(Originally published at Slope of Hope)- Well, my fellow Slope-a-Dopes, as you know, I’m not even supposed to be here. Alas, the ominous geopolitical developments unfolding before our very eyes have the idiot insanely infatuated. The Savant must once again sound off, as he simply can’t help himself when his cerebrum is suddenly spinning a spontaneous scene of super sensational surrealism.

Like many on da Slope, as well as those who used to be with us, I clearly have a very hard time reconciling a U.S. stock market making new all-time-highs almost daily, especially in the face of what most economists consider to be a weak domestic economy with negligible growth prospects.  Moreover, when you layover the thoroughly stalled and certainly weaker overall global economic picture, it’s even harder to rationalize.  Finally, throw into the mix the gravity of threatening geopolitical tensions between the U.S. and Russia, the two nations with the largest stockpiles of tactical nuclear weapons on earth, and the market actually welcomes it.  Something majorly does not add up, well, to this Idiot anyways.

I know, I know, I know the economy is not the stock market.  What are you some kind of an idiot BDI!  But, let’s be honest with each other, the listed companies on the exchanges that make up the market in aggregate, do in fact represent the country’s economic condition at large. Therefore, if the overall economy has poor growth prospects, it surely stands to reason that the equity values which intrinsically measure the future earnings of those companies, should in point of fact reflect that future weakness. Yet, we continue to achieve new highs almost daily?  Some will tell you that it’s not so much the underlying value of the companies that is driving the market to new highs, but rather the Fed QE policy, printing ever free flowing funds which relentlessly increase financial asset values as the currency is consistently devalued, causing higher and higher prices. Well, if that were truly the case, wouldn’t rabid inflation be upon us in a general way, and thus reflected in all things cash buys?  The debased money still seems to be holding its value against certain other goods?  Not to mention that CPI is only around a 1% (rolls eyes).  Still others will tell you that it’s the astounding technology advances of our times driving the productivity gains which are behind these sensational stock valuations.  This I can buy into somewhat for several market sectors, at least where increased margins are concerned, but not across the board.  Moreover, during the past several quarters overall revenues have slowed, which has clearly been reflected in softer earnings growth for the majority of companies.  Yet remarkably, the market continues making new highs, seeing nothing but clear skies above and continued smooth sailing ahead.  Call me a stubborn Savant, but this idiot remains increasingly skeptical.  I mean really, all time highs with little to no median income growth and nearly 60 million Americans permanently on food stamps.  What gives?

If one dares to make the unfathomable hair-brained assumption that the market is quite possibly not reflecting and perhaps even blatantly misrepresenting economic reality, what can really be going on here? What’s really driving the ballistic buying binge?  I realize that the momos and trendos among us don’t give a damn, as they continue to rake in coin via a market seemingly tailor made to reward their systematic approach to trading, almost as if it were specifically designed to entice and encourage their fabulous feeding frenzy. Who’s-your-daddy, that seems reason enough to satisfy them. The quizzical BDI, on the other hand, requires real rational answers to feel grounded in humanity, otherwise he is driven mad in search of meaning. What is really behind this seemingly illegitimate, and laughably ludicrous levitation?  Well, your suspicious Savant has an entirely spectacular answer for you all, which may well identify what is really operating behind the scenes.  Brace yourselves, if it’s even remotely accurate, it is truly terrifying.

Behold BDI’s bold brash belief or bogus bloviated buffoonery:

Most of us will acknowledge that an International Banking Cabal is in full control of the major Central Banks which orchestrate the current monetary order that the globe’s financial system runs on.  Moreover, you would have been living under a rock to have not noticed that, ever since the financial crisis of 2008, the political authorities leading the developed Nation’s of the world’s are now willfully subservient to their respective central banks which in turn take their marching orders form the TBTF multinational banks which own them.  The cabal’s overriding self serving interests are paramount to us all apparently. Yet, this avaricious international banking cartel has no allegiance other then unto itself.

Astonishingly, even the once revered ideal of national sovereignty itself has seemingly had its wings effectively clipped by this elite banking class.  Perhaps the most obvious example of the abject subjugation, is the European Union, with its ECB imposed EURO hand cuffs firmly casting an iron grip around previously magnificent autonomous nations such as Italy and Spain, rendering them to a sad sorry state of subordinate EU foot stools.  How thoroughly we have permitted the self seeking interests of those privileged few closest to the powerful money levers control our collective destiny.  I dare say, many of you here seem to have acquiesced, and now actually welcome the money pushers. Beware my friends, as the pusher soon owns the junkie!

BDI genuinely believes that there may well exist self appointed elites running the deep state, acting as digital demigod’s directing our deferential dependency and deliberate dollar’s demise, nefariously orchestrating a bold and grand master program to complete the outright capture of our entire monetary existence.  It’s the Savant’s contention, that all of this supposed tumult on the ground in Ukraine, is none other than globalist inspired destabilization of the world’s sovereign Nation states designed to open the door for an IMF backed SDR new world monetary order, with the intent of establishing total financial hegemony over the world and all its natural resources, including those that are human.

These depraved puppet masters already have the European nation states right where they want them via their EU/ECB headlock strangle hold. They have rendered China entirely dependent on a debt driven export / low wage economic growth model, as they have done with all the BRICS.  They have destabilized MENA to disembowel OPEC. The next two chess pieces to fall will first be the once mighty Russian queen, followed by the indisputable king USA. The last move is to undermine the United States’ Petro dollar reserve currency supremacy. This final checkmate will be achieved by initiating a disastrous energy war.  They require a raging resource war to destabilize the USD. The current covert NGO manufactured and fomented riots in Kiev’s Maiden square, pitting Ukraine against Russia, is simply another carefully crafted conflict. They tried with Iraq and failed, they tried with Iran and failed, they tried with Libya and failed, they tried with Syria and failed, now they are desperately trying with Ukraine.  The American people could quite possibly fall for this last scheme. The MSM has certainly been working overtime to paint that Putinator prick as a dreadfully dangerous despot intent on world domination. The well publicized and most timely defection of RT network news anchor woman Liz Wahl, surely was induced by deep state operatives so as to sway reluctant U.S. public opinion towards war.   Pay attention America, the international bankers want war, same as it ever was.

The following piece written by Brandon Smith provides provocative historical evidence of the int’l banks’ lust for war:

With the exception of a few revolutions, most wars are instigated and controlled by financial elites, manipulating governments on both sides of the game to produce a preconceived result. The rise of National Socialism in Germany, for instance, was largely funded by corporate entities based in the U.S., including Rockefeller giant Standard Oil, JPMorgan and even IBM, which built the collating machines specifically used to organize Nazi extermination camps, the same machines IBM representatives serviced on site at places like Auschwitz. As a public figure, Adolf Hitler was considered a joke by most people in German society, until, of course, the Nazi Party received incredible levels of corporate investment. This aid was most evident in what came to be known as the Keppler Fund created through the Keppler Circle, a group of interests with contacts largely based in the U.S.

George W. Bush’s grandfather, Prescott Bush, used his position as director of the New York-based Union Banking Corporation to launder money for the Third Reich throughout the war. After being exposed and charged for trading with the enemy, the case against Bush magically disappeared in a puff of smoke, and the Bush family went on to become one of the most powerful political forces in America.

Without the aid of international conglomerates and banks, the Third Reich would have never risen to power.

The rise of communism in Russia through the Bolshevik Revolution was no different. As outlined in Professor Antony Sutton’s book Wall Street And The Bolshevik Revolution with vast detail and irrefutable supporting evidence, it was globalist financiers that created the social petri dish in which the communist takeover flourished.  The same financiers that aided the Nazis…

The two sides, National Socialism and communism, were essentially identical despotic governmental structures conjured by the same group of elites. These two sides, these two fraudulent ideologies, were then pitted against each other in an engineered conflict that we now call World War II, resulting in an estimated 48 million casualties globally and the ultimate formation of the United Nations, a precursor to world government.

Every major international crisis for the past century or more has ended with an even greater consolidation of world power into the hands of the few, and this is no accident.

The same cunning crafty cabal has synthetically pumped the U.S. Stock and Bond markets to precariously unstable new all time highs, under very dubious circumstances.  Could this have been orchestrated to create the most horrific horrendous havoc possible once the plug is pulled on all USD denominated financial assets?  The devastating simultaneous detonation of both the U.S. debt and equity markets ultra bubbles would decimate the USD and what was left of the public’s faith in the U.S. financial markets. This is how the Idiot Savant suspects it will all go down. Once the globalist successfully provoke a major resource war, the oil market will shoot straight through the roof, interest rates will spike, and a US stock market crash of epic proportion will ensue.  After the dreadfully disastrous devastating dollar fall out, the entire world will be on its knees begging and pleading for a NWO with an IMF/BIS/WBG sponsored global SDR currency regime to reset the globe’s malicious monetary mayhem meltdown mess. The Banksters will have us eating out of their filthy hands.  The masterful maniacal mission mercilessly accomplished.

Got Gold?

The Grateful Dead song Truckin comes to mind. The USA is being set up like a bowling pin.

Sitting and staring out of the hotel window
Got a tip they’re gonna kick the door in again
Like to get some sleep before I travel
But if you got a warrant I guess you’re gonna come in

Busted down on Bourbon Street
Set up like a bowling pin
Knocked down, it gets to wearing thin
They just won’t let you be

BDI from the 47th with electrodes taped to his boobs, wishing he were high as a kite. Although, the last thing this EP needs is a further altered state of mind blowing inspiration.

via Zero Hedge http://ift.tt/NP3Ev1 Tim Knight from Slope of Hope

Excerpted from Prem Watsa’s Fairfax Financial Holdings investor letter,

There is a monstrous real estate and construction bubble in China, which could burst anytime. It almost did in 2011 but China increased its credit growth significantly since then.

In the last few years we have discussed the huge real estate bubble in China. In case you continue to be a skeptic, here are a few observations from Anne Stevenson Yang, an American who has been in China for over 20 years and is the founder of JCapital Research in Beijing:

1. China added 5.9 billion square metres of commercial buildings between 2008 and 2012 – the equivalent of more than 50 Manhattans – in just five years!

 

2. In 2012, China completed about 2 billion square metres of residential floor space – approximately 20 million units. For perspective, the U.S. at its peak built 2 million homes in a year.

 

3. At the end of 2013, China had about 6.6 billion square metres of new residential space under construction, around 60 million units.

 

4. Yinchuan, a city of 1.2 million people including the suburbs, has 30 million square metres of available apartments – roughly 300,000 units that could house 900,000 people. This is in addition to the delivered but unoccupied units. The city of Guiyang, capital of Guizhou Province, has roughly 5.5 million extra units for a city of 5 million.

 

5. In almost every city Anne has visited, pretty much the whole existing housing stock has been replicated and is empty.

 

6. Home ownership rates in China are estimated to be over 100% versus 65% in the U.S. Many cities report ownership over 200%. Tangshan, near Beijing, is one.

 

7. This real estate boom could only be financed through unrestrained credit growth. Since 2009, the Chinese banks have grown by the equivalent of the entire U.S. banking system or 15% of world GDP.

 

8. The real estate bubble has resulted in companies extensively borrowing and investing in real estate or lending on real estate in the shadow banking system. This is exactly what happened in Japan in the late 1980s.

 

9. And one observation of our own: Since 2009, the easing by the Federal Reserve combined with the explosive growth in China, backed by higher interest rates, has resulted in huge inflows (‘‘hot money’’) into China. The near unanimous view that the renminbi would strengthen has resulted in a massive carry trade where speculators have borrowed at low rates across the world and invested in China, almost always backed by real estate. The shadow banking system in China – i.e., assets not on the books of the major Chinese banks – is estimated by Bank of America Merrill Lynch to be approximately $4.7 trillion or 51% of Chinese GDP. Oddly enough, prior to the credit crisis, the U.S. had $4.5 trillion in asset-backed securities outstanding or approximately 31% of U.S. GDP. You know what happened then. When the flows reverse in China, watch out!

These observations remind me again of the following quote from Michael Lewis’ essay in Vanity Fair, “When Irish Eyes are Crying”, which I wrote to you about in our 2010 Annual Report: “Real estate bubbles never end with soft landings. A bubble is inflated by nothing firmer than expectations. The moment people cease to believe that house prices will rise forever, they will notice what a terrible long term investment real estate has become and flee the market, and the market will crash.” Amen!

As they say, it is better to be wrong, wrong, wrong and then right than the other way around!

For those of you who believe a picture is worth a thousand words, please watch the recent BBC documentary “How China Fooled the World”.

Brief clip here

Finally, in our 2007 Annual Report, we quoted Hyman Minsky, the father of the Financial Instability Hypothesis, who said that history shows that ‘‘stability causes instability’’. Prolonged periods of prosperity lead to leveraged financial structures that cause instability. This quote was in relation to the U.S. in 2007. It applies in spades to China in 2013!

Any credit event in China will have very significant ramifications for the world economy, as China is the world’s second largest economy and consumes 40% to 50% of most commodities from iron ore to copper.

via Zero Hedge http://ift.tt/1llKYhv Tyler Durden

What does the typical Westerner think of when asked about Ukraine?

 

 

Source: Russian Esquire

via Zero Hedge http://ift.tt/1nxF26l Tyler Durden

Submitted by Nick Cunningham via OilPrice.com,

The Russian occupation of Crimea has raised concerns about the European Union’s dependence on its eastern neighbor for natural gas. The EU gets about 34% of its natural gas imports from Russia, a large portion of which transits Ukraine through a web of pipelines. For Eastern Europe, that dependence is much greater. In the brutally cold winter of 2009 Russia cut off gas supplies to Europe allegedly over a pricing dispute with Ukraine. However, it was also a lesson to Western Europe on its dependence on Russia for energy.

 

Russia has a track record of using its natural gas supplies as a political weapon. The latest incursion into Ukraine has no doubt revived worries among European policymakers that saw what happened back in 2009. Thankfully, Vladimir Putin eased tensions on March 4, indicating that he wasn’t seeking a military conflict. This allowed natural gas prices to fall back a bit after spiking by 10% the day before.

But how vulnerable is Europe to the political machinations of the Kremlin? It appears that this time around the EU is in better shape. A mild winter and stagnant demand have left Europe with higher levels of inventory than in past years. According to a spokeswoman at the European Commission, the EU has 40 billion cubic meters of natural gas on hand in storage, which accounts for 10% of annual demand for the entire European Union.  Those figures vary by country (Czech Republic and Slovakia have 90 days of supplies; Hungary two months; Austria six months), but as a bloc, the EU has 20% greater supplies at its disposal than it did last year.

And it’s not just seasonal patterns that have put the EU in a better spot. Europe has been reducing its reliance on Russian gas for a while now – in 2003 the EU imported 45% of its natural gas from Russia. It’s now down to around one-third.

Europe has been the beneficiary of the shale gas boom in the United States, even though the U.S. hasn’t even really begun to export LNG. The surge in domestic production allowed LNG from other parts of the world – Qatar, for example – to be rerouted to Europe. (Several U.S. members of Congress have tried to exploit the Ukrainian crisis, arguing for the Obama administration to issue a blanket approval for LNG exports in order to isolate Russia. Over the short-term, that is nonsense – it will take years to build the terminals, so issuing licenses for exports won’t do anything to help out Europe. Over the longer-term, that may be a different story). Europe has also undergone a big effort at implementing greater energy efficiency and renewable energy. Moreover, the U.S. has exported more coal to the EU in recent years, which competes with high priced natural gas there.

Thus Europe is more secure than many believe. Moreover, the EU and Russia are so interdependent that it is unlikely Russia will proactively cut off gas supplies to Europe. In fact, Russia is arguably more dependent on the EU than the other way around. Europe has other options. Russia, on the other hand, is heavily dependent on oil and gas, which account for half of the country’s total budget revenues. For Putin, cutting off gas exports to Europe would be akin to him cutting off his nose to spite his face.

“It would be highly counterproductive for Russian interests at a time when Europe is considering how to respond to Russian actions in Crimea, to take steps that would have a major and negative direct impact on Europe,” said Laurent Ruseckas, a senior associate at IHS CERA, as reported by Politico.

The economic damage of energy supply disruptions cuts both ways. Putin likes to play the role of bully, but Russia is not exactly in a strong position in terms of using energy as a political weapon. Whether or not the Ukraine crisis deepens, it is unlikely that Moscow would intentionally turn off the taps for any prolonged period of time.

via Zero Hedge http://ift.tt/1iqZEyt Tyler Durden

The only thing that is unclear about the following clip released by the Ukraine’s Border Guard supposedly capturing Russians “digging in” on a key route linking Crimea to the rest of the Ukraine, is what is funnier: that the Russian soldier is “painting” the drone with a laser flashlight, or that according to the Ukrainians said action was evidence the drone was being “shot at” by Russian soldiers.

 

As a follow up, here is another video made by a Ukrainian drone showing the distribution of Russian forces on the peninsula.

via Zero Hedge http://ift.tt/1dFSl1J Tyler Durden

Submitted by StreetCry via the MarkStCyr.com blog,

There probably isn’t an over used phrase thrown across the media landscape than, “It’s different this time.”

One can’t look at the financial markets, the political stage, and more without shaking ones head. Nothing seems to make sense. Yet if one wants to lazily answer, “It’s different this time.” Things become crystal clear.

Water now seems to run uphill. The definition of words no longer mean what they once did. (we’re still marveling on what is – is) Free society means the loss of only a few freedoms per year, as opposed to everything at once. Work is a bad thing however, if someone else goes to work and pay for your things – then that’s good. You can keep your plan if you like your plan – but if we don’t like it – well – you can’t. The Federal Reserve would never monetize the debt – however if you’re a preferred dealer in the QE (quantitative easing) program – they’ll do it for you. I could go on but for brevity’s sake, I’ll stop there. I believe you get the drift.

These precarious times leave many scratching their heads. It has been (and continues to be) extremely difficult to rationalize exactly what one personally, or business and investing wise should, or should not be doing.

When everything one has both learned through experience or looked back through history for clues now seems irrelevant, or worse – indifferent. It truly makes one question one’s sanity as you wrestle daily with the over whelming feeling that you just may be – the only sane person in the asylum. And that is not a comforting resolution to one’s conclusions. For it begs the rebuttal: Then who’s truly the crazy one?

I was asked the other day why I continue to make arguments for caution where some people at times are having a field day with the equivalent of kicking me in the shins as the financial markets rise higher, and higher, to ever higher heights? It’s a good question and I thought I’d extrapolate more on what or why I’m seeing blatant warning signs others can’t or, refuse to.

Let me express why my observations cause this with the following line: When everyone is on the band wagon – except the band. You had better take notice.

First, let me give some background as to why I have standing to make such arguments.

In addition to my business acumen, I cut my teeth and actually traded my own money (not some form of 401K account – a true margin account) in the futures markets and more both before, during, and after the financial market meltdown of 2009. A period where; if you momentarily dared to turn away from your screens to just shred a document, your positions could be up six figures (as in making money) or down the same. (as in lost)

So turbulent and crazy this period of time was, many had to shake their heads to snap out of their contemplations of; “Hmmmm?” after seeing a Depends® commercial roll across the TV. And every single one almost to a person of the so-called “smart crowd” paraded across the financial media landscape not only didn’t see it coming – they were patently dumb struck on why it was happening, and what one should do about it. (People think these commercials are placed because of age demographics. After 2009, I started to question that argument. It now seemed to speak to a far greater group. But I digress.)

During that time, I have traded with open positions when the markets has been “Lock limit down.” For those not familiar with the term it basically means the markets are halted or shut down as to try to stop the panic.

I have been in situations (and know of many other veteran traders) where positions were unable to be closed as to stop the bleeding – as one watched the account balances disappear, or worse  – go negative. Not to mention the frustration when the inability to get hold of brokers to alter or close positions when platforms freeze, while account balances swing wildly out of control.

There are people who’ll line up to tell me about how they currently have this or that hedged. How X will take care of Y and so forth. All sounds good, the rationale appears sound, but experience will tell you, a backup plan for the markets is insufficient and foolhardy at best. You need a backup plan – to your backup plan – with an additional backup plan. Along with the ability and faith you can execute it in a panic situation. Period. And that’s just for starters.

You haven’t truly traded volatile markets till you’ve stood and stared doe-eyed watching the money in your account as it spirals downward out of control with seemingly no way to stop it. There are ways, but very few know, never mind could execute in the moment. I would venture to say based on people I’ve spoken or listened to, 4 out of 5 are ill-equipped for any real shock to the markets. Especially at where they are currently. However it’s exactly this crowd that is the most vocal using the guise of “The Fed’s got their back.” as if bad things now can’t happen. So why worry? Because – (you guessed it) “It’s different this time.”

I know and try to relate first hand stories of veteran market traders worth millions wiped out in near moments and far, far more. (Never-mind by their own hand or trades just ask a victim of the MF Global™ scandal) Yet, it continually falls on deaf ears as one talks to people who just believe the markets are, “ducky.”

Many (if not most) either just started handling their self-directed 401K accounts (which is the way to do it in my opinion) over the last few years. To them the tone and tenor of anything market related falls into the category of, “Everything of the past is old news.” “The Fed’s got their back,” and more. I’m usually left to myself just shaking my head.

Personally, I have read more books on technical analysis, market psychology, option studies, probability studies, volatility strategies by all the best known authors, along with even more brilliant yet, less heralded ones. I have put money to work via investment advisers, as well as real-time trading strategy/execution services. Yet, if I question someones thinking or thoughts on the markets? I get a look like, “Yeah sure. What do you know. Can’t you see? It’s different this time!” And once again, the conversation just about ends there.

I’m begging to feel that in some strange way they may have a point. But – it’s for all the wrong reasons. And here’s why…

A few things (although very big) have changed over the past 5 years since the great market collapse. These are in no specific order of importance.

First: The advent of government involvement within the financial markets is unprecedented in its history. It can not be understated the influx of Trillions of dollars via the Federal Reserves QE programs, and the levered effects that influence has brought to bear. We don’t have a shred of true market forces that warrant such levels. (Please save the emails. You’ll do better with CNBC® than me.)

Who cares if war, or anything else pops up on the horizon which not that long ago (say before QE?) at the very least would cause the markets to take at the very least – a defensive position. (Remember Greece?) Nope, not in the least.

As one nation after another with its cities on fire, citizens battling in the streets, cries of defaulting on sovereign debt, export/import disruptions, and more. Since the intervention of the QE programs; as long as the spigot remains open – the world and its crises are mere footnotes.

Just look at what is taking place today in the Ukraine. Quite possibly the greatest global uncertainty wrench into the gears of the world at large. Russia puts boots on the ground, test fires an ICBM to heighten threats. North Korea test fires more missiles during this same period. At the same time our largest holder of debt and largest trading partner China publicly sides with Russia’s invasion calculations, not to mention their newest economic figures have been awful (and they are notorious in fudging them as to make them better than they truly are)  and the markets reaction? Not only higher, but Investor Intelligence™ surveys show that traders are the least caring of a market hiccup in over 15 years!

That’s the equivalent of more unicorn and rainbow thinkers in the market today than the dot-com bubble! Absolutely mind-boggling in my view.

Back all this into an algo-filled, machine dominated, high frequency trading environment and you can make the rational argument that the once ,”free” financial markets. Are now truly different this time.

For if the machines only care about the numbers – will act on those numbers – and you only supply the numbers the way the machines care about. Well, you do in theory have control, right?

Well yes but (and it’s a very big but) till you don’t. Then what?

And that’s where my arguments still fall. Again, far too many whether they be entrepreneurs, traders, business executives, and more are not calculating, “what ifs?” That is a recipe for disaster in my view.

To show how far we’ve come from reality all one needs to do is to look at how or what the media will or will not cover. Remember, Black Monday? That was back in 1989 when the markets crashed. Over, and over, and over this was reported on anniversary after anniversary. Now? For all intents and purposes, it passes quieter than two ships passing in the night.

I bring this point to the forefront for the sole purpose of pointing out there was an anniversary this week. It was the 5th anniversary of the financial markets collapse. The worst since the era that brought about The Great Depression. And if I didn’t bring it to your attention now, many of you probably didn’t even know it. The near mention of this event had more in line with the Harry Potter character of “You know who” as in “He that shall not be named.” The 2009 financial collapse now seems to be of the same ilk.

Again, as to push the point I made earlier on things that leave people scratching their heads. Black Monday (a far less eventful matter as compared with the final declines of 2009) was headlined, spoke of, theorized, along with a great whaling and the gnashing of teeth – every anniversary. And what about this one? The silence was deafening.

Here’s the rub – we all know the unemployment #’s are worthless. We know they’re currently manipulated to the point of absurdity. We know that GDP (gross domestic product) trade deficits, and much, much more are now running inline with as much controversy as to their validity as those we get from the Chinese government. Accounting standards and the reporting of earnings are once again venturing on comedic.
(As in an a company lost money according to general accounting, but based on Non-general? The place is rolling in dough!”)

Fact or fiction seems to no longer matter anymore. It’s now blatantly obvious: spin a tale no matter how large for if it sticks – it’s now considered fact. And if they don’t believe the first lie – just readjust or recalculate the formulations to provide something they will believe. It’s becoming near maddening.

So I guess it truly is, “different this time.”

Just what happens when it’s realized that puddle on the floor isn’t from unicorn tears but from someone who didn’t see a Depends commercial is now anyone’s guess.

via Zero Hedge http://ift.tt/1k7KThs Tyler Durden

Deja vu all over again…

 

Source: Sunday Funnies

via Zero Hedge http://ift.tt/1ehzhUn Tyler Durden

Investors can’t bail fast enough on emerging markets at the moment. And rightly so, given the potential for further problems as I highlighted in last week’s post, Emerging Market Banking Crises Are Next. But the indiscriminate sell-off of emerging markets also opens up some potential opportunities. Asia Confidential thinks South Korea stands out as one such opportunity.

South Korea isn’t really an emerging market though. It’s a US$1.1 trillion economy, the 15th largest in the world. With populations above 50 million, the economy ranks 7th globally. Nonetheless, those in charge of indices such as MSCI still classify South Korea as an emerging market. Which should make you question the entire notion of “emerging markets”, as I do.

That aside, South Korea has tremendous long-term prospects. It’s an open economy with a robust democracy. It’s a world-class manufacturer which has every chance of becoming the next Germany. It has a highly educated and hard working labor force. Unlike its former coloniser, Japan, it’s shown the ability to adapt and reinvent itself. And importantly, the prospect of reunification with North Korea in the not-too distant future would prove a tremendous boon for the South and drive an unprecedented investment boom.

The short-term outlook is bright too. Unlike many other emerging markets, South Korea runs a current account surplus and therefore isn’t vulnerable to capital outflows from QE tapering. It also never had the credit boom that other Asian countries experienced. Significantly, it’s highly exposed, via exports, to economic recoveries in the US and Europe (the latter being more dubious than the former).

To top it off, South Korea is the cheapest country in Asia with a 2014 price to earnings ratio (PER) of just 8.8x. There are a number of world-class companies in South Korea trading at just 6x earnings. Bargains in plain sight, you might say.

Emerging market, really?

To get a sense of the long-term opportunity, it’s important to understand a brief bit of history. South Korea tends to get lost in the headlines of much larger neighbours, China and Japan. Only the threat of North Korean conflict or music poking fun at rich people (Gangnam style) occasionally breaks this trend. But the success story of South Korea is on par with its neighbours.

As many of you would know, South Korea was brutally occupied by Japan from 1910-1945. Post-World War Two, it was split into North and South Korea by the US and Soviet Union. The Cold War was the central driver to the Korean War soon after. The 1953 armistice signed at the conclusion of the war split the peninsula along a demilitarised zone. Technically, South and North Korea are still at war. Some 2 million troops patrol the demilitarised zone, making it the most heavily-guarded border in the world.

Fast forward to 1961 and the rise of Park Ching-hee to the leadership. Chung-hee is known for being the most important ruler in South Korea’s history.

When he came to power, South Korea’s GDP per capita was just US$72. Needless to say, a very poor country. Chung-hee drove South Korea into the modern age with often brutal efficiency. He did this through export-led industrialisation and oversaw the creation of the now-famous conglomerates known as chaebol. Along with Hong Kong, Singapore and Taiwan, South Korea became known as one of the four “Asian Tiger” economies.

During the 1970s though, economic growth slowed as the investment-led model ran out of steam. And resentment grew towards Chung-hee’s authoritarian rule. The President was subsequently assassinated in 1979.

South Korea recovered and, along with many other Asian countries, experienced rapid growth in the early-to-mid 1990s. When exploding foreign debts led to the collapse of Asian currencies, South Korea had to go to the IMF for a record US$58 billion bail-out package. This was humiliating to a proud nation.

South Korea handled the Asian crisis in a very different way to other countries, however. People in countries elsewhere moved their money to the Cayman Islands for protection. In contrast, South Koreans banded together, determined to pay off the debts. People queued up for hours to donate jewelry to the cause.

Unlike a number of other Asian countries, South Korea also let companies fail instead of bailing them out. Some 40% of the biggest companies were allowed to go under. This included multinationals such as Daewoo. Staggeringly, the IMF debt was repaid by 2001 and South Korea’s economy was back on track.

South Korea’s adaptability under dire circumstances stands in stark contrast to others. Its once colonial master, Japan, hasn’t shown the same attributes since 1990. And Taiwan, another former Japan colony, has also failed to remake itself post the crisis.

From 1998, the chaebol brought in professional managers to oversee operations, while the founding families retained control over strategic decisions. They moved fast to build plants in China to give them a low-cast labor advantage. They outspent rivals on research and development. And they weren’t afraid to expand abroad and take on the big boys.

Hyundai is a case in point. It first entered the North American car market in 1986. Funnily enough, its cars initially met with some success as Americans mistook them for Honda cars (they had similar logos). Post that, Hyundai’s cars became a bit of a joke, known for poor design and numerous quality issues.

Instead of retreating though, Hyundai doubled down. In 1998, it offered a ten-year warranty, more than twice its competitors. The move was laughed at by many. By it proved a game-changer for the company and the industry.

In 2005, Hyundai opened its first American plant in Alabama. US competitors dismissed the move, given the enormous problems they were having with high-cost union labor forces in Detroit at the time. The difference was that Hyundai didn’t have these same labor issues. And the plant has now become one of the most efficient in the US.

Turn to today and Hyundai is one of the world’s top-5 car companies. Though it’s certainly not the only South Korean company to have proved itself on the world stage.

Challenges today

South Korea does resemble some other emerging markets in one respect: it relies extensively on an export-led economic model. Exports account for 56% of GDP. And chaebols account for 82% of GDP.

It’s obvious that the country needs to become less reliant on exports and look to the next drivers of economic growth. Those drivers are likely to come from the still undeveloped services sector. 

South Korea’s leaders realise the urgency of the task. Recently, President Park Guen-hye (daughter of Park Chung-hee) outlined her so-called 474 plan: 4% economic growth, 70% employment rate and average per-capita income of US$40,000.

Simply put, the plan involves the following:

• Shift tax benefits from chaebol manufacturers to start-ups
• Rein in state-owned enterprises
• Provide support to venture capital
• Cut back on regulations in a variety of sectors including health and education to promote competition
• Incentivise employers to hire more young people and women

This isn’t the first time that South Korea has tried to reduce its reliance on exports. In the early 2000s, it granted tax breaks to credit card users in order to spur domestic spending. Predictably, consumers got carried away and delinquencies on credit cards reached 30%. Companies had to be bailed out and economic growth stalled by 2003.

Corporate deleveraging and government restrictions on business borrowing since the 1997 crisis have also encourage bank lending to households. That borrowing has mostly found its way into real estate. Consequently, household debt has grown about 2x GDP since the crisis. And household debt in South Korea is now around 150% of household disposable incomes. 

The risks from this debt are limited though. More than 70% of the debt is owed by the top two quintiles by income, which have twice as many assets as debt. Also, South Korea has imposed strict 40% loan-to-value ratios on property purchases. Finally, the central bank has forced some lenders to write off 40% of the value of personal loans, reducing the risks of a consumer debt bust.

However, the challenges of rebalancing the economy and finding new sources of growth remain. Given its track record of adaptability, Asia Confidential is confident that South Korea can reinvent itself again.

2014 economic outlook

So what about the short-term outlook for the economy? Here, the prospects seem reasonable.

Unlike many emerging markets, South Korea consistently runs current account surpluses and therefore isn’t susceptible to capital outflows from QE tapering. It also hasn’t had a credit boom over the past 3-4 years and thus isn’t vulnerable to a hangover on this front.

Prospects for growth look ok too. South Korea’s still large dependence on exports may play in its favour as the country is geared to any recovery in the US and EU. While on paper the US and EU only account for 20% of Korean exports, the number is actually much larger as these are the ultimate destinations for the bulk of Korean exports to emerging markets.

South Korean exports to the US and EU bottomed in 2012 and have steadily improved. Bank of America Merrill Lynch forecasts 8% growth in exports to the US and EU in 2014.

South Korea is highly correlated to US growth. Every 100 basis point change in US GDP growth impacts South Korean GDP growth by 80 basis points. 

In addition, deflationary fears in South Korea appear misguided. Inflation is likely to return to the 2% level this year after bottoming at 1.3% last year. Signs of rising inflation can be seen in core inflation, which rose almost 3% quarter-on-quarter, in seasonally-adjusted terms, over the last several months. Any rate hikes though aren’t likely until the end of the year, at the earliest.

Lastly, the housing market is showing signs of life after five years in the doldrums. Transaction volumes and prices improved in the second half of last year. Volumes could reach 80,000 units/month in the first half, the third-highest level since 2008. That said, high household debt should limit the extent of the property recovery.

In sum, the near-term outlook isn’t outstanding. But it’s better than most.

Long-term powerhouse

The long-term prospects for South Korea look brighter, for three reasons: 

1. Its already world-class companies are likely to move aggressively up value chains to find new niches to dominate. South Korea is well known for its cars and electronics. It’s also found success in less sexy industries such as shipbuilding too. The top three global shipbuilders are from South Korea. I not only expect continued gains in these type of industries, but new ones too. A highly educated workforce, high investment in R&D and a proven ability to compete and adapt should ensure this.
2. The aim to boost service industries should pay dividends and provide the next leg of growth for South Korea. Skeptics will point to South Korean historical failures on this front. But it’s increasingly clear that South Korea realises the risks of the country being left behind if it doesn’t rebalance the economy.
3. The real potential kicker is North Korea. Yes, North Korea is exceedingly poor but it has a disciplined population of 24 million and immense natural resources. Put this together with South Korea’s capital pool and management capability and you have an irresistible combination. It would likely produce an investment bonanza of unprecedented proportions. South Korea is already preparing for unification by keeping its debt low to absorb the huge costs in rebuilding the North. Note also, the President is pushing for unification, recently saying:  

“Unification will allow the Korean economy to take a fresh leap forward and inject great vitality and energy. People would even sing “We dream of unification in our dreams””.

If I’m right about the bright long-term prospects for South Korea, the so-called “Korean discount” should fade. For the uninitiated, markets continue to impose a discount on the valuation of South Korean stocks given the often murky operating structures and financials of the large companies. 

This view is somewhat outdated given the substantial improvements in business structures and accounting over the past decade. Further improvements should eventually see the discount disappear, providing further upside to Korean stocks.

Valuations stack up

Price is ultimately what matters with any investment. And on this front, South Korea looks attractive. It’s the cheapest market in Asia, trading at just 8.8x this year’s earnings, a 24% discount to Asia ex-Japan’s 11.6x PER. Consensus forecasts 13% earnings growth in 2014, versus 12% for the Asian region.

If you dig a little more, there are some exceedingly cheap valuations for world-class companies. For instance, Kia Motors is trading at 5.9x 2014 PER. Samsung Electronics is also priced at just 6.9x earnings. 

Some of the domestically-focused large caps are also priced at levels not seen in other markets. For instance, KB Financial, a consumer bank, trades at a 40% discount to tangible book value (net asset value, in other words). Yes, return on equity at KB Financial is a low 6% but if this improves from abnormally depressed levels, then the discount to book value should diminish too.

Potential risks

No investment is without risks and these risks need to weighed against the potential rewards. I see three key risks for South Korean stocks:

1. Any recovery stalls in developed markets. The US recovery is painfully slow, but it’s better than elsewhere. Particularly the EU, where deflationary risks remain. If economies in these regions lurch downward again, South Korea would be disproportionately impacted.
2. The yen is also a big risk. Regular readers will know that I foresee a much lower yen in the medium term given the Abe government’s insane money printing policies. Given a lower yen, Japanese exporters are expected to provide much stiffer competition to their South Korean counterparts going forward.
3. The obvious long-term risk is North Korea. A messy and violent reunification with the South would seriously dent future economic prospects.

In my view, the first and second risks are already partially if not fully factored into South Korean valuations. If these things don’t eventuate, or not to the extent envisaged, then the upside for stocks is pretty clear.

AC Speed Read

– South Korea stands out as a buying opportunity amid the indiscriminate emerging markets sell-off.

– The country’s short-term economic prospects are positive given its sound financial position reduces risks from QE tapering. Also, its export-led economy has significant exposure to the US recovery.

– Long-term, South Korea manufacturing prowess could turn it into the next Germany. There’s also the prospect of reunification with North Korea, which would prove an investment boon to the South.

– Valuations are cheap as well, with South Korea trading on just 8.8x 2014 earnings. World-class companies such as Kia are priced at just 6x earnings.

– Potential risks include a slowdown in developed market economies and a lower yen making Japanese exporters more competitive vis-a-vis their South Korean counterparts.

This post was originally published at Asia Confidential: 
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via Zero Hedge http://ift.tt/1ehzeaX Asia Confidential

Submitted by Mark Thornton via the Ludwig von Mises Institute,

President Barack Obama has recently released his budget in which he calls for an “end of austerity.” This is an amazing statement from a president whose government has spent the highest percentage of GDP in history and added more to the national debt than all past presidents combined. What must he mean by austerity?

There are demonstrations around the world over austerity on an almost daily basis. It is condemned as an evil poison for tough economic times while others tout it as the elixir for economic depressions.

The president’s rejection of austerity represents the Keynesian view which completely rejects austerity in favor of the “borrow and spend” — increase aggregate demand — approach to recession. What he really is rejecting is the infinitesimal cutbacks in the rate of spending increases and the political roadblocks to new spending programs.

While the 2009-2012 budgets have been relatively flat, they are still more than 15 percent higher than in 2008 and 75 percent higher than in the previous decade. This four year leap in spending was financed with a $5 trillion increase in the national debt. No austerity here!

The type of austerity that gets the most worldwide press attention on a daily basis is that promoted by economists at the International Monetary Fund. This “austerian” approach involves cutbacks in government services and tax increases on the beleaguered public in order to, at all costs, repay the government’s corrupt creditors. This pro-bankster approach is what generates a massive amount of media attention and sometimes violent demonstrations.

Austrian School economists reject both the Keynesian stimulus approach and the IMF-style high-tax, pro-bankster approach as counterproductive. Although “Austrians” are often lumped in with “Austerians,” Austrian School economists support real austerity. Real austerity involves cutting government budgets by reducing salaries, employee benefits, and retirement benefits. It also involves selling government assets and even repudiating government debt. Instead of increasing taxes, the Austrian approach advocates decreasing taxes.

Despite all the hoopla in countries like Greece, there is no real austerity except in the countries of Eastern Europe. For example, Latvia is Europe’s most austere country and also one of the fastest growing economies. Estonia implemented an austerity policy that depended largely on cuts in government salaries. In contrast there simply is no significant austerity in most of Western Europe or the U.S. As Professor Philipp Bagus explains, “the problem of Europe (and the United States) is not too much but too little austerity — or its complete absence.”

Real austerity for individuals means living a highly restricted lifestyle. The best example is the monk who lives on a subsistence-level diet, wears simple clothing, possesses a few basic pieces of furniture, and uses only necessary utensils. His days consist of long hours of work and prayer with no leisure activities and he may not even enjoy indoor heating or plumbing.

Austerity applied to whole countries, is not necessarily so harsh or ascetic. It simply means that the government has to live within its means.

If government were to adopt a thoroughgoing “Libertarian Monk” lifestyle, then the national government would be cut back to only national defense without standing armies and nuclear weapons. The national debt would be wholly repudiated. This would involve certain short-run hardships, although much greater long-run prosperity.

In contrast, the typical austerity policy is not severe. Government employees would be given cuts in wages, benefits, and retirement benefits necessary to balance the budget. The biggest cuts would fall on politicians, appointees, and senior bureaucrats. Given that such cutbacks occur when most everyone is facing cutbacks and hardships and given that government employees are typically very well compensated, it is not unreasonable to expect them to bear most of the burden of an austerity policy.

One particularly promising area for cutbacks is government regulation. Regulation is a burden on taxpayers, discourages entrepreneurship, and makes us less safe. One recent empirical study found that regulation was extremely costly and that “eliminating the job of a single regulator grows the American economy by $6.2 million and nearly 100 private sector jobs annually.”

Real austerity actually works best with tax cuts. To help austerity create growth it needs to be understood that certain taxes are highly discouraging to production. Tax cuts on investment and capital in contrast stimulate economic activity and production.

IMF-inspired tax increases make no sense. In hard times, government policies should be guided by the idea of increasing production, not of making production more burdensome via higher taxes. In much the same way, our ascetic monk does not force his duties and burdens on ordinary citizens.

President Obama has also suggested higher taxes (again) this time such as the removal of “tax breaks” for the retired rich. This would be the first step toward robbing our IRAs. Some have even suggested that “austerity” should involve extending existing taxes onto charities and nonprofits. Others have suggested taking away the tax-exempted status of charities and non-profits, which is nothing but a backdoor tax increase. These are some of the dumbest suggestions, especially in economic crises and are not real austerity.

Austerity does not mean, for example, budget cuts that would eliminate garbage collection or shutting down the fire department while leaving the military, education, and the spy state untouched. This is just a form of extortion that does not solve the problem. It only reveals the true nature and intent of those who work in government.

The Keynesian stimulus approach does not work. The IMF-inspired austerian approach also does not work. Only real austerity works. This means cutting government employee incomes, benefits, and retirement benefits. This alone would encourage them to run a tighter ship in the future. Eliminating regulators and regulations, cutting taxes, and selling government assets would all aid in the recovery process.

President Obama and Congress should get busy doing what is best for the economy and the American public instead of enriching themselves and those who feed at the public trough.

via Zero Hedge http://ift.tt/1cH2Nrx Tyler Durden