophets who in their heart know themselves to be false cannot prevail against those filled with the power of sincere conviction. Nothing can corrupt ideas. Neither by money nor by other rewards can one hire men for the fight against ideas.

Human society is an issue of the mind. Social co-operation must first be conceived, then willed, then realized in action. It is ideas that make history, not the "material productive forces," those nebulous and mystical schemata of the materialist conception of history. If we could overcome the idea of Socialism, if humanity could be brought to recognize the social necessity of private ownership in the means of production, then Socialism would have to leave the stage. That is the only thing that counts.

The victory of the socialist idea over the Liberal idea has only come about through the displacement of the social attitude, which has regard to the social function of the single institution and the total effect of the whole social apparatus, by an anti-social attitude, which considers the individual parts of the social mechanism as detached units. Socialism sees the individuals–the hungry, the unemployed, and the rich—and finds fault on that account; Liberalism never forgets the whole and the interdependence of every phenomenon. It knows well enough that private ownership in the means of production is not able to transform the world into a paradise; it has never tried to establish anything beyond the simple fact that the socialist order of society is unrealizable, and therefore less able than Capitalism to promote the well-being of all.

No one has understood Liberalism less than those who have joined its ranks during the recent decades. They have felt themselves obliged to fight excrescences of Capitalism, thereby taking over without a qualm the characteristic anti-social attitude of the socialists. A social order has no excrescences which can be cut off at will. If a phenomenon results inevitably from a social system based on private ownership in the means of production, no ethical or aesthetic caprice can condemn it. Speculation, for example, which is inherent in all economic action, in a socialistic society as well as any other, cannot be condemned for the form it takes under Capitalism merely because the censor of morals mistakes its social function. Nor have these disciples of Liberalism been any more fortunate in their criticisms of Socialism. They have constantly declared that Socialism is a beautiful and noble ideal towards which one ought to strive were it realizable, but that, alas, it could not be so, because it presupposed human beings more perfect morally than those with whom we have to deal. It is difficult to see how people can decide that Socialism is in any way better than Capitalism unless they can maintain that it functions better as a social system. With the same justification it might be said that a machine constructed on the basis of perpetual motion would be better than one worked according to the given laws of mechanics—if only it could be made to function reliably. If the concept of Socialism contains an error which prevents that system from doing what it is supposed to do, then Socialism cannot be compared with the Capitalist system, for this has proved itself workable. Neither can it be called nobler, more beautiful or more just.

It is true, Socialism cannot be realized, but it is not because it calls for sublime and altruistic beings. One of the things this book set out to prove was that the socialist commonwealth lacks above all one quality which is indispensable for every economic system which does not live from hand to mouth but works with indirect and roundabout methods of production: that is the ability to calculate, and therefore to proceed rationally. Once this has been generally recognized, all socialist ideas must vanish from the minds of reasonable human beings.

How untenable is the opinion that Socialism must come because social evolution necessarily leads to it, has been shown in earlier sections of this book. The world inclines to Socialism because the great majority of people want it. They want it because they believe that Socialism will guarantee a higher standard of welfare. The loss of this conviction would signify the end of Socialism.

via Zero Hedge Tyler Durden

What Energy Bankers Are Really Saying: “We Are Looking To Save Ourselves Now”

There are three important observations in the latest “Things We’ve Learned This Week” weekly report from Credit Suisse’s James Wicklund. 

The first, is that anyone holding out for a big push higher across energy equities as a result of a wave of distressed equity M&A can give up: according to Credit Suisse the next wave of mergers will take place via “debt negotiations”, not equity buyout offers: “the best M&A will be done on the credit side, not the equity side.” This means that instead of stock prices rising, they will collapse as companies engage in corporate reorgs, ones where the debt is impaired partially, and by definition, the equity fully.

The second is that the Dallas Fed was lying when it said our story about the Dallas Fed forcing energy lenders to delay counterparty bankruptcies as long as possible was untrue. This is what Credit Suisse just said:

Give and take between the Comptroller of the Currency and the Fed generated stories of big banks being a bit more lenient rather than swamping regional banks with failures. E&P companies had their borrowing bases upheld, for now, but were told to generate additional liquidity or have those bases cut in the spring

Precisely as we said; it also explains the significant delay in the announcement of Chapter 11 (and 7) filings from the shale patch. It also explains the surge in companies reducing or outright cutting dividends.

But not even these attempts to dramatically conserve liquidity are giving the lender banks much comfort, because as Wicklung says:

while your borrowing base might be upheld, there will be minimum liquidity requirements before capital can be accessed. It is hitting the OFS sector as well. As one banker put it, “we are looking to save ourselves now,” with banks selling company debt for as low as $0.10 on the dollar on companies that only had a 50-75% borrow rates to start.

Wicklund’s full note:

Yikes. We had some interesting conversations with a few friends this week who were swapping “war stories” about the current market. The stories demonstrate the view that acquisitions will be done through debt negotiations, not equity buyout offers. In the E&P space, many banks admit to giving their customers a bit of a pass during fall redeterminations. That was then, this is now. Give and take between the Comptroller of the Currency and the Fed generated stories of big banks being a bit more lenient rather than swamping regional banks with failures. E&P companies had their borrowing bases upheld, for now, but were told to generate additional liquidity or have those bases cut in the spring. The second part was not lost on company boards of directors who have pressured managements to dramatically reduce capex. Now, while your borrowing base might be upheld, there will be minimum liquidity requirements before capital can be accessed. It is hitting the OFS sector as well. As one banker put it, “we are looking to save ourselves now,” with banks selling company debt for as low as $0.10 on the dollar on companies that only had a 50-75% borrow rates to start. That pushes the value to $0.05-0.075 to the dollar. Buying the debt at a significant discount and getting the banks to accept a haircut, rather than going through an expensive bankruptcy process that generates the same results, is the conventional wisdom. That means the best M&A will be done on the credit side, not the equity side. As one friend put it, we just have to find the “nuclear cockroaches” that will survive. Ugly.

For now, however, everyone is delaying the inevitable moment of “credit side M&A” (which is a euphemism for prepack reorganizations), in fading hopes oil will somehow surge and be the proverbial deus ex for the sector. It won’t arrive, at which point the “nuclear cockroaches” will finally start emerging.

via Zero Hedge Tyler Durden

The Deep State’s Top Choice For President Is…


Submitted by Bill Bonner of Bonner & Partners (annotated by's Pater Tenebrarum),

As we’ve been warning, this market is extremely vulnerable. Watch out.


Leftist war-harpy Hillary Clinton – the candidate of the country’s assembled cronies and zombies, in short, the prototypical Deep State representative. We feel reminded of an aged Cersei Lannister every time we contemplate Ms.“best cattle futures trader in the world” (more). Whatever you do America, please refrain from making this harridan your president. Nothing could possibly be worse. Luckily, even syphilis is more popular than Hillary among young voters. This fills us with hope.


Meanwhile… who’s the crony? Democrat front-runner Hillary Clinton is the Deep State’s top choice for president.  She has already received $21 million from Wall Street for her campaign. That’s 280 times more than Bernie Sanders.

This is why Sanders and Donald Trump are doing so well in the polls. People are catching on to how the system works. They know they are being taken for fools. According to a recent CNN poll, 69% of Americans are either “very angry” or “somewhat angry” about “the way things are going” in the U.S.

And according to a recent NBC/Wall Street Journal poll, the same percentage – 69% – are angry because the U.S. political system “seems to only be working for the insiders with money and power, like those on Wall Street or in Washington.” Among young voters, according to a well-watched video, “syphilis is more popular than Hillary.

But Clinton is the crony favorite, supported by Wall Street and the Pentagon. In the old days, the conservatives believed the U.S. government was the devil at home and an angel abroad. The liberals believed the government was an angel at home and a devil overseas. Hillary believes that government always wears wings – at home and abroad.



Hillary Clinton: welfare/warfare statist par excellence.


The Rise of the Outsiders

The young and the plain folk know it isn’t so. They put on uniforms. They salute the flag. They do their military service. They pay their taxes. But they know something is wrong.

They don’t necessarily understand how the system works. But they know it is rigged against them. So, they turn to outsiders Trump and Sanders. The Washington Examiner reports:

“In a nearly one-hour speech, Trump railed against pharmaceutical companies. He railed against oil companies. And insurance companies. And defense contractors. And he set himself against a political system that he said allows big-money corporate “bloodsuckers” to control the government with campaign contributions.


“Whether it’s the insurance companies, or the drug companies, or the oil companies, it’s all the same thing,” Trump said. “We’re never going to get our country back if we keep doing this.”



Bernie and the Donald – you only have to follow mainstream media reportage on these two to realize that they are positively scaring the cr*p out of the establishment. Yes, many of their policies are absolutely hair-raising nonsense…but both also have a handful of praiseworthy ideas, which incidentally are precisely the kind of things that are held to be “beyond debate” by the ruling crony elite.


As former Washington insider turned Deep State whistleblower Mike Lofgren put it in the January issue of Bonner & Partners Investor Network:

“What Trump and Sanders have in common is they are not your typical politicians. And don’t think that doesn’t scare the daylights out of the political establishment.”

via Zero Hedge Tyler Durden

Indonesia Worried These Same-Sex Emojis Will Make You Gay

Indonesia is home to the planet’s largest Muslim population—and to a government that is willing to squelch controversial expression that runs afoul of prevailing attitudes toward gays, lesbians, bisexuals, and trans residents.

The latest targets, according to The Stack via Slashdot, include 

emojis, stickers and emoticons which depict same-sex couples, the rainbow flag, and any symbol that symbolises the lesbian, bay, bisexual and transgender (LGBT) community.

Apps that have been targeted by the demands include the popular Asian messaging app LINE, Whatsapp, Facebook and Twitter.

“Such contents are not allowed in Indonesia based on our cultural law and the religious norms and the operators must respect that,” said Ismail Cawidu, a spokesperson for the Indonesian Communication and Information Ministry.

Homosexuality isn’t illegal in most parts of Indonesia, mind you, but Cawidu says that kids might dig brightly colored stickers and emojis and the next thing you know, you’ve got a full-blown Tinky Winky situation on your hands.

More here.

This is all sad and stupid, especially for Indonesians in the Aceh province, which adheres to sharia law. There, you can be caned for having gay sex. But given the spread of communications tools, it’s also clear that such prohibitions are not only doomed to fail but self-evidently useless upon first being imposed. Which of course, just makes them sadder and stupider.

from Hit & Run

Should You Buy “Falling Knives”

Long before the saying “BTFD” emerged on Wall Street as a result of some $13 trillion in central bank liquidity injections (now rapidly unwinding as a result of the failure off the Petrodollar and the so-called Quantitative Tightening) which made corrections impossible if not yet illegal, the phenomenon of buying sharply falling stocks had a different name on Wall Street: “catching a falling knife” (alternatively “dash for trash”).

And yet, absent a functioning global central bank does it pay to catch falling knives? That is the topic of the latest analysis by SocGen’s Andrew Laphtorne, whose conclusion is bound to disappoint thousands of 20-year-old hedge fund managers whose only “edge” is to buy whatever is most red on any daily heatmap.

But before we get to the conclusion, a quick look at this fascination with “catching bottoms.” As Lapthorne writes, in the retail industry “there is a whole sphere of psychological research dedicated to exploiting our fondness for a bargain. From overpricing items to begin with, only then to discount them, to placing them next to more expensive assets, to bundling items together to give the impression you are getting more for less. ‘Black Friday sales’ type events are essentially there to exploit our weakness for an apparent bargain, to the extent that the thrill of getting a bargain is emotionally more important than the actual pleasure you derive from the underlying item itself. Steep price declines in equities markets can create such emotions.”

According to Wikipedia, anchoring is “the tendency to rely too heavily, or “anchor”, on one trait or piece of information when making decisions (usually the first piece of information that we acquire on that subject),” and in the world of investing that piece of information tends to be price. So just as a bargain hunter in a sale will see “value” if the sale price is significantly different to the pre-sale price, so investors will get excited about big price declines relative to recent history. This effect has profound effects. Witness the near 25% bounce in UK Mining stocks in the last few days. When faced with an index that has fallen some 60% in the space of a year, you can’t help thinking of the potential 150% upside to the old price. We’ve all done it. Maybe it was gold, or biotech stocks, or Apple… It’s in our DNA.


So faced with a whole bunch of stocks trading significantly down from their highs, many investors will sense an opportunity to pick up bargain. But as investors our job should then be to try to curb that instinct and seek alternative and more useful information. An obvious starting point, which we aim to address here, is to ask the simple question: does it make sense to buy stocks simply because they have fallen a lot.

Lapthorne then analyzed the performance of buying “falling knive” portfolios over time. This is what he found.

We start our analysis with a simple exercise, where we look at the relative performance of a strategy that buys companies that have seen 1) 20%, 2) 30%, 3) 40% and 4) 50% declines from their 12-month peak. As our portfolios might only include a handful of companies in some periods, we only take into account periods where we have at least 20 companies, and otherwise we assume a zero return. All portfolios are then rebalanced on a monthly basis, and our universe is based on FTSE World stocks since 1990.


As the chart below shows, despite some periods of strong outperformance (these periods are often referred to as the “dash to trash”), all portfolios eventually underperformed the market.



Maybe the performance better over longer holding periods? Again, No.

We also wanted to look at the performance of the different portfolios across longer holding periods as you might think that given the price declines these stocks have seen, it will take a longer time period for them to recover. Still we find relative performance to be consistently negative for the longer holding periods as well. The chart below shows holding periods up to 1yr, and we have actually looked at even longer periods and observed a very similar pattern.



Another thing we checked is each stock’s performance relative to their sector and country as often distress is associated with particular countries or sectors and hence our portfolios historically will probably see heavy biases versus the universe portfolio (for example energy stocks today). So, it could be argued that while distress stocks show poor performance versus the market, they fare better versus their country or sector peers. This seems not to be the case, for while we see some improvement in the relative performance, it still remains negative across all the holding periods.



According to the SocGen strategist, when markets move downwards, i.e., when there is a broad selloff, the “falling knives” portfolio sees even worse performance with an excess return of ~-17% and a hit ratio (i.e. percentage of periods that the has outperformed the market) of close to 0% on a forward 1-year basis. Perhaps more surprising is the performance of SocGen’s portfolio in up-markets, where one would expect the portfolio to perform better and produce strong relative performance. Instead, while overall the excess performance is positive, it is only by less than 2% with hit ratios of around ~50%.

In summary, according to Lapthorne, “it is obvious that the upside versus downside payoff of ‘falling knives’ is not very enticing for even the bravest investors. There is a significant penalty to pay in case you get the timing wrong and the actual upside is very limited.”

So is all lost for BTFDers? There is one exception: while it doesn’t pay to buy falling knives, as “rarely do those stocks that lead us down into a slump provide the best performances on the  return back up, and as such investing in ‘falling knives’ is a bad idea”, this strategy does seem to work in one specific case: if one ties this performance to the absolute proportion of beaten up stocks within the market in any given month. “That is to say if the whole market is cheap, the strategy seems to work.” Also “if we select and buy the cheapest stocks in valuation terms within this universe, the strategy also works. So it would appear that bargain hunting can work, just make sure the share price is not your only guide.”

So the last question: is the market cheap enough to where buying falling knives could potentially work? Lapthorne one final time:

Despite last month declines, valuation dispersion has been so depressed in recent years that it still sits slightly below average on a global basis. It has risen quite fast recently but the current level still does not look very attractive, particularly given where the absolute level of equity valuations remain today and the deteriorating global macro environment

Dip buyers: you have been warned.

via Zero Hedge Tyler Durden

Los Angeles Sheriff Will Serve Jail Time for Lying to Investigators

Former Los Angeles County Sheriff Lee Baca will serve up to six months in prison for lying to federal investigators who were investigating civil rights violations at the Los Angeles County Men’s Jail. An FBI probe found that deputies abused inmates and even hid an informant who had been reporting abuses in the jail to the authorities (read the pleading document here). From the Los Angeles Times:

Last year, Baca’s former top aide, Undersheriff Paul Tanaka, was indicted on charges of orchestrating an elaborate scheme to thwart the FBI, raising questions about whether Baca would be the next to face prosecution.

The grand jury indictment of Tanaka offered a portrait of a department adrift, with senior officials who were responsible for investigating abuses working instead to undermine internal safeguards and ignoring repeated warnings of widespread problems in the nation’s largest jail system.

The investigation into the sheriff’s department has been going on for five years and has resulted in more than a dozen former officials being convicted. Reason TV spoke with the American Civil Liberties Union back in 2013 after the feds announced they would be charging 18 officers involved in corruption in the largest jail system in the United States.

from Hit & Run

The Double Fallacy Recovery – The Fed’s Central Planning Is Destroying Capitalism

Submitted by Jeffrey Snider via Alhambra Investment Partners,

Everyone knows the Titanic sank in April 1912, and if they didn’t they were reminded only a few years ago at its centennial. Less well known, for good reason, is the novel Futility, written by Morgan Robertson in 1898 years before Titanic had even been conceived. Robertson’s book includes the largest vessel ever constructed and he even offered it the name “Titan.” And much like the real Titanic, Titan carries only about half the lifeboats necessary for all the souls onboard and even strikes an iceberg in the Atlantic closing in on Newfoundland.

The physical descriptions of the ship in the novel were eerily close to what Titanic would eventually become; including a capacity for 3,000 passengers and crew, the configuration of the masts and even the propellers. To some, Robertson was a visionary if not a prophet. The legend survives to this day because of those similarities.

It is not well-known beyond the committed because the similarities end there. And even the seeming connections are not all that fantastic to begin with; in 1898 large ships were attaining that configuration and size, Robertson merely imagined what the next steps might be. Further, the route through the North Atlantic was just common and icebergs a quite familiar hazard especially at night (both Titan and Titanic met their fate around midnight).

Thinking the novel some kind of wizardry on the part of Morgan Robertson is an example of the Texas Sharpshooter fallacy. In this specific case, observation has proved that view correct as Robertson does not ever again appear in the same visionary capacity.

The name of the fallacy is reportedly traced to epidemiologist Dr. Seymour Grufferman in debunking cancer clusters. There are various versions of the story, but one of the earliest appeared in a newspaper in Arizona in October 1982:

I once read a story of an army sharpshooter who visited a small town. He was amazed to find targets drawn on trees, walls, fences and barns. Even more fascinating was the fact that each target had a bullet hole in the exact center of its bull’s eye.


Inquiring about this, he had the honor of meeting the remarkable marksman. “I’ve never seen anything like this in my entire career,” said the Army man. “It’s incredible!


How did you do it?”


“Easy as pie,” replied the local rifleman. “I shoot first and draw the circles afterwards.”

Other versions, applied with Texas as the location, tell of some unknown gunman spraying the side of a barn with shotgun blasts and then drawing a bull’s eye around the greatest cluster, declaring himself a sharpshooter. In terms of statistics or even just scientific observation, the idea is the observer only taking account those data points that “fit” a predetermined narrative while ignoring or discarding all the misses (usually as “random”).

Janet Yellen this week testified before Congress with her best shotgun:

Still, Yellen underscored strength in other sectors of the economy. The job market has made substantial gains since unemployment peaked at 10 percent in 2010. The jobless rate is now just 4.9 percent, in line with what many economists believe is its lowest sustainable level. The number of discouraged workers and those in part-time jobs who want more hours have dropped, though Yellen said there is room for more improvement.

Here is her shotgun in February 2015 in the same setting:

The unemployment rate now stands at 5.7 percent, down from just over 6 percent last summer and from 10 percent at its peak in late 2009. The average pace of monthly job gains picked up from about 240,000 per month during the first half of last year to 280,000 per month during the second half, and employment rose 260,000 in January. In addition, long-term unemployment has declined substantially, fewer workers are reporting that they can find only part-time work when they would prefer full-time employment, and the pace of quits–often regarded as a barometer of worker confidence in labor market opportunities–has recovered nearly to its pre-recession level.

Commentary surrounding Yellen’s testimony only further confirms the fallacy. From UniCredit economist Harm Bandholz:

In a nutshell: Chair Yellen has, correctly in our view, highlighted the solid fundamentals of the US economy. Accordingly, her baseline outlook for both the economy and monetary policy have [sic] not changed. That said, recent developments in financial markets as well as in the global economy have clouded the picture. In this environment, Fed officials prefer to take a step back and wait. Once the clouds have lifted, the gradual normalization of interest rates will continue.

That was, tellingly, exactly the same view that the FOMC and economists took after the September non-decision – that once the August strains in financial markets abated, the “clouds lifted”, they could get back to the work of normalization. Yet, they have persisted again as has the increasingly recessionary circumstances despite the continued drive of the BLS’s statistics toward and into “full employment.” Unlike the labor statistics, however, the cluster of market data and recessionary indications in other economic accounts is much larger and more internally consistent.

As if to further reinforce that point, exit polls from this week’s New Hampshire vote underscored the obvious lack of appreciation for the economy that Yellen keeps talking about; as if the jobs and labor progress in her numbers doesn’t match the popular view of labor out in the real world.

Republican voters expressed deep worries about both the economy (three-quarters were very worried) and the threat of terrorism (6-in-10 very worried)…


Though Democrats voting on Tuesday were less apt to say they felt betrayed by their party or to express anger with the federal government, about three-quarters said they were worried about the economy.

It was the same in Iowa, where jobs were a prevalent concern even though the unemployment rate there (and in New Hampshire) is officially calculated below 4%.

In a parallel poll of Democrats, 35 percent said that jobs and the economy were paramount. Those issues ranked second among Republicans, 27 percent of whom named jobs and the economy as the most important.

It’s a rather curious and curiously bipartisan agreement coming during the “best jobs market in decades.” Further, it isn’t any different than the New Hampshire/Iowa concerns from the last Presidential cycle in 2012, meaning that despite the unemployment rate, jobs and the economy remain entrenched in voters’ minds.

Nearly seven in 10 New Hampshire voters say they were “very worried” about the national economy, almost three times the number saying so four years ago before the financial crisis that tanked the economy. Barely more than one in six say their families are “getting ahead” financially, a slide from 2008.

The comparison to 2008 is devastating to Yellen’s fantasy. In early 2008, only two (and a half) in ten were worried about jobs and the economy – early 2008. That seems to offer yet more evidence that the economy shrunk during the Great Recession leaving the positive numbers in employment statistics just that by comparison. And it further isolates Yellen’s sharpshooting in economic prediction and commentary.

SABOOK Feb 2016 Never About Oil Money to Economy GR Eurodollar Decay

It could very well be that the main body of the public has been altered in their perceptions of the economy and even their behavior in it due to the devastating effects of the Great Recession; not unlike what occurred during and after the Great Depression. Either way, however, that still doesn’t add up to what Yellen believes about the economy as presented by the payroll data (and only the surface or headlines of that report). It certainly hasn’t counted for much if anything over the past year and a half. Economists keep claiming economic recovery fulfilled, and yet it is found nowhere other than the BLS.

As noted above, it is certainly not the view of funding and credit markets.

SABOOK Feb 2016 Eurodollar Curve

RHINO has only further raged through credit and money curves. In some respects, the levels of depression in funding (“dollar”) prices and indications are beyond description (above). Worse, the implications are the exact opposite of Yellen’s quarantined labor cheer.

ABOOK Feb 2016 Payrolls Unem Rate Emp Ratio Longer

We don’t have to go far for motivation, either. In answering why economists and policymakers would throw out the vast and growing volume of especially market-based contradictions to their preferred labor view, we only have to note that this is an existential question for them. In other words, if the market view prevails, as it has already to a great degree, then that means not only are the economic models all wrong (again) they are wrong for the basic reason that monetary policy just doesn’t work. Not that QE and ZIRP don’t work well, as Bernanke himself has been forced to scale back toward, but that it is then exposed that they don’t work at all.

It’s an issue of somewhat clouded nature in the US for specific reasons of the US. In other places, the imprint of QE is far less debatable. From that perspective the observational determination of the QE experiment is not only that QE doesn’t work at all, QE is actually harmful (redistribution) in a way that helps explain why the US would be heading toward recession without a major “shock.” Monetary interference may produce some jobs, but far less than estimated, leaving the redistribution to only bifurcate into further disastrous attrition.

 ABOOK Feb 2016 Payrolls Unem Rate Part Rate

Voters in Iowa and New Hampshire seem to be motivated by that presence. Worse, for Yellen and monetarism in politics, they are inspired in an increasingly determined backlash against the “Establishment” which includes, on both sides, perceptions of monetary policy as at least unhelpful. Bernie Sanders young voters in particular, see socialism as the acceptable solution to the “best jobs market in decades” fallacy because they have been taught Alan Greenspan, Ben Bernanke and now Janet Yellen, even with her own socialist tendencies, are all part of the failure of capitalism. Even if the young don’t know exactly what it is, the fact they see it as failure is what counts at this point.

It isn’t capitalism, of course, as central bank interference destroys capitalism. That is the point about oil prices. Monetarism is simply another form of statism and soft central planning – and it works in exactly the same depressive tendencies as everywhere else it has been tried. When everyone else starts to see that more clearly as time drags on (and on), then monetary practitioners are forced into smaller and smaller clusters of what might even slightly suggest that there is success in their life’s work. If necessity the mother of invention, desperation might be the father of fallacy.

That leaves media commentary exposed to at least two logical fallacies, one heaped upon the next. Janet Yellen nor the FOMC has particularly distinguished themselves in just these terms for more than a decade, as even Yellen’s own Vice Chairmen once conceded. Yet, they are still given primary consideration for what passes as mainstream commentary because of instead their credentials alone, despite all the circular reasoning that is offered to maintain them. That is the logical fallacy “appeal to authority”; a very human tendency that the Fed and central banks actively seek to cultivate (more actively in just these kinds of conflicting circumstances). But it only leaves the sharpshooter fallacy and appeal to authority, distinct logical breakdowns, as the picture of the recovery and the supposed defense against onrushing recession.

ABOOK Oct 2015 FOMC CircularABOOK Feb 2016 PCE Deflator Fed BSABOOK Feb 2016 Further RHINO Breakevens 5yr5yr Forward

via Zero Hedge Tyler Durden

10,000 Greek Farmers Stage Massive Revolt In Athens, Destroy Police Cars

On Friday, some 800 angry Greek farmers marched on the Agriculture Ministry in Athens and beat police with Shepherd’s crooks.

No, really:

The farmers are understandably upset with Alexis Tsipras and the government for a proposal to triple the social security burden and double income taxes in an effort to appease the powers that be in Brussels who claim Greece has not made enough progress towards fiscal consolidation since the country’s third bailout was agreed last August.

Tsipras and Syriza swept to power a little over a year ago with promises to roll back austerity, but prolonged negotiations with creditors and the resulting economic malaise that gripped the country last summer broke the PM’s revolutionary spirit and now, he’s been reduced to something of a technocrat rather than a socialist firebrand.

Putting Greece on a sustainable path is a virtual impossibility at this juncture. There are myriad structural problems that cut to the heart of the currency bloc’s woes and on top of that, Athens’ debt burden is simply astounding. In other words, Tsipras and Brussels can raise taxes and cut pension benefits all they want but this problem is never going to be solved. It’s too late.

Adding insult to injury, data out Friday shows the country slipped back into recession in Q4.

All of this helps to explain why, after the tomato-tossing, stick-waving melee at the Agriculture Ministry, the farmers – joined by some 10,000 of their compatriots as well as union members, massed in Syntagma Square on Friday where tractors could be seen meandering through the crowd.

While that clip depicts a mostly peaceful scene, things weren’t so calm earlier in the day when still more farmers clashed with authorities and beat a police car half to death:

And the punchline to the whole thing is that one farmer told RT that if the measures are passed the entire lot will simply pack up and leave. “We cannot let the government pass these catastrophic measures. If they pass, we are going to have to become migrants,” Antonis Bitsakis, a member of the coordinating committee of the farmers of Creta said.

So there you have it. An irony of ironies. Thanks to Berlin’s austerity demands, Athens will not only be sending Mid-East refugees north to Germany, it will be sending Greek asylum seekers as well.

via Zero Hedge Tyler Durden

“A Market Collapse Is On The Horizon”

Submitted by Gail Tverberg via,

What is ahead for 2016? Most people don’t realize how tightly the following are linked:

1. Growth in debt
2. Growth in the economy
3. Growth in cheap-to-extract energy supplies
4. Inflation in the cost of producing commodities
5. Growth in asset prices, such as the price of shares of stock and of farmland
6. Growth in wages of non-elite workers
7. Population growth

It looks to me as though this linkage is about to cause a very substantial disruption to the economy, as oil limits, as well as other energy limits, cause a rapid shift from the benevolent version of the economic supercycle to the portion of the economic supercycle reflecting contraction. Many people have talked about Peak Oil, the Limits to Growth, and the Debt Supercycle without realizing that the underlying problem is really the same–the fact the we are reaching the limits of a finite world.

There are actually a number of different kinds of limits to a finite world, all leading toward the rising cost of commodity production. I will discuss these in more detail later. In the past, the contraction phase of the supercycle seems to have been caused primarily by too high a population relative to resources. This time, depleting fossil fuels–particularly oil–plays a major role. Other limits contributing to the end of the current debt supercycle include rising pollution and depletion of resources other than fossil fuels.

The problem of reaching limits in a finite world manifests itself in an unexpected way: slowing wage growth for non-elite workers. Lower wages mean that these workers become less able to afford the output of the system. These problems first lead to commodity oversupply and very low commodity prices. Eventually these problems lead to falling asset prices and widespread debt defaults. These problems are the opposite of what many expect, namely oil shortages and high prices. This strange situation exists because the economy is a networked system. Feedback loops in a networked system don’t necessarily work in the way people expect.

I expect that the particular problem we are likely to reach in 2016 is limits to oil storage. This may happen at different times for crude oil and the various types of refined products. As storage fills, prices can be expected to drop to a very low level–less than $10 per barrel for crude oil, and correspondingly low prices for the various types of oil products, such as gasoline, diesel, and asphalt. We can then expect to face a problem with debt defaults, failing banks, and failing governments (especially of oil exporters).

The idea of a bounce back to new higher oil prices seems exceedingly unlikely, in part because of the huge overhang of supply in storage, which owners will want to sell, keeping supply high for a long time. Furthermore, the underlying cause of the problem is the failure of wages of non-elite workers to rise rapidly enough to keep up with the rising cost of commodity production, particularly oil production. Because of falling inflation-adjusted wages, non-elite workers are becoming increasingly unable to afford the output of the economic system. As non-elite workers cut back on their purchases of goods, the economy tends to contract rather than expand. Efficiencies of scale are lost, and debt becomes increasingly difficult to repay with interest. The whole system tends to collapse.

How the Economic Growth Supercycle Works, in an Ideal Situation

In an ideal situation, growth in debt tends to stimulate the economy. The availability of debt makes the purchase of high-priced goods such as factories, homes, cars, and trucks more affordable. All of these high-priced goods require the use of commodities, including energy products and metals. Thus, growing debt tends to add to the demand for commodities, and helps keep their prices higher than the cost of production, making it profitable to produce these commodities. The availability of profits encourages the extraction of an ever-greater quantity of energy supplies and other commodities.

The growing quantity of energy supplies made possible by this profitability can be used to leverage human labor to an ever-greater extent, so that workers become increasingly productive. For example, energy supplies help build roads, trucks, and machines used in factories, making workers more productive. As a result, wages tend to rise, reflecting the greater productivity of workers in the context of these new investments. Businesses find that demand for their goods and services grows because of the growing wages of workers, and governments find that they can collect increasing tax revenue. The arrangement of repaying debt with interest tends to work well in this situation. GDP grows sufficiently rapidly that the ratio of debt to GDP stays relatively flat.

Over time, the cost of commodity production tends to rise for several reasons:

1. Population tends to grow over time, so the quantity of agricultural land available per person tends to fall. Higher-priced techniques (such as irrigation, better seeds, fertilizer, pesticides, herbicides) are required to increase production per acre. Similarly, rising population gives rise to a need to produce fresh water using increasingly high-priced techniques, such as desalination.

2. Businesses tend to extract the least expensive fuels such as oil, coal, natural gas, and uranium first. They later move on to more expensive to extract fuels, when the less-expensive fuels are depleted. For example, Figure 1 shows the sharp increase in the cost of oil extraction that took place about 1999.

Figure 1. Figure by Steve Kopits of Westwood Douglas showing the trend in per-barrel capital expenditures for oil exploration and production. CAGR is “Compound Annual Growth Rate.”

3. Pollution tends to become an increasing problem because the least polluting commodity sources are used first. When mitigations such as substituting renewables for fossil fuels are used, they tend to be more expensive than the products they are replacing. The leads to the higher cost of final products.

4. Overuse of resources other than fuels becomes a problem, leading to problems such as the higher cost of producing metals, deforestation, depleted fish stocks, and eroded topsoil. Some workarounds are available, but these tend to add costs as well.

As long as the cost of commodity production is rising only slowly, its increasing cost is benevolent. This increase in cost adds to inflation in the price of goods and helps inflate away prior debt, so that debt is easier to pay. It also leads to asset inflation, making the use of debt seem to be a worthwhile approach to finance future economic growth, including the growth of energy supplies. The whole system seems to work as an economic growth pump, with the rising wages of non-elite workers pushing the growth pump along.

The Big “Oops” Comes when the Price of Commodities Starts Rising Faster than Wages of Non-Elite Workers

Clearly the wages of non-elite workers need to be rising faster than commodity prices in order to push the economic growth pump along. The economic pump effect is lost when the wages of non-elite workers start falling, relative to the price of commodities. This tends to happen when the cost of commodity production begins rising rapidly, as it did for oil after 1999 (Figure 1).

The loss of the economic pump effect occurs because the rising cost of oil (or electricity, or food, or other energy products) forces workers to cut back on discretionary expenditures. This is what happened in the 2003 to 2008 period as oil prices spiked and other energy prices rose sharply. (See my article Oil Supply Limits and the Continuing Financial Crisis.) Non-elite workers found it increasingly difficult to afford expensive products such as homes, cars, and washing machines. Housing prices dropped. Debt growth slowed, leading to a sharp drop in oil prices and other commodity prices.

Figure 2. World oil supply and prices based on EIA data.

It was somewhat possible to “fix” low oil prices through the use of Quantitative Easing (QE) and the growth of debt at very low interest rates, after 2008. In fact, these very low interest rates are what encouraged the very rapid growth in the production of US crude oil, natural gas liquids, and biofuels.

Now, debt is reaching limits. Both the US and China have (in a sense) “taken their foot off the economic debt accelerator.” It doesn’t seem to make sense to encourage more use of debt, because recent very low interest rates have encouraged unwise investments. In China, more factories and homes have been built than the market can absorb. In the US, oil “liquids” production rose faster than it could be absorbed by the world market when prices were over $100 per barrel. This led to the big price drop. If it were possible to produce the additional oil for a very low price, say $20 per barrel, the world economy could probably absorb it. Such a low selling price doesn’t really “work” because of the high cost of production.

Debt is important because it can help an economy grow, as long as the total amount of debt does not become unmanageable. Thus, for a time, growing debt can offset the adverse impact of the rising cost of energy products. We know that oil prices began to rise sharply in the 1970s, and in fact other energy prices rose as well.

Figure 3. Historical World Energy Price in 2014$, from BP Statistical Review of World History 2015.

Looking at debt growth, we find that it rose rapidly, starting about the time oil prices started spiking. Former Director of the Office of Management and Budget, David Stockman, talks about “The Distastrous 40-Year Debt Supercycle,” which he believes is now ending.

Figure 4. Worldwide average inflation-adjusted annual growth rates in debt and GDP, for selected time periods. See post on debt for explanation of methodology.

In recent years, we have been reaching a situation where commodity prices have been rising faster than the wages of non-elite workers. Jobs that are available tend to be low-paid service jobs. Young people find it necessary to stay in school longer. They also find it necessary to delay marriage and postpone buying a car and home. All of these issues contribute to the falling wages of non-elite workers. Some of these individuals are, in fact, getting zero wages, because they are in school longer. Individuals who retire or voluntarily leave the work force further add to the problem of wages no longer rising sufficiently to afford the output of the system.

The US government has recently decided to raise interest rates. This further reduces the buying power of non-elite workers. We have a situation where the “economic growth pump,” created through the use of a rising quantity of cheap energy products plus rising debt, is disappearing. While homes, cars, and vacation travel are available, an increasing share of the population cannot afford them. This tends to lead to a situation where commodity prices fall below the cost of production for a wide range of types of commodities, making the production of commodities unprofitable. In such a situation, a person expects companies to cut back on production. Many defaults may occur.

China has acted as a major growth pump for the world for the last 15 years, since it joined the World Trade Organization in 2001. China’s growth is now slowing, and can be expected to slow further. Its growth was financed by a huge increase in debt. Paying back this debt is likely to be a problem.

Figure 5. Author’s illustration of problem we are now encountering.

Thus, we seem to be coming to the contraction portion of the debt supercycle. This is frightening, because if debt is contracting, asset prices (such as stock prices and the price of land) are likely to fall. Banks are likely to fail, unless they can transfer their problems to others–owners of the bank or even those with bank deposits. Governments will be affected as well, because it will become more expensive to borrow money, and because it becomes more difficult to obtain revenue through taxation. Many governments may fail as well for that reason.

The U. S. Oil Storage Problem

Oil prices began falling in the middle of 2014, so we might expect oil storage problems to start about that time, but this is not exactly the case. Supplies of US crude oil in storage didn’t start rising until about the end of 2014.

Figure 6. US crude oil in storage, excluding Strategic Petroleum Reserve, based on EIA data.

Once crude oil supplies started rising rapidly, they increased by about 90 million barrels between December 2014 and April 2015. After April 2015, supplies dipped again, suggesting that there is some seasonality to the growing crude oil supply. The most “dangerous” time for rapidly rising amounts added to storage would seem to be between December 31 and April 30. According to the EIA, maximum crude oil storage is 551 million barrels of crude oil (considering all storage facilities). Adding another 90 million barrels of oil (similar to the run-up between Dec. 2014 and April 2015) would put the total over the 551 million barrel crude oil capacity.

Cushing, Oklahoma, is the largest storage area for crude oil. According to the EIA, maximum working storage for the facility is 73 million barrels. Oil storage at Cushing since oil prices started declining is shown in Figure 7.

Figure 7. Quantity of crude oil stored at Cushing between June 27, 2014, and June 1, 2016, based on EIA data.

Clearly the same kind of run up in oil storage that occurred between December and April one year ago cannot all be stored at Cushing, if maximum working capacity is only 73 million barrels, and the amount currently in storage is 64 million barrels.

Another way of storing oil is as finished products. Here, the run-up in storage began earlier (starting in mid-2014) and stabilized at about 65 million barrels per day above the prior year, by January 2015. Clearly, if companies can do some pre-planning, they would prefer not to refine products for which there is little market. They would rather store unneeded oil as crude, rather than as refined products.

Figure 8. Total Oil Products in Storage, based on EIA data.

EIA indicates that the total capacity for oil products is 1,549 million barrels. Thus, in theory, the amount of oil products stored can be increased by as much as 700 million barrels, assuming that the products needing to be stored and the locations where storage are available match up exactly. In practice, the amount of additional storage available is probably quite a bit less than 700 million barrels because of mismatch problems.

In theory, if companies can be persuaded to refine more products than they can sell, the amount of products that can be stored can rise significantly. Even in this case, the amount of storage is not unlimited. Even if the full 700 million barrels of storage for crude oil products is available, this corresponds to less than one million barrels a day for two years, or two million barrels a day for one year. Thus, products storage could easily be filled as well, if demand remains low.

At this point, we don’t have the mismatch between oil production and consumption fixed. In fact, both Iraq and Iran would like to increase their production, adding to the production/consumption mismatch. China’s economy seems to be stalling, keeping its oil consumption from rising as quickly as in the past, and further adding to the supply/demand mismatch problem. Figure 9 shows an approximation to our mismatch problem. As far as I can tell, the problem is still getting worse, not better.

Figure 9. Total liquids oil production and consumption, based on a combination of BP and EIA data.

There has been a lot of talk about the United States reducing its production, but the impact so far has been small, based on data from EIA’s International Energy Statistics and its December 2015 Monthly Energy Review.

Figure 10. US quarterly oil liquids production data, based on EIA’s International Energy Statistics and Monthly Energy Review.

Based on information through November from EIA’s Monthly Energy Review, total liquids production for the US for the year 2015 will be about 700,000 barrels per day higher than it was for 2014. This increase is likely greater than the increase in production by either Saudi Arabia or Iraq. Perhaps in 2016, oil production of the US will start decreasing, but so far, increases in biofuels and natural gas liquids are partly offsetting recent reductions in crude oil production. Also, even when companies are forced into bankruptcy, oil production does not necessarily stop because of the potential value of the oil to new owners.

Figure 11 shows that very high stocks of oil were a problem, way back in the 1920s. There were other similarities to today’s problems as well, including a deflating debt bubble and low commodity prices. Thus, we should not be too surprised by high oil stocks now, when oil prices are low.

(Click to enlarge)

Figure 11. US ending stock of crude oil, excluding the strategic petroleum reserve. Figure by EIA.

Many people overlook the problems today because the US economy tends to be doing better than that of the rest of the world. The oil storage problem is really a world problem, however, reflecting a combination of low demand growth (caused by low wage growth and lack of debt growth, as the world economy hits limits) continuing supply growth (related to very low interest rates making all kinds of investment appear profitable and new production from Iraq and, in the near future, Iran). Storage on ships is increasingly being filled up and storage in Western Europe is 97% filled. Thus, the US is quite likely to see a growing need for oil storage in the year ahead, partly because there are few other places to put the oil, and partly because the gap between supply and demand has not yet been fixed.

What is Ahead for 2016?

1. Problems with a slowing world economy are likely to become more pronounced, as China’s growth problems continue, and as other commodity-producing countries such as Brazil, South Africa, and Australia experience recession. There may be rapid shifts in currencies, as countries attempt to devalue their currencies, to try to gain an advantage in world markets. Saudi Arabia may decide to devalue its currency, to get more benefit from the oil it sells.

2. Oil storage seems likely to become a problem sometime in 2016. In fact, if the run-up in oil supply is heavily front-ended to the December to April period, similar to what happened a year ago, lack of crude oil storage space could become a problem within the next three months. Oil prices could fall to $10 or below. We know that for natural gas and electricity, prices often fall below zero when the ability of the system to absorb more supply disappears. It is not clear the oil prices can fall below zero, but they can certainly fall very low. Even if we can somehow manage to escape the problem of running out of crude oil storage capacity in 2016, we could encounter storage problems of some type in 2017 or 2018.

3. Falling oil prices are likely to cause numerous problems. One is debt defaults, both for oil companies and for companies making products used by the oil industry. Another is layoffs in the oil industry. Another problem is negative inflation rates, making debt harder to repay. Still another issue is falling asset prices, such as stock prices and prices of land used to produce commodities. Part of the reason for the fall in price has to do with the falling price of the commodities produced. Also, sovereign wealth funds will need to sell securities, to have money to keep their economies going. The sale of these securities will put downward pressure on stock and bond prices.

4. Debt defaults are likely to cause major problems in 2016. As noted in the introduction, we seem to be approaching the unwinding of a debt supercycle. We can expect one company after another to fail because of low commodity prices. The problems of these failing companies can be expected to spread to the economy as a whole. Failing companies will lay off workers, reducing the quantity of wages available to buy goods made with commodities. Debt will not be fully repaid, causing problems for banks, insurance companies, and pension funds. Even electricity companies may be affected, if their suppliers go bankrupt and their customers become less able to pay their bills.
5. Governments of some oil exporters may collapse or be overthrown, if prices fall to a low level. The resulting disruption of oil exports may be welcomed, if storage is becoming an increased problem.

6. It is not clear that the complete unwind will take place in 2016, but a major piece of this unwind could take place in 2016, especially if crude oil storage fills up, pushing oil prices to less than $10 per barrel.

7. Whether or not oil storage fills up, oil prices are likely to remain very low, as the result of rising supply, barely rising demand, and no one willing to take steps to try to fix the problem. Everyone seems to think that someone else (Saudi Arabia?) can or should fix the problem. In fact, the problem is too large for Saudi Arabia to fix. The United States could in theory fix the current oil supply problem by taxing its own oil production at a confiscatory tax rate, but this seems exceedingly unlikely. Closing existing oil production before it is forced to close would guarantee future dependency on oil imports. A more likely approach would be to tax imported oil, to keep the amount imported down to a manageable level. This approach would likely cause the ire of oil exporters.

8. The many problems of 2016 (including rapid moves in currencies, falling commodity prices, and loan defaults) are likely to cause large payouts of derivatives, potentially leading to the bankruptcies of financial institutions, as they did in 2008. To prevent such bankruptcies, most governments plan to move as much of the losses related to derivatives and debt defaults to private parties as possible. It is possible that this approach will lead to depositors losing what appear to be insured bank deposits. At first, any such losses will likely be limited to amounts in excess of FDIC insurance limits. As the crisis spreads, losses could spread to other deposits. Deposits of employers may be affected as well, leading to difficulty in paying employees.

9. All in all, 2016 looks likely to be a much worse year than 2008 from a financial perspective. The problems will look similar to those that might have happened in 2008, but didn’t thanks to government intervention. This time, governments appear to be mostly out of approaches to fix the problems.

10. Two years ago, I put together the chart shown as Figure 12. It shows the production of all energy products declining rapidly after 2015. I see no reason why this forecast should be changed. Once the debt supercycle starts its contraction phase, we can expect a major reduction in both the demand and supply of all kinds of energy products.

Figure 12. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.


We are certainly entering a worrying period. We have not really understood how the economy works, so we have tended to assume we could fix one or another part of the problem. The underlying problem seems to be a problem of physics. The economy is a dissipative structure, a type of self-organizing system that forms in thermodynamically open systems. As such, it requires energy to grow. Ultimately, diminishing returns with respect to human labor–what some of us would call falling inflation-adjusted wages of non-elite workers–tends to bring economies down. Thus all economies have finite lifetimes, just as humans, animals, plants, and hurricanes do. We are in the unfortunate position of observing the end of our economy’s lifetime.

Most energy research to date has focused on the Second Law of Thermodynamics. While this is a contributing problem, this is really not the proximate cause of the impending collapse. The Second Law of Thermodynamics operates in thermodynamically closed systems, which is not precisely the issue here.

We know that historically collapses have tended to take many years. This collapse may take place more rapidly because today’s economy is dependent on international supply chains, electricity, and liquid fuels–things that previous economies were not dependent on.

via Zero Hedge Tyler Durden

The 4 Key Themes From Q4 Conference Calls

With Q4 earnings season drawing to a close, here is a quick recap of the key issues facing corporate CEOs and CFOs based on their conference calls as summarized by Goldman’s David Kostin: 1) Company managements forecast positive US GDP growth in 2016, in contrast with investor concerns of a potential recession. However, global growth prospects appear grim, particularly within commodity-exposed nations. (2) Strong domestic consumer demand persists amid industrial weakness. (3) Several firms announced large or accelerated share repurchase programs in 2016. Corporates will remain the largest source of US equity demand this year. (4) Despite recent economic and currency turmoil, firms view China as an attractive market in the long term.

Oddly enough, despite consensus being on the verge of forecasting that 2016 will see another Y/Y EPS decline, which would mean 7 consecutive quarters of declining earnings growth, management teams still remain oddly upbeat and instead of conserving cash, they prefer to delude themselves that the current economic slowdown will be transitory and chose to spend said cash on stock buybacks instead, giving shareholders one last out as the company itself scrambles to buy every share outside shareholders (and management teams) have to sell. Good luck with that.

Here are the 4 key themes summarized:

  • Theme 1: US economy appears insulated from global weakness – Managements expect stable US economic growth in 2016, dismissing concerns of a potential recession. However, global growth forecasts remain bleak.
  • Theme 2: Strong domestic consumer demand persists – Companies benefit from positive US consumer spending. Wage and job growth, low rates, and low oil prices should keep spending power elevated.
  • Theme 3: Managements remain devoted to share repurchases – Several firms announced large share buyback programs. S&P 500 YTD repurchase authorizations of $63 billion are at the highest level since 2007.
  • Theme 4: Outlook for China is positive despite recent turmoil – Managements expect consumers will drive long-term economic growth in China and remain committed to expanding their businesses in the region.

And here are some actual quotes from management teams:

Theme 1: US economy appears insulated from global weakness

Managements are optimistic about US economic growth this year. In contrast, firms expect the trend of tepid global growth will persist. Despite recent equity market volatility, domestic economic conditions appear stable. We forecast above-trend US GDP growth of around 2% in 2016. Low oil prices will weigh on global ex-US GDP growth.

US strong

JPMorgan Chase

We’re not forecasting a recession. We think that the U.S. economy looks pretty good at this point…The U.S. economy has been chugging along at 2% to 2.5% growth for the better part of five years now. In the last two years, it has created 5 million jobs. And when you look at the actual household formation, car sales, wage, people working, it still looks okay. Corporate credit is quite good. Small business formation is not back to where it was, but it’s quite good.

Wells Fargo

…while parts of the global economy have continued to experience stress and the markets have reacted negatively in the early weeks of 2016, domestic economic conditions remain generally favorable…strength and diversity of the U.S. economy benefited our results in 2015. The economy continues to advance with strong job creation including 70 consecutive months of gains in private payrolls, the longest run ever recorded.

United Technologies

I think it’s a relatively solid outlook for U.S. GDP growth, despite what we’ve seen in the equity markets in January.

Southern Co.

Despite economic headwinds from overseas, our regional economy remains in a positive growth mode.

Delta Air Lines

We’re planning for roughly 4% to 5% growth in the domestic region in the first quarter and 1% to 3% growth for the full-year in line with how we see demand and economic growth in the U.S.

Global weak


Outside the U.S., it appears likely that sluggish market conditions and currency devaluation, particularly in Europe and many Latin American countries, will remain a challenge.


…we expect 2016 to be a continuation of 2015. The U.S. and European economies are showing signs of strength, but the rest of the world remains challenged.


U.S. outbound spend is strong, but it is offset by continued weakness from Canada, Brazil, and Russia. And more recently, we’re seeing increasing weakness in the Middle East and China. We do see some areas of strength such as Mexico, Japan, and New Zealand, but they’re obviously smaller markets for us.

Procter & Gamble

Market growth rates on both a volume and value basis have decelerated, due mainly to slower growth in developing markets. We entered the year expecting the market to grow close to 3% to 4% globally. We now expect 2% to 3%.

United Parcel Service

Looking at the global economy, conditions remain uncertain, with the first half of 2016 continuing the mixed economic trends from the last half of 2015. Across Europe and Asia, GDP growth was modest in 2015, however, slight improvements are expected this year. At the same time, we continue to see challenges in emerging markets in 2016.


The macroeconomic environment is weakening. When you think about all the, particularly all the commodity-driven economies, Brazil and Russia in emerging markets but also Canada, Australia in developed markets, clearly the economy is significantly weaker than a year ago.


* * *

Theme 2: Strong domestic consumer demand persists

Consumer strength continues to boost the US economy amid industrial weakness. Improvements in labor market indicators and low oil prices will keep spending power elevated. Consumer and industrial activity within the US have diverged in recent months. Our US current activity indicator (CAI), which is a proxy for US GDP growth, currently equals 1.8%. The consumer components of the CAI indicate growth of 2.9% vs. 0.6% for the industrial components.

Delta Air Lines

We’re pretty optimistic relative to what you read on CNBC, or The Wall Street Journal, or some of the pundits out there that are predicting the future…we see demand as very strong.

Capital One Financial

But let me say this about the health of the consumer…most indicators of the, quote, unquote, real economy, at least in the U.S., continue to look pretty strong. We’ve seen sustained improvement in labor markets in recent months and steady home price growth. Consumer confidence remains solid.

Ford Motor

In the case of North America, in terms of the industry, we don’t see the cycle being over. Obviously, the consumer sector drives a majority of the economic growth. All the metrics we’re seeing, wages growing, jobs growing, low interest rates, low energy costs, those type of things are really putting more spending power in the hands of consumers.


I think what we’re seeing is a very stable U.S. consumer environment. If you look at multiple quarters, all the way through last year and into this year, and you adjust for, as we said, conversions and gas prices, it’s been very stable.

Wells Fargo

…with respect to consumers, they have not spent a lot of their gas savings so far. I think they’ll start to spend some more. And the thing for Wells Fargo is 97% of what we do is in the U.S. and virtually everything we do in the U.S. is involving the real economy. And there are pockets of strength. You think of autos, you think of commercial real estate, you think of residential real estate, parts of ag, so middle market. And I’m not going to say it’s robust but we’re really happy.

JPMorgan Chase

We saw strong growth in consumer drivers on the back of improvement in the U.S. economy…

United Parcel Service

…the U.S. remains dependent on a consumer-based economy for growth, while industrial manufacturing continues to be held down by a strong dollar and lower global demand.


…we continue to see good demand in consumer-oriented sectors like food, beverage, automotive, healthcare, refining and chemicals.

Union Pacific

I would say, the consumer is spending, there is consumer confidence, household income is going up. There appears to be a shift between consuming on products or goods to spending on services. There does appear to be that shift.


In fact, it was a decent holiday season in light of really aggressive competition, but the consumer continued to spend money.


* * *

Theme 3: Managements remain devoted to share repurchases

Several firms announced large share buyback programs. S&P 500 YTD repurchase authorizations of $63 billion are at the highest level since 2007. We forecast total S&P 500 buybacks will equal $608 billion during 2016, 7% higher than the previous year. Corporate repurchases will also remain the largest source of US equity demand this year.

United Technologies

Clearly, the best M&A opportunity we see right now is UTX stock. We’ll continue our share repurchase program as long as we feel there’s a significant discount between the intrinsic value of UTC and the share price.

Norfolk Southern

…our board is very focused on buybacks right now, that’s a big part of our strategy, it has been in the past, as we went through.


…given what we saw in the holiday and what we saw in the equity markets, we’ve significantly increased our buybacks to the tune of roughly double already this quarter what we did in the whole quarter last year.


…we are going to continue repurchasing stock in an amount no less than last year.

Delta Air Lines

We have a bias toward applying that to share buyback…we would expect that given the performance that we’re on pace to achieve that our share buyback number will be materially higher in 2016 than it was in 2015.

Johnson & Johnson

During Q4 2015 we used approximately $1 billion to repurchase shares of our stock in connection with our $10 billion share repurchase program that we announced in October.


In light of our strong tax flow generation, yesterday our board of directors approved a new $10 billion share buyback program.

Chipotle Mexican Grill

…our Board has approved an additional $300 million of share repurchases, bringing our total life-to-date authorization to $1.9 billion. As of January 31, including the new $300 million authorization, we have $478 million remaining to repurchase stock.

Altria Group

We also completed our $1 billion share repurchase program and announced a new $1 billion program that we expect to complete by the end of 2016.

Procter & Gamble

Over the past five years, we’ve returned $60B to shareholders and intend to pay dividends, retire shares, and repurchase shares worth up to $70B over just the next four years.


At the end of 2015 we had approximately $4.9 billion remaining under our board authorized share repurchase program. We intend to repurchase an additional $2 billion to $3 billion of shares in 2016 and are on track to deliver our capital allocation commitments to shareholders.

Illinois Tool Works

…based on our ability to tax-efficiently accessed $1.2 billion of non-U.S. cash this month, we’re increasing our share repurchase expectation by $1 billion to approximately $2 billion.


We also launched our sixth accelerated share repurchase program, spending $3 billion and receiving an initial delivery of 20.4 million shares.We have now completed over $153  billion of our $200 billion program, including $110 billion in share repurchases.


…we recently announced a four-year $12B share repurchase program.


* * *

Theme 4: Outlook for China is positive despite recent turmoil

Managements expect the rapidly rising consumer population will drive long-term economic growth in China. As China transitions from an industrial growth economy to a consumer-driven economy, firms view the Chinese market as an attractive opportunity.


First let me say that China is here to stay…Short-term market gyrations, however, should not be confused with actions that will lead to long-term sustainable economic gain, especially as China moves to a consumer-driven economy. I strongly believe that the Chinese government’s commitment to true economic reform is genuine and that its goal of doubling 2010 per capita income by 2021, resulting in a middle class in China approaching 600 million Chinese people, or almost twice the size of the entire current U.S. population, is attainable. We are taking a long-term view on how we will build our business in China…


…while North America is currently one of the larger growing ones, China has a tremendous, tremendous growth opportunity. We can see that as being one of the most connected markets out there.

Ford Motor

But our view is that the market will grow in China this year, and a lot of that on the back of the response we’ve seen from the purchase tax reduction.


Beyond the short-term volatility, we remain very confident about the long-term potential of the China market…

Procter & Gamble

…we see significant opportunity remaining in China with those very attractive growth rates, albeit somewhat slower than they were two and three years ago, with the conversion from a manufacturing to a consumption-based economy, with the dramatic potential that exists as a result of larger family sizes from the possibility of two children vs. just one, and with the premiumization of the market…

Johnson & Johnson

…we’re optimistic about China going into 2016. Our plans are for improved growth in China in 2016.

Delta Air Lines

In the Pacific, we expect to see good improvement in profitability again in 2016, as we reallocate additional capacity from Japan to growth markets, primarily China, the important pillar of our Pacific and overall company long-term strategy.

United Technologies

China will be down for 2016, but let’s keep China in perspective. While it’s certainly experiencing some challenges as it grapples with reform and rebalances its economy from an industrial growth story to a consumer consumption economy, its long-term growth prospects remain strong.


And while we are believers in China for the long-term, the domestic volatility is creating increased headwinds for us.


Consumer-related industries are still performing well in China as we continue to see good demand for things like transportation fuels, food, healthcare, environmental solutions and plastics…


It’s important to note that we still see the Chinese tourist as an increasingly large part of our business globally and have experienced the strengthening in Chinese tourist spending, notably in Japan and Europe. We are staffing into this trend, increasing the number of Mandarin-speaking store associates in these geographies.

via Zero Hedge Tyler Durden