Category: zerohedge

Guest Post: What Happened To The Future?

Submitted by Gregor Mcdonald via Peak Prosperity,

Improbably, the global economy has returned to growth over the past four years despite the ravages of a deflationary debt collapse, a punishing oil shock, ongoing constraint from debt and deleveraging, and stagnant global wages.

The proof of this growth comes from the best indicator of all: the growth of global energy consumption. Halted in 2009, as global trade collapsed from the second half of 2008 into the first half of the following year, the global demand for energy inputs quickly returned to its long-term trend in 2010, growing at approximately 2% per year.

Ecological economics holds that human economies are subordinate to the availability of natural capital. Technology therefore does not create natural resources, nor does human innovation. Instead, technology and innovation mediate the utilization of existing natural resources. In other words, an improvement in the techniques of longwall coal mining (late 1700s), deepwater offshore oil drilling (late 1900s), and horizontal natural gas fracking (early 2000s) are all impressive. But these innovations only matter when the prize of dense energy deposits are actually on offer. No dense energy deposits = no value to innovation.

We are therefore obligated to acknowledge that when few natural resources exist or are too expensive to extract, very little economic activity is possible. Conversely, we are equally obligated to admit that when resources are available for consumption, then growth will likely result. And lo and behold, that is precisely the explanation for the world’s return to growth since the collapse of 2008: Despite the punishing repricing of oil from $25 earlier in the decade to $100, there was enough energy from other sources to get the global economy back to some kind of growth.

Of course, this is not the smooth and well-lubricated growth that many in the West had become accustomed to in the post-war era. The nature of today’s growth is highly asymmetric between East and West, and highly imbalanced between rich and poor. Today’s growth is also quite lumpy, or highly clustered, as certain domains and regions are benefiting while other populations are living in very stagnant conditions. We’ll get to these details shortly.

But first, let’s look at the longer-term chart of global energy consumption from all sources – oil, natural gas, coal, nuclear, solar, wind, hydro, and biomass – denominated in Mtoe (million tonnes oil equivalent):

This chart is bad news for the many observers on all sides of the macroeconomic equation who are trying to puzzle out the post-crisis era. The fact is, there is enough energy to fund traditional, industrial economic growth in the phase after Peak Oil. Yes, the end of cheap oil did indeed shock the system, and along with the previous credit bubble, it has cast a pall on the potential rate of global growth. But many of the forecasts about the absolute end of growth have yet to come true. This is important because while the global economic system was highly sensitive to an oil shock coming into 2007, it is actually less sensitive now to an oil shock. Those who, ten years ago, correctly predicted the tail risk that oil presented to the system should declare victory. Equally, forecasting a repeat of that experience is probably unwise.

The Oil Crash is Now Behind Us

Why? Simply put, whereas oil used to be the key commodity on which a fast, just-in-time, high-functioning global economy depended all too much, now a combination of coal, natural gas, and other inputs to the power grid have taken nearly all of the market share over the past decade. It is axiomatic, therefore, that if the global supply of oil has only increased from 74 mbpd (million barrels per day) in 2004 to 76 mbpd here at the end of 2013, but total energy consumption globally from all sources has risen over 20% in the same period, then nearly all the growth in the global economy is being funded by other forms of energy.

So you can abandon the idea there will be a future oil crash – because we already had it. The world has been busily starting to wean itself off oil for nearly ten years now. Oil use in Europe and the United States peaked in 2004-2005. The decline of oil consumption only accelerated after 2008, and in the OECD, it's still declining. Will $125 or $150 oil crash the economies of Japan, the United States, or Europe at this point? Perhaps not. There is hardly any growth to crash in the OECD. It is as if the OECD economies are effectively bunkered, with no growth in wages, jobs, or construction, and nearly all progress is confined to asset prices, mainly the stock market. Perversely, this stagnation is the new strength.

Meanwhile, in the Non-OECD, where growth is actually taking place, the big drive that has taken world energy use higher since 2008 – from 11310 Mtoe in 2009 to this year’s projected 12726 Mtoe – continues to be funded by natural gas, various inputs to the power grid, and the world’s still fastest growing energy source: coal. Yes that's right, coal, which grew 2.5% last year. Again, ecological economics informs us that there must be energy inputs to fund economic growth. Well, the world has plenty of energy inputs in the form of natural gas and coal. There is no Peak Natural Gas and there is no Peak Coal. No crash is coming in either of these resources in the foreseeable future, either.

To give a better sense of the decline of oil and the rise of other energy inputs, consider that in almost every European country now, bicycle sales now outnumber automobile sales. Life After the Oil Crash, indeed! In the United States, oil demand has fallen to levels last seen over thirty years ago. The 5 mbpd of new demand in Asia, built over the past decade, has been supplied more from demand declines in the West than new global production. The real oil crash, now, the oil crash that matters most, is the decline of oil’s share in the total energy mix. A decade ago, oil provided nearly 39% of total global energy supply. Oil’s now down to 33%, and heading to 32% either this year, 2013, or by next year:

We would not say that the global economy is currently at high risk of losing its access to coal. So we should no longer be overly concerned that the global economy is going to lose its access to oil. It has already lost its access to cheap oil. And now coal, not oil, is in position to take the lead as the number one energy source, globally. But there is little room for complacency in this regard. Because there is little good news in this lower tail risk from oil and its lower-level threat to the global economy. Rather, the global economy is growing increasingly imbalanced.

The Grand Asymmetry

We can think of reflationary policy from Europe, the U.S., and especially Japan as an attempt to counter the West&
rsquo;s loss of access to cheap oil. Is that policy working? Not really.

The primary beneficiaries of this policy have largely been corporations, which derive most of their growth from the 5 billion people in the developing world but are located in the OECD. These corporations are sited in London, New York, Tokyo; the cash from worldwide operations rolls in, but they have little need for expensive, high-wage Western workers. Accordingly, stock markets in the West, composed of these corporations, continue to soar, while investment and growth in the OECD stagnates.

It’s bad enough that Western corporations do not hire domestic workers, do not raise wages, and have maintained capex (capital expenditures) at low levels for years. The huge cash piles stored in corporations represents their conversion, in some sense, to global utilities. Energy companies, technology companies, and infrastructure companies now operate at a very high level of efficiency. So high, and with the aid of information technology, that their need to invest in new capital equipment and especially human labor has fallen to very low levels. How low? A Standard-and-Poor's report on global capex released just this summer showed that investment is, unsurprisingly, far lower in the post-2008 period than before. Recent commentary from the folks at FT Alphaville lays some color on this data point, because at current rates, U.S. capex has only recovered to the previous trough levels of prior recessions. Worse, whatever meager recovery in capex has taken place from the lows of 2009 is now stalling again. From the S&P Global Corporate Capital Expenditure Survey, July 2013:

The global capex cycle appears to be stalling even before it has fully got under way. In real terms, capex growth for our sample of nonfinancial companies slowed in 2012 to 6% from 8% in 2011. Current estimates suggest that capex growth will fall by 2% in 2013. Early indications for 2014 are even more pessimistic, with an expected decline in real terms of 5%…. Worldwide, capex growth has become increasingly reliant on investment in the energy and materials sectors. Together, these sectors account for 62% of capex in the past decade. This reliance creates risks. If the global commodity "super cycle" is fading, global capex will struggle to grow meaningfully in the near term. Sharp cutbacks in the materials sector are a key factor in the projected slowdown in capex for 2013 and 2014.

Notice that the total volume of global capex is increasingly reliant on investment in the very capital-intensive energy and materials sector. This is highly revealing. In the aftermath of oil’s repricing and the repricing of many other natural resources, the global natural resources sector now requires significantly more investment to extract the same units of oil, copper, iron ore, coal, natural gas, and potash, and requires more expensive technology and more human labor. This is the sector holding up the average spend of global capex, so we can conclude that beneath that average, the capex in typical post-war industries like media, finance, real estate, and even infrastructure is not only low, but historically low. The very poor level of employment growth confirms exactly this conclusion. Most poignant of all, this is a wildly strong confirmation of ecological economics, showing that a larger and larger proportion of total investment needs to be devoted now to natural resource extraction, leaving less investment to other areas. The net energy available to society is in decline.

But it’s not just the private sector that has stopped investing. Public sector levels of investment have been dropping as well. In fact, according to yet another dump of recent data, U.S. government investment in public infrastructure is at the lowest levels since WWII. The Financial Times covered this on November 3rd and produced a rather stunning chart. The Financial Times writes, “Public investment picked up at the start of Mr. Obama’s term – temporarily rising to its highest level since the early 1990s – because of his fiscal stimulus. But that has been more than reversed by subsequent cuts. The biggest falls are in infrastructure, especially construction of schools and highways by states and municipalities.”

Conclusion (to Part I)

When neither the private nor public sector is willing to invest in the future, it seems appropriate to ask, what happened to the future? Have corporations along with governments figured out that a return to slow growth does not necessary equal a return to normal growth? Why invest in new infrastructure, new workforces, new office space, equipment, highways, or even rail, when the demand necessary to provide a return on this investment may never materialize?

Many sectors in Western economies remain in oversupply or overcapacity. There is a surplus of labor and a surplus of office and industrial real estate, as well as airports, highways, and suburbs that are succumbing to a permanent decrease in throughput and traffic. Perhaps the private sector is not so unwise. Collectively, through its failure to invest, it is making a de facto forecast: No normal recovery is coming.

In Part II: Why Social & Environmental Imbalances Are Becoming the Biggest Risks, we explore how the misguided policies being pursued worldwide to return to the growth we've been accustomed to are resulting in a volatile mix of imbalances in both wealth and resource availability.

As we move further into a future defined by less per capita – not more, as we've become accustomed to – dangerous rifts in our social fabric (both within and among countries) threaten to define the days ahead.

Click here to access Part II of this report (free executive summary; enrollment required for full access).

 


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/LXCM8zqyrEA/story01.htm Tyler Durden

"I Have A Helicopter" – Bernanke's Legendary Central-Planning Sermon Turns 11

Who can forget the following immortal paragraphs from Bernanke’s: “Deflation: Making Sure “It” Doesn’t Happen Here “

The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt.

 

I need to tread carefully here. Because the economy is a complex and interconnected system, Fed purchases of the liabilities of foreign governments have the potential to affect a number of financial markets, including the market for foreign exchange. In the United States, the Department of the Treasury, not the Federal Reserve, is the lead agency for making international economic policy, including policy toward the dollar; and the Secretary of the Treasury has expressed the view that the determination of the value of the U.S. dollar should be left to free market forces. Moreover, since the United States is a large, relatively closed economy, manipulating the exchange value of the dollar would not be a particularly desirable way to fight domestic deflation, particularly given the range of other options available. Thus, I want to be absolutely clear that I am today neither forecasting nor recommending any attempt by U.S. policymakers to target the international value of the dollar.

 

Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it’s worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt’s 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934. The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt’s devaluation.

 

Each of the policy options I have discussed so far involves the Fed’s acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman’s famous “helicopter drop” of money.

 

Of course, in lieu of tax cuts or increases in transfers the government could increase spending on current goods and services or even acquire existing real or financial assets. If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets.

And there you have it: in five paragraphs, or just 590 words, Bernanke predicted not only the deflationary crisis its policies would create, but its one and only recourse: injecting gobs of liquidity into the system.

More importantly, since the Fed will once again fail at its task – to reallocate capital from the market and into the economy – it also gave us a flowchart of the next steps: monetization of not only US but foreign debt, as well as outright monetary finance, in the form of either a money-financed tax cut funded through even more QE, or, a Treasury program to purchase private assets. In other words: the Fed’s remaining “Helicopter Drop” tools will make Weimar seem like a walk in the park.

And all this happened 11 years ago today on November 21, 2002.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Bpm6iaM4oFU/story01.htm Tyler Durden

“I Have A Helicopter” – Bernanke’s Legendary Central-Planning Sermon Turns 11

Who can forget the following immortal paragraphs from Bernanke’s: “Deflation: Making Sure “It” Doesn’t Happen Here “

The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt.

 

I need to tread carefully here. Because the economy is a complex and interconnected system, Fed purchases of the liabilities of foreign governments have the potential to affect a number of financial markets, including the market for foreign exchange. In the United States, the Department of the Treasury, not the Federal Reserve, is the lead agency for making international economic policy, including policy toward the dollar; and the Secretary of the Treasury has expressed the view that the determination of the value of the U.S. dollar should be left to free market forces. Moreover, since the United States is a large, relatively closed economy, manipulating the exchange value of the dollar would not be a particularly desirable way to fight domestic deflation, particularly given the range of other options available. Thus, I want to be absolutely clear that I am today neither forecasting nor recommending any attempt by U.S. policymakers to target the international value of the dollar.

 

Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it’s worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt’s 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934. The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt’s devaluation.

 

Each of the policy options I have discussed so far involves the Fed’s acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman’s famous “helicopter drop” of money.

 

Of course, in lieu of tax cuts or increases in transfers the government could increase spending on current goods and services or even acquire existing real or financial assets. If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets.

And there you have it: in five paragraphs, or just 590 words, Bernanke predicted not only the deflationary crisis its policies would create, but its one and only recourse: injecting gobs of liquidity into the system.

More importantly, since the Fed will once again fail at its task – to reallocate capital from the market and into the economy – it also gave us a flowchart of the next steps: monetization of not only US but foreign debt, as well as outright monetary finance, in the form of either a money-financed tax cut funded through even more QE, or, a Treasury program to purchase private assets. In other words: the Fed’s remaining “Helicopter Drop” tools will make Weimar seem like a walk in the park.

And all this happened 11 years ago today on November 21, 2002.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Bpm6iaM4oFU/story01.htm Tyler Durden

The U.S. Is Sending Americans’ Confidential Info Abroad … For the Same Reason It’s Outsourcing Torture to Foreign Governments

Torture doesn’t work to produce actionable intelligence. Indeed, it harms our national security and creates more terrorists.

Because torture is blatantly illegal, the Bush and Obama administrations have tried to hide America’s torture by shipping prisoners to foreign countries … so they can torture them for us.

Similarly, mass spying by the NSA and other agencies doesn’t prevent terror attacks … but actually interferes with our ability to stop them.

Because mass spying on Americans is blatantly illegal (and see this), the Bush and Obama administrations have tried to hide America’s Big Brother act by shipping Americans’ most confidential, sensitive information to foreign countries like Israel (and here) the UK and other countries … so they can “unmask” the information and give it back to the NSA.

In other words, the NSA is subverting the legal prohibition against mass spying on Americans by shipping data overseas … and then having our allies give it back to us.

The list of countries which are doing this for the NSA are almost certainly as follows:

Postscript: Unfortunately, the American elite aren’t particularly concerned with protecting the basic rights – let alone the sovereignty – of the American people.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/RrlxJe6cXmw/story01.htm George Washington

Sternlicht On The QE Melt-Up: "Enjoy It As An Investor, Not As An American"

“In some stocks,” Starwood Capital’s Barry Sternlicht warns, “we are seeing irrational exuberance with silly valuations.” The outspoken asset manager warns that the signs are coming from the credit markets of “silly debt deals” with no covenants – which is helping equities melt-up but is a sign of a bubble. Perhaps his answer to what the Fed will do and when is the most succinct (and likely accurate) summation of the current idiocy, “very little and never,” as the anchor grinningly suggests how great higher stock prices are for ‘investors’ before Sternlicht exclaims that may be true for the minority who hold stocks, “enjoy it is an investor,” he suggests, “but don’t love it as an American.” Sternlicht goes on to address the dysfunctional political class and the Fed’s enabling of that to continue as well as where the real estate bubbles are in the US.

 

 


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/ARMrvV3G1g8/story01.htm Tyler Durden

Sternlicht On The QE Melt-Up: “Enjoy It As An Investor, Not As An American”

“In some stocks,” Starwood Capital’s Barry Sternlicht warns, “we are seeing irrational exuberance with silly valuations.” The outspoken asset manager warns that the signs are coming from the credit markets of “silly debt deals” with no covenants – which is helping equities melt-up but is a sign of a bubble. Perhaps his answer to what the Fed will do and when is the most succinct (and likely accurate) summation of the current idiocy, “very little and never,” as the anchor grinningly suggests how great higher stock prices are for ‘investors’ before Sternlicht exclaims that may be true for the minority who hold stocks, “enjoy it is an investor,” he suggests, “but don’t love it as an American.” Sternlicht goes on to address the dysfunctional political class and the Fed’s enabling of that to continue as well as where the real estate bubbles are in the US.

 

 


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/ARMrvV3G1g8/story01.htm Tyler Durden

Obama Explains Why "Even If You Like Your Filibuster, You Can't Keep It" – Live Webcast

The President will deliver statement explaining, we assume, why Harry Reid’s “nuclear option” vote is good for all American citizens…

 


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/-NMDLaIMFOY/story01.htm Tyler Durden

Obama Explains Why “Even If You Like Your Filibuster, You Can’t Keep It” – Live Webcast

The President will deliver statement explaining, we assume, why Harry Reid’s “nuclear option” vote is good for all American citizens…

 


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/-NMDLaIMFOY/story01.htm Tyler Durden

Quant Giant RenTec Has Best Month Ever In October Thanks To… Shorts

For all purists still stuck in a world in which humans are the most efficient allocators of capital, and where, under Ben Bernanke’s centrally-planned New Normal, shorting stocks has become blasphemy, the following table showing the monthly return of quant giant RenTec’s chief equity fund open to the outside world, the Renaissance Institutional Equities Fund (RIEF B), whose AUM has ballooned to $8.7 billion in the past few years, will come as a shock. Because the quant strategy-driven fund, which does not look at fundamentals but purely at technical relationships and quant arbs, just posted its best month in history in October returning 8.65% nearly doubling the 4.60% return of the broader market.

But the truly stunning aspect of RenTec’s October performance is that it was not driven by a highly levered beta position (2x leverage on the S&P would do it easily) which is how virtually everyone else does it (a strategy that works great as long as the market is going higher), but instead thanks to that nearly forgotten aspect of a “hedge” fund’s exposure – shorts.

From RenTec:

Where did RIEF’s alpha come from? The answer is that it came from the short portfolio. In fact, we made so much alpha in the short portfolio that we made positive profits from our short positions despite the S&P 500’s 4.6% return in October. Drilling down further, we note that almost half of RIEF’s alpha was made in the Barra Biotechnology and Drugs industries. Within those industries, RIEF is short in many of the smaller and (presumably) more speculative names. Those issues fared particularly poorly in October as the two industries combined had a cap-weighted return of 2.8% but a flat-weighted return of -4.3%. Since RIEF is long overall in Biotechnology and Drugs, but made its alpha in the short portfolio, the fund’s gains are a result of stock selection rather than sector or industry selection.

 

The good news: alpha generation still works. The bad news: one has to be a math genius or a robot to figure out how to do it. For everyone else – especially those 90% of hedge funds underperforming the S&P for the fifth year in a row – the Pied Piper of Marriner Eccles has an unbeatable deal on all time high beta-chasing margin debt.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/lMWnw1l_Dnk/story01.htm Tyler Durden