zerohedge – Page 18535

THe MaN WHo USeD To WaLK On WaTeR…

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5 (+3) Themes For The Next 5 Years

The following five themes (and three bonus ones) are what UBS Andrew Cates believes will be of the greatest importance for global economic and capital markets outcomes for the next five years. There is little to surprise here but the aggregation of these factors and the increasingly binary outcomes of each of them suggest there may be a little more uncertainty about the future than most people sheepishly admit…

Via UBS,

We highlight five themes we expect will be dominant for global economic and capital market outcomes over the next five years. For the curious, we also mention a few themes that didn’t quite make the cut, but are nevertheless worthy of consideration.

#1 Right-sizing monetary policy

Cleary, a major challenge facing central banks at some point in the next five years will be restoring ‘normality’ to monetary policy. The first task, in all probability, will be right-sizing bloated central bank balance sheets (followed by a normalisation of policy rates). The challenges for the central bankers—and market participants—are both unprecedented and enormous. How will central banks manage that process? Can they manage it? What will be the implications for real economic activity, capital flows and asset prices? Those are all topics we’ll explore in this theme.

#2 Right-sizing fiscal policy

As if monetary policy weren’t enough, fiscal policy in many economies—advanced and emerging—requires right-sizing as well. For some, the focus is on deficit reduction. For others, it is debt stabilisation. And for still others, it is meeting demographic challenges to government spending and tax revenues. For some, it is all of the above.

#3 Age of plutocracy

In many advanced economies returns on capital—physical and human—have soared. Income and consumption distribution have become more skewed. Yet, populist backlashes against unequal outcomes are relative tepid. Indeed, business seems to be getting its way politically—witness the reality of more corporate tax cuts than hikes in recent years or the new-found will to press ahead with globalisation via free-trade deals spanning (much of) the Pacific and the Atlantic. How long can an era of plutocracy last? What challenges lie ahead?

#4 A world not re-balanced

Although current account imbalances have shrunk since the outbreak of the financial crisis, much of the decline is due to recession and subpar recovery. Sources of domestic demand are few and largely concentrated in the US. Emerging economies, once the poster children for domestic-led growth and re-balancing, are now facing debt hangovers. Emerging economies, along with Europe and Japan, are returning to a greater reliance on net exports as their chief drivers of growth. The consequence is a return to a world of imbalanced growth. What are the implications for the world economy and asset pricing?

#5 Technological innovation

New technologies applied to energy extraction, information systems and manufacturing hold great promise for lifting potential growth around the world. How big might the impact be on real output? Who are the likely winners and losers of the next technological revolution? What are the implications forinvestment returns?

Finally, we felt it important to consider key themes that didn’t quite make the cut into our top-five. That doesn’t mean they won’t occasionally capture the attention of investors and policy makers. But in our opinion they aren’t likely to be as durably important as the five we’ve listed above. Here are some of those candidates:

Eurozone risk

Just because Eurozone sovereign risk premiums have declined does not mean all is permanently solved. The European monetary union remains incomplete and hence fundamentally flawed. Moreover, the prospects for a more robust re-design of the Eurozone—which would include a banking union with single resolution authority and mutualised deposit insurance, plus enhanced labour mobility or fiscal transfers—remain bleak. So, too, do the prospects for re-employing the millions left jobless in Europe’s periphery, chief among them young people. Against that backdrop, ‘exit’ or ‘breakup’, but also political stress, will form a spectre hanging over the single currency project for considerably longer.

Japan rising? Or Japan setting?

‘Abenomics’ is not hype. It’s decisive. If Japan can restore inflation, achieve a reasonable rate of GDP growth, raise potential output, and rein in its explosive debt dynamics, it and the world economy will be vastly better off. Investors would have much to cheer. But if ‘Abenomics’ fails, Japan will probably return to its deflationary malaise of recent years and could be potentially on an irreversible course to default via hyper-inflation. A great deal is at stake. How will it turn out?

Emerging reforming? Or emerging deforming?

As we have noted in a series of reports over the past two years, productivity growth is slowing rapidly in emerging economies. Equally, relative returns on capital are slumping. And debt trajectories are unsustainable in many emerging economies, including China. A common prescription is required to get emerging back on track: Reform. To be sure, the required reforms differ considerably from country to country, but the overarching question is whether emerging politics and policy can deliver. We’re sceptical, not because the challenges aren’t recognized (witness the reform language of China’s 3rd Plenary session or of Mexico’s reformminded president). Rather, reformers are up against vested interests, such as the banks and state-owned enterprises in China, nationalism in Mexico, or business, labour and legal opposition in India. Absent a crisis, reform is politically very difficult and, for now, most of the emerging complex is not sufficiently in crisis mode to embark on reform.

[ZH: So apart from all that… why not BTFATH?!!]

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Guest Post: The Money Bubble Gets Its Grand Rationalization

Submitted by John Rubino of the Dollar Collapse blog,

Late in the life of every financial bubble, when things have gotten so out of hand that the old ways of judging value or ethics or whatever can no longer be honestly applied, a new idea emerges that, if true, would let the bubble keep inflating forever. During the tech bubble of the late 1990s it was the “infinite Internet.” Soon, we were told, China and India’s billions would enter cyberspace. And after they were happily on-line, the Internet would morph into versions 2.0 and 3.0 and so on, growing and evolving without end. So don’t worry about earnings; this is a land rush and “eyeballs” are the way to measure virtual real estate. Earnings will come later, when the dot-com visionaries cash out and hand the reins to boring professional managers.

During the housing bubble the rationalization for the soaring value of inert lumps of wood and Formica was a model of circular logic: Home prices would keep going up because “home prices always go up.”

Now the current bubble – call it the Money Bubble or the sovereign debt bubble or the fiat currency bubble, they all fit – has finally reached the point where no one operating within a historical or commonsensical framework can accept its validity, and so for it to continue a new lens is needed. And right on schedule, here it comes: Governments with printing presses can create as much currency as they want and use it to hold down interest rates for as long as they want. So financial crises are now voluntary. They only happen if a country decides to stop depressing interest rates – and why would they ever do that? Here’s an article out of the UK that expresses this belief perfectly:

Our debt is no Greek tragedy

“The threat of rising interest rates is a Greek tragedy we must avoid.” This was the title of a 2009 Daily Telegraph piece by George Osborne, pushing massive spending cuts as the only solution to a coming debt crisis. It’s tempting to believe anyone who still makes it is either deliberately disingenuous, or hasn’t been paying attention.

The line of reasoning goes as follows: Britain’s high and rising public debt causes investors to take fright and sell government bonds because the UK might default on those bonds.

Interest rates then spike up because as less people want to hold UK debt, the government has to pay them more for the privilege, so that the cost of borrowing becomes more expensive and things become very, very bad for everyone.

This argument didn’t make sense back in 2009, and certainly doesn’t make sense now. Ultimately this whole Britain-as-Greece argument is disturbing because it makes the austerity project of the last three years look deeply duplicitous.

If you go to any bond desk in the City that trades British sovereign debt, money managers care about one thing – what the Bank of England does or doesn’t do. If Governor Mark Carney says interest rates should fall and looks like he believes it, they fall. End of story.

Why? Because the Bank directly controls the interest rate on short-term government debt, so it can vary it at will in line with any given objective. Interest rates on long-term government debt are governed by what markets expect to happen to short term rates, and so are subject to essentially the same considerations.

It doesn’t matter if investors get scared and dump government bonds because this has no implication for interest rates – it is what the Bank of England wants to happen that counts.

If investors do suddenly decide to flee en masse, the Bank can simply use its various tools to bring interest rates back into line.

The simple point is that since countries like the UK have a free-floating currency, the Bank of England doesn’t have to vary interest rates to keep the exchange rate stable. Therefore it, as an independent central bank, can prevent a debt crisis by controlling the cost of government borrowing directly. Investors understand this, and so don’t flee British government debt in the first place.

Greece and the other troubled Eurozone countries are in a totally different situation. They don’t have their own currency, and have a single central bank, the ECB, which tries to juggle the needs of 17 different member states. This is a central bank dominated by Germany, which apparently isn’t bothered by letting the interest rates of other nations spiral out of control. Investors, knowing this, made it happen during the financial crisis.

On these grounds, the case of Britain and those of the Eurozone countries are not remotely comparable – and basic intuition suggests steep interest rate rises are only possible in the latter.

Britain was never going to enter a sovereign debt crisis. It has everything to do with an independent central bank, and nothing to do with the size of government debt. How well does this explanation stand up given the events of the last few years? Almost perfectly. The US, Japan and the UK are the three major economies with supposed debt troubles not in the Eurozone.

The UK released a plan in 2010 to cut back a lot of spending and raise a little bit of tax money. The US did nothing meaningful about its debt until 2012, and has spent much of the time before and since pretending to be about to default on its bonds. Japan’s debt patterns are, to put it bluntly, screwed – Japan’s debt passed 200 per cent of GDP earlier this year and is rising fast.

But the data shows that none of this matters for interest rates whatsoever. Rates have been low, stable and near-identical in all three countries regardless of whatever their political leaders’ actions.These countries have had vastly different responses to their debt, and markets don’t care at all.

By the same token, the problems of spiking interest rates inside the Eurozone have nothing to do with the prudence or spending of the governments in charge.

Spain and Ireland both had debt of less than 50 per cent of GDP before the crisis and were still punished by markets. France and the holier-than-thou Germany had far higher debt in 2007, and are fine.

The takeaway is that problems with spiking interest rates amongst advanced countries are entirely restricted to the Eurozone, where there is a single central bank, and have no obvious relation to the state of public finances.

So what we have, then, is a disturbingly mendacious line of reasoning . Back in 2010 the Conservative party made a perhaps superficially plausible argument about national debt that was wrong then and is doubly wrong now. They then – sort of – won a mandate to govern based on this, and used it to radically alter the size of the state. The likelihood that somehow this was all done in good faith beggars belief.

Britain has had a far higher proportion of austerity in the form of spending cuts than tax rises relative to any comparator nation. On this basis austerity is a way of reshaping the state in the Conservative image, flying under the false flag of debt crisis-prevention.

If the British public had knowingly and willingly voted for the major changes made under the coalition in how the go
vernment taxes, spends and borrows, this wouldn’t be such a great problem.

Instead, they were essentially conned into it by the ridiculous story of Britain as the next Greece.

Some thoughts
What’s great about the above article is that it doesn’t beat around the bush. Without the slightest hint of irony or historical sense, it lays out the bubble rationale, which is that central banks are all-powerful: “If you go to any bond desk in the City that trades British sovereign debt, money managers care about one thing – what the Bank of England does or doesn’t do. If Governor Mark Carney says interest rates should fall and looks like he believes it, they fall. End of story.”

So this is the end of history. Interest rates will stay low and stock prices high and governments will keep on piling up debt with impunity – because they control the financial markets and get to decide which things trade at what price. Breathtaking! Why didn’t humanity discover this financial perpetual motion machine earlier? It would have saved thousands of years of turmoil.

At the risk of looking like a bully, let’s consider another peak-bubble gem:

“The simple point is that since countries like the UK have a free-floating currency, the Bank of England doesn’t have to vary interest rates to keep the exchange rate stable. Therefore it, as an independent central bank, can prevent a debt crisis by controlling the cost of government borrowing directly. Investors understand this, and so don’t flee British government debt in the first place.”

The writer is saying, in effect, that the value of the British pound – and by extension any other fiat currency – can fall without consequence, and that the people who might want to use those currencies in trade or for savings will continue to do so no matter how much the issuer of those pieces of paper owes to others in the market. If holders of pounds decide to switch to dollars or euros or gold, that’s no problem for Britain because it can just buy all the paper thus freed up with new pieces of paper.

This illusion of government omnipotence is no crazier than the infinite Internet or home prices always going up, but it is crazy. Governments couldn’t stop tech stocks from imploding or home prices from crashing, and when the time comes, the Bank of England, the US Fed, and the Bank of Japan won’t be able to stop the markets from dumping their currencies. Nor will they be able to stop the price of energy, food, and most of life’s other necessities from soaring when the global markets lose faith in their promises.

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Experts Warn Healthcare.gov So Big And So Riddled With Security Flaws It Should Be Shut Down, Rebuilt From Scratch

While the abysmal rollout of Obamacare hardly needs any additional debacles, a recent hearing by technology experts in Congress added yet another, quite major, wrinkle to an already insurmountable problem: healthcare.gov is so fraught with security flaws, and so bloated with code, that it may easily expose the personal data of millions (we are being generous here) of users – it collects user names, birth dates, social security numbers, email addresses and much more – to even the least experienced of hackers.

It gets worse: when asked “Do any of you think today that the site is secure?” the answer from the experts, which included two academics and two private sector technical researchers, was a unanimous “no.”

And worse when the experts were asked “would you recommend today that this site be shut down until it is?” three of the experts said “yes,” while a fourth said he did not have enough information to make the call.

But the worst news of the day the experts said the site needed to be completely rebuilt to run more efficiently, making it easier to protect. They said HealthCare.gov runs on 500 million lines of code, or 25 times the size of Facebook, one of the world’s busiest sites.

Well… “Obama built that”

Senate Now Voting On "Nuclear Option"

As reported earlier, the Senate was set to vote on Harry Reid’s proposal to enact a “nuclear option” to eliminate the filibuster for Obama nominees (and potentially in toto). Watch the vote live on C-Span after the jump.

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Senate Now Voting On “Nuclear Option”

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The China Inflation Problem and Its Impact For Markets

Elsewhere in the world, China’s government continues to walk a very thin line. China’s GDP is largely created by funneling easy credit (total credit is now at 200% of GDP) into infrastructure projects (a record 49% of China’s GDP is in investment)… the cost of this money pumping and incessant investment is higher inflation:

In China, consumers pay nearly $1 more for a latte at Starbucks than their U.S. counterparts. A Cadillac Escalade Hybrid Base 6.0 costs $229,000 in China, compared to just over $73,000 in the U.S.

Welcome to China's modern retail world, where the price of many goods is far higher than in many other countries, a disparity that is all the more stark considering the income differences. A basic iPad 2 is priced at $488 in China, where average per capita income is around $7,500. The same tablet is $399 in the U.S., where average per capita personal income totals $42,693.

Clothing and other apparel is on average 70% more expensive for consumers in China than in the U.S., according to data from SmithStreet, which compared the prices of 500 items of 50 brands in both countries.

http://online.wsj.com/news/articles/SB10001424127887323932604579052973988936230

However, the reality of higher inflation won’t show up in China’s inflation data (which clocks in at an absurdly low 3%). However, you can see clear signs of this in China’s civil unrest: you don’t get wage and labor strikes for nothing. Workers protest for higher wages because they cannot afford increased costs of living.

In the three months from June to August 2013, China’s Labor Board recorded a total of 183 incidents on our Strike Map, up seven percent from the previous three months, and more than double the 89 incidents recorded from June to August in 2012.* In July alone, we recorded 78 incidents, with another 67 in August…

In Guangdong, for example, police detained 14 workers from Xinrongxin Kitchen Appliance in Shunde district on 27 August after they took to the streets demanding a total of four million yuan in wage arrears…

One trend of particular note in the strike map data is the increasing number of disputes in larger enterprises, those with 100 to 1000 employees. The proportion jumped from 35 percent in the months of June, July and August 2012 to 60 percent in the same period this year. In addition we noted five strikes involving more than a thousand people. In the manufacturing hub of Dongguan, for example, more than a thousand women workers staged a strike against wage cuts on 14 June and blocked the roads outside Hop Lun, a Swedish-owned garment company.

http://www.clb.org.hk/en/content/china’s-workers-turn-heat-summer-protest

Thus we are in a world in which Chinese officials must manage expectations, trying to convince investors that they won’t let inflation get out of control… but won’t crash the financial system either.

China's central bank added fuel to fears on Thursday it was clamping down on inflation risks as it allowed cash to drain from the financial system for a second straight week, sparking a jump in short-term rates.

The move by the People's Bank of China (PBOC) happened as Beijing stepped up its efforts to counter surging property prices in the capital in an attempt to calm rising discontent over the city's record-high home prices.

China also widened the funding options for local governments and property companies by giving them access to the interbank bond market to finance affordable housing, a priority of Chinese leaders, sources told IFR, a Thomson Reuters publication.

Housing data this week has raised fresh concerns about property bubbles in some major cities, which could add to consumer inflation – already at a seven-month high – and add to criticism that home prices are increasingly out of reach of ordinary Chinese.

http://www.reuters.com/article/2013/10/24/us-china-economy-idUSBRE99N07P20131024

I was bearish on China before, but they appear to have successfully navigated their “liquidity crisis” from earlier this year. But inflation is becoming a real problem there. The key issue will be how a slowdown in China impacts the markets.

Mark this as a major theme for 2014.

For a FREE Special Report on how to beat the market both during bull market and bear market runs, visit us at:

http://phoenixcapitalmarketing.com/special-reports.html

Best Regards

Phoenix Capital Research

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Obama's Sinking Feeling

…and it appears few, even among his own party, are willing to be Obama’s much needed Lazarus.

…

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Obama’s Sinking Feeling

…and it appears few, even among his own party, are willing to be Obama’s much needed Lazarus.

…

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Is Venezuela Selling Gold to Goldman Sachs?

With gold once again getting the slamdown treatment this morning (even as stocks shrug off any taper tantrum fears) the following article from Venezuelan newspaper El Nacional seems quite prescient. As Liberty Blitzkrieg's Mike Krieger notes, it appears to imply that the struggling South American nation has agreed to sell or swap the gold it still holds overseas at the Bank of England to Goldman Sachs. Perhaps that helps explain where Maduro got the money for the Samsung deal…

Via Liberty Blitzkrieg blog,

This is one of the major problems with gold. Despite what some may say, it is probably the most manipulated asset on the planet. Given the fact that so much of the gold is in the hands of sovereign nations and Central Banks that can be pressured by the U.S. empire, this is what happens. In fact, as I have said on many occasions, many of the Central Bank purchases we hear about do not consist of countries actually moving gold to within their borders, but rather just paper purchases. This does nothing to tighten supply/demand for gold. The main countries whose Central Banks actually appear to buy and deliver gold within their borders are China, Russia, Iran, and well, Venezuela. Until that changes, gold will be relatively easily manipulated, which is exactly why I support Bitcoin and why is taking off as it has.

From a sentiment perspective I think gold is buy, but personally I am waiting to see if we get one more major flush.

Here are excepts from the article courtesy of GATA. I believe it is a google translation and the actual sourced article in Spanish can be found here.

Venezuela’s Central Bank and Goldman Sachs are ready to sign an agreement to swap or exchange international gold reserves, with a start date in October, as stated in the contract, and until October 2020.

The negotiated amount, equivalent to 1.45 million ounces of gold, are deposited in the Bank of England and the transfers are made directly to Goldman Sachs once delivery times are stipulated.

The operation involves the delivery of gold from the central bank, which will receive dollars from the U.S. firm. The transactions are made through the creation of a financial instrument that is traded in the international market.

During the term of the instrument is an account called “margin,” in which the central bank agrees to deposit a larger amount of gold in the event that the price of gold falls or in which Goldman Sachs deposits a larger amount when gold increases. “At the expiration of the transaction the contributions are returned to their owners,” the document says.

There will be an adjustment to the asset value of 10 percent, to be used as a hedge in case the international market price falls, indicating that the U.S. bank takes care that if it produces a depreciation it will be covered and Venezuela would assume risk. The annual interest rate will be a combination of dollars with the call BBA Libor equivalent to 8 percent.

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