Month: November 2014

What happened to Americans?

 

h/t Jim Quinn’s Burning Platform blog

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

A little over a year ago, we presented a “Yellow” asset, which was “the best performer of the past year.” It wasn’t gold: it was yellow cab medallions.

 

 

As we wrote then, “the best returning asset class traded in the NY Metro area is yellow but doesn’t change hands on Wall Street…. over the last 12 months New York City taxi medallions have risen 49% in price, besting the relatively humdrum returns of the S&P 500 (up 21%), the NASDAQ (22%) and the Dow (18%).  Medallions – essentially the right to operate a for-hail taxi in New York City – now trade for as much as $1.3 million, an all-time record.”

In retrospect it was also the perfect time to cash out on the “yellow” euphoria. According to the NYT, “the average price of an individual New York City taxi medallion fell to $872,000 in October, down 17 percent from a peak reached in the spring of 2013, according to an analysis of sales data. Previous figures published by the city’s Taxi and Limousine Commission — showing flat prices — appear to have been incorrect, and the commission removed them from its website after an inquiry from The New York Times.”

Like everything else, when it comes to price discovery of a depreciating asset, it was not easy to extract that “non-seasonally adjusted” real data:

The turmoil in the medallion market has been obscured in part because publicly disclosed data about taxi medallion prices can be misleading. And the turmoil suggests that the taxi business, which has undergone little change over many decades, is now in the midst of a revolution.

…

The trouble in New York’s market was also partly obscured by a flaw in the average price reports that were published monthly by the city’s taxi commission until September. Those reports erroneously said average prices for individual medallions had stayed largely the same since setting a record of $1.05 million in June 2013.

 

In fact, individual medallions have traded below $1 million for most of the last year. But the commission excludes from its statistics any transaction at a price more than $10,000 below the previous month’s reported average.

It’s not just New York:

In other big cities, medallion prices are also falling, often in conjunction with a sharp decline in sales volume. In Chicago, prices are down 17 percent. In Boston, they’re down at least 20 percent, though it’s hard to establish an exact market price because there have been only five trades since July. In Philadelphia, the taxi authority recently failed to sell any medallions at its asking price of $475,000; it will try again, at $350,000.

…

In Boston, the story is similar. As recently as April, Boston taxi medallions were selling for $700,000. The last sale, in October, was for $561,000.

The reason for this precipitous plunge: the arrival of such competitor services as Uber and Lyft. “A seven-mile ride from the Loop to the University of Chicago in a medallion taxi costs about $26, including tip. The same trip cost $12.29 this April with UberX, the lowest-cost service option from Uber. The crucial question for medallion owners like Mr. Ionescu is, if Uber is that much cheaper than a taxi, why would anyone take a taxi, and therefore why would any driver pay to lease a medallion? Mr. Ionescu says his revenues are down around 25 percent, and he’s having trouble leasing out his whole fleet.”

Meanwhile those who are still long of Medallions in depreciating terms, are becoming just a little hysterical:

“I’m already at peace with the idea that I’m going to go bankrupt,” said Larry Ionescu, who owns 98 Chicago taxi medallions. That might be overly dramatic; after all, Mr. Ionescu also compared Chicago’s pro-Uber mayor, Rahm Emanuel, to Nicolae Ceausescu, the reviled ex-dictator of his native Romania. It’s likely Mr. Ionescu remains a very rich man. In November, Chicago medallion sale prices averaged $298,000, well below the $357,000 price that was typical this spring, but far up from the $50,000 price of a decade ago.

Naturally none of this will come as a surprise to those following Uber’s ridiculous valuation ascent in recent months. As we said in July:

Because while one may or may not believe that Uber will ultimately succeed in putting NYC’s cab drivers out of business, and it is very much doubtful if legacy Yellow Cabs will follow Uber in its price dumping strategy, one thing is certain: the value of a New York Yellow Cab Medallion, which about a year ago hit a record $1.3 million price, will suffer – at least in the near-term – as the conflict between Uber and Yellow Cab picks up, and as the NYC market is suddenly flooded with countless providers of cab-equivalent services.

 

Alas, there is no way to short the Medallion “price” which with the ongoing private status of Uber makes arbing the future of the cab industry rather difficult except for the most connected institutional investors, those which will have no choice but to keep investing in future Uber rounds at ever higher valuations until one day the Amazon strategy of beggar thy competitor either succeeds or fails.

And invest they have: when we wrote this in July Uber’s valuation was $17 billion. Less than 6 months later it was more than doubled once again, and according to Bloomberg “the startup is close to raising a round of financing that would value it between $35 billion and $40 billion. T. Rowe Price Group Inc. is in discussions to be a new investor and existing investor Fidelity Investments is also set to participate in the funding, the people said.”

“At this valuation, investors appear to be thinking that when Uber goes public, it might be worth $80 billion to $100 billion,” said Anand Sanwal, chief executive officer of CB Insights, a research firm in New York. “This type of mega-financing affords Uber a great deal of flexibility in terms of when they might go public.”

If Uber completes the funding, the valuation of as much as $40 billion would more than double its $17 billion value from a June financing round. That would also put Uber at about 1.5 times the capitalization of microblogging service Twitter (TWTR) and at the same size as Salesforce.com Inc., Delta Airlines Inc. and Kraft Foods Group Inc. It would dwarf car-rental company Hertz, which has a market capitalization of $11 billion.

It is unclear just what Uber plans to do with the $1 billion it is set to raise at a $40 billion valuation: the proceeds of the last equity raise round were largely used to subsidize below-cost, money-losing trips in order to accelerate the demise of traditional Yellow Cab service providers. It is very likely that the latest use of cash will be more of the same, as Uber uses investor money to essentially put competitors out of business, in hopes of subsequently raising prices once it becomes a monopoly.

That strategy is also nothing new, and has been used by Amazon for many years, with mixed success when it comes to actual monopolization of the cash flow process to go alongside its online marketplace monopoly.

In the meantime, putting things in perspective, there are 13,336 Medallions on the street in NYC, which assuming a roughly $900,000 cost each, implies that Uber is now valued at over 3 times the entire NYC taxicab industry.

In other words, the “Yellow” transportation bubble may have popped – if only with a whimper- but when it is Uber’s turn to return to a not-so-Uber valuation, the bang will be heard around the world. 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/F15xRZrL5KI/story01.htm Tyler Durden

Submitted by Mark Thornton via Mises.org,

Season five of the smash hit British period drama, Downton Abby, begins in six weeks. The series continues the fictional story of the aristocratic Crawley family and the family’s friends, relatives and servants set in and around the Downton Abbey estate. The series recounts the day-to-day lives impacted by all the great events of the early twentieth century from the sinking of the Titanic through the aftermath of World War I and beyond.

An Even-Handed View of the Aristocracy

A key general theme is the vast disparity in wealth between the aristocratic family and the lowly servant class. The irony is that the people in the aristocratic family and their servants seem oddly equal in terms of both abilities and flaws. The series is not an indictment of the aristocracy, which is why the left hates it. For example, Salon recently published a hit piece on the show. “The show depicts a group of actual monsters in a manner that’s explicitly loving,” the article opines. “[W]hen the facts get in the way, they’re disposed of. Downton Abbey is a show about how the world was straightforwardly better when an entrenched class system ruled.”

“Actual monsters”? The idea that there are no decent people in an aristocracy is just nonsense and so is the idea that the show depicts the characters unrealistically. In truth the Crawley family is portrayed as vulnerable, somewhat inept, increasingly irrelevant, and often forced to adapt to change against its collective will.

Other commentators have seized on this realism. For example, Jerry Bowyers of Forbes finds the show reasonable and realistic, and that the aristocrats are flawed but admirable. He even concludes that the show portrays an anti-class-warfare message, which is another reason the left hates it and the masses love it. John Tamny’s exploration of series creator Julian Fellowes’s ideology reveals an insightful and complex thinker and one that points us in the direction of libertarianism rather than conservatism, which also helps explain the show’s great popularity.

The plot is largely driven by secrets. One episode might be based around a servant who has a secret on another servant. Another episode might be based on one member of the aristocratic family having a secret about another family member or friend. The juiciest secrets are often secrets held by a servant about one of the family members. However, the dirtiest secret about Downton Abbey is not fictional and has never been told before. The secret reveals the true nature of the state, whether it be aristocratic, democratic, or dictatorial.

The Origins of the Titled Aristocracy

The actual setting for the show is Highclere Castle, which is used for exterior and interior shots of Downton Abbey. Highclere is the estate of George Herbert, the 8th Earl of Carnarvon (third creation) and his wife Fiona Aitken. 

The dirtiest secrets of the real-life Downton Abbeys of the world can be better understood with an examination of the 1^st Earl of Carnarvon (second creation) James Brydges, and how such aristocracies came to be in the first place.1

The first true economist, Richard Cantillon, described during Brydges’s era (i.e., the early 1700s), the nature of human society thusly:

[I]f a prince at the head of an army has conquered a country, he will distribute the lands among his officers or favorites according to their merit or his pleasure. He will then establish laws to vest the property in them and their descendants.

This pretty much explains how the original English aristocracy came into being and how James Brydges became the 1^st Earl of Carnarvon. Brydges was born into a low-level aristocratic family and became a Member of Parliament, largely through bribery, around age 25. He then used this position to impress and curry favor with the ruling political elite. His political influence continued to grow and he soon was appointed Commissioner of the Admiralty.

His next appointment was the lucrative position of British Paymaster General. He held the military purse strings during most of the War of Spanish Succession (1701–1714). It was this position that allowed Brydges to become fabulously wealthy and to be able to purchase several more high-ranking positions in the English aristocracy. Biographers Collin and Muriel Baker called him the “most successful war profiteer in that age.”

Biographer Joan Johnson draws attention to records that indicate that Brydges “was the most surprising instance of a change in fortune … in any age. When he came first into the office of Paymaster of the army, he had little or no estate of his own … but by means of this office … in little more than ten years, living expensively too in the meanwhile, he had accumulated a fortune of not less than six or seven hundred thousand pounds.” This would be the equivalent today of over $1 billion!

Government “Service” as the Way to Wealth

Using political offices for self enrichment was as common then as it is today. Brydges merely surpassed all others of his time period and of course wartime is the perfect time for feeding at the public trough. The two main tools at his disposal were the budget of his office, which was enormous. He received his full budget at the beginning of the year so he had access to vast sums of money. He also had insider information about the war on the continent because he was one of the first to know the location of armies, the outcomes of battles, and the requirements of the troops. He therefore had a vast amount of capital to invest and the critical insider information with which to invest it. Plus he could legitimately collect fees and take advantage of swings in exchange rates.

Here enters the previously-mentioned economist, Richard Cantillon. He came from a dispossessed Irish Catholic family some members of which were fighting on the side of Spain and France in the War of Spanish Succession. Other members of his family operated banks on the European continent. Cantillon’s uncle was a banker in Spain who no doubt initiated the effort that resulted in Richard being hired by Brydges as his agent in Spain.

Cantillon developed what was a “two sets of books” accounting system whereby Cantillon would use money obtained from Brydges through his uncle’s bank to purchase supplies and materials for Brydges’s personal account. These goods would then be marked up in price and resold to the Paymaster’s account. With war raging and communications greatly diminished it was fairly easy to widen the spread between the two accounts and amass a huge fortune.

It was a safe bet on Brydges part that Cantillon would keep Bridges’s secrets because the British had invaded Cantillon’s country and taken possession of his family’s estates in Ireland. To seal the deal, Brydges helped set up Cantillon in the banking business in Paris after the war.

Brydges finally relinquished his office as Paymaster when the Peace Treaty of Utrecht was signed in 1713, making further work in the office unprofitable. Brydges was accused of wrongdoings and embezzlement in office, but was never brought to trial or convicted for his crimes. Having amassed a vast illicit fortune we can gain a clearer sense of his character by what he did with his wealth.

Not a True Meritocracy

As Cantillon indicates, the aristocracy is established by a conquering King who claims title to the conquered land. The land is then subdivided among his generals and friends who manage their estates and pay taxes to the King. The aristocracy is therefore not a true meritocracy, but quite the opposite. These positions are obtained by being good at killing, corruption, and court intrigue. The pomp and circumstance of the aristocracy is designed to mislead the public about the true nature and origins of the privileged class.

It should not be surprising that Brydges was a man of bad character and limited abilities. Johnson notes that outside of holding aristocratic and political positions, Brydges could not compete in a world that was growing more competitive and that he “had none of the necessary shrewdness, ruthlessness and staying power for this” (i.e., entrepreneurship). “The results of his undertakings only rarely measured up to the effort he put into them or impressed his contemporaries.”

Johnson goes on to note the narrow-mindedness of Brydges by noting that he “did not concern himself with philosophical moralizing or political and economic theories. He was essentially a realist, living in the present and rather like Walpole whom he admired, he had no lofty ideals that might have made him stand out among his contemporaries. His successes were material ones and his influences limited to his own immediate circle, so that his death caused few ripples beyond his circle.” It is exactly this “living in the present” lifestyle that led Brydges to eventually exhaust the vast fortune acquired as a war profiteer.

The dirtiest secret of the real-life Downton Abbey is that it was established with the ill-gotten gains of a corrupt and conniving spendthrift, James Brydges, the 1^st Earl of Carnarvon. War may be the health of the State. However, let it also be said that not only does it bring out the worst in us, it also raises up the worst among us. The underlying issue is not so much class warfare, but real warfare. War is destruction and theft on a massive scale. It enriches the State and its minions at the expense of the productive class.

Whether aristocratic or democratic, the administration of the State matters little. Power, theft, war, and plunder is what really matters. That is the dirtiest of all secrets.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/ep96QsEdEQA/story01.htm Tyler Durden

A week ago, when we reported that in a stunning move, the “Dutch Central Bank Secretly Withdrew 122 Tons Of Gold From The New York Fed“, and when looking at the NY Fed’s monthly reports of gold deposits by foreign entities, we observed that “we can see that while the 5 tons outflow in 2013 was most likely Germany, the recent surge in gold repatriation from Liberty 33 was the Netherlands. That said, only 57.5 tons of NY deposits gold has been officially repatriated through September, which means the October update, when it comes out, will be a doozy.” Yesterday, the long anticipated October update of “earmarked gold” held on deposit at the NY Fed was released, and sure enough it did not disappoint. Declining in dollar value from $8.305 billion to $8.248 billion, this was the equivalent of 42 tonnes of gold being withdrawn, in the process reducing net gold located in the vault of JPMorgan the NY Fed to 6,076 tonnes. The 42 tonnes withdrawal was also the biggest single monthly redemption from the NY Fed since 2001.

So with the 119 tonnes of gold withdrawn so far in 2014, it is now abundantly clear that the “logistical complications” excuse used by Germany to halt its own gold repatriation program was nothing but a lie to cover up what, as Deutsche Bank explained earlier this month, was an escalation of “diplomatic difficulties” between the US and Germany, one in which Germany has folded, if only for now.

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

The US dollar has been consolidating for the past couple of weeks, and that phase appears to be coming to an end.  Next week’s economic data and events will likely underscore the divergent theme, which works in the dollar’s favor.  

 

We do not expect the ECB to announce a sovereign bond purchase program at next week’s meeting, the last of the year. Recall that with Lithuania joins EMU on January 1, the ECB reduces its policy making meetings from once a month to once every six weeks, like the Federal Reserve.   It also introduces a rotating voting scheme, which means that all member central banks, including the Bundesbank, will not vote at every meeting.    

 

Many important ECB decisions have taken place over the objections of the Bundesbank, like the initial bond buying program SMP and OMT (which the Bundesbank has argued against before the European Court of Justice), and the recent covered bond and asset-backed securities purchase plans.  Nevertheless, many observers still see the Bundesbank as having some sort of veto over ECB action, even though such veto power has not been tested.  Others argue that the rotating voting is of little consequence in the ECB’s deliberative process.  It is not as if,  they say, the ECB will be able to take action just because the BBK did not have a vote at a particular meeting.  

 

The biggest development has been a breakdown in oil prices.  It will add to the divergent theme.  Even though US oil output surpassed Saudi Arabia in recent weeks, American policy makers will view it as a net stimulative for the US economy.  It is tantamount to a modest tax cut.  In terms of the impact on inflation, the Federal Reserve puts more emphasis on the core rate.  

 

In contrast, the drop in energy prices will be seen exacerbating the disinflationary/deflationary headwinds in the euro area.   This, more than the small stimulus that BBK’s Weidmann acknowledged, will be the focus of the ECB.   While the Bank of Japan places greater weight on the core measure of inflation, excluding the sales tax, its core measure includes energy.  

 

The euro has largely been confined to a $1.24-$1.26 trading range through November. The lower end has been frayed a bit, but the breaks were not sustained.  Technical indicators are not generating strong signals presently, however, ahead of the ECB meeting on December 4 the risk is on the downside.  The message from ECB officials appears to be that they want to see how the existing initiatives pan out over the coming weeks before taking new action. 

 

However, it will emphasize that all its options are open, including sovereign bond purchases.   Moreover, ECB officials cannot be very happy that the new EC Commission, like the old, is not insisting forcefully enough on structural reforms.  The combination of ECB meeting and the US employment data at the end of next week gives the euro potential toward its cyclical low recorded on November 7 just below $1.2360.  A surprise move by the ECB could send it lower still.  The next key target is $1.20.  

 

Sterling is pointing the way.  It has been in a four cent range this month, mostly between $1.56 and $1.60.  Since the middle of the month it has, with one brief exception, stayed in the lower half of that range.   The precipitous drop in oil prices is yet another factor pushing the market in the direction it was going in any event, and that is to defer the first rate hike.  Ahead of the weekend the December 2015 short-sterling futures contract set a new high for the year (which implies lower interest rate).  A break of $1.56 targets $1.5540 then $1.5500.  We see near-term potential extending toward $1.5425.  

 

The range for dollar-yen last week was set over the last two sessions.  The dollar had eased to JPY117.25 on Thursday before OPEC’s announcement and rallied to hit a high near JPY118.80 on Friday.   The dollar is poised to rise through the previous high set just below JPY119.  The JPY120 level is likely to be a more formidable obstacle.   While officials seem more concerned about the pace than the level, there have been some officials (like Finance Minister Aso) and former officials (like Sakakibara) who are getting more concerned about the level.   Despite claims by some journalists that Japanese monetary policy is tantamount to a shot in a currency war, few countries have objected to the BOJ’s course.  

 

Within the dollar-bloc, we had liked the Canadian dollar over the Australian dollar.  That worked out fine until the OPEC meeting.  In fact, the day before OPEC met, the Australian dollar had fallen to its lowest levels against the Canadian dollar since January.  However, despite higher than expected October inflation, a stronger than expected Q3 GDP, and a more dynamic US economy (judging from Q3 GDP’s unexpected upward revision), the drop in sharp drop in oil prices proved too much for the Canadian dollar.   There is room for the Aussie to extend its correction against the Canadian dollar.  That said, we are cognizant that both central banks meet next week and that the RBA presses harder than the BOC against their respective currencies.   

 

The US dollar is challenging the multi-year high set on November 5 just below CAD1.1470.  A move through there targets CAD1.1670-CAD1.1725.   Technical indicators are generally supportive of the US dollar.  However, its sharp two-day gain leaves it just below the upper Bollinger Band (~CAD1.1440).   This suggests buying a modest dip is preferred to chase the market.    For its part, the Australian dollar is also flirting with its (lower) Bollinger Band just below $0.8500.  The Aussie’s price action is a bit more constructive than for the Canadian dollar, especially given that the $0.8480 multi-year low set at midweek held on the retest at the end of the week.     To be clear, the downtrend still seems to be intact.  

 

The Mexican peso cracked under the weight of the political woes and the drop in oil prices.  The peso fell each day last week for a cumulative loss of 2.3%, the most since September 2013.  Only the Norwegian krone of the major currencies lost more (3.1%).  Within Latam, the Brazilian real (-2.4%) and the Colombian peso (-3.2%) lost more than Mexico.  Mexico’s stock market fared better than the other two markets as well (Brazil’s Bovespa  -2.1% and Colombia’s COLCAP -5%, with Mexico’s Bolsa off about 0.6%).

 

Turning to other market, the US 10-year yield slipped through the 2.20% level. With Q4 growth tracking around 2.5% and the drop in oil prices, inflation expectations will likely soften further.  The risk is that the 10-year yield eases to 2.13%, and possibly to 2.06% in the period ahead.  Energy accounts a larger component of the S&P 500 than the Dow Industrials and NASDAQ.  This could hold back this key benchmark, which staged a key reversal before the weekend (it set a new record high before falling and closing below the previous session’s low).  

 

The S&P 500 gapped higher on November 21.  The gap has not been filled yet, but the technical condition is such that the gap could be filled in the week ahead.  The gap is found between 2053.84 and 2056.75.   In last week’s technical note, we had suggested that the Dow Jones Stoxx 600 could begin outperforming the US S&P 500.  This  was the case (1.65% to 0.7%), and the technical case for this continues. 

 

In terms of oil prices themselves, the downside beckons.  We are using a light sweet futures continuation contract to determine downside targets.  The next target is the spike low from 2010 which was near $64.25.  Below there,  is the $59.50-$60.00 band that could slow the descent.  That said, the January contract closed more than three standard deviations below the 20-day moving average (Bollinger Band is set at two standard deviations).  Given the speed of the descent that was fundamentally driven, it is difficult to have much confidence in the magnitude of a corrective bounce. We suspect it will be shallow and capped around $70 a barrel.  

 

 

(Due to the holiday, the latest CTFC Commitment of Traders report is unavailable)

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Zt4qSQ8hACE/story01.htm Marc To Market

Submitted by  Raúl Ilargi Meijer of Automatic Earth

OPEC Presents: QE4 And Deflation

Thinking plummeting oil prices are good for the economy is a mistake. They instead, as I said only yesterday in The Price Of Oil Exposes The True State Of The Economy point out how bad the global economy is doing. QE has been able to inflate stock prices way beyond anything remotely looking fundamental, but energy prices have now deflated instead of stocks. Something had to give at some point. Turns out, central banks weren’t able to inflate oil prices on top of everything else. Stocks and bonds are much easier to artificially inflate than commodities are.

The Fed and ECB and BOJ and PBoC may of course yet try to invest in oil, they’re easily crazy enough to try, but it will be too late even if they did. In that sense, one might argue that OPEC – or rather Saudi Arabia – has gifted us QE4, but the blessings of the ‘low oil price stimulus’ will of necessity be both mixed and short-lived. Because while the lower prices may free some money for consumers, not nearly all of the freed up ‘spending space’ will end up actually being spent. So in the end that’s a net loss as far as spending goes.

The ‘OPEC Q4? may also keep some companies from going belly up for a while longer due to falling energy costs, but the flipside is many other companies will go bust because of the lower prices, first among them energy industry firms. Moreover, as we’re already seeing, those firms’ market values are certain to plummet. And, see yesterday’s essay linked above, many of eth really large investors, banks, equity funds et al are heavily invested in oil and gas and all that comes with it. And they are about to take some major hits as well. OPEC may have gifted us QE4, but it gave us another present at the same time: deflation in overdrive.

You can’t force people to spend, not if you’re a government, not if you’re a central bank. And if you try regardless, chances are you wind up scaring people into even less spending. That’s the perfect picture of Japan right there. There’s no such thing as central bank omnipotence, and this is where that shows maybe more than anywhere else. And if you can’t force people to spend, you can’t create growth either, so that myth is thrown out with the same bathwater in one fell swoop.

Some may say and think deflation is a good thing, but I say deflation kills economies and societies. Deflation is not about lower prices, it’s about lower spending. Which will down the line lead to lower prices, but then the damage has already been done, it’s just that nobody noticed, because everyone thinks inflation and deflation are about prices, and therefore looks exclusively at prices.

It’s like a parasite can live in your body for a long time before you show symptoms of being sick, but it’s very much there the whole time. A lower gas price may sound nice, but if you don’t understand why prices fall, you risk something like that monster from Alien popping up and out.

I had started writing this when I saw a few nicely fitting articles. First, at MarketWatch, they love the notion of the stimulus effects. They even think a ‘consumer-spending explosion’ is upon us. They’re not going to like what they see. That is, not when all the numbers have gone through their third revision in 6 months or so.

OPEC Has Ushered In QE4

 

Welcome to the new era of QE4. As if on cue, OPEC stepped in just as monetary policy (at least the Fed’s) has dried up. Central bankers have nothing on the oil cartel that did just what everyone expected, but has still managed to crush oil prices. Protest away about the 1% getting richer and how prior QE hasn’t trickled down to those who really need it, but an oil cartel is coming to the rescue of America and others in the world right now.

 

It’s hard to imagine a “more wide-reaching and effective stimulus measure than to lower the cost of gas at the pump for everyone globally,” says Alpari U.K.’s Joshua Mahoney. “For this reason, we are effectively entering the era of QE4, with motorists able to allocate more of their money towards luxury items, while firms are now able to lower costs of production thus impacting the bottom line and raising profits.” 

 

The impact of that could be “bigger than anything that has come before,” says Mahoney, who expects that theory to be tested and proved, via sales on Black Friday and the holiday season overall. In short, a consumer-spending explosion as we race to the malls on a full tank of cheap gas. Tossing in his own two cents in the wake of that OPEC decision, legendary investor Jim Rogers says it’s a “fundamental positive for anybody who uses oil, who uses energy.” Just not great if you’re from Canada, Russia or Australia, he says. Or if you’re the ECB, fretting about price deflation. Or until it starts crushing shale producers.

Bloomberg, talking about Europe, has a less cheery tone.

Eurozone Inflation Slows as Draghi Tees Up QE Debate

 

Eurozone inflation slowed in November to match a five-year low, prodding the European Central Bank toward expanding its unprecedented stimulus program. Consumer prices rose 0.3% from a year earlier, the EU statistics office said today. Unemployment held at 11.5% in October [..] While the slowdown is partly related to a drop in oil prices, President Mario Draghi, who may unveil more pessimistic forecasts after a meeting of policy makers on Dec. 4, says he wants to raise inflation “as fast as possible.” [..]

 

“The only crumb of comfort for the ECB – and it is not much – is that November’s renewed drop in inflation was entirely due to an increased year-on-year drop in energy prices,” said Howard Archer at IHS. The data are “worrying news” for the central bank, he said. Data yesterday showed Spanish consumer prices dropped 0.5% this month from a year ago, matching the fastest rate of deflation since 2009. In Germany, Europe’s largest economy, inflation slowed to the weakest since February 2010. [..] 

 

Bundesbank President Jens Weidmann, a long-running opponent to buying government bonds, today highlighted the positive consequence of low oil prices. “There’s a stimulant effect coming from the energy prices – it’s like a mini stimulus package,” he said in Berlin.

Sure, there’s a stimulant effect. But that’s not the only effect. While I’m happy to see Weidmann apparently willing to fight Draghi and his pixies over ECB QE programs, I would think he understands what the other effect is. And if he does, he should be far more worried than he lets on.

But then I stumbled upon a long special report by Gavin Jones for Reuters on Italy, and he does provide intelligent info on that other effect of plunging oil prices. Deflation. As I said, it eats societies alive. I cut two-thirds of the article, but there’s still plenty left to catch the heart of the topic. For anyone who doesn’t understand what deflation really is, or how it works, I think that is an excellent crash course.

Why Italy’s Stay-Home Shoppers Terrify The Eurozone

 

Italy is stuck in a rut of diminishing expectations. Numbed by years of wage freezes, and skeptical the government can improve their economic fortunes, Italians are hoarding what money they have and cutting back on basic purchases, from detergent to windows. Weak demand has led companies to lower prices in the hope of luring people back into shops. This summer, consumer prices in Italy fell on a year-on-year basis for the first time in a half-century ..

 

Falling prices eat into company profits and lead to pay cuts and job losses, further depressing demand. The result: Italy is being sucked into a deflationary spiral similar to the one that has afflicted Japan’s economy for much of the past two decades. That is the nightmare scenario that policymakers, led by European Central Bank chief Mario Draghi, are desperate to avoid.

 

The euro zone’s third-biggest economy is not alone. Deflation – or continuously falling consumer prices – is considered a risk for the whole currency bloc, and particularly countries on its southern rim. Prices have fallen for 20 months in Greece and five in Spain, for example. Both countries are suffering through deep cuts in salaries and state welfare. Yet Italy, a large economy with a huge public debt, is the country causing most worry. [..]

 

Like Japan, Italy has one of the world’s oldest and most rapidly aging populations – the kind of people who don’t spend. “It is young people who spend more and take risks,” says Sergio De Nardis, at thinktank Nomisma. In recent years, young people have been the hardest hit by layoffs, he says. Many have left the country to seek work elsewhere. People tend to spend more when they see a bright future. Italian confidence has steadily eroded over the past two decades … In Italy, as in Japan, the lack of economic growth has become chronic.

 

Underpinning economists’ worries is Italy’s biggest handicap: a huge national debt equal to 132% of national output and still growing. Rising prices make it easier for high-debt countries like Italy to pay the fixed interest rates on their bonds. And debt is usually measured as a proportion of national output, so when output grows, debt shrinks. Because output is measured in money, rising prices – inflation – boost output even if economic activity is stagnant, as in Italy. But if activity is stagnant and prices don’t rise, then the debt-to-output ratio will increase. [..]

 

Sebastiano Salzone, a diminutive 33-year-old from the poor southern region of Calabria, left with his wife five years ago to run the historic Cafe Fiume on Via Salaria, a traditionally busy shopping street near the center of Rome. Salzone was excited by the challenge. But after four years of grinding recession, his business is struggling to survive. “When I took over they warned me demand was weak and advised me not to raise prices. But now, I’m being forced to cut them,” he says. [..] Despite the lower prices, sales have dropped 40%, or 500 euros a day, in the last three years.

For hard-pressed individuals, low and falling prices can seem a godsend; but low prices lead to business closures, lower wages and job cuts – a lethal spiral. Since Italy entered recession in 2008 it has lost 15% of its manufacturing capacity and more than 80,000 shops and businesses. Those that remain are slashing prices in a battle to survive.

Home fixtures maker Benedetto Iaquone says people are now only changing their windows when they fall apart. To hold onto his €500,000-a-year business, Iaquone says he is cutting prices. By doing so, he is helping fuel the chain of deflation from consumers to other companies.

 

In Italy’s largest supermarket chains, up to 40% of products are now sold below their recommended retail price, according to sector officials. “There is a constant erosion of our margins,” says Vege chief Santambrogio.

 

What Italy would look like after a decade of Japan-style deflation is grim to imagine. It is already among the world’s most sluggish economies, with youth unemployment at 43%. As a member of a currency bloc, Rome’s options are limited [..] Italy’s budget has to follow European Union rules.

 

Lasting deflation would force more companies out of business, reduce already stagnant wages and raise unemployment further [..] The inevitable rise in its public debt could eventually lead to a default and a forced exit from the euro.

 

Many in southern Europe say the EU should abandon its strict fiscal rules and invest heavily to create jobs. They also say Germany, the region’s strongest economy, should do more to push up its own wages and prices. Mediterranean countries need to price their products lower than Germany to make up for the fact that their goods – particularly engineered products such as cars – are less attractive. But with German inflation at a mere 0.5%, maintaining a decent price difference with Germany is forcing southern European countries into outright deflation

 

Italy’s policymakers are trying to stop the drop. Prime Minister Matteo Renzi cut income tax in May by up to €80 a month for the country’s low earners. But so far the emergency measures have had little effect – partly because Italians don’t really believe in them. A survey by the Euromedia agency showed that, despite the €80 cut, 63% of Italians actually think taxes will rise in the medium-term. Early evidence suggests most Italians are saving the extra money in their paychecks. If so, it will be reminiscent of similar attempts to boost demand in Japan in the late 1990s. The Japanese hoarded the windfalls offered by the government rather than spending them.

That same process plays out, as we speak, in a lot more countries, both in Europe and in many other parts of the world: South America, Southeast Asia etc.

Deflation erodes societies, and it guts entire economies like so much fish. Deflation is already a given in Japan, and in most of not all of southern Europe. Where countries might have saved themselves if only they weren’t part of the eurozone.

If Italy had the lira or some other currency, it could devalue it by 20% or so and have a fighting chance. As things stand now, the only option is to keep going down and hope that another country with the same currency Italy has, i.e. Germany, finds some way to boost its own growth. And even if Germany would, at some point in the far future, what part of that would trickle down to Italy? So what’s Renzi’s answer? An €80 a month tax cut for people who paid few taxes to begin with.

Deflation is not lower prices. Deflation is people not spending, then stores lowering their prices because nobody’s buying, then companies firing their employees, and then going broke. Rinse and repeat. Less spending leads to lower prices leads to more unemployment leads to less spending power. If that is not clear, don’t worry; you’ll see so much of it you own’t be able to miss it.

And don’t think the US is immune. Most of the Black Friday and Christmas sales will be plastic, i.e. more debt, and more debt means less future spending power. Unless you have a smoothly growing economy, but that’s not going to happen when Europe, Japan and soon China will be in deflation.

And yes, oil at $50-60-70 a barrel will accelerate the process. But it won’t be the main underlying cause. Deflation was baked into the cake from the moment that large scale debt deleveraging became inevitable, and you can take any moment between the Reagan administration, which first started raising debt levels, to 2008 for that. And all the combined central bank stimulus measures will mean a whole lot more debt deleveraging on top of what there already was.

We’ll get back to this topic. A lot.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Z4rEdHNyXGk/story01.htm Tyler Durden