Stephen Roach Warns China's Policy Incoherence Has Become Evident

Authored by Stephen Roach, originally posted at Project Syndicate,

China was hardly lacking in policy pronouncements in the final months of 2013. From the 60-point reform program issued by the Central Committee’s Third Plenum in early November to the six core tasks endorsed by the Central Economic Work Conference a month later, China’s leaders proposed a raft of new measures to address the daunting challenges that their country faces in the years ahead.

But, seen in their entirety, the risk of incoherence has become evident. The Third Plenum initiatives, for example, have a strategic focus: promoting the economy’s long-awaited pro-consumption structural rebalancing. While the Work Conference’s core tasks embody the spirit of these reforms, they also reflect a tactical focus: “keeping growth steady.” Given the likely tradeoffs between strategy and tactics – that is, between long-term reforms and short-term growth imperatives – can Chinese policymakers really accomplish all of their objectives?

Of course, such tradeoffs have long been evident in most economies – developed and developing alike. What has separated China from the pack has been its strong inclination to place greater emphasis on strategic objectives in charting its economic-development path.

Even so, new tensions between the Third Plenum’s policies and those of the latest Work Conference have raised the question of tradeoffs once again. The consumer- and services-led rebalancing initially proposed in the 12th Five-Year Plan and endorsed by the recently concluded Third Plenum implies slower GDP growth than the 10% average annual rate recorded from 1980 to 2010.

Yet slower growth need not be a bad thing. Employment in Chinese services is about 30% higher per unit of output than in the manufacturing and construction sectors, which means that an increasingly services-led China can accomplish its critical labor-absorption objectives – namely, rapid job creation and poverty reduction – with 7-8% annual growth.

For China, rebalancing and slower growth go hand in hand – and yield the additional benefits of less intensive resource demand, a more subdued rise in energy consumption, and related progress in addressing environmental pollution and income inequality. But the recent Work Conference failed to consider China’s growth slowdown in this strategic context, placing considerable weight instead on the macro-stabilization imperatives of “proactive fiscal and prudent monetary policies.”

Since the Work Conference was concluded, investors have been debating the 2014 growth target. Will the 7.5% objective set for 2013 be maintained next year, as a recent leak from senior Chinese officials seems to indicate, or do the recent pronouncements indicate further deceleration toward 7%?

The answer will be revealed at the National People’s Congress in March. But focusing on a near-term growth target, and fine-tuning fiscal and monetary policies in order to achieve it – to say nothing of yet another credit crunch roiling Chinese short-term funding markets – detract from the emphasis on strategic shifts that economic rebalancing now requires.

Indeed, most of the six major economic tasks for 2014 set by the recent Work Conference – including efforts aimed at ensuring food security, containing local-government debt, and improving coordination of regional development – have little or nothing to do with China’s strategic rebalancing imperatives. Though laudable, they seem disconnected from pro-consumption restructuring.

In fact, only two of the six major economic tasks identified by the Work Conference fit neatly with the Third Plenum’s strategic agenda. The call for enhanced social security is consistent with the Third Plenum’s proposal to allocate 30% of state-owned enterprises’ profits to fund safety-net programs such as pensions and health care. Likewise, the emphasis on markets’ “decisive role” in upgrading China’s industrial structure and eliminating excess capacity is compatible with the Third Plenum’s goal of achieving a market-based shift to a consumer society.

But what emerges from all of this is yet another example of the timeworn “kitchen sink” approach to Chinese economic policymaking – countless proposals, initiatives, and goals that are loosely connected at best, and that are often plagued by internal inconsistencies. A new approach is needed, and it will require three key changes to China’s economic-policy framework.

First, in keeping with global best practice, Chinese authorities need to be far more explicit (that is, transparent) in prioritizing, or ranking, their policy objectives. Setting different agendas on multiple platforms – Five-Year Plans, Third Plenums, and Work Conferences – is a recipe for confusion and potential conflict.

Second, economy-wide growth targets should be downplayed. Such targets smack of the legacy of a state-directed economy – a legacy that runs counter to policymakers’ new emphasis on the “decisive role” of markets.

Finally, there is a need to separate stabilization objectives from strategic imperatives. The former should be handled by an independent central bank with primary responsibility for monetary and currency policies, whereas the latter should be the responsibility of the new Central Leading Group on Reforms, which has just been established by the Third Plenum.

Chinese policymakers’ traditional emphasis on long-term strategy has enabled them to steer past the inevitable bumps on the road to economic development. Now, however, as the authorities set out on a new course aimed at sustaining China’s extraordinary progress, they should act quickly to achieve greater coherence in their policy agenda.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Rxylw0X1cPk/story01.htm Tyler Durden

2013 Summed Up In Just One Chart

Given it is the last day of what is being reported as a breath-takingly good year, we thought a gentle reminder of the reality underlying the exuberance was worthwhile. Presented with little comment, we give you 2013… the death cross…

 

And what to expect for 2014? Well, that’s easy… as is evident from the following chart of real economic expectations for 2014…

 

(h/t @Not_Jim_Cramer)


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/C8hi-myBrew/story01.htm Tyler Durden

2013 Greatest Hits: Presenting The Most Popular Posts Of The Past Year

The fifth anniversary of Zero Hedge is just around the corner, and so, for the fifth year in a row we continue our tradition of summarizing what you, our readers, found to be the most relevant, exciting, and actionable news of the year, determined objectively by the number of page views. Those eager for a brief stroll down memory lane of prior years can do so at their leisure, by going back in time to our top articles of 2009, 2010, 2011 and 2012. For everyone else, without further ado, these are the articles that readers found to be the most popular posts of the past 365 days.

  • In 25th place, with just over 100k reads, was the extended profile of the puppetmaster of the biggest geopolitical event of 2013, the false flag-driven Syran conflict which nearly escalated into the world’s first YouTube “justified” world war pitching the US-led west against the Russia-led east, the Saudi intelligence chief: Prince Bandar, exposed in “Meet Saudi Arabia’s Bandar bin Sultan: The Puppetmaster Behind The Syrian War.” The war was avoided with a last minute gambit by Putin, which lead to a historic detente between the US and Iran, as well as an unprecedented breakdown in US relations with its long-time middle east allies Saudi Arabia and Israel. Look for the Middle East to make geopolitical headlines in the new year since the underlying issue – Europe’s dependence on Gazprom – remains entirely unresolved.
  • The 24th most popular article hardly needs an explanation: “The Chinese Don’t Want Dollars Anymore, They Want Gold” – London’s Gold Vaults Are Empty: This Is Why.” The only comment here is that like above, the trend of gold’s transfer from West to East, started in earnest in late 2012, and peaking in 2013, is sure to continue in 2014 when the liquidation of paper gold in Western capital markets will afford Chinese buyers with ever more attractive prices at which to purchase physical gold
  • In 23rd spot an “Unidentified Navy Officer summed it all up” when he said that “I didn’t join the navy to fight for Al Qaeda in a Syrian civil war.” It is understandable why over 106,000 people agreed with the message
  • The 22nd most popular article looked at “What Happened The Last Time We Saw Gold Drop Like This?” which compared the fall in the price of gold in 2013 to previous historic occasions, most notably the months just before the collapse of Lehman. For now, courtesy of the $170 billion in liquidity injected by the Fed and the BOJ, “this time has proven different.” But with the Fed now tapering, how much longer will the illusion persist? We, like everyone else, look to 2014 for the answer.
  • With 108k views, the 21st most read post of 2013 revealed the “Photos And Video Of the Boston Bombing Suspects“, culminating the most violent terrorist event in years, and one which brought back vivid memories of the events from September 11
  • It may seem like a distant memory now, but the shocking announcement from mid-March in which Cypriot deposits were confiscated without a warning, reverberated across Europe and all insolvent banking systems, especially since it is now the blueprint of how banks will impair depositors going forward. Then again, with over 112k reads of our summary “For Everyone Shocked By What Just Happened… And Why This Is Just The Beginning” we reminded our readers that the deposit confiscation event of 2013 was predicted on these pages nearly two years earlier, and explained why, indeed, this is just the beginning of the great balance sheet rebalancing. For now Europe has managed to hide its hundreds of billions in bad loans under the couch; 2014 will be a different story. Look for the Cyprus “blueprint” to see a much wider acceptance in the coming year.
  • In 19th spot, mother nature reminded everyone with a “Stunning Time-Lapse Video Of 2-Mile Wide Oklahoma Tornado” that despite their sense of omnipotence, the central planners better pray each and every day that in a world priced to beyond perfection, that there are no material natural disasters. Because 10 out of 10 times, a liquidity tsunami generated from a central bank’s printer is powerless to withstand a natural one, as the Fukushima catastrophe reminds us each and every day with headlines of its ever deteriorating radiation “containment.”
  • A long-time favorite of readers, Kyle Bass’ Japan thesis came one step closer to fruition when earlier this year Japan went all in on its great reflation experiment, described in “Kyle Bass Warns The ‘AIG’ Of The World Is Back“, a presentation seen by over 114K readers. So far Abenomics has been a failure with wages contracting, import food and energy prices soaring, a record trade deficit (yes, Abenomics was supposed to boost net exports), and of course Fukushima in the background, but for now everyone has a rampaging Nikkei to be easily distracted by. With Abe’s popularity finally tumbling, will his second tenure as Prime Minister be cut short, and would his departure finally force Japan to cross the event horizon of no return? This is but another question which we hope 2014 will answer.
  • In 17th spot, we revealed some very disturbing trends in US energy consumption with “These Charts Better Not Reflect The True State Of The US Economy.” Because while the shale revolution may have revealed a (transitory) marginal source of oil, what remains unknown is why demand for energy in the US economy is tumbling in parallel. Unless, of course, the narrative about a US recovery has been a lie from the beginning…
  • With 121k reads, in the 16th top spot another post that needs no explanation was “Stunning Images From China: Ten Thousand People Waiting In Line To Buy Gold“. Perhaps the only article that could beat this one is “Ten thousand hedge fund managers waiting in line to sell GLD”
  • There are stereotypes about others, and then there are stereotypes about America. Which perhaps explains why over 121k people eagerly read “10 Things Most Americans Don’t Know About America.” We can only hope they learned something.
  • It may be forgotten now, but the biggest story of early 2013 was the Bundesbank’s shocking announcement in mid-January that it would proceed to repatriate some 700 tons of its gold held in central bank vaults in New York and Paris. Of course, the events described in “It Begins: Bundesbank To Commence Repatriating Gold From New York Fed” and read by 127k people, could be seen coming by Zero Hedge readers from a mile away: after all it was this website that repeatedly warned in late 2012 about the trials and tribulations that had surrounded the official German gold hoard. We can only hope that we were in some part responsible for the Buba’s correct decision to repatriate its gold. Then again, as we updated last week, having collected only 37 tons of gold in one year (out of 700), Germany will really have to pick up the pace if it hopes to have recourse to its hard currency before it is no longer a matter of convenience but one of survival.
  • The 13th top article of the year was the release of the list with “132 Names Who Pulled Cyprus Deposits Ahead Of “Confiscation Day.” It appeared the Cyprus deposit confiscation was not a complete secret to everyone, but then again the Animal Farm “new normal” justice in which some are more equal than others is hardly a surprise to anyone these days.
  • And speaking of confiscation, the 12th most read article of 2013, with 131k views was “Poland Confiscates Half Of Private Pension Funds To “Cut” Sovereign Debt Load.” It would appear that wealth transfer, first voluntary and then, not so much, will be an increasingly prevalent theme of the “recovery”…
  • But the biggest stunner in this category was the impromptu announcement itself when on March 16, “Europe Does It Again: Cyprus Depositor Haircut “Bailout” Turns Into Saver “Panic”, Frozen Assets, Bank Runs, Broken ATMs.” Don’t worry though: Europe is now fixed, it is recovering, and, if one believes the continent’s unelected leaders, all shall forever be well. We are confident 2014 will show otherwise.
  • The 10th most read article in 2013 dealt with the bedrock of the New Normal – the dollar’s reserve currency status, and rather, its gradual disintegration as China increasingly makes itself heard. It made itself heard loud and clear to the 142k readers who clicked on “Thanks, World Reserve Currency, But No Thanks: Australia And China To Enable Direct Currency Convertibility.” The loss of USD-reserve status will be yet another theme to keep a close eye on in 2014 and onward.
  • Showing just how reliant on welfare the US has become was top article #9 in which a leaked USDA memo hinted of a “Foodstamp Program Shutdown Imminent” which grabbed the attention of 148k readers. For now SNAP as it is better known has been merely “tapered”, not fully shut down, although ensuing Walmart stampedes driven by EBT card glitches provided a glimpse of just had bad things could be if indeed nearly 50 million Americans suddenly found themselves without government backstops
  • The troubles of the poor were hardly an issue for the 8th most popular article of 2013 in which we asked if “The Russians Have Already Quietly Withdrawn All Their Cash From Cyprus?” Once again it was the middle class that got shafted, while those who could fly in and out on private jets appear to have gotten away unscathed. This is certainly the prevailing theme of the past five years and one which will accelerate into the future.
  • 152k people read the breaking news from April when “Large Explosions Reported At Boston Marathon; Numerous Injuries And Casualties.” The focal point of all watercooler talk for the next several weeks, the analogies to terrorist attacks in the past were unavoidable even if the motivations behind the attacks turned out to be far less nefarious and organized than initially feared. 
  • 2013 was the year in which the largest US city (to date) filed bankruptcy. However it was “25 Facts About The Fall Of Detroit That Will Leave You Shaking Your Head” that was read by 154k people, that made this the 6th most popular article of 2013.
  • 2013 was also the year in which the stock market finally took out its previous, 2007 highs, driven entirely by the unprecedented expansion of both the Fed’s and the Bank of Japan’s balance sheets. What over 163k found curious, however, were the other economic comparisons to “The Last Time The Dow Was Here…” Needless to say, there is nothing in the economy that would justify a market at the current levels, or even levels far lower, if it were only up to the economy. Luckily, there Fed is always there to lend a helping hand. And what can possibly go wrong…
  • 2013 was not only the year of the Fed’s QEternity: it was also the year in which Japan went all in with its own reflation experiment. However, all will be for nothing unless the troubling facts revealed in “Why Have Young People In Japan Stopped Having Sex?” remain unresolved. Because at its core, Japan’s crisis is a demographic one, and at the current pace of social aging, there will be no Japan left in several decades. Unfortunately for Kuroda, he can’t print babies.
  • The third most popular article of 2013 was posted almost exactly a year ago, when it “Put America’s Tax Hike In Perspective.” Over 171k people realized just how meaningless in the grand scheme of things was America’s grand bargain achieved last year at this time, over much stock market huffing and puffing. Then again, the fact that all major decisions in the US are put in the can that is later kicked down the street is also no news to anyone. The only thing in the here and now is theatrics, theatrics and more theatrics…
  • The second most popular post of 2013, with nearly 200k reads, was our succinct summary of the US “recovery” laid out in “People Not In Labor Force Soar By 663,000 To 90 Million, Labor Force Participation Rate At 1979 Levels.” We are happy that by now everyone has finally understood that plunging unemployment at the expense of a collapsing work force is nothing to be proud about.
  • And in the top spot, with nearly 300k reads, our most read article was the satirical, sarcastic look at the Egyptian counterrevolution titled “Egyptians Love Us For Our Freedom.” Turns out… they don’t. But they certainly appreciate the irony of two-faced, hypocritical US foreign policy which was humiliated and left in tatters both in Egypt and in every other place around the globe where either Hillary Clinton or John Kerry came, saw and promptly departed in the past year.

So what to make of the world as we enter 2014?

With nearly $2 trillion in emergency liquidity pumped by the world’s two largest central banks – more than has been injected ever before – the entire world is floating on an ocean of excess liquidity, which for now has succeeded in masking just how ugly the truth beneath the calm surface is. Sooner or later, the tide comes out, as it always does, and the naked are revealed for all to see. However, this time it will be the very final backstoppers of the status quo regime, the central banking emperors of the New Normal, who are finally exposed as wearing absolutely nothing. What happens then, and when that happens, is anyone’s guess. We, however, will be there to document every aspect of it.

Finally, and as always, we wish all our readers the best of luck and success in 2014, and leave everyone with a promise of what we can be 100% sure of: Zero Hedge will be there each and every day helping readers expose, unravel and comprehend the fallacy, fiction, fraud and farce that the system is reduced to (ab)using each and every day just to keep the grand tragicomedy going for at least one more day.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/SiODpObgs_8/story01.htm Tyler Durden

The Journey and the Destination

The Journey and the Destination

By

Cognitive Dissonance

 

“Mama always said life is like a box of chocolates. You never know what you’re gonna get.” – Forrest Gump

 

Mrs. Cog and I live at the end of a dirt road off of a dirt road off of a back road up on the beautiful Blue Ridge Plateau of Southwestern Virginia. God’s country as I’m fond of say to just about anyone who’s willing to listen. But we are (intentionally) a ways off the beaten path, which means we must travel more than a mile of dirt road before we hit first pavement of the day.

Once we arrive at that first intersection, where brown dirt greets blacktop, life for us is not much different than just about anyone else pulling out of their suburban driveway or parking lot for the first time that day. We seemingly face a choice; turn left or turn right. Oftentimes we believe our choices in life are dictated solely by our ultimate destination, and thus we feel there’s no real choice to be selected at all. I owe I owe, so off to work I go.

The paved side road we initially reach, which in my mind is a classic utilitarian Destination road, runs more or less parallel to The Blue Ridge Parkway, an equally classic Journey road and a Virginia scenic byway. There are several points on the Destination road in either direction where we can turn directly onto the Parkway. In fact if we were to travel the Parkway for a hundred miles in either direction we would find that for much of the way there are dozens of side roads that run parallel to, or intersect with, the Parkway.

These days when I hit tarmac for the first time I try to pause a moment and ask myself a simple question. What type of path would I like to travel to get to where I’m going? In most cases the Journey road is much longer and more time consuming, but relaxing and wonderfully scenic. On the other hand the Destination road is just the opposite, narrow and twisty and demanding of my attention, but often more direct and much faster.

If you think about it for a moment, while the first decision point crossed may dictate several other choices that follow, there are often many combinations of routes you can travel to arrive at your final destination. And this is why for Mrs. Cog and I it is often not an either/or, left/right, Journey/Destination choice. Rather there is really no need to make a definitive choice driven solely by the destination unless we wish to select a specific chocolate from the box. And where’s the fun in that?

Precisely because the Parkway crosses all manner of back roads, lately if time allows (and I do try to allow for plenty of time these days) I have been using the Journey road as a gateway to explore all kinds of side roads I might never have traveled otherwise. The same applies to several Destination roads around here. Many meander back and forth through the hills and valleys and several join back up with the Parkway at various points. Half the fun of getting lost is finding your ‘self’ again.

The Journey

For most of my life I have tended to travel unfamiliar roads just to see what’s down there. Once they are known to me I then attempt to work them into my travel routine as much as possible. Even if I have traveled a road dozens of times before there is always much more to see and learn along the way if only I would bother to really look rather than just to see.

One can find inspiration wherever one looks, a conscious choice we often ignore or don't even know exists. The truth of the matter is that I have always had endless possibilities to explore and I was just too blind or lazy (crazy?) to ever fully see them for what they are. One does not need to travel the plateau in order to experience the endless possibilities of each day. Life’s choices are only absolute ‘or’ rather than ‘and’ decision points commanded by circumstances or destination if I consciously decide to create them that way.

The truth is that whenever I wish to do so, I can close my eyes and reach into my box of chocolates to see what type of surprise or inspiration life has to offer. Ultimately it is not a choice of Journey or Destination, but rather Journey and Destination. We can have life's box of chocolates and eat it too because our conscious, aware and willing life choices either replenish or drain the box. Deliberately expand your field of choices, then act upon them and you will refill your box of chocolates.

If there is one theme that resonates with me, within Cognitive Dissonance, it is to question everything beginning with ourselves. Just because we have always turned left at the end of the driveway doesn’t mean we should do so today. Get up thirty minutes or an hour early and turn right instead. More than anything else you will do during your day, breaking from your routine in such a small but significant way will reinforce your continued awakening by changing your physical and mental perspective which in turn continues the freeing of the mind.

Next time you reach the first decision point in any aspect of your life (physical, spiritual, career, family, travel, hobby etc.) close your eyes and reach into life’s box of chocolates. You might be surprised what you pull out and where it will take you from there.

 

12-31-2014

Cognitive Dissonance

 

The Destination


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/5vs3YS8tM3o/story01.htm Cognitive Dissonance

What Happens When The Giants Unwind?

Authored by Andy Xie, originally posted at Caixin Online,

China and the United States, the primary sources of economic stimulus since 2008, will begin to unwind their stimulus in 2014. The Fed’s announcement of its first reduction in quantitative easing and China’s rising interbank interest rate are signals of what is to come. The main driver for the unwinding is concerns of bubbles, not that economies are strong enough.

Unwinding stimulus, especially one so large and prolonged, is fraught with unintended consequences. Bubbles tend to pop, not deflate slowly. Even though authorities are calibrating their tightening steps carefully to achieve a smooth landing, financial turmoil due to a bubble bursting is possible, which may drag the global economy into another recession.

Even if no financial turmoil emerges, some assets are likely to come under strong pressure. The economies that depend on commodity exports and/or hot money to plug their current accounts may see their currencies under more pressure. The Australian dollar and Brazilian real are highly vulnerable. The Indian rupee is another weak currency. The Canadian dollar and Russian ruble may come under pressure too.

Stimulus and Growth

After the 2008 financial crisis broke out, I predicted widespread monetary and fiscal stimulus all around, and such stimulus wouldn’t bring back sustainable and sound growth, eventually leading to another crisis. I also predicted that stimulus advocates will blame the failure on insufficient stimulus. My predictions are coming true halfway there. Another financial crisis will make them whole.

The magnitude of the United States’ stimulus could be measured by national debt rising from 62 percent to 100 percent of GDP and the Federal Reserve’s balance sheet more than tripling from 2007 to 2013. The impact on asset prices is reflected by a 60 percent increase in household wealth from the crisis low and 21.4 percent above the 2007 peak – a level considered a bubble that led to the 2008 financial crisis. During the same period the U.S. economy has expanded by 6 percent in real terms and 15.8 percent in nominal terms. The current level of total employment is still below the pre-crisis level. It is obvious that the U.S. stimulus policy has had an outsized impact on asset prices and small one on the real economy or employment.

Why would the Fed decrease its QE while the economy is far from healthy? When the Fed first sounded its tightening warning in June, I argued that it was trying to manage an asset bubble. Before 2008, property appreciation was driving the U.S. bubble. Financial markets have been doing the job since. It appeared that the U.S. stock market was ready to spike like in early 2000 when the Fed sounded its warning. The market consolidated afterward. But, when the Fed backed off in September, it went on a tear again. When the Fed took its first step in December, it was viewed as too small to have an impact. The market has continued its rally. The S&P 500 rose by 30 percent in 2013. It remains to be seen if the Fed could prevent a rerun of 2000: the market surges in the first quarter of 2014 and falls sharply afterward.

China’s stimulus, mainly through lowering the credit standard, led to a 175 percent increase in M2 from 2007 to 2013. The main growth consequences are a 61 percent increase in electricity production and an 82 percent increase in nominal dollar exports. While the growth data are still impressive, they are small in comparison to monetary growth. If such a relationship persists, hyperinflation is likely. Further, the growth numbers have come down in the past two years, while monetary growth has slowed less. The trend suggests that the effectiveness of monetary stimulus is declining. Hence, achieving the same growth target brings a higher inflation rate.

The growth dynamic in the past five years depends on local governments borrowing money to spend. The declining effectiveness of monetary growth reflects the same declining efficiency in local government expenditure. The growth dependency on local government spending is tied up with property speculation. As excessive monetary growth triggers inflation expectations, money has poured into land and property. As local governments control all the land supply, they have been able to raise revenues from selling land and borrowing money with land as collateral. These two are the main channels for money supply to turn into expenditure.

Neither China nor the United States has built a sustainable growth dynamic with stimulus. As the stimulus side effects – bubbles and rising leverage – become the main show unwinding stimulus becomes urgent. This is why both countries are likely to take tightening steps.

Smooth Tightening Is Rare

Unwinding stimulus is usually a dangerous business. One never knows how much hot air the stimulus has created. When it leaks, it could cause a big explosion. For example, the Fed’s tightening cycle in the past usually triggered an emerging market crisis. As the United States itself isn’t on a strong growth path, the risk at home is substantial.

I’m surprised by how weak the United States’ growth has been, considering how much household wealth has risen. Hindsight suggests that the wealth increase is concentrated in a small minority who are too rich to spend all the gains. Before 2007 property inflation was driving household wealth, which benefited most people. As Wall Street created financial products for the masses to borrow against property appreciation, the economy benefited from a powerful wealth effect. The surging stock market has been driving household wealth in this cycle. As 10 percent of the United States’ population own most of the stock, the wealth effect isn’t broadly based. This is probably the main reason for the weak economic response to the stimulus.

Similar to the past, the Fed’s tightening cycle could trigger another emerging market crisis. When the Fed mentioned that it could taper QE, emerging markets tumbled. Those with persistent current account deficits, like Brazil and India, saw a mini crash in their currencies. The hot money into emerging markets could be between US$ 3 trillion and US$ 4 trillion during the Fed’s easing cycle. If a fraction of it returns, the shock to the monetary condition in some emerging economies could be severe enough to trigger a banking crisis. I suspect that several major emerging economies would have to raise interest rates aggressively to maintain financial stability. Otherwise, a currency-cum-banking crisis could happen.

The risk at home for the Fed is much higher than during the previous tightening cycles. The U.S. economy is still quite fragile. The improving labor market is due to declining wages for the reemployed. Hence, its contribution to demand is limited. The stock market could be 50 percent overvalued. The Internet sector is a vast bubble similar to what happened in early 2000. If the bubble pops, it may lead to reduction in corporate capex, which could pull the economy back into recession.

I have argued against the Fed’s monetary policy on the grounds that globalization has short-circuited the feedback loop between demand and supply. Wages, for example, are determined by globalization, not the strength of local demand. What’s happening to the U.S. labor market is similar to what happened to Japan and Taiwan in the 1990s. The economics behind the phenomenon are sound. What’s unstable in the United States is that its stimulus policy has vastly inflated non-tradables like housing, health care and education, which makes internationally competitive wages insufficient for a minimum living standard. This could be the driver for stagflation in the United States. As labor demands a living wage, say, doubling minimum wage to US$ 15 per hour, the Fed may be forced to restart QE to counter its negative impact on labor demand, which leads to a price-wage spiral.

The Fed’s tightening cycle this time is far from predictable, even though the Fed tries to project such an impression. If a financial crisis breaks out, either at home or among emerging markets, the Fed would be back to pumping liquidity to stabilize the market, which would be another step toward stagflation. If a labor movement at home depresses labor demand, it would be back to QE again, which also leads to stagflation. I predicted that stagflation is the ultimate outcome for the global economy. Most of the United States’ nominal GDP increase since 2007 is due to inflation, which already fits the description of mild stagflation. If the Fed is forced to back off from tightening, more pronounced stagflation is not far off.

China’s tightening is really about limiting local government borrowing. They are not interest rate sensitive. The current rise in interest rate is unlikely to dent their appetite. Indeed, China’s local governments went to the shadow banking system for money at high interest rates in 2013, as banks have become wary of too much exposure to them. Local governments depend on the perception that provinces and, ultimately, the central government will bail them out, if they can’t repay their loans. This is the reason that the shadow banking system is focusing on them. Private companies have been borrowing at low interest rates offshore and lending to them at high interest rate, either directly or through trust companies. Unless the bailout responsibility is clarified, China’s credit bubble would continue.

If the central government spells out its position of no bailouts clearly and convincingly, the reaction in the credit market will likely be massive. The shadow banking system, for example, wouldn’t roll over their loans. Unless the banks step in – probably forced by the government – a financial crisis is possible. If the banks do step in, it is actually a bailout by the central government, as it will be forced to bail them out if they go down. When moral hazard is the main reason for a credit boom, cooling it slowly is very difficult.

I have always argued that a hard landing would be a good thing for China. It flushes out all the financial excesses quickly and allows the economy to have a fresh start and soon. China’s labor shortage ensures that such a landing wouldn’t lead to social instability. Declining inflation would improve people’s living standards. Hence, it’s all good looking from the people’s perspective. The banks and local governments wouldn’t look at it that way. They all hope to stretch out the time horizon for paying off the legacy costs from the bubble. Or better that the people in charge now could walk away before the problems are exposed. Hence, the system’s bias is to drag it out. But, a bubble grows larger if it doesn’t burst. One cannot hold a bubble stable; it either shrinks or expands.

China is showing some resolve in reigning in the credit bubble. A credible anti-corruption campaign and rising interest rate are the visible signs. The tightening path is anything but assured. The system’s bias for stable appearance may cause the policy to change direction.

Global Growth Tilts Down

The global economy has depended on stimulus in China and the United States since 2008. As they embark on tightening, one clear implication is that the global economy will slow in 2014. One obvious market implication is that commodity economies will see their currencies dropping again.

At the beginning of 2013, I predicted that Australian dollar, Indian rupee and Japanese yen will tumble, though for different reasons. In 2014, the Australian dollar will continue its tumbling. Other commodity currencies like Brazilian real, Canadian dollar, Russian ruble and South African rand will all come under pressure. The simple logic is that they are really driven by China’s credit cycle. If China’s credit cycle reverses, their currencies will lose their gains on the way up.

Hot money doesn’t really go back to the United States per se. It just vanishes. When investors or speculators borrow dollars and buy local currency assets in emerging economies, the latter’s central banks issue local currencies and use the dollars, now called foreign exchange reserves, to buy U.S. treasuries. The consequence is an expansion in the global balance sheet of assets and liabilities. When the hot money flow reverses, the global balance just shrinks. Such deleveraging hits hard any economy that depends on hot money to finance its persistent current account deficits. India stands out as an example. Its central bank, since its new governor came in, has surprised on the upside. It has been tightening ahead of the curve. India could avoid a financial crisis. The price is much slower growth or even a recession.

The Japanese yen is likely to be range bound. Japan’s inflation has picked up. The Bank of Japan (BoJ) doesn’t have an excuse to push down the yen further. If it does, the reaction from U.S. automakers would be severe. In the long run, the yen will continue to decline. But, this doesn’t happen in a smooth curve. What the BoJ does is to concentrate the yen weakness in a short period, which gives the economy a lift. When the lift is exhausted, it pushes for another bout of yen weakness.

I believe that gold has already bottomed in 2013. In a Fed tightening cycle, gold tends to go down. Financial players in this cycle have been impatient to kick gold down as hard as possible. They short gold producers first and then gold. The gold stocks are much bigger in value than gold market per se. Hence, the trading strategy of shorting gold stocks and then gold could be lucrative. As more and more people pursue the same trade, the gold is kicked down way beyond its fundamentals.

Gold demand is from emerging economies. The latter have been experiencing high inflation. The demand for gold has been strong despite the weak gold price in 2013. The current gold price is already below the production cost of some of the biggest mines in the world. I suspect that, in 2014, some mines may be shut. The reduction in supply will become a counterforce against the Fed’s tightening.

I want to repeat my long term bullish call on gold. Its price is likely to top US$ 3,000 in five years. The currency market instability and the likely global stagflation will strengthen gold demand for wealth preservation in emerging economies. As supply is unable to grow, the price has to rise to balance the market.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/UYi3fpS33p4/story01.htm Tyler Durden

The Complete Guide To How The NSA Hacked Everything

Two days ago we observed the latest disclosure in the seemingly endless Snowden treasure trove of leaked NSA files, when Spiegel released the broad details of the NSA’s Access Network Technology (ANT) catalog explaining how virtually every hardware architecture in the world has been hacked by the US superspies. We followed up with a close up of “Dropout Jeep” – the NSA’s project codename for backdoor entry into every iPhone ever handed out to the Apple Borg collective (because it makes you look cool). Today, we step back from Apple and release the full ANT catalog showcasing the blueprints of how the NSA managed to insert a backdoor into virtually every piece of hardware known under the sun.

And so, without further ado, here is the complete slidebook of how the NSA hacked, well, everything.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/q8MzCBIXJu0/story01.htm Tyler Durden

Dancing With The Dimons

It's not all work, work, work for the 1% who are trickling down their wealth effect and saving the USA one internet IPO at a time. The following images of the Dimons suggest they find time for some fun in between market manipulation, in which guilt is neither admitted nor denied, and litigation…

 

 

Which reminds us… It's good to be King…

Forward to 1:31…

 

Source: TalkingPointsMemo blog


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/AOSZS8DPyQM/story01.htm Tyler Durden

Dow Surges To Best Year Since 1995 As Bonds & Bullion Slump

2013 is in the books… and quite a year it was…

  • Fed Balance Sheet +39%
  • Dow Transports' best year since 1997 +39%
  • Russell 2000's best year since 2003 +37%
  • S&P 500's best year since 1997 +29%
  • Dow Industrial's best year since 1995 +26%
  • USD, WTI Crude, and Treasury 5s30s curve Unchanged
  • 30Y Bonds' worst year since 2009 -13%
  • Gold's worst year since 1981 -28%

The last few days have seen VIX rising, stocks limp higher (with a mini melt-up into the close today), bond yields higher, and the USD lower.

 

Today was noisy in most asset-classes – precious metals collapsed and soared; VIX continued to surge; Treasury yields dipped then ripped higher into the close; and stocks ripped to new record highs and then dropped unceremoniouslyonly to be ramped handsomely to their highs… but the last few minutes were insane…

 

2013 was a tough year for PMs and a 'special' year for Stocks with the USD unchanged…

 

But in context – from the October 2007 peak in stocks…

 

While VIX is well down on the year (-20%) – from fiscal cliff anxiety at the start – the last few days have seen protection very well bid in a major divergence from stocks into the new year… (of course today's late-day ramp was 'funded' by a VIX dump)…

 

Commodities were a little crazy today – as usual since the Taper (and before) – with precious metals dumped and pumped intraday on very heavy volume…

 

Treasuries pushed notably higher in yield into the close but the belly remains the big underperformer post-Taper

 

 

There is one index of "risk" that has surged this year – ever so quietly and away from the calming eye sof Bob Pisani, SKEW (which 'measures' the options market's perceptions of large moves – as opposed to VIX which measures the market's view of 'normal' moves) has risen dramatically…

 

Charts: Bloomberg

Bonus Chart: The Bond Market's demise (in context)… It would appear the mainstream media has decided that anyone who held bonds this year (and continues to do so) must, by logical deduction since stocks were up 30%, be the greater fool. However, as we have noted in the past, there is a reason why gentlemen prefer bonds (sometimes) and a little context for this year's total return in US Treasuries might help manage the message a little better. Based on IBOXX USD Treasuries index, bonds lost 3.12% total return… not exactly cliff-jumping time… but then again who knows what comes next…

 

Bonus "New Year Special" Chart: The only thing that mattered this year…


    



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

Dow Surges To Best Year Since 1995 As Bonds & Bullion Slump

2013 is in the books… and quite a year it was…

  • Fed Balance Sheet +39%
  • Dow Transports' best year since 1997 +39%
  • Russell 2000's best year since 2003 +37%
  • S&P 500's best year since 1997 +29%
  • Dow Industrial's best year since 1995 +26%
  • USD, WTI Crude, and Treasury 5s30s curve Unchanged
  • 30Y Bonds' worst year since 2009 -13%
  • Gold's worst year since 1981 -28%

The last few days have seen VIX rising, stocks limp higher (with a mini melt-up into the close today), bond yields higher, and the USD lower.

 

Today was noisy in most asset-classes – precious metals collapsed and soared; VIX continued to surge; Treasury yields dipped then ripped higher into the close; and stocks ripped to new record highs and then dropped unceremoniouslyonly to be ramped handsomely to their highs… but the last few minutes were insane…

 

2013 was a tough year for PMs and a 'special' year for Stocks with the USD unchanged…

 

But in context – from the October 2007 peak in stocks…

 

While VIX is well down on the year (-20%) – from fiscal cliff anxiety at the start – the last few days have seen protection very well bid in a major divergence from stocks into the new year… (of course today's late-day ramp was 'funded' by a VIX dump)…

 

Commodities were a little crazy today – as usual since the Taper (and before) – with precious metals dumped and pumped intraday on very heavy volume…

 

Treasuries pushed notably higher in yield into the close but the belly remains the big underperformer post-Taper

 

 

There is one index of "risk" that has surged this year – ever so quietly and away from the calming eye sof Bob Pisani, SKEW (which 'measures' the options market's perceptions of large moves – as opposed to VIX which measures the market's view of 'normal' moves) has risen dramatically…

 

Charts: Bloomberg

Bonus Chart: The Bond Market's demise (in context)… It would appear the mainstream media has decided that anyone who held bonds this year (and continues to do so) must, by logical deduction since stocks were up 30%, be the greater fool. However, as we have noted in the past, there is a reason why gentlemen prefer bonds (sometimes) and a little context for this year's total return in US Treasuries might help manage the message a little better. Based on IBOXX USD Treasuries index, bonds lost 3.12% total return… not exactly cliff-jumping time… but then again who knows what comes next…

 

Bonus "New Year Special" Chart: The only thing that mattered this year…


    



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

Caption Contest: Nutcracker On The NYSE

We are not exactly sure why the ballerinas of the Nutcracker can be found on the floor of the TV studio formerly known as the New York Stock Exchange (now owned by the Atlanta-based ICE) but we are sure there is a good reason.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/o6CiO0Hahhk/story01.htm Tyler Durden