Month: September 2014

The Hong Kong Protest: What It's All About

Considering that as recently as 3 weeks ago the leader of the Occupy Central movement in Hong Kong decided to throw in the towel, after admitting that his civil disobedience movement’s pursuit of democracy had “failed” as a result of waning public support, many are shocked by how aggressively Hong Kong’s students took up the baton: almost as if the mystery sponsor behind the ISIS blitz-ascent from obscurity had decided to “destabilize” yet another region. Tongue-in-cheek kidding aside, for everyone confused about the context of this weekend’s at time very violent student protests, here is Evergreen GaveKal with its wrap up of the “Hong Kong Democracy Protests.”

By Tom Holland, of Evergreen GaveKal

The inhabitants of Hong Kong were treated over the weekend to the unusual spectacle of police battling political protesters in the city’s streets. Baton charges and volleys of tear gas might be common enough tactics in New York or London, but not in Asia’s leading international financial center. The rapid escalation of the protests over the weekend and the police’s strong-arm response shocked locals, and triggered a -2% fall in the city’s benchmark Hang Seng stock index on Monday morning as investors worried about the impact of continued unrest on Hong Kong’s markets, its economy and its future as Beijing’s laboratory of choice for China’s financial liberalization.

Only a few weeks ago it seemed that Hong Kong’s pro-democracy movement was a spent force. After Beijing ruled out open elections for the chief executive of the territory’s government, the leader of Occupy Central admitted that his civil disobedience movement’s pursuit of democracy had “failed”. However, Hong Kong’s students and high school pupils failed to take heed. Last Friday a group of around 200 stormed security fences blocking off the ‘Civic Square’ outside the government’s headquarters to stage a sit-down protest against official obduracy. The heavy-handed police response prompted thousands more protesters to descend on the site over the weekend and on Monday morning the city woke up to find a civil disobedience campaign dismissed as irrelevant just weeks before had paralyzed the area surrounding Hong Kong’s government headquarters. With the mood highly febrile ahead of a public holiday on Wednesday to mark the Communist Party’s assumption of power in China, the fear is that the crowds of protesters could swell further over the course of the week, prompting an even more uncompromising response from the city’s Beijing-backed government.

The worst case scenario—that the Beijing government will deploy the People’s Liberation Army to restore order at the barrel of a gun—is extremely improbable. It would be a public relations disaster for China’s leaders. However, it is equally hard to envisage any lasting rapprochement between Hong Kong’s pro-democracy movement and the city’s government. Indeed, although the protesters’ overt cause may be their campaign for free and open elections, many are motivated by underlying grievances both towards the mainland, which they fear is swamping Hong Kong’s unique identity and culture, and towards the city’s own administration, which they believe to favor the interests of property and business tycoons over the aspirations of  local people.

As a result, even if this week’s protests end peacefully, the discontent will rumble on. And if slowing Chinese growth and rising US interest rates inflict economic hardship on the city, the dissatisfaction is only likely to mount. In recent years the combination of mainland money flows and rock-bottom mortgage rates—Hong Kong’s currency is pegged to the US dollar, so local borrowing costs follow US rates—have propelled the city’s property prices to record highs, up 300% from their 2003 low. While any slump would make property more affordable, it would also hammer the balance sheets of the city’s middle class property-owners, many of whom are inclined to sympathize with the weekend’s demonstrators.

Against that backdrop, an extended campaign of civil disobedience is likely to weigh further on Hong Kong’s stock market, already down -8.3% since early September. A new equity trading link between the Hong Kong and Shanghai market, which is due to go live towards the end of October, may not help much. With the valuations on Hong Kong listed-stocks bang in line with their mainland peers, there are currently few arbitrage opportunities to be exploited. And with Beijing’s ‘mini-stimulus’ to support the mainland economy running out of steam and the People’s Bank of China resisting pressure for a full-scale monetary easing, the chances that a continued rally in mainland stock prices will support the Hong Kong market look slim.

Finally, some critics have suggested that the weekend’s pro-democracy demonstrations could prompt Beijing to choose Shanghai’s Free Trade Zone over Hong Kong as the favored venue for its financial liberalization program. Possibly, but one year after it was opened with great fanfare, progress at drawing up rules to govern capital flows in and out of Shanghai’s new zone is glacially slow and almost entirely opaque. The mainland city still looks decades away from mounting a credible challenge to Hong Kong.

Even so, hopes that Hong Kong investors will benefit from a new spate of mainland liberalization measures look exaggerated. With China’s growth rate now slowing towards 7%, exposing the vulnerabilities of China’s financial system, complete interest rate liberalization and a full opening of the capital account are receding further into the future. That may preserve Hong Kong’s pole position. But along with the gathering momentum of pro-democracy protests, it will also limit future opportunities for growth.




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The Oil Head-Fake: The Illusion that Lower Oil Prices Are Positive

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The essence of the Oil Head-Fake Dynamic is the inevitable drop in oil price due to global recession will trigger disruption of the global oil supply chain.

I've described the dynamic of structural imbalances of supply and demand leading to lower prices for crude oil as the Oil Head-Fake: high global production (supply) continues while demand declines due to global recession, and the resulting imbalance of supply and demand triggers a major decline in price. But this drop is not positive; it's a temporary response that triggers a variety of disruptive consequences.
 
There's nothing fancy about a basic supply-demand pricing model; if the world is awash in crude oil and demand slides, price will eventually follow.
 

Everywhere I Look, I See Cheap Oil (May 12, 2010)

The interesting parts of the Oil Head-Fake Dynamic arise from the supply side, not the demand side. Demand for oil is famously inelastic, meaning that easy substitutes are not readily available, and the primacy of oil in the global economy insures a steady demand.
 
Yes, natural gas can be substituted for vehicles that have been converted to burn natural gas, coal can be converted into liquid fuels, gasoline/diesel vehicles can be scrapped and replaced with electric vehicles–but all of these substitutes require reworking not just the vehicles but the entire infrastructure of extracting and delivering liquid fuels (or sufficient quantities of electricity) to substitute for oil.
 
Even with natural gas production soaring due to the fracking revolution (a rise in production many doubt is sustainable), there isn't enough natural gas being extracted to substitute for oil, except at the margins: the fuel being replaced with natural gas is coal.
 
While the Nazi war machine famously ran (at least partly) on liquified coal, fabricating enough plants to liquify coal in quantities large enough to substitute the new coal-based fuel for oil-derived fuels is non-trivial.
 
As for using electricity, all the electricity generated by alternative-energy sources such as solar and wind amount to a few percentage points of total energy consumption in the U.S. The percentage is higher in other nations (for example, Germany), but substituting alt-energy for oil-based fuels is not practical without massive, sustained capital investment in new energy production, delivery and distribution infrastructure.
 
Despite the relative inelasticity of oil demand, a significant percentage of oil consumption is discretionary: tourism is discretionary, and so are many single-passenger commutes. Keeping the lights on all night in empty buildings is discretionary. Some percentage of military training is discretionary. Driving every day to run one errand when all five errands per week could be accomplished in one trip is discretionary. Much of business travel is discretionary. Driving to a restaurant when a meal could be prepared at home is discretionary. Shopping for non-essentials is discretionary.
 
When jobs are lost and budgets are slashed, discretionary demand for oil craters.
 
The ebb and flow of discretionary demand is known as the business cycle of expansion and recession. Though the business cycle is considered the natural order of all economies, the current crop of Central Planners is convinced that their powers enable them to eliminate the business cycle, i.e. recessions are no longer a necessary feature of the credit cycle and everyone can enjoy permanent expansion of consumption, debt and risk.
 
History suggests the omnipotence of central banks is illusory, and their hubris will be rewarded with a recession that breaks the back of their interventions.
 
Even if you believe in the omnipotence of central banks, statistical reversion to the mean suggests recessions (declines in discretionary demand) have not been eliminated–they've just been pushed forward.
 
Several emerging features of the oil supply story complicate the supply-demand pricing model. In the classic model, as demand drops, price follows, and at some point it's no longer profitable for high-cost producers to continue pumping oil. As a result, they cap their wells, cease extracting oil, and eventually supply drops to match demand and price stabilizes.
 
When demand recovers, price follows, and marginal production is brought back on line to meet rising demand. Price stabilizes as supply rises to meet demand.
 
So far so good, but as noted above, oil is not a commodity that can be replaced with a substitute, except at the margins.
 
Oil has another peculiarity: it isn't distributed evenly around the world. Some nations-states have large reserves, others essentially none. Those with large reserves export some of their production to those with little or no oil.
 
Those nations with abundant oil often suffer from The Resource Curse:–due to the extraordinary wealth generated by their oil, the rest of their economy atrophies and their political/social structure is distorted by the oil wealth.
 
The atrophying of the non-oil economy and endemic corruption driven by oil wealth lead to societies and economies with few opportunities. The despots, monarchies and other Elites reaping the oil wealth keep a lid on this simmering social unrest with welfare. As their populations of non-Elites have exploded, the costs of placating the restive masses with social welfare have also exploded higher.
 
Domestic consumption of oil has also soared, along with population and as a result of subsidies that keep the cost of petrol absurdly low. What is nearly free is inevitably squandered, and with no price discipline, consumption has skyrocketed in oil exporting nations.
 
Another peculiarity is the easy-to-get oil was extracted first. This makes sense in terms of cost-benefit, and the inevitable result is the oil that's left is more difficult to extract and process. This means the cost of producing a barrel of oil has risen from $1/barrel in the good old days to $40 or more in many exporting nations.
 
Add in graft, waste, distribution costs, taxes to fund social welfare programs, etc., and the break-even price for oil exporters is much higher than the production costs alone.
 
This sets up a contradictory set of requirements for oil exporters: oil exporters can only maintain their social spending and keep the regime afloat if oil prices stay elevated. When global recession guts demand and the price of oil tumbles, the exporter regimes are at risk of collapse if they can't maintain social welfare spending.
 
The only way to offset lower prices is to pump more oil, which paradoxically pushes prices lower. This is a double-bind: if they cut production in the hopes that prices will stabilize, this enables their competitors to keep production high: pri
ces won't decline. But if they pump more to compensate, prices also decline.
 
Higher production costs mean any serious price decline makes production unprofitable at a higher threshold. Where it might have taken a decline to $40/barrel to squeeze marginal producers out, now the threshold might be closer to $60/barrel.
 
This means even modest declines in price soon trigger production cuts as marginal wells are capped and exploration/development of costly reserves are put on hold.
 
But since the supergiant oil fields responsible for most of the global production are in exporting nations, the dynamic of maintaining social control and regime stability outweighs declines in marginal production.
 
This set up a price decline spiral as marginal production is taken offline but supply doesn't drop along with demand. The Resource Curse establishes a positive feedback loop: in the classic model, the feedback is negative: demand drops, price and supply follow, and price stabilizes as supply reaches equilibrium with demand.
 
But the Resource Curse is positive feedback: the lower price declines, the greater the need to compensate for lower revenues with higher production.
 
Meanwhile, the more price drops, the more marginal (costly) production is taken offline. This sets up the ideal conditions for a positive feedback on price: when demand recovers, supply will never be able to catch up.
 
It doesn't take much imagination to discern a tipping point in oil revenues: once price declines enough that social welfare programs cannot be funded, some exporting nation regimes will be toppled by domestic instability. Others may become vulnerable to external forces. The point here is that production generally suffers mightily when regimes collapse and the Status Quo is disrupted.
 
Another peculiarity is that as the easy-to-get oil is depleted, the need for financial and human capital investment soars. It requires billions of dollars and vast expertise to maintain production, and exporting nations have typically made the choice to devote their scarce capital to social welfare and feathering the beds of Elites rather than investing billions of dollars to maintain their production capacity.
 
Add these dynamics up and we get a supply chain that is vulnerable to price declines and depletion of the cheap, easy-to-get oil. If supply is disrupted on multiple fronts–social, economic, physical–it will be incapable or rising to meet recovering demand after the forest-fire of global recession clears out the deadwood.
 
This sets up a new pricing dynamic: demand rises but supply does not, and prices continue higher without respite or any intrinsic limit. As I have noted before, a motorcycle deliveryman in India or China will pay $10/gallon for fuel because he only needs a few liters to conduct his business. The energy/price threshold of the American household with two gas-guzzling vehicles is considerably less resilient and adaptive: below a high level of consumption, the household ceases to function, and above a relatively low price, the household also ceases to function.
 
The essence of the Oil Head-Fake Dynamic is the inevitable drop in oil price resulting from a sharp decline in demand (i.e. global recession) will trigger disruption of the global oil supply chain that will eventually push prices higher than most currently think possible.
 
Of related interest:
 

Low Oil Prices: Sign of a Debt Bubble Collapse, Leading to the End of Oil Supply?




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Did Ruth Bader Ginsburg Just Disqualify Herself from Hearing the Texas Abortion Clinic Case?

The latest issue of The New Republic
features a long, fascinating
interview with Supreme Court Justice Ruth Bader Ginsburg. Among
other things, the octogenarian justice denounces the various
liberal pundits who keep calling on her to retire, attacks
Citizens United as the “one [current] decision I would
overrule,” and even gets a nice little jab in at her former
colleague John Paul Stevens (“He was always fair in assigning
dissents: He kept most of them himself”). But the most interesting
part of the interview occurs when the talk turns to abortion.
Here’s the relevant exchange with interviewer Jeffrey Rosen:

JR: And if Roe [v. Wade] were overturned, how
bad would the consequences be?

RBG: It would be bad for non-affluent women. If we imagine the
worst-case scenario, with Roe v. Wade overruled, there
would remain many states that would not go back to the way it once
was. What that means is any woman who has the wherewithal to
travel, to take a plane, to take a train to a state that provides
access to abortion, that woman will never have a problem. It
doesn’t matter what Congress or the state legislatures do, there
will be other states that provide this facility, and women will
have access to it if they can pay for it. Women who can’t pay are
the only women who would be affected.

JR: So how can advocates make sure that poor women’s access to
reproductive choice is protected? Can legislatures be trusted or is
it necessary for courts to remain vigilant?

RBG: How could you trust legislatures in view of the
restrictions states are imposing? Think of the Texas legislation
that would put most clinics out of business.

The Texas legislation to which Ginsburg refers is a 2013 statute
known as H.B. 2. That law placed various restrictions on abortion
access throughout the state, including requiring all physicians who
perform or induce abortions to have admitting privileges at a
hospital no more than 30 miles away from the clinic where the
abortion occurs. According to Planned Parenthood of Greater Texas
Surgical Health Services, which filed suit against the law, H.B. 2
serves no legitimate health or safety rationale and is instead just
a shadowy way for the state to harass and eliminate abortion
providers. In March 2014, the U.S. Court of Appeals for the 5th
Circuit took the opposite view, upholding
the provision as a constitutionally permissible health
regulation.

So what’s the big deal with Ginsburg’s comment? As law professor
Josh Blackman
observes, “What makes this comment so problematic is that she
referred to a specific law that is currently before the 5th
Circuit, and will be appealed to SCOTUS one way or the other…. It
seems that Justice Ginsburg has made up her mind about this law. It
is not a health measure, but a law to put clinics out of
business.”

To say the least, sitting judges are supposed to refrain from
stating how they will vote on a specific case that is likely to
come before them in the near future. If this dispute does finally
reach SCOTUS, don’t be surprised when the state of Texas demands
Ginsburg’s recusal.

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The Real Crisis in Europe Will Be Political With Spain as Ground Zero

Spain’s Mariano Rajoy is back with yet another display of why he should never have been allowed to take office in the first place.

 

For those who need a quick primer, here’s a quick highlight reel of Rajoy’s more notable accomplishments:

 

1)   Helped facilitate biggest housing bubble in Spanish history, a bubble so large that the US’s looks like a molehill in comparison

 

2)   Took bribes and kickbacks from developers in helping to create said bubble (more on this later).

 

3)   Claimed Spain would never need a bailout, then demanded a €100 billion bailout one weekend before flying off to watch a soccer match.

 

4)   Raided Spain’s social security fund, investing 90% of its assets in Spanish bonds… which were on the verge of default a mere six months before.

 

5)   Got caught with dirty money he received from property developers and stated the following, “…everything that has been said about me and my colleagues in the party is untrue, except for some things that have been published by some media outlets,”

 

Now Rajoy is dealing with the problem of Catalonia (a region in Spain) wanting independence. Catalonians are proposing putting the matter to a vote, much as Scotland recently did regarding its own move to potentially break away from the UK.

 

Rajoy, never one to miss the opportunity to embarrass himself, has called the decision to vote for independence “profoundly anti-democratic.”

 

Bear in mind, this is the same “leader” who likes to proclaim that Spain is in a recovery… while Spain’s unemployment is roughly 24% and youth unemployment is above 50%.

 

At some point, the markets will call BS on Spain’s dreams of recovery and the bond markets will rebel. When this happens the whole fraud will come unraveled. However it might take a full-scale political crisis before this happens. And by the look of things we’re not far from one.

 

We’re back in trouble whenever Spain takes out the long-term trendline for its 10-year bond yields.

 

This concludes this article. If you’re looking for the means of protecting your portfolio from the coming collapse, you can pick up a FREE investment report titled Protect Your Portfolio at http://ift.tt/170oFLH.

 

This report outlines a number of strategies you can implement to prepare yourself and your loved ones from the coming market carnage.

 

Best Regards

 

Phoenix Capital Research

 

 




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“Hong Kong Risks Losing Its Role As A Financial Capital,” Deutsche Bank Chief Economist Warns

“Hong Kong clearly has its work cut out holding on to its role as the entry way to [investing in] mainland China,” warns Deutsche Bank’s Chief Economist Taimur Baig as he reflects on the civil disobedience this weekend. Even before this weekend’s riots, Baig believes “Hong Kong will have to shape up,” and while his base case suggests the unrest will not have a major detrimental effect on the economy per se, he fears it will add to investor angst – and along with macro uncertainty – leaves Hong Kong more precariously positioned than Singapore as Asia’s major financial capital.

 




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"Hong Kong Risks Losing Its Role As A Financial Capital," Deutsche Bank Chief Economist Warns

“Hong Kong clearly has its work cut out holding on to its role as the entry way to [investing in] mainland China,” warns Deutsche Bank’s Chief Economist Taimur Baig as he reflects on the civil disobedience this weekend. Even before this weekend’s riots, Baig believes “Hong Kong will have to shape up,” and while his base case suggests the unrest will not have a major detrimental effect on the economy per se, he fears it will add to investor angst – and along with macro uncertainty – leaves Hong Kong more precariously positioned than Singapore as Asia’s major financial capital.

 




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Spot The Total Logic Fail

It appears the leadership in Spain has reached its panic-point. Following Catalonia’s President Artur Mas signing of a decree calling for an ultimately democratic referendum on independence for the region, Spanish Prime Minister Rajoy uttered this mind-numbing phrase:

  • CATALAN VOTE PROFOUNDLY ANTI-DEMOCRATIC, RAJOY SAYS

It appears Rajoy’s perspective on democracy and the will of the people is a little different as the situation has become serious enough that he has gone full-Juncker.

As The BBC reports,

“Catalonia wants to speak,” he said after signing on Saturday. “Wants to be heard. Wants to vote. Now is the right time and we have the right legal framework to do so.”

 

The referendum’s two questions

 

“Do you want Catalonia to be a state?”

 

“If so, do you want Catalonia to be an independent state?”

 

Soon after the decree was signed, the Catalan hash tag EstemConvocats9N (“We called it for 9 November”) became the highest trending topic on Spanish Twitter.

 

Until recently, few Catalans had wanted full independence, but Spain’s painful economic crisis has seen a surge in support for separation, correspondents say.

 

There is resentment over the proportion of Catalan taxes used to support poorer regions.

And Rajoy is clearly concerned…

  • *CATALONIA GOVT HAS TAKEN UNILATERAL DECISIONS, RAJOY SAYS
  • *SPAIN TO CHALLENGE CATALAN INDEPENDENCE VOTE, RAJOY SAYS
  • *CATALAN VOTE WON’T HAPPEN, IS AGAINST CONSTITUTION: RAJOY
  • *CATALAN VOTE IS AGAINST RIGHTS OF SPANISH CITIZENS: RAJOY

Then followed that up these 2 stunners!!!

  • *CATALAN VOTE PROFOUNDLY ANTI-DEMOCRATIC, RAJOY SAYS
  • *LAWS CAN CHANGE THROUGH DEMOCRATIC MEANS, RAJOY SAYS

And concluded…

  • *CATALONIA STILL HAS TIME TO CHANGE COURSE, RAJOY SAYS
  • *DIALOGUE OVER CATALONIA MUST RESPECT THE LAW, RAJOY SAYS
  • *CATALONIA’S MAS MUST COMPLY WITH THE LAW, RAJOY SAYS

So in summary:

1. The Catalans want to exercise a right to democratically vote for their independence.

 

2. But Spanish PM Rajoy say a vote is anti-democratic and against the law

 

3. And then adds that laws can be changed through democratic means… (like voting for independence?)

Lost in translation?




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Martin Armstrong Warns The West “Sanctioning Russia Is A Big Mistake”

Judging from the plunge in stocks and the Ruble and along with proclamations that Russia is "isolated" (when it is clearly not), The West's sanctions appear to be achieving their goals (propaganda-wise). However, Martin Armstrong warns "politicians just keep making the same mistakes over and over again," as he explains, to the people of Russia, "sanctions only make Putin stronger for they allow him to point to the West as the evil empire."

 

Via Armstrong Economics,

Politicians just keep making the same mistake over and over again.

MickyMouseClub

 

They perpetually turn to sanctions bankrupting private business with no respect whatsoever as the USA is wiping out farmers in Europe.

But worst of all, there is not a single incident where sanctions have EVER worked even once. They often remain in place beyond a decade even as in Iran, but there is no change in politics.

Sanctions only make Putin stronger for they allow him to point to the West as the evil empire that covertly toppled the Soviet Union with a CIA plot.

Tomcat

 

The most popular T-Shirt in Russia says: "This particular tree [which is also the name of a weapon] is not afraid of sanctions."

The one in the middle says: "Sanctions? Don’t make our Iskanders laugh" (Iskander SS-26 Stone is the missile system shown).

The Mickey Mouse Club would be nice if there were really qualified people instead of questionable lawyers.

 




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Martin Armstrong Warns The West "Sanctioning Russia Is A Big Mistake"

Judging from the plunge in stocks and the Ruble and along with proclamations that Russia is "isolated" (when it is clearly not), The West's sanctions appear to be achieving their goals (propaganda-wise). However, Martin Armstrong warns "politicians just keep making the same mistakes over and over again," as he explains, to the people of Russia, "sanctions only make Putin stronger for they allow him to point to the West as the evil empire."

 

Via Armstrong Economics,

Politicians just keep making the same mistake over and over again.

MickyMouseClub

 

They perpetually turn to sanctions bankrupting private business with no respect whatsoever as the USA is wiping out farmers in Europe.

But worst of all, there is not a single incident where sanctions have EVER worked even once. They often remain in place beyond a decade even as in Iran, but there is no change in politics.

Sanctions only make Putin stronger for they allow him to point to the West as the evil empire that covertly toppled the Soviet Union with a CIA plot.

Tomcat

 

The most popular T-Shirt in Russia says: "This particular tree [which is also the name of a weapon] is not afraid of sanctions."

The one in the middle says: "Sanctions? Don’t make our Iskanders laugh" (Iskander SS-26 Stone is the missile system shown).

The Mickey Mouse Club would be nice if there were really qualified people instead of questionable lawyers.

 




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Hong Kong’s Luxury Shopping Street Right Now

The protests in Hong Kong continue to spread. The following images from Causeway Bay – one of HK's most affluent neighborhoods with many higher-end stores – show calm and well-organized protesters  (carrying slogans such as "Democracy is now here", "Occupy Hong Kong", and "We Are Not Enemies") have blocked a long section of a major thoroughfare called Hennesy Road (and have created first aid posts to attend to any injured). Locals report virtually no police presence for now, but that is likely to change as night turns to early morning.

 

 

 

h/t Tinky




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