David Stockman On Yellenomics And The Folly Of Free Money

Submitted by David Stockman via Contra Corner blog,

The Fed and the other major central banks have been planting time bombs all over the global financial system for years, but especially since their post-crisis money printing spree incepted in the fall of 2008.  Now comes a new leader to the Eccles Building who is not only bubble-blind like her two predecessors, but is also apparently bubble-mute. Janet Yellen is pleased to speak of financial bubbles as a “misalignment of asset prices,” and professes not to espy any on the horizon.

Let’s see. The Russell 2000 is trading at 85X actual earnings and that’s apparently “within normal valuation parameters.”  Likewise, the social media stocks are replicating the eyeballs and clicks based valuation madness of Greenspan’s dot-com bubble.  But there is nothing to see there, either–not even Twitter at 35X its current run-rate of sales or the $19 billion WhatsApp deal. Given the latter’s lack of revenues, patents and entry barriers to the red hot business of free texting, its key valuation metric reduces to market cap per employee–which  computes out to a cool $350 million for each of its 55 payrollers.   Never before has QuickBooks for startups listed, apparently, so many geniuses on a single page of spreadsheet.

Tesla: Valuation Lunacy Straight From the Goldman IPO Hatchery

Indeed, as during the prior two Fed-inspired bubbles of this century, the stock market is riddled with white-hot mo-mo plays which amount to lunatic speculations.  Tesla, for example, has sold exactly 27,000 cars since its 2010 birth in Goldman’s IPO hatchery and has generated $1 billion in cumulative losses over the last six years—–a flood of red ink that would actually be far greater without the book income from its huge “green” tax credits which, of course, are completely unrelated to making cars. Yet it is valued at $31 billion or more than the born-again General Motors, which sells about 27,000 autos every day counting weekends.

Even the “big cap” multiple embedded in the S&P500 is stretched to nearly 19X trailing GAAP earnings—the exact top-of-the-range where it peaked out in October 2007.  And that lofty PE isn’t about any late blooming earnings surge.  At year-end 2011, the latest twelve months (LTM) reported profit for the S&P 500 was $90 per share, and during the two years since then it has crawled ahead at a tepid 5 percent annual rate to $100.

So now the index precariously sits 20% higher than ever before. Yet embedded in that 19X multiple are composite profit margins at the tippy-top of the historical range. Moreover, the S&P 500 companies now carry an elephantine load of debt—$3.2 trillion to be exact (ex-financials). But since our monetary politburo has chosen to peg interest rates at a pittance, the reported $100 per share of net income may not be all that. We are to believe that interest rates will never normalize, of course,  but in the off-chance that 300 basis points of economic reality creeps back into the debt markets, that alone would reduce S&P profits by upwards of $10 per share.

America’s already five-year old business recovery  has also apparently discovered the fountain of youth, meaning that recessions have been abolished forever. Accordingly, the forward-year EPS hockey sticks touted by the sell-side can rise to the wild blue yonder—even beyond the $120 per share “ex-items” mark that the Street’s S&P500 forecasts briefly tagged a good while back. In fact, that was the late 2007 expectation for 2008—a year notable for its proof that the Great Moderation wasn’t all that; that recessions still do happen; and that rot builds up on business balance sheets during the Fed’s bubble phase, as attested to by that year’s massive write-offs and restructurings which caused actual earnings to come in on the short side at about $15!

In short, recent US history signifies nothing except that the sudden financial and economic paroxysm of 2008-2009 arrived, apparently, on a comet from deep space and shortly returned whence it came. Nor are there any headwinds from abroad. The eventual thundering crash of China’s debt pyramids is no sweat because the carnage will stay wholly inside the Great Wall; and even as Japan sinks into old-age bankruptcy, it demise will occur silently within the boundaries of its archipelago. No roiling waters from across the Atlantic are in store, either: Europe’s 500 million citizens will simply endure stoically and indefinitely the endless stream of phony fixes and self-serving lies emanating from their overlords in Brussels.

Meanwhile, what hasn’t been creeping along is the Fed’s balance sheet, which has exploded by $1.2 trillion or 41 percent versus two years ago and the S&P price index, which is up 47 percent in that span. Likewise, the NASDAQ index is up 60 percent compared to earnings growth that languishes in single digits.

Not Even Orange?

Still, Dr.Yellen recently told a credulous Congressman that “I can’t see threats to financial stability that have built to the point of flashing orange or red.”

Not even orange? Apparently, green is the new orange. The truth is, the monetary central planners ensconced in the Eccles Building are terrified of another Wall Street hissy-fit. So they strive by word cloud and liquidity deed to satisfy the petulant credo of the fast money gamblers—namely, that the stock indices remain planted firmly in the green on any day the market’s open.  It is not a dearth of clairvoyance, then, but a surfeit of mendacity which causes our mad money printers to ignore the multitude of bubbles in plain sight.

Actually, the Fed’s bubble blindness stems from even worse than servility. The problem is an irredeemably flawed monetary doctrine that tracks, targets and aims to goose Keynesian GDP flows using the crude tools of central banking. Yet these tools of choice— pegged interest rates and stock market puts—actually result not in jobs and income for Main Street but ZERO-COGS for Wall Street. And the latter is an incendiary, avarice-inducing financial stimulant that enables speculators to chase the price of financial assets to the mountain tops and beyond. So at the heart of our drastically over-financialized, bubble-ridden economy is this appalling truth: the speculator’s COGS—that is, his entire “cost of goods”—consists of the funding expense of carried assets, and the Fed’s prevailing doctrine is to price that at near zero for at least seven years running through 2015.

Pricing anything at zero is a recipe for trouble, but the last thing on earth that should deliberately be made free is the credit lines of gamblers and speculators. That is especially so when the free stuff—-repo, short-term unsecured paper, the embedded carry cost in options, futures and OTC derivatives—-is guaranteed to remain free through a extended time horizon by the central banking branch of the state. In that respect and even with tapering having allegedly commenced, just look at the two-year treasury benchmark. In the world of fast money speculation the latter time horizon is about as far as the eye can see, but the cost to play amounts to a paltry 37 basis points.

Even J.M. Keynes Knew Better

Once upon a time traders confronted reasonably honest two-way money markets. When they woke up in the morning in 1980-1981 they most definitely did not believe that the money market rate was pegged even for the day–let alone seven years. Instead, by allowing short rates to soar to market-clearing levels, the Volcker Fed laid low the carry trade in commodities, thereby reminding speculators that spreads can go negative—suddenly,sharply and even catastrophically

Owing to the reasonably honest money markets of the Volcker era, the leading edge of inflation–soaring commodity prices—was decisively crushed and the inflationary fevers were quickly drained from the system. But more importantly, the vastly swollen level of capital pulled into the carry trades during the 1970s Great Inflation was reduced to its natural minimum—that is, to the amount needed by professional market-makers to arbitrage-out imbalances in the term structure of interest rates. Under those conditions, fund managers made a living actually investing capital, not chasing carry.

But nowadays, by contrast, the central bank’s free money guarantee nullifies all that and induces massive inflows to speculative positions in any and all financial assets that can generate either a yield or an appreciation rate slightly north of zero. To adapt Professor Keynes’ famous aphorism, the Fed’s quasi-permanent regime of ZERO-COGS  “engages all of the hidden forces of economic law on the side of [speculation], and does it in a manner that not one in [nineteen members of the Fed] is able to diagnose”.

Indeed, no less an authority on the great game of central bank front-running than Pimco’s Bill Gross trenchantly observed last week: “Our entire finance-based system….is based on carry and the ability to earn it.”

Stated differently, the preponderant effect of the Fed’s horribly misguided ZIRP has been to unleash a global horde of financial engineers, buccaneers and plain old punters who ceaselessly troll for carry. The spreads they pursue may be derived from momentum-driven stock appreciation and credit risk premiums or, as Bill Gross further observed, they may be “duration, curve, volatility or even currency related…..but it must out-carry its bogey until the system itself breaks down.”

Not surprisingly, therefore, our monetary central planners are always, well, surprised, when financial fire storms break-out. Even now, after more than a half-dozen collapses since the Greenspan era of Bubble Finance incepted in 1987, they don’t recognize that it is they who are carrying what amounts to monetary gas cans. Having no doctrine at all about ZERO-COGS, they pour on the fuel completely oblivious to its contagious, destabilizing and perilous properties. Nor is recognition likely at any time soon. After all, ZERO-COGS is an artificial step-child of central bankers’ writ; its what they do, not a natural condition on the free market.

The Prehistoric Era of Volcker the Great vs. Bathtub Economics

When money market yields and the term structure of interest rates are not pegged by the Fed but cleared by the market balance between the supply of economic savings and the demand for borrowed funds, the profit in the carry trades is rapidly arbitraged away—as last demonstrated during the pre-historic era of Volcker the Great. So the way back home is clear: liberate interest rates from the destructive embrace of the FOMC and presently money markets would gyrate energetically and the global horde of carry-seekers would shrink to a corporals’ guard. Pimco’s mighty balance sheet would also end-up nowhere near $2 trillion gross, if it survived at all.

By contrast, as we approach the bursting of the third central banking bubble of this century, the fates have saddled the world with the most oblivious and therefore dangerous Keynesian Fed-head yet. Not only does Yellen not have the slightest clue that ZERO-COGS is a financial time-bomb, she is actually so invested in the archaic catechism of the 1960s New Economics that she mistakes today’s screaming malinvestments and economic deformations for “recovery.”

In that regard, the ballyhooed housing recovery in the former sub-prime disaster zones is not exactly all that. Instead, the housing price indices in Phoenix, Los Vegas, Sacramento, the Inland Empire and Florida went screaming higher in 2011-2013 due to speculator carry trades.

Stated differently, the 29-year olds in $5,000 suits riding into Scottsdale AZ on the back of John Deere lawnmowers are not there owing to their acumen as landlords of single-family, detached homes, nor do they bring competitively unique skills at managing crab-grass in the lawns, insect infestations in the trees and mold in the basement. What they bring is cheap funding for the carry. They will be gone as soon as housing prices stop climbing, which in many of these precincts has already happened.

Similarly, the auto sector has rebounded smartly, but the catalyst there is not hard to spot either—namely, the re-eruption of auto debt and especially of the sub-prime kind. The latter specie of dopey credit had almost been killed off by the financial crisis—when issuance plummeted by 90%, and properly so.  After all, sub-prime “ride” loans had been mainly issued against rapidly depreciating used cars and down-market new vehicles at 115% loan-to-value ratios for seven year terms to borrowers living paycheck-to-paycheck, meaning that they had an excellent chance of defaulting if the Fed’s GDP levitation game failed and their temp jobs vanished.

All the forgoing transpired in 2008-2009, of course, but that is ancient credit market history that has now been forgiven and forgotten. Since those clarifying moments, sub-prime car loans have soared 10X—-rising from $2 billion to $22 billion last year, when issuance clocked in above the frenzied level of 2007. Sub-prime loans now fund a record 55% of used car loans and 30% of new car loans, but there’s more. The Wall Street meth labs have already produced a credit mutant called “deep sub-prime” which now account for one-in-eight car loans. Borrowers able to post a shot-gun or PlayStation as downpayment can get a loan even with credit scores below 580.

In short, even as real wage and salary incomes grew by less than 1% last year, new vehicle sales boomed by 25% during the last two years to nearly the pre-crisis level of 16 million units. The yawning disconnect between stagnant incomes and soaring car sales is readily explained, of course, by the usual suspect in our debt-besotted economy—namely, auto loans, which were up 25% since the post-crisis bottom and now at an all-time high.

This reversion to borrowing our way to prosperity also highlights the untoward pathways through which the Fed’s toxic medicine of cheap debt disperses through the body economic. Much of the dodgy auto paper now flowing out of dealer showrooms is not coming from Dodd-Frank disabled banks, but from non-banks like Exeter Finance and Santander Consumer USA that have a tell-tale capital structure. They are funded with a dollop of “private equity” from the likes of Blackstone and KKR and tons of junk bonds that have been voraciously devoured by yield hungry money managers who have been flushed out of safer fixed income investments by the monetary central planners in the Eccles building.

The Financial Crime of ZERO-COGS

At the end of the day, the financial crime of ZERO-COGS is a product of the primitive 1960s ”bathtub economics” of the New Keynesians. Not coincidentally, their leading light was professor James Tobin, who was not only the architect of the disastrous Kennedy-Johnson fiscal and financial policies that caused the breakdown of Bretton Woods and its serviceably stable global monetary order, but who was also PhD advisor to Janet Yellen. To this day Tobin’s protégé ritually incants all the Keynesian hokum about slack aggregate demand, potential GDP growth shortfalls and central bank monetary “accommodation” designed to guide GDP and jobs toward full capacity.

In more graphic terms, however, the fancy theories of Tobin-Yellen reduce to this: the $17 trillion US economy amounts to a giant bathtub that must be filled to the brim at all times in order to insure full employment and maximum societal bliss. But it is only the deft management of the fiscal and monetary dials by enlightened PhDs that can that can keep the water line snuff with the brim–otherwise known as potential GDP. Indeed, left to its own devices, market capitalism tends in the opposite direction—that is, a circling motion toward the port at the bottom.

For nigh onto fifty years, however, it has been evident that the bathtub economics of the New Keynesians was fundamentally flawed. It incorrectly  assumes the US economy is a closed system and that artificial demand induced by the fiscal or monetary authorities will cause idle domestic labor and productive assets to be mobilized. Well, we now have $8 trillion of cumulative and chronic current account deficits that prove the opposite—that is, the relevant labor supply is the 2 billion or so workers who have come out of the EM rice paddies and the relevant industrial capacity is the massive excess supply of steel mills, shipyards, bulk-carriers and iron ore mines that have been built all over the planet based on export demand originating in the borrowed  prosperity of the West and ultra-cheap capital flowing from central bank printing presses around the world.

The truth is, pumping up the American ”demand” mobilizes lower cost factors of production abroad in a great economic swapping game. Exchange rate-pegging, mercantilist-oriented central banks in the EM swap the sweat of their domestic workers and the resource endowments of their lands for the paper emissions of the US and other DM treasuries.  And the $5.7 trillion of USTs held abroad, mostly by central banks, proves that proposition, as well. In any event, it is not Uncle Sam’s fiscal rectitude that has created the EMs’ ginormous appetite for pint-sized yields on America’s swelling debts.

So through all the twists and turns of Keynesian demand management since the days when Tobin and his successors and assigns supplanted the four-square orthodoxy of President Dwight Eisenhower and Chairman William McChesney Martin, what really happened was not the triumph of modern policy science or economic enlightenment in Washington, as Kennedy’s arrogant PhD’s then averred. Instead, “policy” spent nearly a half-century using up the balance sheet of the American economy and all its components on a one-time basis.  Total credit market debt—-including business, household, financial and government–went  from its historic ratio of 1.5X GDP  to 3.5X at the crisis peak in 2007—where it remains until this day.

The $30 Trillion Rebuke To Keynesian Professors

Those extra two turns of aggregate debt amount to $30 trillion—a one time exploitation of American balance sheets that did seemingly accommodate Keynesian miracles of demand management. GDP was boosted by households that were enabled to spend more than they earned and a national economy that was empowered to consume more than it produced.

But there was nothing enlightened about the rolling national LBO over the decades since Professor Tobin’s unfortunate arrival in Washington. It was then—and always has been—just a cheap debt trick. During each successive business cycle’s stimulus phase, debt ratios were ratcheted up to higher and higher levels. But now we have hit peak debt in both the public and private sectors, and there is no ratchet left because balance sheets have been exhausted.

The household sector data tell the story of the cheap debt trick which is now over. The relevant leverage ratio here is household debt to wage and salary income, because the NIPA “personal income” metric is now massively bloated by $2.5 trillion of transfer payments—-flows which come from debt and taxes, not production and supply.

As shown below, the ratchet was powerful. During the 1980-1985 cycle, the household debt ratio jumped from 105% to 117% of wage and salary income; then it ratcheted from 130% to 147% during the 1990-1995 cycle; thereafter it climbed from 160% to 190% during 2000-2005; and it finally peaked out at almost 210% at the 2007 peak.

Household Leverage Ratio - Click to enlarge


That’s the Keynesian cheap debt trick in a nutshell: it does not describe a timeless science that can be applied over and over again, but merely a one-time party that is over. As shown above, the ratio has now retraced to the 180s, but that’s still high by historic standards, and more importantly, is the reason that Professor Larry Summers can be seen on most days sucking his thumb, looking for “escape velocity” that can’t happen.

The up-ratchet in private and public leverage ratios is over, and that means that the Keynesian monetary policy is done, too. It worked for a few decades thru the credit transmission mechanism to the household sector, but one thing is now certain: the only part of household debt that is growing is NINJA loans to students and what amounts to de facto rent-a-car deals in autos, which in due course will lead to a new pile-up of defaulted paper and acres of repossessed used cars.

Meanwhile, Yellen and her mad money printers keep “accommodating”  as they try to fill to the brim an imaginary bathtub of potential GDP. The exercise would be laughable, even stupid, if it were not for its true impact, which is ZERO-COGS. The latter, unfortunately, is fueling the mother of all bubbles here and abroad; crushing savers and fixed income retirees; showering the fast money traders and 1% with unspeakable windfalls of ill-gotten “trickle-down”; and placing control of the very warp and woof of our $17 trillion national economy in the hands of unelected, academic zealots.

The worst thing is that Yellenomics is just getting started because the whole crony capitalist dystopia that has become America can not function for more than a few days without another dose of its deadly monetary heroin.


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

Behold, The InVIXible Hand

The last few days have seen credit markets weaken drastically, Treasuries rallying, precious metals bid, and copper prices collapsing… but amid all of that stocks are “staying the course.” Perhaps the following 3 charts of the last few days will explain where that magical bid is coming from…

It seems the last hour of the trading day sees sellers arrive (and protection-seekers) worried about overnight angst in Asia… but out of nowhere at 1540ET, VIX is slammed lower (as traders dump protection like a bad case of the crabs) and that lifts stocks close to (or even above) green…


Perhaps, somewhere, someone wants oil prices lower and Russian stocks lower but wants to show the US equity market as the great bastion of trust and security the world can rely on?


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Baltic Dry Plunges 8%, Near Most In 6 Years

It would appear record inventories of Iron ore and plunging prices due to China’s shadow-banking unwind have started to weigh on the all-to-important-when-it-is-going-up Baltic Dry Index. With the worst start to a year in over a decade, the recent recovery in prices provided faint hope that the worst of the global trade collapse was over… however, today’s 8% plunge – on par with the biggest drops in the last 6 years – suggests things are far from self-sustaining. Still think we are insulated from the arcane China shadow-banking system? Think again…



Charts: Bloomberg


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Late-Day VIX-Selling Panic Closes S&P Green; Bonds/Bullion Bid

For the 2nd day in a row, US Treasuries and precious metals were well bid as it seems safe-havens were in strong demand. EUR strength (repatriation flows after risk-aversion in Europe from Ukraine – EURUSD closed at highest since Oct 11) drove the USD Index lower (-0.15% on the week) and while gold and silver benefitted from that modest weakness they are now up 2% on the week (with gold above $1365 and at 6-month highs). Oil slipped (on SPR release talk) and copper lifted modestly (as Yuan strengthen very mildly). Credit markets have lost all gains from Putin. Once again the magic elixir of the US day-session open spiked AUDJPY and supported stocks up to unchanged from overnight weakness but once Europe close (well in DST terms) US equities drifted sideways to lower leaving the Dow and S&P red into the last hour.  Another late-day scramble to sell VIX managed to get the S&P just green!


Totally normal VIX slam into the close… MUST CLOSE GREEN!!!! Mission Accomplished


AUDJPY inseparable from stocks (aside from the same vol as we saw yestrday around the US open)…


But Treasury yields tumble – regaining all losses from payrolls…


Stocks remain green from pre-Putin but gave back some more of those gains today…


Gold is sending warning signs that all is not well in the risk world…


But it's clear that this week has been about risk not growth…


As EUR dominated the USD – EURUSD closed above 1.39 for the first time since Oct 2011


Credit markets are extremely skeptical and protection is bid well beyond pre-Putin levels…


Charts: Bloomberg

Bonus Chart: Herbalife bears must have been rejoicing… but it really didn't end that bad…


Bonus Bonus Chart: It seems the dead-cat did bounce then died again…


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New Zealand Hikes Rate By 25 bps To 2.75%

Yes, rates can be raised too. Just out from the Reserve Bank of New Zealand which just hiked rates by 25bps to 2.75%, as was largely expected.

The Reserve Bank today increased the OCR by 25 basis points to 2.75 percent.


New Zealand’s economic expansion has considerable momentum, and growth is becoming more broad-based. GDP is estimated to have grown by 3.3 percent in the year to March. Growth is gradually increasing in New Zealand’s trading partners. However, improvements in major economies have required exceptional support from monetary policy. Global financial conditions continue to be very accommodating, with bond yields in most advanced countries low and equity markets performing strongly.


Prices for New Zealand’s export commodities remain very high, and especially for dairy. Domestically, the extended period of low interest rates and continued strong growth in construction sector activity have supported recovery. A rapid increase in net immigration over the past 18 months has also boosted housing and consumer demand. Confidence is very high among consumers and businesses, and hiring and investment intentions continue to increase.


Growth in demand has been absorbing spare capacity, and inflationary pressures are becoming apparent, especially in the non-tradables sector. In the tradables sector, weak import price inflation and the high exchange rate have held down inflation. The high exchange rate remains a headwind to the tradables sector. The Bank does not believe the current level of the exchange rate is sustainable in the long run.


There has been some moderation in the housing market. Restrictions on high loan-to-value ratio mortgage lending are starting to ease pressure, and rising interest rates will have a further moderating influence. However, the increase in net immigration flows will remain an offsetting influence.


While headline inflation has been moderate, inflationary pressures are increasing and are expected to continue doing so over the next two years. In this environment it is important that inflation expectations remain contained. To achieve this it is necessary to raise interest rates towards a level at which they are no longer adding to demand. The Bank is commencing this adjustment today. The speed and extent to which the OCR will be raised will depend on economic data and our continuing assessment of emerging inflationary pressures.


By increasing the OCR as needed to keep future average inflation near the 2 percent target mid-point, the Bank is seeking to ensure that the economic expansion can be sustained.


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Wall Street Bonuses Soar 15% To Highest Since 2007

Wall Street bonuses (on average) in 2013 rose 15% to the highest since 2007. As OSC Tom DiNapoli notes, "Securities industry employees took home significantly higher bonuses on average… although profits were lower than the prior year." In fact, as we noted earlier, profits at the banks fell 30%.



Average compensation for securities industry professionals in New York City ($360,700) were 5.2 times greater than the rest of the private sector ($69,200).


Thank You Ben…

But don't get too excited… The US is not #1 when it comes to bonuses…


Which global financial services centre should you situate yourself in if you work in banking and want to earn a big bonus? Surprisingly perhaps, the eFinancialCareers 2013 bonus survey suggests the answer is the City of London.


The average bonus in the UK was $98k (£58k) in 2013, according to survey respondents. This compares to an average of $72.9k in the U.S. and just $32.7k and $20.2k in Hong Kong and Singapore respectively. 


via Zero Hedge http://ift.tt/1fvoR7N Tyler Durden

Is this place the next Hong Kong?

March 12, 2014
Roatan, Honduras

Deep within the Congo basin along the banks of the Kasai River exist two native peoples– the Lele and the Bushong.

The two tribes are practically the same people, separated only by a river.

Yet when two anthropologists went to Africa in the early 1950s to study these tribes, the differences they found in their standards of living were astounding.

As Mary Douglas wrote in her book The Lele of the Kasai, “Everything the Lele have or do, the Bushong have more and can do better. They produce more, live better, as well as populating their region more densely than the Lele.”

The Bushong tribe was rich. The Lele tribe was poor. The Bushong used nets and traps to catch fish and game. The Lele did not. The Bushong had a “profit-motivated, wealth-accumulating economy”. The Lele did not.

The Bushong ate a much more abundant diet. They excelled at agriculture as well, planting five crops in succession in a two year rotation cycle. And they accumulated large pools of savings (excess food) for trade with other tribes.

The Lele barely subsisted.

As you can imagine, the Lele tribal structure was very centrally planned. The tribe imposed a rules on labor and employment, wealth redistribution was rampant, and there were heavy tithes to be paid.

This lack of economic freedom in the Lele tribe caused huge imbalances.

Just like the differences between North and South Korea, or East and West Germany during the Cold War days, there was very little that actually separated these people… very little except politics and economic freedom.

Similarly, it was the abundance of economic freedom in places like Hong Kong that led to their rapid growth and wealth.

Hong Kong had no major resources to speak of. Its prosperity is based solely on being a place where individuals were allowed to trade and thrive.

Here in Honduras, they’re trying to take a page from that playbook.

Last year the government approved a series of initiatives for what they call Zonas de Empleo y Desarrollo Económico (ZEDE), or Employment and Economic Development Zones.

The idea is that a handful of special zones in the country will be established that essentially have no taxation and their own administrative court systems (or apply laws and courts from any other country).

Naturally, a lot of folks will probably scoff at the idea– after all, what nut case would want to set up a business in what’s now a thick jungle in Honduras?

Then again, there were probably a lot of Brits in 1897 who thought the same thing about an illiterate fishing village on the South China Sea.

But history shows us that money and talent goes where it is treated best, and those places prosper far beyond all the rest.

That place might not be Honduras (it’s certainly possible this project won’t succeed)…

But as the debt and paper-based global financial system continues its terminal decline into insolvency, you can be sure that there will be a mass migration of talent and capital to the few places that still provide freedom and opportunity.

People will realize that they are being taxed more just to pay interest on a rising debt, meanwhile their money is worth less and their standard of living is falling.

Once they realize this, they’ll start looking for greener pastures elsewhere, just as human beings have always done throughout history.

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After Annexing Crimea, Russian Troops Are Piling Up By The East Ukraine Border

Despite the relentless protests of Kiev, and of course the G7 group of world’s most indebted nations, in the past two weeks Vladimir Putin once again succeeded in outplaying the west and annexed the Crimea penninsula without firing a single shot (granted there is still potential for material situational deterioration, one which would involve military participation by NATO whose outcome is not exactly clear). The market has “priced in” as much, with prevailing consensus now dictating that Russia will preserve its foothold in the Crimea however without additional attempts for annexation: certainly Poland is hoping and praying as much.

However, as the following photos taken on the Russian side of East Ukraine, one next to Belgorod, and one in the proximity of Rostov, the Russian tanks are now piling up, only not in Crimea, which needs no further Russian military presence, but ostensibly to prepare for the next part of the annexation: that of Russian-speaking east Ukraine.

On the picture below, one can see Russian troops on the move near the border with Ukraine in the Belgorod Oblast, about 20 kilometers from the border with Ukraine near Kharlkiv:

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The indicative location:


Meanwhile, on the birder with Crimea, Ukrainian troops are digging in and mining fields in anticipation of Russians rolling out of the Penninsula:


H/T @raymond_saint


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Guest Post: Why 2014 Is Beginning To Look A Lot Like 2008

Submitted by Charles Hugh-Smith via Peak Prosperity blog,

Does anything about 2014 remind you of 2008?

For example, the increasing signs of stress in the global financial system, from periphery currencies crashing to China’s shadow banking bailouts to the constant flow of official assurances that all is well and whatever situations aren’t well are on the mend.

The long lists of visible stress in the global financial system and the almost laughably hollow assurances that there are no bubbles, everything is under control, etc. etc. etc.  certainly remind me of the late-2007-early 2008 period when the subprime mortgage meltdown was already visible and officialdom from Federal Reserve chairman Alan Greenspan on down were mounting the bully pulpit at every opportunity to declare that there was no bubble in housing and the system was easily able to handle little things like defaulting mortgages.

Some five years after repeatedly declaring there was no bubble in housing and nothing to worry about even as the global financial system was coming apart at the seams, Greenspan bleated out a shopworn and not very credible mea culpa, Never Saw It Coming: Why the Financial Crisis Took Economists By Surprise (Foreign Affairs magazine, December 2013).  First, he claimed no one foresaw the crisis, and second, he attributed this failure to a lack of insight into “animal spirits,” the emotional drivers of behavior.

Greenspan claimed that the herd behavior of animal spirits drove financial firms (i.e. Wall Street and Too Big To Fail banks) to keep extending risky bets lest they lose fat profits by exiting the risk-on trade too early. In Greenspan’s view, the abundance of apparent liquidity in the bullish phase created the expectation that the liquidity would be available when everyone decided to sell their positions and exit the risk-on trades.

In Greenspan’s words:

“Financial firms accepted the risk that they would be unable to anticipate the onset of a crisis in time to retrench. However, they thought the risk was limited, believing that even if a crisis developed, the seemingly insatiable demand for exotic financial products would dissipate only slowly, allowing them to sell almost all their portfolios without loss.


They were mistaken. They failed to recognize that market liquidity is largely a function of the degree of investors’ risk aversion, the most dominant animal spirit that drives financial markets. Leading up to the onset of the crisis, the decreased risk aversion among investors had produced increasingly narrow credit yield spreads and heavy trading volumes, creating the appearance of liquidity and the illusion that firms could sell almost anything. But when fear-induced market retrenchment set in, that liquidity disappeared overnight, as buyers pulled back. In fact, in many markets, at the height of the crisis of 2008, bids virtually disappeared.”

It wasn’t just gamblers and financiers who were mistaken—so was Greenspan. Numerous analysts waved the warning flag long before 2008, and the financial media began publishing stories about the housing bubble as early as 2005. In claiming no one foresaw the inevitability of a subprime mortgage meltdown and a domino effect on securitized debt based on those mortgages, Greenspan is flat-out wrong.

Greenspan is also off-track on another of his claims: that the global financial meltdown of 2008 was widely considered a “once in a lifetime” tail risk, too unlikely to ever happen.

The founder of fractal mathematics, Benoit Mandelbrot, published a book in 2004 titled The (Mis)Behavior of Markets: A Fractal View of Risk, Ruin and Reward that completely eviscerated the standard portfolio model of immense faith in the low odds of major crises ever erupting in modern hedged markets.

On the contrary, Mandelbrot showed, major crises were likely to erupt far more often than predicted, and with less predictability than was assumed by the cohort of economists and financiers that dominated the Fed and Wall Street.

In other words, not only was the global meltdown of 2008 foreseeable, it was inevitable.

Looking to Charts for Clues

A number of technical analysts have been posting charts that suggest a meltdown-type decline in global markets could occur in 2014—there’s an analog chart of 1929 making the rounds, and Tom McClellan published a chart of the Coppock Curve indicator that looks like the next downdraft is imminent. 

Chris Kimble published a chart of the St. Louis Fed financial stress index that suggests market complacency has returned to the low levels last touched just before the 2008 global financial meltdown. (Kimble annotated his copy of the chart; this is the plain chart.)

There are a great many indicators, metrics and correlations to watch for signs of a breakdown: analog charts that overlay the current markets onto past eras, corporate earnings, credit spreads, volatility indices, investor sentiment readings, inflation expectations, and various carry trades and ratios such as the S&P 500 (SPX) to gold, oil, Treasury yields and so on.

Just for context, here is a chart of the S&P 500 (SPX) from 2005 to the present:

Hindsight is 20-20, as the saying goes, so it’s worthwhile to look at a chart of the Dow Jones Industrial Average (DJIA) I annotated on December 30, 2007. The head and shoulders visible in the above chart—a classic topping pattern—was already visible, but technically, a bullish case could still be made at the end of 2007.

By late summer 2008, just before the collapse of Lehman Brothers unleashed a cascading decline in global markets, the technical picture was much uglier:

The Bullish case had been extinguished by June, when the recovery broke down at the uptrend line, and as a result there were technical reasons to target the 10,300 level (and once below that, then on to even lower targets). 

Properly used, charts help us anticipate what might happen once various targets are hit, but that’s not the same as forecasting a timeline for a global crisis and meltdown. To do that, some fundamental and/or cyclical analysis must be brought to bear.

For example, consider this chart from my friend and colleague Gordon Long of Gordon T. Long Market Analytics & Technical Analysis.

This chart combines an analysis of trend lines and patterns with cycles of speculative bubbles and inflation, deflationary fear, reflation and real deflation.

Martin Armstrong and other analysts have published forecasts based on cycles: the four-year cycle, the 8.3 year cycle, etc.  It is noteworthy that the market peaks in January 2000 and late 2007 were about eight years apart, as were the bottoms in 2002 and 2009.

It’s tempting to extend these cycles and forecast the next top in 2015 and the next bottom in 2017, and perhaps that’s exactly what will transpire. But if we take Mandelbrot’s lessons to heart, we have to accept the fractal nature of markets and the possibility that these cycles may not be reliable guides.

Here are three more charts for your consideration, of income and employment. I’ve annotated the first chart to match what I view as the waves of financialization that have inflated speculative credit bubbles and temporarily, incomes:

Notice that the current asset reflations (or bubbles, if you dare speak the word openly) in stocks, bonds and real estate have failed to lift the year-over-year rate of change in disposable per capita income, which has been declining since 2007.


Income per capita doesn’t reflect the enormous divide between the top 10%, who have seen their incomes rise in financialization, and the bottom 90%, who have seen their income stagnate for four decades:

The number of full-time jobs has also failed to reach the peak set in 2007; clearly, the current asset bubbles have failed to boost meaningful (i.e. full-time) employment.

The Party Is Clearly Ending

Collectively, these charts above force us to ask two questions:

1.  If asset bubbles no longer boost full-time employment or incomes across the board, what is the broad-based, “social good” justification for inflating them?

2.  If employment and incomes are stagnating for the vast majority of Americans, how much longer can assets increase in price, presuming there is still some correlation between incomes and sales, profits, creditworthiness, etc.?

In Part 2: What Will Be Different About the Crisis of 2014/2015, we unpack the unprecedented state and central bank policies that turned a global financial rout into one of the most extended Bull markets in history, and make the case that these — policies designed to combat a liquidity crisis and then a collateral crisis — have reached diminishing returns.

As a result the next crisis will not be a repeat of 2008 but a much less fixable and much more monumental crisis.

Click here to access Part 2 of this report (free executive summary, enrollment required for full access).



via Zero Hedge http://ift.tt/1nNj2of Tyler Durden