Where Obama Still Polls Strongly

With African Americans. However, even they are unhappy with Obama’s Ferguson performance.

 

 

As The Washington Post reports,

President Obama has pointedly refused to weigh in on what happened in Ferguson, Mo., aiming not to inflame an already delicate situation.

 

That approach, though, is not earning him his usual strong marks from his most loyal base of support: fellow African Americans.

 

A new poll from the Washington Post and ABC News shows that blacks still approve of Obama’s handling of the issue by a significant margin. But the 63 percent who approve is his lowest rating on any of seven issues tested in recent months by WaPo and ABC. It’s also 28 points below his overall approval rating among blacks, 91 percent in a late-October Post-ABC poll.

 

Further, the 30 percent of African Americans who disapprove of Obama’s handling of Ferguson is an unusually high number. This demographic, after all, voted for Obama 93-6 in 2012 and 95-4 in 2008.

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UK Regulator Shocked That Slapping Banker Wrists Achieves Nothing

Not a quarter passes without a bank announcing, as part of its earning statement, that – it just so happens – it has incurred a few hundreds million (or billion) in legal fees, expenses and charges for breaking the law and manipulating this market or that (recall that for banks “Crime Is Now An Ordinary Course Of Business“), but it’s ok, because it is a one-time, non-recurring thing, so please exclude it from the EPS calculation…. Until the next quarter when everything repeats once more. But the repetition of “one-time” events is not the only constant: the other one, of course, is that nobody ever goes to jail.

The latter is also the reason why, as the WSJ reports, British regulators are “getting exasperated with banks failing to clean up their act after repeated wrongdoings.”

No, really: the UK’s equivalent to the SEC truly can’t understand how banks, which have trillions in central bank reserves sloshoing around on their balance sheets as the replacement to trillions in taxpayer bailout funds, and which are delighted to use said reserves to pay for hundreds of billions in legal fees in order to avoid prison time for financial crimes, market manipulations and countless other legal transgressions which their executives were caught doing, refuse to stop breaking the law when the have a paid for by others – and quite literal – get out of jail card.

The FCA’s so-called quandary in a nutshell: “Following the £1.1 billion ($1.7 billion) of fines it doled out to five banks over misconduct related to foreign exchange rate rigging, Tracey McDermott, head of enforcement at the Financial Conduct Authority, said: “Is our action effective at all?

The answer, clearly, is no. But hey, maybe the next wristslap will fix everything and the New Normal criminal syndicate, i.e., bankers. will promptly fix their ways.

On Tuesday Ms. McDermott said she had recently looked though the slew of statements put out by punished banks dating back to 2002. They read like a  “PR paint by numbers,” she said. The press releases all state that the wrong doing is linked to a few employees, changes have been made and that it won’t happen again.

 

But “lessons are not being learnt,” she said.

 

She was speaking at a conference in London on legal enforcement.

Here is Tracey McDermott confused that
“Lessons are not being learnt.”

Surely, there were also hundreds of bankers at said conference, smiling gleefully at what the past 6 years have demonstrated beyond a reasonable doubt, is unconditional banker immunity from prison time. In perpetuity.

The recent foreign exchange debacle has cause particular consternation for the regulator. In 2012 and 2013 several banks paid fines for misconduct relating to rigging interbank lending benchmarks. At the time many pledged to reform their rate setting practices more widely.

 

But Barclays traders manipulated  gold prices the day after the bank was fined over efforts to rig interbank lending rates, according to the FCA. It is now clear that employees at some lenders, such as Royal Bank of Scotland Group RBS.LN +2.39% PLC, continued to try to rig foreign exchange markets even as these internal clean up operations were ongoing, the FCA found.

So what is the FCA’s solution? Well, just like central planners, central bankers, and clueless Princetonian economists, the FCA has a brilliant idea – let’s do more of the same and hope this time it’s different.

Ms. McDermott said that big fines must continue to be meted out to keep bank boards focused on changing their institution’s culture. She refuted claims that the FCA’s approach to fining was “like a soviet tractor factory” — referring to accusations that the regulator was just churning out fines to appease policitians — saying that London’s reputation as a financial center was at stake.

 

“Enforcement should not be written off as a trip to the headmaster’s office where you take your punishment and leave,” Ms. McDermott said.

 

Lessons are being learnt. Slowly. The FCA hopes that banks will change in the same way that attitudes to drink driving have altered over time. Ms. McDermott said her parents’ generation didn’t drink and drive for fear of getting caught. “For my generation it was presented as a moral issue… the impact on the lives of other people.”

So according to the FCA, the one thing that should stop banker crime is concerns over the loss of their pristine reputation. Yes, for those wondering, the FCA does resides on this world, a world where bankers at least in the eyes of the FCA, still have something called a “reputation” which is “at stake.”

Which also explains why said reputation will continue to get worse until even organized crime syndicates will bristle when compared to the most criminal, pardon, lucrative M&A bank or hedge fund du jour.

In the meantime, if the FCA, or SEC, or DOJ, or whoever, really wants to “fix” the rampant, criminal banker problem, here is a simple solution: throw someone in jail for a long, long time, and stop showing to the world that one can avoid prison if only one pays a large enough fee (out of other shareholders’ funds).

Better yet, take a clue from Iran:

A billionaire businessman at the heart of a $2.6 billion state bank scam in Iran, the largest fraud case since the country’s 1979 Islamic Revolution, was executed Saturday, state television reported…. A total of 39 defendants were convicted in the case. Four received death sentences, two got life sentences and the rest received sentences of up to 25 years in prison.

And guess what: nobody in Tehran has rigged the USDJPY, ramped the E-mini, or banged the close in gold in years.




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Sam Zell Asks If Obama “Wants To Work With Anyone To Create Anything?”

Outspoken realist billionaire Sam Zell tells Fox’s Maria Bartiromo, “the US economy is bifurcated,” noting that “the very top has done very well as The Fed’s QE ‘saved the system’,” but, he adds, the 90% that did not benefit from that “have seen wages go down and the recent election showed a lot of discomfort and a lack of trust.” A hopeful money-honey asks whether the president will work with the Republicans to improve this situation, Zell lashes back, “isn’t the question whether the president wants to work with anybody to create anything?”

 

At 4:45, Zell discusses the market, “the stock market does not reflect what’s going on in the economy.” “Holding cash is a better holding than investing in an over-valued stock market”

 

Via Fox News,




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Despite Face-Ripping Rally off Bullard Lows, US Investors In Japan Remain Down 4% Year-To-Date

Mission Accomplished Abenomics? The Nikkei 225 just hit fresh 7 year highs at around 17,900 (the highest since July 2007) managing to soar 24% off the mid-October ‘Bullard lows’. Great news for all the bulled up US investors we see day after day on financial TV… wrong! In US Dollars, US investors remain down 4% year-to-date (and have yet to have a positive close in 2014). But hey on the bright side, your Japanese brethren are loving the nominal surge in their ‘wealth’ as their currency collapses to 119.4 this evening.

 

The Nikkei 225 is up ~24% off the Bullard lows…

 

But Year-to-Date, US investors in Japan remain losers… underperforming US Treasuries by over 20%…

 

Charts: Bloomberg

Bonus Chart: And if you’re wondering where all the Chinese QE-lite money went now that the real estate market has started to collapse…

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Fun-durr-mentals indeed!!!




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Nobel Prize Winning Economists, Federal Reserve Chair and Other Top Experts: War Is BAD for the Economy

Preface: True conservatives are anti-war.  And – as Ron Paul observes – so are the teachings of Jesus. But let's focus on economics …

About.com notes:

One of the more enduring myths in Western society is that wars are somehow good for the economy.

It is vital for policy-makers, economists and the public to have access to a definitive analysis to determine once and for all whether war is good or bad for the economy.

That analysis is below.

Top Economists Say War Is Bad for the Economy

Nobel prize winning economist Paul Krugman notes:

If you’re a modern, wealthy nation, however, war — even easy, victorious war — doesn’t pay. And this has been true for a long time. In his famous 1910 book “The Great Illusion,” the British journalist Norman Angell argued that “military power is socially and economically futile.” As he pointed out, in an interdependent world (which already existed in the age of steamships, railroads, and the telegraph), war would necessarily inflict severe economic harm even on the victor. Furthermore, it’s very hard to extract golden eggs from sophisticated economies without killing the goose in the process.

 

We might add that modern war is very, very expensive. For example, by any estimate the eventual costs (including things like veterans’ care) of the Iraq war will end up being well over $1 trillion, that is, many times Iraq’s entire G.D.P.

 

So the thesis of “The Great Illusion” was right: Modern nations can’t enrich themselves by waging war.

Nobel-prize winning economist Joseph Stiglitz agrees that war is bad for the economy:

Stiglitz wrote in 2003:

War is widely thought to be linked to economic good times. The second world war is often said to have brought the world out of depression, and war has since enhanced its reputation as a spur to economic growth. Some even suggest that capitalism needs wars, that without them, recession would always lurk on the horizon. Today, we know that this is nonsense. The 1990s boom showed that peace is economically far better than war. The Gulf war of 1991 demonstrated that wars can actually be bad for an economy.

Stiglitz has also said that this decade’s Iraq war has been very bad for the economy. See this, this and this.

Former Federal Reserve chairman Alan Greenspan also said in that war is bad for the economy. In 1991, Greenspan said that a prolonged conflict in the Middle East would hurt the economy. And he made this point again in 1999:

Societies need to buy as much military insurance as they need, but to spend more than that is to squander money that could go toward improving the productivity of the economy as a whole: with more efficient transportation systems, a better educated citizenry, and so on. This is the point that retiring Rep. Barney Frank (D-Mass.) learned back in 1999 in a House Banking Committee hearing with then-Federal Reserve Chairman Alan Greenspan. Frank asked what factors were producing our then-strong economic performance. On Greenspan’s list: “The freeing up of resources previously employed to produce military products that was brought about by the end of the Cold War.” Are you saying, Frank asked, “that dollar for dollar, military products are there as insurance … and to the extent you could put those dollars into other areas, maybe education and job trainings, maybe into transportation … that is going to have a good economic effect?” Greenspan agreed.

Economist Dean Baker notes:

It is often believed that wars and military spending increases are good for the economy. In fact, most economic models show that military spending diverts resources from productive uses, such as consumption and investment, and ultimately slows economic growth and reduces employment.

Professor Emeritus of International Relations at the American University Joshua Goldstein notes:

Recurring war has drained wealth, disrupted markets, and depressed economic growth.

 

***

 

War generally impedes economic development and undermines prosperity.

And David R. Henderson – associate professor of economics at the Naval Postgraduate School in Monterey, California and previously a senior economist with President Reagan’s Council of Economic Advisers – writes:

Is military conflict really good for the economy of the country that engages in it? Basic economics answers a resounding “no.”

The Proof Is In the Pudding

Mike Lofgren notes:

Military spending may at one time have been a genuine job creator when weapons were compatible with converted civilian production lines, but the days of Rosie the Riveter are long gone. [Indeed, WWII was different from current wars in many ways, and so its economic effects are not comparable to those of today's wars.] Most weapons projects now require relatively little touch labor. Instead, a disproportionate share is siphoned into high-cost R&D (from which the civilian economy benefits little), exorbitant management expenditures, high overhead, and out-and-out padding, including money that flows back into political campaigns. A dollar appropriated for highway construction, health care, or education will likely create more jobs than a dollar for Pentagon weapons procurement.

 

***

 

During the decade of the 2000s, DOD budgets, including funds spent on the war, doubled in our nation’s longest sustained post-World War II defense increase. Yet during the same decade, jobs were created at the slowest rate since the Hoover administration. If defense helped the economy, it is not evident. And just the wars in Iraq and Afghanistan added over $1.4 trillion to deficits, according to the Congressional Research Service. Whether the wars were “worth it” or merely stirred up a hornet’s nest abroad is a policy discussion for another time; what is clear is that whether you are a Keynesian or a deficit hawk, war and associated military spending are no economic panacea.

The Washington Post noted in 2008:

A recent paper from the National Bureau of Economic Research concludes that countries with high military expenditures during World War II showed strong economic growth following the war, but says this growth can be credited more to population growth than war spending. The paper finds that war spending had only minimal effects on per-capita economic activity.

 

***

 

A historical survey of the U.S. economy from the U.S. State Department reports the Vietnam War had a mixed economic impact. The first Gulf War typically meets criticism for having pushed the United States toward a 1991 recession.

The Institute for Economics & Peace (IEP) shows that any boost from war is temporary at best. For example, while WWII provided a temporary bump in GDP, GDP then fell back to the baseline trend. After the Korean War, GDP fell below the baseline trend:

IEP notes:

By examining the state of the economy at each of the major conflict periods since World War II, it can be seen that the positive effects of increased military spending were outweighed by longer term unintended negative macroeconomic consequences. While the stimulatory effect of military outlays is evidently associated with boosts in economic growth, adverse effects show up either immediately or soon after, through higher inflation, budget deficits, high taxes and reductions in consumption or investment. Rectifying these effects has required subsequent painful adjustments which are neither efficient nor desirable. When an economy has excess capacity and unemployment, it is possible that increasing military spending can provide an important stimulus. However, if there are budget constraints, as there are in the U.S. currently, then excessive military spending can displace more productive non-military outlays in other areas such as investments in high-tech industries, education, or infrastructure. The crowding-out effects of disproportionate government spending on military functions can affect service delivery or infrastructure development, ultimately affecting long-term growth rates.

 

***

 

Analysis of the macroeconomic components of GDP during World War II and in subsequent conflicts show heightened military spending had several adverse macroeconomic effects. These occurred as a direct consequence of the funding requirements of increased military spending. The U.S. has paid for its wars either through debt (World War II, Cold War, Afghanistan/Iraq), taxation (Korean War) or inflation (Vietnam). In each case, taxpayers have been burdened, and private sector consumption and investment have been constrained as a result. Other negative effects include larger budget deficits, higher taxes, and growth above trend leading to inflation pressure. These effects can run concurrent with major conflict or via lagging effects into the future. Regardless of the way a war is financed, the overall macroeconomic effect on the economy tends to be negative. For each of the periods after World War II, we need to ask, what would have happened in economic terms if these wars did not happen? On the specific evidence provided, it can be reasonably said, it is likely taxes would have been lower, inflation would have been lower, there would have been higher consumption and investment and certainly lower budget deficits. Some wars are necessary to fight and the negative effects of not fighting these wars can far outweigh the costs of fighting. However if there are other options, then it is prudent to exhaust them first as once wars do start, the outcome, duration and economic consequences are difficult to predict.

We noted in 2011:

This is a no-brainer, if you think about it. We’ve been in Afghanistan for almost twice as long as World War II. We’ve been in Iraq for years longer than WWII. We’ve been involved in 7 or 8 wars in the last decade. And yet [the economy is still unstable]. If wars really helped the economy, don’t you think things would have improved by now? Indeed, the Iraq war alone could end up costing more than World War II. And given the other wars we’ve been involved in this decade, I believe that the total price tag for the so-called “War on Terror” will definitely support that of the “Greatest War”.

Let’s look at the adverse effects of war in more detail …

War Spending Diverts Stimulus Away from the Real Civilian Economy

IEP notes that – even though the government spending soared – consumption and investment were flat during the Vietnam war:

The New Republic noted in 2009:

Conservative Harvard economist Robert Barro has argued that increased military spending during WWII actually depressed other parts of the economy.

(New Republic also points out that conservative economist Robert Higgs and liberal economists Larry Summers and Brad Delong have all shown that any stimulation to the economy from World War II has been greatly exaggerated.)

How could war actually hurt the economy, when so many say that it stimulates the economy?

Because of what economists call the “broken window fallacy”.

Specifically, if a window in a store is broken, it means that the window-maker gets paid to make a new window, and he, in turn, has money to pay others. However, economists long ago showed that – if the window hadn’t been broken – the shop-owner would have spent that money on other things, such as food, clothing, health care, consumer electronics or recreation, which would have helped the economy as much or more.

If the shop-owner hadn’t had to replace his window, he might have taken his family out to dinner, which would have circulated more money to the restaurant, and from there to other sectors of the economy. Similarly, the money spent on the war effort is money that cannot be spent on other sectors of the economy. Indeed, all of the military spending has just created military jobs, at the expense of the civilian economy.

Professor Henderson writes:

Money not spent on the military could be spent elsewhere.This also applies to human resources. The more than 200,000 U.S. military personnel in Iraq and Afghanistan could be doing something valuable at home.

 

Why is this hard to understand? The first reason is a point 19th-century French economic journalist Frederic Bastiat made in his essay, “What Is Seen and What Is Not Seen.” Everyone can see that soldiers are employed. But we cannot see the jobs and the other creative pursuits they could be engaged in were they not in the military.

 

The second reason is that when economic times are tough and unemployment is high, it’s easy to assume that other jobs could not exist. But they can. This gets to an argument Bastiat made in discussing demobilization of French soldiers after Napoleon’s downfall. He pointed out that when government cuts the size of the military, it frees up not only manpower but also money. The money that would have gone to pay soldiers can instead be used to hire them as civilian workers. That can happen in three ways, either individually or in combination: (1) a tax cut; (2) a reduction in the deficit; or (3) an increase in other government spending.

 

***

 

Most people still believe that World War II ended the Great Depression …. But look deeper.

 

***

 

The government-spending component of GNP went for guns, trucks, airplanes, tanks, gasoline, ships, uniforms, parachutes, and labor. What do these things have in common? Almost all of them were destroyed. Not just these goods but also the military’s billions of labor hours were used up without creating value to consumers. Much of the capital and labor used to make the hundreds of thousands of trucks and jeeps and the tens of thousands of tanks and airplanes would otherwise have been producing cars and trucks for the domestic economy. The assembly lines in Detroit, which had churned out 3.6 million cars in 1941, were retooled to produce the vehicles of war. From late 1942 to 1945, production of civilian cars was essentially shut down.

 

And that’s just one example. Women went without nylon stockings so that factories could produce parachutes. Civilians faced tight rationing of gasoline so that U.S. bombers could fly over Germany. People went without meat so that U.S. soldiers could be fed. And so on.

 

These resources helped win the war—no small issue. But the war was not a stimulus program, either in its intentions or in its effects, and it was not necessary for pulling the U.S. out of the Great Depression. Had World War II never taken place, millions of cars would have been produced; people would have been able to travel much more widely; and there would have been no rationing. In short, by the standard measures, Americans would have been much more prosperous.

 

Today, the vast majority of us are richer than even the most affluent people back then. But despite this prosperity, one thing has not changed: war is bad for our economy. The $150 billion that the government spends annually on wars in Iraq and Afghanistan (and, increasingly, Pakistan) could instead be used to cut taxes or cut the deficit. By ending its ongoing warsthe U.S. governmentwould be developing a more prosperous economy.

Austrian economist Ludwig Von Mises points:

That is the essence of so-called war prosperity; it enriches some by what it takes from others. It is not rising wealth but a shifting of wealth and income.

We noted in 2010:

You know about America’s unemployment problem. You may have even heard that the U.S. may very well have suffered a permanent destruction of jobs.

 

But did you know that the defense employment sector is booming?

 

[P]ublic sector spending – and mainly defense spending – has accounted for virtually all of the new job creation in the past 10 years:

The U.S. has largely been financing job creation for ten years. Specifically, as the chief economist for BusinessWeek, Michael Mandel, points out, public spending has accounted for virtually all new job creation in the past 1o years:

Private sector job growth was almost non-existent over the past ten years. Take a look at this horrifying chart:

 

longjobs1 The Military Industrial Complex is Ruining the Economy

 

Between May 1999 and May 2009, employment in the private sector sector only rose by 1.1%, by far the lowest 10-year increase in the post-depression period.

 

It’s impossible to overstate how bad this is. Basically speaking, the private sector job machine has almost completely stalled over the past ten years. Take a look at this chart:

 

longjobs2 The Military Industrial Complex is Ruining the Economy

 

Over the past 10 years, the private sector has generated roughly 1.1 million additional jobs, or about 100K per year. The public sector created about 2.4 million jobs.

 

But even that gives the private sector too much credit. Remember that the private sector includes health care, social assistance, and education, all areas which receive a lot of government support.

 

***

 

Most of the industries which had positive job growth over the past ten years were in the HealthEdGov sector. In fact, financial job growth was nearly nonexistent once we take out the health insurers.

 

Let me finish with a final chart.

 

longjobs4 The Military Industrial Complex is Ruining the Economy

 

Without a decade of growing government support from rising health and education spending and soaring budget deficits, the labor market would have been flat on its back. [120]

***

So most of the job creation has been by the public sector. But because the job creation has been financed with loans from China and private banks, trillions in unnecessary interest charges have been incurred by the U.S.

And this shows military versus non-military durable goods shipments: us collapse 18 11 The Military Industrial Complex is Ruining the Economy [Click here to view full image.]

 

So we’re running up our debt (which will eventually decrease economic growth), but the only jobs we’re creating are military and other public sector jobs.

 

Economist Dean Baker points out that America’s massive military spending on unnecessary and unpopular wars lowers economic growth and increases unemployment:

Defense spending means that the government is pulling away resources from the uses determined by the market and instead using them to buy weapons and supplies and to pay for soldiers and other military personnel. In standard economic models, defense spending is a direct drain on the economy, reducing efficiency, slowing growth and costing jobs.

A few years ago, the Center for Economic and Policy Research commissioned Global Insight, one of the leading economic modeling firms, to project the impact of a sustained increase in defense spending equal to 1.0 percentage point of GDP. This was roughly equal to the cost of the Iraq War.

 

Global Insight’s model projected that after 20 years the economy would be about 0.6 percentage points smaller as a result of the additional defense spending. Slower growth would imply a loss of almost 700,000 jobs compared to a situation in which defense spending had not been increased. Construction and manufacturing were especially big job losers in the projections, losing 210,000 and 90,000 jobs, respectively.

 

The scenario we asked Global Insight [recognized as the most consistently accurate forecasting company in the world] to model turned out to have vastly underestimated the increase in defense spending associated with current policy. In the most recent quarter, defense spending was equal to 5.6 percent of GDP. By comparison, before the September 11th attacks, the Congressional Budget Office projected that defense spending in 2009 would be equal to just 2.4 percent of GDP. Our post-September 11th build-up was equal to 3.2 percentage points of GDP compared to the pre-attack baseline. This means that the Global Insight projections of job loss are far too low…

 

The projected job loss from this increase in defense spending would be close to 2 million. In other words, the standard economic models that project job loss from efforts to stem global warming also project that the increase in defense spending since 2000 will cost the economy close to 2 million jobs in the long run.

The Political Economy Research Institute at the University of Massachusetts, Amherst has also shown that non-military spending creates more jobs than military spending.

High Military Spending Drains Innovation, Investment and Manufacturing Strength from the Civilian Economy

Chalmers Johnson notes that high military spending diverts innovation and manufacturing capacity from the economy:

By the 1960s it was becoming apparent that turning over the nation’s largest manufacturing enterprises to the Department of Defense and producing goods without any investment or consumption value was starting to crowd out civilian economic activities. The historian Thomas E Woods Jr observes that, during the 1950s and 1960s, between one-third and two-thirds of all US research talent was siphoned off into the military sector. It is, of course, impossible to know what innovations never appeared as a result of this diversion of resources and brainpower into the service of the military, but it was during the 1960s that we first began to notice Japan was outpacing us in the design and quality of a range of consumer goods, including household electronics and automobiles.

 

***

 

Woods writes: “According to the US Department of Defense, during the four decades from 1947 through 1987 it used (in 1982 dollars) $7.62 trillion in capital resources. In 1985, the Department of Commerce estimated the value of the nation’s plant and equipment, and infrastructure, at just over $7.29 trillion… The amount spent over that period could have doubled the American capital stock or modernized and replaced its existing stock”.

 

The fact that we did not modernise or replace our capital assets is one of the main reasons why, by the turn of the 21st century, our manufacturing base had all but evaporated. Machine tools, an industry on which Melman was an authority, are a particularly important symptom. In November 1968, a five-year inventory disclosed “that 64% of the metalworking machine tools used in US industry were 10 years old or older. The age of this industrial equipment (drills, lathes, etc.) marks the United States’ machine tool stock as the oldest among all major industrial nations, and it marks the continuation of a deterioration process that began with the end of the second world war. This deterioration at the base of the industrial system certifies to the continuous debilitating and depleting effect that the military use of capital and research and development talent has had on American industry.”

Economist Robert Higgs makes the same point about World War II:

Yes, officially measured GDP soared during the war. Examination of that increased output shows, however, that it consisted entirely of military goods and services. Real civilian consumption and private investment both fell after 1941, and they did not recover fully until 1946. The privately owned capital stock actually shrank during the war. Some prosperity. (My article in the peer-reviewed Journal of Economic History, March 1992, presents many of the relevant details.)

 

It is high time that we come to appreciate the distinction between the government spending, especially the war spending, that bulks up official GDP figures and the kinds of production that create genuine economic prosperity. As Ludwig von Mises wrote in the aftermath of World War I, “war prosperity is like the prosperity that an earthquake or a plague brings.”

War Causes Austerity

Economic historian Julian Adorney argues:

Hitler’s rearmament program was military Keynesianism on a vast scale. Hermann Goering, Hitler’s economic administrator, poured every available resource into making planes, tanks, and guns. In 1933 German military spending was 750 million Reichsmarks. By 1938 it had risen to 17 billion with 21 percent of GDP was taken up by military spending. Government spending all told was 35 percent of Germany’s GDP.

 

***

 

No-one could say that Hitler’s rearmament program was too small. Economists expected it to create a multiplier effect and jump-start a flagging economy. Instead, it produced military wealth while private citizens starved.

 

***

 

The people routinely suffered shortages. Civilian wood and iron were rationed. Small businesses, from artisans to carpenters to cobblers, went under. Citizens could barely buy pork, and buying fat to make a luxury like a cake was impossible. Rationing and long lines at the central supply depots the Nazis installed became the norm.

Nazi Germany proves that curing unemployment should not be an end in itself.

War Causes Inflation … Which Keynes and Bernanke Admit Taxes Consumers

As we noted in 2010, war causes inflation … which hurts consumers:

Liberal economist James Galbraith wrote in 2004:

Inflation applies the law of the jungle to war finance. Prices and profits rise, wages and their purchasing power fall. Thugs, profiteers and the well connected get rich. Working people and the poor make out as they can. Savings erode, through the unseen mechanism of the “inflation tax” — meaning that the government runs a big deficit in nominal terms, but a smaller one when inflation is factored in.

 

***

 

There is profiteering. Firms with monopoly power usually keep some in reserve. In wartime, if the climate is permissive, they bring it out and use it. Gas prices can go up when refining capacity becomes short — due partly to too many mergers. More generally, when sales to consumers are slow, businesses ought to cut prices — but many of them don’t. Instead, they raise prices to meet their income targets and hope that the market won’t collapse.

Ron Paul agreed in 2007:

Congress and the Federal Reserve Bank have a cozy, unspoken arrangement that makes war easier to finance. Congress has an insatiable appetite for new spending, but raising taxes is politically unpopular. The Federal Reserve, however, is happy to accommodate deficit spending by creating new money through the Treasury Department. In exchange, Congress leaves the Fed alone to operate free of pesky oversight and free of political scrutiny. Monetary policy is utterly ignored in Washington, even though the Federal Reserve system is a creation of Congress.

 

The result of this arrangement is inflation. And inflation finances war.

Blanchard Economic Research pointed out in 2001:

War has a profound effect on the economy, our government and its fiscal and monetary policies. These effects have consistently led to high inflation.

 

***

 

David Hackett Fischer is a Professor of History and Economic History at Brandeis. [H]is book, The Great Wave, Price Revolutions and the Rhythm of History … finds that … periods of high inflation are caused by, and cause, a breakdown in order and a loss of faith in political institutions. He also finds that war is a triggering influence on inflation, political disorder, social conflict and economic disruption.

 

***

 

Other economists agree with Professor Fischer’s link between inflation and war.

 

James Grant, the respected editor of Grant’s Interest Rate Observer, supplies us with the most timely perspective on the effect of war on inflation in the September 14 issue of his newsletter:

“War is inflationary. It is always wasteful no matter how just the cause. It is cost without income, destruction financed (more often than not) by credit creation. It is the essence of inflation.”

Libertarian economics writer Lew Rockwell noted in 2008:

You can line up 100 professional war historians and political scientists to talk about the 20th century, and not one is likely to mention the role of the Fed in funding US militarism. And yet it is true: the Fed is the institution that has created the money to fund the wars. In this role, it has solved a major problem that the state has confronted for all of human history. A state without money or a state that must tax its citizens to raise money for its wars is necessarily limited in its imperial ambitions. Keep in mind that this is only a problem for the state. It is not a problem for the people. The inability of the state to fund its unlimited ambitions is worth more for the people than every kind of legal check and balance. It is more valuable than all the constitutions every devised.

 

***

 

Reflecting on the calamity of this war, Ludwig von Mises wrote in 1919

One can say without exaggeration that inflation is an indispensable means of militarism. Without it, the repercussions of war on welfare become obvious much more quickly and penetratingly; war weariness would set in much earlier.***

In the entire run-up to war, George Bush just assumed as a matter of policy that it was his decision alone whether to invade Iraq. The objections by Ron Paul and some other members of Congress and vast numbers of the American population were reduced to little more than white noise in the background. Imagine if he had to raise the money for the war through taxes. It never would have happened. But he didn’t have to. He knew the money would be there. So despite a $200 billion deficit, a $9 trillion debt, $5 trillion in outstanding debt instruments held by the public, a federal budget of $3 trillion, and falling tax receipts in 2001, Bush contemplated a war that has cost $525 billion dollars — or $4,681 per household. Imagine if he had gone to the American people to request that. What would have happened? I think we know the answer to that question. And those are government figures; the actual cost of this war will be far higher — perhaps $20,000 per household.

 

***

 

If the state has the power and is asked to choose between doing good and waging war, what will it choose? Certainly in the American context, the choice has always been for war.

And progressive economics writer Chris Martenson explains as part of his “Crash Course” on economics:

If we look at the entire sweep of history, we can make an utterly obvious claim: All wars are inflationary. Period. No exceptions.

 

***

 

So if anybody tries to tell you that you haven’t sacrificed for the war, let them know you sacrificed a large portion of your savings and your paycheck to the effort, thank you very much.

The bottom line is that war always causes inflation, at least when it is funded through money-printing instead of a pay-as-you-go system of taxes and/or bonds. It might be great for a handful of defense contractors, but war is bad for Main Street, stealing wealth from people by making their dollars worth less.

Given that John Maynard Keynes and former Federal Reserve chair Ben Bernanke both say that inflation is a tax on the American people, war-induced inflation is a theft of our wealth.

IEP gives a graphic example – the Vietnam war helping to push inflation through the roof:

War Causes Runaway Debt

We noted in 2010:

All of the spending on unnecessary wars adds up.

 

The U.S. is adding trillions to its debt burden to finance its multiple wars in Iraq, Afghanistan, Yemen, etc.

Indeed, IEP – commenting on the war in Afghanistan and Iraq – notes:

This was also the first time in U.S. history where taxes were cut during a war which then resulted in both wars completely financed by deficit spending. A loose monetary policy was also implemented while interest rates were kept low and banking regulations were relaxed to stimulate the economy. All of these factors have contributed to the U.S. having severe unsustainable structural imbalances in its government finances.

We also pointed out in 2010:

It is ironic that America’s huge military spending is what made us an empire … but our huge military is what is bankrupting us … thus destroying our status as an empire.

Economist Michel Chossudovsky told Washington’s Blog:

War always causes recession. Well, if it is a very short war, then it may stimulate the economy in the short-run. But if there is not a quick victory and it drags on, then wars always put the nation waging war into a recession and hurt its economy.

Indeed, we’ve known for 2,500 years that prolonged war bankrupts an economy (and remember Greenspan’s comment.)

It’s not just civilians saying this …

The former head of the Joint Chiefs of Staff – Admiral Mullen – agrees:

The Pentagon needs to cut back on spending.

 

“We’re going to have to do that if it’s going to survive at all,” Mullen said, “and do it in a way that is predictable.”

Indeed, Mullen said:

For industry and adequate defense funding to survive … the two must work together. Otherwise, he added, “this wave of debt” will carry over from year to year, and eventually, the defense budget will be cut just to facilitate the debt.

Former Secretary of Defense Robert Gates agrees as well. As David Ignatius wrote in the Washington Post in 2010:

After a decade of war and financial crisis, America has run up debts that pose a national security problem, not just an economic one.

 

***

 

One of the strongest voices arguing for fiscal responsibility as a national security issue has been Defense Secretary Bob Gates. He gave a landmark speech in Kansas on May 8, invoking President Dwight Eisenhower’s warnings about the dangers of an imbalanced military-industrial state.

 

“Eisenhower was wary of seeing his beloved republic turn into a muscle-bound, garrison state — militarily strong, but economically stagnant and strategically insolvent,” Gates said. He warned that America was in a “parlous fiscal condition” and that the “gusher” of military spending that followed Sept. 11, 2001, must be capped. “We can’t have a strong military if we have a weak economy,” Gates told reporters who covered the Kansas speech.

 

On Thursday the defense secretary reiterated his pitch that Congress must stop shoveling money at the military, telling Pentagon reporters: “The defense budget process should no longer be characterized by ‘business as usual’ within this building — or outside of it.”

While war might make a handful in the military-industrial complex and big banks rich, America’s top military leaders and economists say that would be a very bad idea for the American people.

Indeed, military strategists have known for 2,500 years that prolonged wars are disastrous for the nation.

War Increases Inequality … And Inequality Hurts the Economy

Mainstream economists now admit that runaway inequality destroys the economy.

War is great for the super-rich, but horrible for everyone else.  Defense contractors, Congress members and bankers love war, because they make huge profits from financing war.

Pulitzer prize winning New York Times reporter James Risen notes that the so-called war on terror has caused “one of the largest transfers of wealth from public to private hands in American history,” and created a new class of war profiteers which Risen calls “the oligarchs of 9/11.”

War Increases Terrorism … And Terrorism Hurts the Economy

Security experts – conservative hawks and liberal doves alike – agree that waging war in the Middle East weakens national security and increases terrorism. See this, this, this, this, this, this and this.

Terrorism – in turn – terrorism is bad for the economy. Specifically, a study by Harvard and the National Bureau of Economic Research (NBER) points out:

From an economic standpoint, terrorism has been described to have four main effects (see, e.g., US Congress, Joint Economic Committee, 2002). First, the capital stock (human and physical) of a country is reduced as a result of terrorist attacks. Second, the terrorist threat induces higher levels of uncertainty. Third, terrorism promotes increases in counter-terrorism expenditures, drawing resources from productive sectors for use in security. Fourth, terrorism is known to affect negatively specific industries such as tourism.

The Harvard/NBER concludes:

In accordance with the predictions of the model, higher levels of terrorist risks are associated with lower levels of net foreign direct investment positions, even after controlling for other types of country risks. On average, a standard deviation increase in the terrorist risk is associated with a fall in the net foreign direct investment position of about 5 percent of GDP.

So the more unnecessary wars American launches and the more innocent civilians we kill, the less foreign investment in America, the more destruction to our capital stock, the higher the level of uncertainty, the more counter-terrorism expenditures and the less expenditures in more productive sectors, and the greater the hit to tourism and some other industries. Moreover:

Terrorism has contributed to a decline in the global economy (for example, European Commission, 2001).

So military adventurism increases terrorism which hurts the world economy. And see this.

Attacking a country which controls the flow of oil also has special impacts on the economy. For example, well-known economist Nouriel Roubini says that attacking Iran would lead to global recession. The IMF says that Iran cutting off oil supplies could raise crude prices 30%.

War Causes Us to Lose Friends … And Influence

While World War II – the last “good war” – may have gained us friends, launching military aggression is now losing America friends, influence and prosperity.

For example, the U.S. has launched Cold War 2.0 – casting Russia and China as evil empires – and threatening them in numerous way. For example, the U.S. broke its promise not to encircle Russia, and is using Ukraine to threaten Russia; and the U.S. is backing Japan in a hot dispute over remote islands, and backing Vietnam in its confrontations with China.

And U.S. statements that any country that challenge U.S. military – or even economic – hegemony will be attacked are extremely provocative.

This is causing Russia to launch a policy of “de-dollarization”, which China is joining in. This could lead to the collapse of the petrodollar.




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Guest Post: The Flawed 75% Tax Solution From Hollande And Piketty

Submitted by Richard Epstein via CapX.com,

The recent world of political economy features the deep paradox.  By common consent Thomas Piketty’s recent volume Capital in the Twenty-First Century has been hailed of the intellectual triumph of the year.  Its bold recommendations make the theoretical case for a global income tax in the range of 54 to 80—a figure that has also been defended in the academic work of 2010 Nobel Prize winner Peter Diamond and Emmanuel Saez, a frequent coauthor of Piketty and the winner of the 2009 John Bates Clark award.  The basic conceit of these distinguished authors is that preserving economic growth does not require governments to sacrifice the strong push to income equality, for which the strongly progressive taxes on both income and wealth are thought to be primary policy levers.

I have already expressed my theoretical disagreement with their position both here and here.  But there is no reason to rest with these theoretical objections, in light of the unfortunate test case kindly presented by French President Francois Hollande, who made a two-year top tax bracket of 75 percent on salaries of over 1 million euros an essential part of his economic programme.  His political boldness comes at a high price, as Hollande suffers from an enormous loss of popularity, racking up recent approval ratings in the order of 12 percent owing to the persistence of high unemployment rates in a zero growth economy.

The intellectual challenge is to explain the gap between Piketty’s confident theoretical assertions on the one side, and Hollande’s empirical abyss on the other.  Clever social democratic economists can surely think of some confounding factor to explain the results in question.  But to this lawyer, a set of simple economic propositions help to explain why the grand theories of Piketty and company cannot respond to the fatal flaws of their theoretical construction.

The basic question is why would anyone assume that major shifts in tax rates should have only relatively modest effects on the production of wealth.  No one would say that about a cut in market wages of over 50  percent. So why assume otherwise in a tax context?  To orient the discussion, any accurate prediction of the effects of high taxation critically depends on the distribution of benefits from those tax expenditures.  In theory, some taxes should increase the willingness of individuals to work, but only if the public goods they generate for each taxpayer exceeds their tax contribution.  But exactly the opposite conclusion applies to tax regimes that use, as do Piketty and Hollande, higher taxes as the first step in a large program of income and wealth redistribution to individuals further down on the income chain.  At this point, the simple question is how earners and investors now respond to these new incentives.

To give the numerical examples suppose that we increase total taxation on the marginal euros from around 40 percent to around 75 percent.  That move represents a reduction in disposable income from 60 percent to 25 percent, or a reduction in excess of 58 percent.  People might not make any major adjustments to that tax burden if they knew that it were to last for only a year or two.  But let the new tax rates be regarded as permanent, and it have enormous impact on the entire pattern of human activity from cradle to grave.  People will be less reluctant to take short term sacrifices in (low-taxed) Euros today in order to earn (high-taxed) euros tomorrow, when the after-tax income from lower but flatter earnings profile exceeds that from a higher, but more peaked, earnings profile.  The entire nation loses from the destruction of human capital.

In the short term, moreover, we should expect to see other effects, including considerable migration into more tax friendly jurisdictions.  Just those types of dramatic movements are evident among states in the United States with its persistent relocation of people from high-tax to low-tax states. These movements take place notwithstanding the fact that the high levels of federal taxation apply across the nation.  Those differentials are far smaller than the tax increases of the sort introduced in France.  And as one wag has put it, there are many English people who live in France, and they are all retired, and many French who live in England, at the peak of their professional careers. No mystery here.

It will of course be answered that the reason for the migration is that the high tax rates are not imposed across the board.  But if uniform high taxes solve one problem, they create another, which is that individuals will drop out of the formal labour market and engage in other tax avoidance strategies, including working in the barter or underground economy.  Ordinary people may not have the sophistication of eminent French and American economists, but they nonetheless perceive the decline in their after-tax income and act accordingly.  I confess that I am unable to find any empirical study which shows the various responses to the high marginal tax rates that have caused such widespread resentment in France.  But that reason is simple.  Most politicians have long some vestigial economic survival instincts that prevent them from going over the tax-cliff.  Until now, people were reluctant to impose taxes at that self-destructive levels.  The great danger of theoretical studies like Diamond’s and Saez’s is that it gives adventurous politicians the intellectual cover to try take that ill-advised plunge.  Yet note how squishy their results really are given the 26 point range from 54 to 80 percent in the Diamond/Saez estimate. Prudentially, why would any champion of progressive taxation start at the top end of that dicey range remains a mystery to me.

The ultimate folly is that the highly-stylized models of Piketty and company misunderstand the productive interaction between capital and labour.  A simpler economic model stresses that high taxation cuts off private investment by putting more capital in government hands.  That capital which is consumed will not be invested.  That which remains will be invested unwisely by government officials who are all too vulnerable to strong political crosswinds.  The reduction of available capital for investment reduces in turn the demand for labour, as a complementary good.  Wage stagnation is the result.

The American situation is by no means as grave as the European Union’s, but median U.S. family income has declined, as John Kyl and Stephen Moore recently wrote in the Wall Street Journal, in the six years since Barack Obama unleashed his own interventionist policies, whereby high taxes on the rich result in lower wages over much of the income distribution, at rates are far lower than those that Piketty has championed and Hollande has implemented.

Any economic sage should conclude that the cure for high taxation is, well, low taxation. Remember our job is not to maximize government revenues in the short run, but to improve living standards in the long run. As this is written, the Democrats in the U.S. Congress are engaged in a fierce debate about how to reverse the fortunes of the declining middle class that deserted them during the recent mid-term elections. But some people never learn.  The major criticism of President Obama was that he put his health care program above the an economic program that featured tax cuts for the middle class and an increase in minimum wage rates and protections for labour unions.   Even Mr. Hollande has to be aware that this program too is bound to fail, giving that restrictive labour market regulation will compound, not offset, the dangers of high taxation. France would do well to repudiate its native son Piketty, and move to align its policies with the Scotsman Adam Smith, who a long time ago advocated low-broad taxation and light-handed regulation of capital and labour markets.




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How Retailers Manipulate Your Senses To Increase Their Sales

If you notice that display racks this holiday season are nicely scented, it’s not just shops are tidier at year’s end. Scents like citrus and floral can make you linger and stay alert in the shop to buy more. Marketers believe scents do sell, with an increasing number of scientific studies backing such claims, that the whole act spawned a new marketing sub-industry: scent marketing. It reminds us of germ warfare, an unseen weaponry that has your wallet in the crosshairs.

Real estate agents are already deploying this trick to unsuspecting buyers; the smell of freshly baked goods is said to encourage prospects to buy property during ocular visits. Similarly, talcum powder makes you feel nostalgic and, perhaps, want to buy that cushioned reading chair you don’t need.

The use of scent is just one of four sensory marketing tricks being used on us by shops eager for more sales. Collated in the new infographic below you can find a number of scientific studies that indicate what we see, hear or touch affect our buying decisions. You’ll be surprised at some of the seemingly unrelated factors that have a profound effect on your shopping. In one experiment published in the Harvard Business Review, participants were found to be a harder bargainer when sitting on a hard chair.

Likewise, you may already know that colors have meanings. For instance, sale signs are in red (urgency) and many insurance logos are in blue (trust). You’ll also get an idea how a number of your favorite shops, such as Bloomingdale’s, Apple Store, and Nike Town, lure you by playing tricks on your senses. Do you know why Apple Store leaves its notebook display half-open, or why you suddenly crave for a tropical vacation while inside Bloomingdale’s?

 

 

increase sales

Made available by: alternativesfinder.com Author: Kate Stephens

 

Source: AlternativesFinder.com




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Energy Selling And “The Greatest Crisis Of Faith In The Markets Since The 1930s”

Submitted by Ben Hunt via Salient Partners' Epsilon Theory blog,

 

Young nanny: Look at me, Damien! It's all for you. 

[she jumps off a roof, hanging herself] 
– "The Omen" (1976) 

When one has little faith, one must survive from day to day signs.

– Stephen King, "Bag of Bones" (1998)

Criminals are a superstitious cowardly lot, so my disguise must be able to strike terror into their hearts. I must be a creature of the night, black,  terrible … a … a … 

– Bob Kane and Bill Finger, "Batman" (1939) 

When clouds appear, wise men put on their cloaks;

When great leaves fall, the winter is at hand;
When the sun sets, who doth not look for night?

? William Shakespeare, “Richard II” (1595)

Alas, why gnaw you so your nether lip?
Some bloody passion shakes your very frame:
These are portents; but yet I hope, I hope,
They do not point at me.

? William Shakespeare, “Othello” (1603)

Destiny does not send us heralds. She is too wise or too cruel for that.
? Oscar Wilde (1854 – 1900)

Like the criminals that Bruce Wayne fought as Batman, we investors are a superstitious, cowardly lot. We are constantly ascribing way too much import to this sign or that sign, constantly freaking out over the meaning and significance of this market event or that market event. It doesn’t help that the financial media world has devolved into fiefdoms of rah-rah soothsayers on the one hand and doom-seeing end-timers on the other, so that whatever our predispositions might be we can easily find Voices of Authority to read the entrails to our liking. And it really doesn’t help that we are in the midst of the greatest crisis of faith in the markets since the 1930’s, so that – as Stephen King wrote – we survive by looking for day-to-day signs to show us what to do.

And yet sometimes a little freaking out over the signs and portents is clearly the right thing to do. Sure, if your nanny declares her loyalty to your adopted-under-mysterious-circumstances devil-child as she hangs herself outside the nursery window it’s probably a case of mental illness, but I’d also listen a little more closely to what that pesky priest says. If you’re Pierce Brosnan in the “Bag of Bones” mini-series and you think that your dead wife is sending you cryptic messages via a handful of refrigerator magnets … well, maybe you should drive into town and buy more refrigerator magnets, see if she’s got anything interesting to say. If you’re Desdemona and you’re worried that Othello’s lip-biting is a sign that he’s about to fall into a jealous, murderous rage … well, maybe you should run out of the room instead of hanging around to see if you’re right.

It’s a tough call, evaluating what’s a “true” sign and what’s a “false” sign. Are we being foolish to sell our energy stocks after oil prices took another big hit, or are we reading the market’s tea leaves correctly and saving ourselves a lot of future pain? Are we acting as Shakespeare says any wise person would in a knowable and deterministic world, by putting on our cloaks as clouds appear and looking for the night as the sun sets? Or are we mistaking our play-acting market world for the real world, putting on our cloaks as the projectionist shows us a picture of clouds and looking for the night as the stage lights dim?

Here’s the Epsilon Theory answer: the latter mistake is 1,000 times more common than the former wisdom, and the vast majority of investors would be better off if they never read the newspaper and never turned on the TV. Why? Because what they think is a “sign” is actually a signal, neither true nor false in and of itself but only more or less influential in changing their mind and other investors’ minds about the world. (for more on signals and Information Theory, see “Through the Looking Glass” and “The Music of the Spheres”) Signals are constructed. Signals are malleable. And unless you are focused on how and why signals are constructed and shaped, you will be whipsawed. You will be shaken out. You will be roped in. You will catch a falling knife. Pick your own analogy or metaphor … there are a million to choose from and anyone who has spent any time at all in the market has experienced most of them. We’ve all been there.

Case in point: why are many investors puking energy sector stocks today? It’s not because they have a detailed cash flow model of the specific companies they’re selling and have calculated the incremental earnings impact of oil prices moving from a $70 handle to a $60 handle. It’s also not because there’s some credit freeze roiling financial markets and a careful balance sheet analysis shows imminent dividend cuts or debt stress throughout the sector. Will lower oil prices over a long period of time hurt earnings and crimp growth for the entire sector? Well, sure. That’s kinda what it means to invest in a cyclical stock, and if this comes as a surprise to you then I really don’t know what to say. Will lower oil prices over a long period of time create balance sheet distress in the energy sector’s more levered, go-go stocks? Absolutely. If you’re not stress testing the balance sheet, capital allocation, and distribution coverage models of the energy stocks you own, then you’re not doing your job as a risk manager. But neither earnings risk nor balance sheet risk explains why you see a spasm of energy sector selling today or back in October.

No, the selling is because the dominant Common Knowledge regarding energy sector stocks is that they move up and down with the price of oil. Common Knowledge is not what everyone knows; that’s the consensus. Common Knowledge is what everyone knows that everyone knows, and it’s the driving force behind the Game of Sentiment. Everyone knows that everyone knows energy stocks are tied to oil prices, we just took another sharp leg down in oil prices, and so energy stocks must be sold. The fact that energy stocks are down “proves” the relationship (a wonderful example of Soros’s concept of reflexivity), which adds to the selling. And “Even After Selloff, Energy Stocks Attract Few Buyers” because, as the WSJ breathlessly announces, “prices could soon plumb new depths.” Or not, but … hey, all the better to set-up that “rebound that no one was expecting” story. Until that story is written, any oil price increases are merely because “traders who had bet on lower prices locked in gains.” I find it awfully telling that this WSJ article now titled “U.S. Oil Prices Trade Higher After Selloff” was originally titled and archived as “Oil Slides as Market Struggles To Get Grip” (you can track URL’s to identify this stuff), but then the market failed to cooperate and they had to change the title!

A couple of Epsilon Theory points on all this.

The reality (not that it matters) is that energy stocks are barely correlated with the price of oil, and their correlation with each other is barely driven by oil prices. We’ve run some basic regression analyses on MLP portfolios, and since 2012 only about 7% of the total return profile of MLP’s can be “explained” (statistically speaking) by change in oil prices. The largest explanatory factor is just the S&P 500, with about 4 times the “power” of oil prices to predict MLP prices. My interpretation is not that a rising overall market is “causing” MLP stocks to work, but that the same non-fundamental monetary policy-driven forces that are driving up the overall market are also at work in the MLP space. MLP’s have both growth and yield – the two rarest things in a Fed-dominated world – so whatever market dynamics work for stocks overall have really worked for MLP’s.

For another perspective, take a look at this recent piece by Ed Tom and the Credit Suisse Equity Trading Strategy team, titled “What’s Driving Energy Sector Correlation? (Hint: It’s NOT Oil)”. Ed and his team do stellar econometric analysis of equity market derivative contracts, which means that their papers typically need some translation into plain English. Here’s the skinny: most investors think that energy stocks traded off in unison in October because they’re highly correlated to the decline in oil prices. Not true. Yes, there’s some correlation to oil, but what’s really driving this across-the-board decline is the fact that “long energy” has become a very crowded trade. So if you get a signal that spooks the long energy crowd, you’re going to get a mad rush of investors heading for the exit even if the signal isn’t truly that relevant for the fundamentals or the historical beta of energy stocks. When a trade is crowded on the long side, everyone has an itchy trigger finger to sell.

So what does matter? How can we improve our investing around energy sector stocks by thinking about oil prices as a malleable signal that drives sentiment dynamics (at least in the short and medium term) rather than as a deterministic and inexorable sign of things to come? I think what happens from here depends on the strategic interaction of four factors:

1)    How crowded is the trade (still)? The good news here is that the Credit Suisse team believes a lot of the air was let out of the long-energy crowded trade balloon in October. I think that’s probably true, although I certainly wouldn’t call it un-crowded. I also think there’s a tremendous amount of air in the more general “the Fed has got your back” crowded trade balloon, which is worrisome for all equity market sectors, including energy.

2)    What’s the investing DNA – value or growth – of the majority of energy sector holders? The notion of population dynamics and evolutionary theory is something I explored earlier this year in Epsilon Theory (here and here), and it’s a topic that I’m going to refocus on in 2015. The basic idea is that different investors have different linguistic grammars (value investors possess a mean-reversion grammar, while growth investors possess a momentum grammar), and that for a stock or sector to “work” you need the dominant Narrative grammar to fit the dominant investor type.

3)    How is the oil price Narrative framed – supply/demand fundamentals or monetary policy? I wrote about this at length in last week’s Epsilon Theory note, so won’t repeat all that here. Everything I wrote then remains true: the supply/demand fundamentals Narrative is now ascendant and I suspect will remain so for at least a couple of weeks, maybe longer. That’s important because at current supply/demand projections it’s hard (not impossible, but hard) for oil prices to get much below $70 and stay there for a long time if you believe in this Narrative. A fundamentals-driven “explanation” places a martingale on oil prices that does not exist with monetary policy-driven “explanations”.

4)    What will China and the US do with their monetary policy, and what will Saudi Arabia and Russia do with their foreign policy? Hey, your guess is as good as mine. I don’t have a crystal ball on outcomes or timing, but this is where my risk antennae are focused 99% of the time.

I don’t have settled answers to any of these questions. And I don’t have a predictive model (a risk-based econometric analysis), because not only don’t I have settled answers, but I don’t even have a sense of potential outcomes or rough probability distributions for #4. I know that’s unsatisfying to many readers (certainly it’s unsatisfying to me!), but you have to take what the market gives you, not what you wish were there. My goal is not to be a hero and make bold predictions in the Golden Age of the Central Banker. My goal is to be a survivor. My goal is to play the game a bit better than the crowd by paying attention to the construction and shaping of market signals, all the while keeping my attention focused on how politicians and bankers wrestle with a global debt crisis. Call it being reactive if you like. I prefer to call it Adaptive Investing, and that’s what I want to communicate with Epsilon Theory.




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Daniel Hannan Summarizes Europe’s Dead-End Policies In 70 Seconds

“It’s a funny thing… but if you start taxing countries for doing the right thing, in order to pay countries who are doing the wrong thing, you’re going to end up fewer of the former and more of the latter.” Europe’s perverse incentives to ‘not’ succeed exposed in just 70 seconds…

 




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10 Out Of 10 Credit Experts Agree: The Country Most Likely To Default First Is…

With an 83% probability of default within 5 years, Venezuela is in trouble… imminent trouble with a 24% chance of default within a year (more than 10 times the probability of a Russian default)

 

 

Charts: Bloomberg




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