Month: May 2016

Submitted by David Stockman via Contra Corner blog,

The central bank war on savers is rooted in a monumental case of the Big Lie. Here is what a retired worker who managed to save $5,000 per year over a 40 year’s lifetime of toil and sweat in a steel factory now earns in daily interest on a bank CD. To wit, a single cup of cappuccino.

Yet the central bankers claim they have absolutely nothing to do with this flaming economic injustice.

That’s right. A return that amounts to one Starbucks’ cappuccino per day on a $200,000 nest egg is purportedly not the result of massive central bank intrusion in financial markets and pegging interest rates at the zero bound; it’s owing to a global “savings glut” and low economic growth.

Thus, Mario Draghi insisted recently that ultra loose monetary policy and NIRP are,

……… “not the problem, but a symptom of an underlying problem” caused by a “global excess of savings” and a lack of appetite for investment……This excess — dubbed as the “global savings glut” by Ben Bernanke, former US Federal Reserve chairman — lay behind a historical decline in interest rates in recent decades, the ECB president said.

Nor did Draghi even bother to blame it soley on the allegedly savings-obsessed Chinese girls working for 12 hours per day in the Foxcon factories assembling iPhones. Said Europe’s mad money printer:

The single currency area was “also a protagonist…….”

Actually, that’s a bald faced lie. The household savings rate in the eurozone has been declining ever since the inception of the single currency. And that long-term erosion has not slowed one wit since Draghi issued his “whatever it takes” ukase in August 2012.

Yes, double-talking central bankers like Draghi slip in some statistical subterfuge, claiming “current account surpluses” are the same thing as “national savings”. Actually, they are nothing of the kind; current account surpluses and deficits are an accounting identity within the world’s Keynesian GDP accounting schemes, and for all nations combined add to zero save for statistical discrepancies.

In fact, current account surpluses and deficits are a function of central bank credit and FX policies and their impact on domestic wages, prices and costs. Chronic current account surpluses result from pegging exchange rates below economic levels and thereby repressing domestic wages and prices, and chronic deficits from the opposite.

Stated differently, what central bankers claim to be “excess savings” generated by households and businesses, which need to be punished for their sins, are actually deformations of world trade and capital flows that are rooted in the machination of central bankers themselves.

That much is evident in Draghi’s own numbers. He chides Germany and the eurozone for fueling the savings glut as represented by 5% and 3% of GDP current account surpluses. But that’s a case of the cat calling the kettle black, if there ever was one.

During the 14 years before Draghi’s mid-2012 “whatever it takes” ukase, which meant that he was fixing to trash the then prevailing exchange rate of 1.40-1.50 dollars per euro, the eurozone did not have a current account surplus!

What Draghi sites as the problem he is fixing is mainly his own creation. That is, it is a result of the 25% currency depreciation the ECB effected under his leadership, and also the temporary improvement in Europe’s terms of trade owing to the global oil and commodities glut. And even in the latter case it is central banker action that originally led to the cheap credit boom of the last two decades and resulting over-investment in energy and mining production capacity.

In any event, the eurozone surpluses since 2011 shown below do not represent consumers and business failing to spend enough and hoarding their cash. To the contrary, these accounting surpluses are just another phase of the world’s massively deformed system of global trade and capital flows. The latter, in turn, is the fruit of a rotten regime of central bank falsification of money and capital markets.

In fact, when savings are honestly measured, there is not a single major DM economy in the world that has not experienced a severe decline in its household savings rate over the last several decades. The US household savings rate, for example, has not only dropped by more than half, but in so doing it was going in exactly the wrong direction.

That is, the giant 78 million plus baby boom generation was demographically ambling toward the inflection point of massive retirement waves beginning in 2010. The savings rate should have been rising toward a generational peak, not sliding into the sub-basement of history.

In this regard, Japan is the poster child for the truth of the matter, which is that we have actually had the opposite——an anti-savings famine in most of the world.

Thus, Japan’s much vaunted high saving households back in its pre-1990 boom times have literally disappeared from the face of the earth. Yet this baleful development occurred just when Japan needed to be building a considerable savings nest egg for the decades ahead when it will essentially morph into a giant retirement colony.

The deep secular decline of household savings rates throughout the DM world is in itself the tip-off that central banks have drastically deformed the financial system, and are now telling the proverbial Big Lie about a phony “savings glut” in order to justify their continued savage assault on depositors. That’s because under any historical rule of sound money, the kind of investment boom experienced by the EM world during the last two decades would have been accompanied by the upsurge of a large savings surplus in the DM economies.

During the great global growth and industrialization boom between 1870 and 1914, for example, Great Britain, France, Holland and, to a lesser degree, Germany were huge exporters of capital. By contrast, the emerging markets of the day——the United States, Argentina, Russia, India, Australia etc.——-were major capital importers.

That made tremendous economic sense. The advanced economies of the day earned trade surpluses exporting machinery, rolling stock, steel and chemicals and consumer manufactures, and then reinvested these surpluses in loans and investments in ships, mines, railroads, factories, ports and public infrastructure in the developing economies.

The lynch-pin of this virtuous circle, of course, was common global money. That is, currencies that had a constant weight in gold, and which, accordingly, were convertible at fixed rates over long stretches of time. English investors and insurance companies, for example, invested in sterling denominated bonds issued by foreign borrowers because they knew the bonds were good as gold, and that their only real risk was borrower defaults on interest or principal.

Today’s world of printing press money has turned the logic of gold standard capitalism upside down. Accordingly, during the last several decades the east Asian manufacturers and petro-economies have purportedly become varacious savers and capital exporters, while the most advanced economy on the planet has become a giant capital importer. Indeed, Keynesian economists and so-called conservative monetarists alike have proclaimed these huge, chronic US current account surpluses to be a wonderful thing.

No it isn’t. Donald Trump is right—–even if for the wrong reason.

The US has borrowed approximately $8 trillion from the rest of the world since the 1970’s not pursuant to the laws of economics, as the Keynesian/monetarist consensus proclaims. Instead, the unbroken string of giant current account deficits shown below——-the basic measure of annual borrowing from abroad——were accumulated in violation of the laws of sound money; and were, in fact, enabled by Richard Nixon’s abandonment of  the dollar’s convertibility to a fixed weight of gold in August 1971.

At length, the unshackled Fed found one excuse after another to flood the world with dollar liabilities. In fact, the Fed’s balance sheet liabilities (i.e. dollars) totaled just $45 billion in August 1971, meaning that it has exploded by 100X to $4.5 trillion in the years since.

This vast inflation of the monetary system, in turn, enabled total credit outstanding in the US economy to soar from $1.7 trillion at the time of Camp David to $63.5 trillion at present. That means the US economy’s ratio of total public and private debt to national income surged from its historic level of 1.5X in 1971 to 3.5X today.

Needless to say, the evil of this kind of massive money and credit inflation is that it is contagious. The last 45 years have proven in spades that there is no such thing as printing press money in one country.

In fact, the borrowing binge in America, Japan and Europe played right into the hands of the mercantilist policy-makers in East Asia and the petro-states. By pegging their currencies not to a fixed standard like gold, but to the massive emission of floating dollars, they appeared to become prodigious capital exporters and “savers”. That’s because in order to keep their currencies from soaring against depreciating dollars and euros, their central banks accumulated huge amounts of US treasuries and euro debt in the process of chronic, heavy-handed intervention in the FX markets.

Folks, that’s not a savings glut; it’s the consequences of massive money printing and credit expansion on a worldwide basis. Had China not depreciated it currency by 60% in 1994 and kept it more or less linked to the Fed’s flood of dollars ever since, its vaunted $4 trillion of FX reserves and the 60X expansion of its domestic credit—from $500 billion in the mid-1990s to $30 trillion at present—–would not have happened in a million years.

The graphs below, therefore, have nothing to do with a “savings glut”. Had China’s currency been linked to gold in 1994, the dollars exchange rate against the RMB would have collapsed long ago, and America’s ability to live for decades beyond its means by swapping treasury debt for Chinese manufactures would have been stopped dead in its tracks.

At the end of the day, central banker palaver about the world’s alleged “savings glut” refers to nothing more than the inherent accounting identity in world trade. Mercantilist policy makers which choose to swap the sweat of their workers brows (China and east Asia) and the bounty of nature buried in their energy and mineral resources (the petro-states) for paper IOU’s end up with current account surpluses; the net issuers of these paper debts accumulate the net deficits.

It has nothing whatsoever to do with too much savings from real incomes. It’s a consequence of the rampant money printing that has saddled the world economy with $225 trillion of unrepayable debt and massive excess production capacity that will result in deflationary pressures and low-growth for years to come.

Indeed, central bankers has wandered so deep into the rabbit hole of monetary crankery that they no longer even know the difference between honest savings from household incomes, business profits and government surpluses and fiat credits generated ex nihilo by central banks and the financial institutions which they enable. Accordingly, the global economy has been saddled with a historically aberrational run of malinvestment and surplus CapEx that at length has now triggered an sweeping global deflation and collapse of profits in the primary industries and capital goods.

Stated differently, lunatic levels of CapEx in China and its supply train satellites during the last two decades was not a function of workers coming out of the rice paddies in their hundreds of millions and saving too much from the 60 cents per hour they were paid in wages. Instead, the economic insanity displayed in the chart  below is on central bankers and their $20 trillion emission of fiat credit over this period.

And that gets us to the end game mendacity of Bernanke, Yellen and most especially Draghi. This blithering fool answered the valid German complaints about his savage war on European savers with this gem:

“In a world where real returns are low everywhere, there is simply not enough demand for capital elsewhere in the world to absorb that excess saving without declining returns,” Mr Draghi said……In such an environment, low central bank interest rates were not the enemy, but exactly what was needed to boost demand for investment….If central banks did not do this, investing would be unattractive,” Mr Draghi said. “So the economy would stay in recession.

Ironically, these baleful conditions were caused by central bankers. Now they want to punish savers for the consequences of their epic errors.

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Moments ago, the 2016 edition of the Sohn Investment Conference started, a feeding frenzy for traders and hedge fund managers such as Gundlach, Einhorn and Chanos who descend on this popular annual “round table” to pitch their best and worst ideas. As always, the moment a company’s name is mentioned in a bullish or bearish context, its stock is sure to surge or slump, as the headline-hungry algos immediate pounce in the current reactionary market environment. But is following the advice of these hedge fund gurus such a good idea? 

According to a Bloomberg analysis, out of all speakers in last year’s, 2015 Sohn Conference, only two had winning bets: this suggests – at least on the surface – that the winning trade is doing the opposite of what is recommended; however that is never the case and instead more clustering and “hedge fund hoteling” ensues, leading to violent blowups a la Valeant and Allergan, also leading to questions why hedge funds are “suddenly” a dying breed.

So for those interests, here is a brief summary of how last year’s picks did, courtesy of Bloomberg.

David Einhorn of Greenlight Capital:

Einhorn’s Sohn picks are fairing quite well, even if some of his other trades like going long SunEdison, Inc. are getting slammed. At the conference he took a shot at the fracking industry, hitting their high cash burn even as oil prices continued to decline. His main target was Pioneer Natural Resources Co., which is trading about 2 percent lower since he made his bearish call. “A business that burns cash and doesn’t grow isn’t worth anything,” he said at the time. Unfortunately for Einhorn, while Pioneer has fallen, he should have made one of his other bearish bets his main call. The others are down between 6 and 70 percent. Einhorn was also bearish on Concho Resources Inc. (down 9 percent), EOG Resources, Inc. (down 18 percent), Continental Resources Inc. (down 29 percent), and Whiting Petroleum Corp. (down 70 percent).

Barry Rosenstein of Jana Partners:

Rosenstein’s picks haven’t turned out quite the way he might have hoped. The activist investor told last year’s attendees that Qualcomm Inc. was extremely undervalued. Shares have since lost another 27 percent of their value. He also reiterated his bullish stance on Walgreens Boots Alliance Inc., which has fared slightly better but is still down about six percent since his call.

Keith Meister of Corvex:

It’s hard to tell if Meister should be in the winner or loser category. His pitch was a bullish call on Yum! Brands Inc, because he believed the firm should spin off its China business. While the company did indeed go ahead with the sale, shares are still lower since he made the call.

Leon Cooperman:

Leon Cooperman’s made a number of picks, with a few of them performing quite well like Alphabet Inc. (up 29 percent), The Dow Chemical Company (up 2 percent), and The Priceline Group Inc. (up 6 percent). Others have struggled with one name down 90 percent. The losing picks include AerCap Holdings NV (down 18 percent), Citigroup Inc. (down 15 percent), General Motors Co. (down 10 percent), a natural gas play in Gulf Coast Ultra Deep Royalty Trust (down 90 percent).

Larry Robbins, of Glenview:

Robbins has made a number of winning calls in years past, with a bearish bet on General Motors Co. before it went bankrupt and going long hospital stocks prior to Obamacare. Last year wasn’t one of his best as he suggested buying AbbVie Inc. and Brookdale Senior Living Inc., which are down 6 and 50 percent respectively.

Mala Gaonkar, co-portfolio manager at Lone Pine Capital LLC:

Gaonkar’s pick was doing quite well until it reported earnings last week. Microsoft Corp. ended up tumbling about seven percent after reporting quarterly results and took her winnings down to four percent.

Jeffrey Gundlach of DoubleLine Capital:

Gundlach had a slightly less conventional idea: buy Puerto Rican bonds. Attendees weren’t too surprised by his pick given that Bloomberg reported his fund’s stake in junk-rated Puerto Rican debt just a couple of weeks before his speech. His pick hasn’t done as bad as you might expect given the turmoil that has continued to plague the region since his call. The S&P Municipal Bond Puerto Rico Index is down about five percent.

Bill Ackman of Pershing Square Capital Management LP:

One of Ackman’s picks is performing quite well, but the other has been grabbing headlines for all of the wrong reasons. Jarden Corp. is up 15 percent since last May, but his bullish bet on Valeant Pharmaceuticals International Inc. has been demolished. The stock is now down 84 percent.

Source

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Speaking through its mouthpiece Global Times, China has published its first reaction to "unpredictable" Trump's position as presumptive Republican nominee and their expectations of a Trump vs Clinton fight for The White House…

The GOP presidential front-runner Donald Trump won a sweeping victory in the Indiana Republican primary on Tuesday, dealing a heavy blow to his rival Ted Cruz, who dropped out of the race later that night. Trump cleared his way to the Republican nomination for the 2016 US presidential election. Chairman of the Republican National Committee Reince Priebus declared Trump to be the party's "presumptive" presidential nominee and called for unity against Hillary Clinton.

 

Trump's breakthrough in the Republican primaries has caused a sensation in US politics, public discourse and the international community. At the beginning of the race, most analysts and observers believed that Trump was no more than a clown. A few months ago, few people believed that the endgame would be between Trump and Clinton.

 

Although many analysts still insist the odds are in favor of Clinton, they are somewhat uncertain about the final result. Trump's performance in the primaries has proven them wrong. Why can't the unstoppable candidate prove them wrong again?

 

If Trump really captures the White House, what will it mean? This scenario is becoming increasingly serious.

 

The US traditional political elite and media have long ignored the drastic changes in US society. Rising against the repression of the GOP establishment and the mockery of US mainstream media, Trump will substantially shake the conventional US' way of operation. Acquiring more authority from US society, he will be expected to bring in more reforms, that might change many established policies.

 

According to Trump's current policy proposals, a Trump-led US might be inclined to isolationism and attach more importance to "America First," and American economy. Ideology will be downplayed. Washington might engage in more squabbles with its free-riding allies, and tighten up its immigration policy which as a result will upset the Latin Americans. After enjoying massive trade surplus from the US for years, China and Japan will be demanded by Washington to widen market access.

 

If Clinton is elected, the US politics will be more predictable and revolve around the previous orbit. Although Washington is expected to be tougher on Beijing, its policies are controllable. While Trump represents pragmatism, Clinton prioritizes ideology in political affairs. To China, this distinction is more important. Clinton sees the Sino-US relationship from a traditional perspective, and Trump from a much newer viewpoint. The latter will bring changes to the Sino-US relationship.

 

However, a single individual is unable to dictate the Sino-US relationship and the US domestic issues. If elected, Trump will be restricted by interior and exterior realities. As a result, he will be subject to "transformation." In fact, the "transformation" is an interaction between Trump and the US. He will be more prudent if taking office in the White House. In fact, compared with the past, Trump has become more attentive to his words.

 

If elected as the president, Trump's ability to take action and make change will not be as great as suggested by his unrestrained performances. He has already "created history" today. Even if he is defeated by Clinton, Trump has deeply impressed the US politics.

 

The US election pattern is basically finalized: Trump versus Clinton. It will be a super political show, attracting unprecedented attention and closely bound up to the world interests. While Trump is a practical business tycoon subverting US political correctness, Clinton is a former secretary of state and former first lady, representative of US political correctness and the mainstream thoughts.

 

Improving strength is the most reliable way to respond to the US uncertainties. We believe that no matter Trump or Clinton, they will see a "China with strength" from different perspectives.

*  *  *

So it would appear China favors the "status quo" of Clinton and while not fearing a Trump presidency, is more than willing to respond to any isolationist actions with "strength."

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By Bill Gross Of Janus Capital

Culture Clash

A respected reporter recently asked me what were a few important things I had learned from all this and all of that during the past decade and I surprised myself and perhaps him by answering that I now realized that younger generations – the Xers and Millenials – were far different generations from my own. “How so?” he asked. They are ephemerally connected as opposed to hardwired, I replied. They hold history less dear and appreciate freshly baked inclusiveness more; they are inclined to move on instead of settle and build, perhaps because employer loyalty has weakened as well; they are more temporary residents than architects. But they are the future.

The challenge for me as a Boomer, I said, was to understand this, yet not sacrifice my generation’s heritage that had made these evolving differences possible. This generation gap, I continued, was just that – a far distance from one side of a chasm to the other. And yet, I thought, (having concluded the interview) culturally we were much the same: making positive, sometimes obsessive contributions at work; loving our families, our pets. No chasm there to bridge. A common culture. But common cultures themselves morph and sometimes quickly so, producing substantial gaps from one figurative day to the next. Most humans who walked this Earth were alive inside a culture that was constant for centuries, yet now it seemed that technology was mutating standards like a cytoplast or perhaps at worst – a cancer cell. Who could say whether this new life form was positive or negative? Who could say that an older generation was any less an ideal than the succeeding one? My experience of the divide between Boomers and Xers is like that; I recognize that youth will be served, but not always for the better.

Yet, if I (you) understood that to be somewhat true, what should I (you) do differently? How to live a life – this Shakespearian brief candle? Should I listen to the beat of a bass drum instead of an ancient tom-tom? Would I dare dance to strange new music with a different step? “Forward” is my futile response. Forward – with difficult questions. John Denver expressed it succinctly, “If there’s an answer, it’s just that it’s just that way”.

Change propels economies as well as cultures, and sometimes before we are even aware of it. We listen to Trump and Bernie, then Cruz and Hillary as if one of them might be the mythical Wizard of Oz, guiding us down that yellow brick road to reinvigorate growth. They all try to emulate the Wizard of course. “Change you can believe in” was Obama’s mantra and then there was Clinton’s “I come from a city called Hope” and so on. Eisenhower was probably the last honest politician. “I like Ike” was his promise for the future, and I think many voters actually did – like Ike. But back then and certainly now, it was the economy that was changing, not politicians’ promises for a better future, and government policies usually took years to respond. If Thatcher and Reagan sparked a “revolution” of tax policy, it was a long lagged response to decades of growth constricting government policies. If the Great Recession exposed holes in those free market ideologies, then to my way of thinking, seven years of Obama have not yet addressed the cracks in our global financial system. Our economy has changed, but voters and their elected representatives don’t seem to know what’s really wrong. They shout: (1) build a wall, (2) balance the budget, (3) foot the bill for college, or (4) make free trade less free. “That will fix it” they discordantly proclaim, and after November’s election some unlucky soul may do one or more of the above in an effort to make things better. Similar battles are being fought everywhere. Brazil and Venezuela approaching depression’s edge; leftist and right-wing government elections in Euroland; Spain without a government; Brexit; China’s ever-changing five year plan; Japan’s obsessional quest for 2% inflation. “Fix it, fix it, restore our hope for a better future”, beats the world’s tom-tom. Or is it a bass drum? It’s loud, whichever generational beat you dance to.

But here’s the thing. No one in 2016 is really addressing the future as we are likely to experience it, and while that future has significant structural headwinds influenced by too much debt and an aging demographic, another heavy gust merits little attention on the political stump. I speak in this Outlook to information technology and the robotization of our future global economy. Virtually every industry in existence is likely to become less labor-intensive in future years as new technology is assimilated into existing business models. Transportation is a visible example as computer driven vehicles soon will displace many truckers and bus/taxi drivers. Millions of jobs will be lost over the next 10-15 years. But medicine, manufacturing and even service intensive jobs are at risk. Investment managers too! Not only blue collar but now white collar professionals are being threatened by technological change.

Nobel Prize winning economist Michael Spence wrote in 2014 that “should the digital revolution continue…The structure of the modern economy and the role of work itself may need to be rethought.” The role of work? Sounds like code for fewer jobs to me. And if so, as author Andy Stern writes in Raising the Floor, a policymaker – a future President or Prime Minister – must recognize that existing government policies have “built a whole social infrastructure based on the concept of a job, and that concept does not work anymore.” In other words, if income goes to technological robots whatever the form, instead of human beings, our culture will change and if so policies must adapt to those changes. As visual proof of this structural change, look at Chart I showing U.S. employment/population ratios over the past several decades. See a trend there? 78% of the eligible workforce between 25 and 54 years old is now working as opposed to 82% at the peak in 2000. That seems small but it’s really huge. We’re talking 6 million fewer jobs. Do you think it’s because Millenials just like to live with their parents and play video games all day? I think not. Technology and robotization are changing the world for the better but those trends are not creating many quality jobs. Our new age economy – especially that of developed nations with aging demographics – is gradually putting more and more people out of work.

What should the policy response be? Retraining and education sound practical and are at the head of every politician’s promised ticket for the yellow brick road, but to be honest folks, I doubt that much of it will be worth the expense. Four years of college for everyone might better prepare them to be a contestant on Jeopardy, but I doubt it’ll create more growth; for the Universities perhaps, but not many good jobs for the students. Instead we should spend money where it’s needed most – our collapsing infrastructure for instance, health care for an aging generation and perhaps on a revolutionary new idea called UBI – Universal Basic Income. If more and more workers are going to be displaced by robots, then they will need money to live on, will they not? And if that strikes you as a form of socialism, I would suggest we get used to it. Even Donald Trump claims he won’t leave anyone out on the street – a liberal Republican thought if there ever was one. And they are on the street you know. Check out any major downtown in the U.S. if you want to see our future culture. Not the stadiums with the box seats; the streets with the tents and grocery carts. But the concept of UBI is not really new or foreign to capitalistic cultures like that of the U.S. We already have sort of a UBI floor. It’s called food stamps and the earned-income tax credit, but those alone will not keep the growing jobless and homeless off city and suburban streets. The question is how high this UBI should be and how to pay for it, not whether it’s coming in the next decade. It is. Strangely, the concept is endorsed more by conservatives than liberals and in Silicon Valley as well. Even with a theoretical $10,000 UBI per eligible citizen, the cost of $1-2 trillion dollars is seen as an income pool to consume many of the high tech products they produce.

Higher taxes are one way to pay for it, but let me suggest another – something that a Rand Paul or father Ron would have been good at. Drop the money from helicopters. Now, even though this idea sounds more fictional than Trump’s 15 foot wall, it really isn’t. Milton Friedman, then Ben Bernanke and now a host of respected economists including the conservative Economist magazine itself are introducing the idea. These advocates do not really intend to throw money out of choppers. In broader terms, they are advocating fiscal stimulus but stimulus that isn’t paid for with private borrowing or taxes. That last sentence is critical – “not with private borrowing or taxes”. Democrats and Republicans alike can endorse that.

Instead, the money can be printed by central banks as it has been recently. It’s a hard concept to understand and that’s why politicians never discuss it – nor do most central bankers, who want to preserve the sanctity of their “balance sheets” and independence of their institutions. But the independence between central banks and government is rapidly eroding – a new culture is forming if only by necessity. Printing money via QE is in effect a comingling of monetary and fiscal policy, of central bank and treasury. The Fed, the ECB, BOJ and BOE have in effect bought bonds from their treasuries for 6 years now in order to allow them to spend money in support of their sagging economies. They buy the bonds by printing money or figuratively dropping it from helicopters – expanding their balance sheets in the process. They then remit any net interest from their trillions of dollars or Yen bond purchases right back to their treasuries. The money in essence is free of expense and free of repayment as long as the process continues uninterrupted. Technically, the central bank will argue, they have not allowed their treasuries to finance for free because they will sell the bonds back to the free market one day. Not a chance. The only way out for Japan for instance with 350% of debt to GDP and much of it owned by the BOJ is to extend and extend maturities at 0% interest until private markets catch on. Which frankly is what they want. Global markets wising up to the scheme will precipitate the sale of the remaining JGB’s, weaken the Yen and create their magical 2% inflation!

Oh this sounds too good to be true. Just print the money! Well to be honest, a politician – and a central banker – should admit that increasing joblessness must be paid for somehow.

1. Raising taxes (not lowering them, Donald) is one way.
2. Issuing more and more debt via the private market is another (not a good idea either in this highly levered economy).
3. A third way is to sell debt to central banks and have them finance it perpetually at low interest rates that are then remitted back to their treasuries.

Money for free! Well not exactly. The Piper that has to be paid will likely be paid for in the form of higher inflation, but that of course is what the central banks claim they want. What they don’t want is to be messed with and to become a government agency by proxy, but that may just be the price they will pay for a civilized society that is quickly becoming less civilized due to robotization. There is a rude end to flying helicopters, but the alternative is an immediate visit to austerity rehab and an extended recession. I suspect politicians and central bankers will choose to fly, instead of die.

Private banks can fail but a central bank that can print money acceptable to global commerce cannot. I have long argued that this is a Ponzi scheme and it is, yet we are approaching a point of no return with negative interest rates and QE purchases of corporate bonds and stock. Still, I believe that for now central banks will print more helicopter money via QE (perhaps even the U.S. in a year or so) and reluctantly accept their increasingly dependent role in fiscal policy. That would allow governments to focus on infrastructure, health care, and introduce Universal Basic Income for displaced workers amongst other increasing needs. It will also lead to a less independent central bank, and a more permanent mingling of fiscal and monetary policy that stealthily has been in effect for over 6 years now. Chair Yellen and others will be disheartened by this change in culture. Too bad. If there is an answer, the answer is that it’s just that way.

Investment implications: Prepare for renewed QE from the Fed. Interest rates will stay low for longer, asset prices will continue to be artificially high. At some point, monetary policy will create inflation and markets will be at risk. Not yet, but be careful in the interim. Be content with low single digit returns.

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In a surprising development, the U.S. monthly international trade deficit decreased substantially in March 2016 from $47.0 billion in February (revised) to $40.4 billion in March, below the $41.2 billion expected, as exports declined by a modest $1.5 billion, a 0.9% drop to $176.62BN from $178.16BN in Feb. At the same time imports outright plunged by $8.1 billion, down 3.6% in March to $217.06BN from $225.13BN in Feb. Curiously this happened just as Canada announced a trade deficit of C$3.4 billion, the widest on record. In March, the US trade deficit excluding petroleum was $37.48 billion.

The previously published February US deficit was $47.1 billion. The goods deficit decreased $6.0 billion from February to $58.5 billion in March. The services surplus increased $0.5 billion from February to $18.1 billion in March.

 

The breakdown:

Exports

• Exports of goods and services decreased $1.5 billion, or 0.9 percent, in March to $176.6 billion. Exports of goods decreased $1.8 billion and exports of services increased $0.3 billion.
• The decrease in exports of goods mainly reflected decreases in consumer goods ($1.6 billion) and in industrial supplies and materials ($0.8 billion). An increase in capital goods ($1.0 billion) was partly offsetting.
• The increase in exports of services mainly reflected increases in travel (for all purposes including education) ($0.2 billion) and in transport ($0.1 billion), which includes freight and port services and passenger fares.

Imports

• Imports of goods and services decreased $8.1 billion, or 3.6 percent, in March to $217.1 billion. Imports of goods decreased $7.9 billion and imports of services decreased $0.2 billion.
• The decrease in imports of goods mainly reflected decreases in consumer goods ($5.1 billion) and in capital goods ($1.6 billion).
• The decrease in imports of services was more than accounted for by a decrease in transport ($0.4 billion).

Goods by geographic area (seasonally adjusted, Census basis)

• The deficit with China decreased $6.2 billion to $26.0 billion in March. Exports increased $0.1 billion to $8.5 billion and imports decreased $6.1 billion to $34.4 billion. Which is also surprising considering China said its net surplus with the US jumped.
• The balance with the United Kingdom shifted from a deficit of $0.5 billion in February to a surplus of $0.5 billion in March. Exports increased $0.6 billion to $4.8 billion and imports decreased $0.3 billion to $4.4 billion.
• The surplus with Saudi Arabia decreased $1.2 billion to $0.1 billion in March. Exports decreased $0.9 billion to $1.4 billion and imports increased $0.3 billion to $1.3 billion.

Finally, looking only at just the suddenly rising US oil imports alone, March crude oil imports increased to $6.71b from $5.9b last month, representing 75.4% of total petroleum imports.

• March non-crude petroleum imports widened to $2.2b from $2.1b m/m; 24.6% of total petroleum imports
• Crude oil imports averaged 7.819m b/d in March compared to 7.404m b/d in Feb.
• Oil imports from OPEC rose to 43.9% of the total
• Oil imported from Canada and Mexico was 43.6% of total in March vs 49.6% in Feb.
• Petroleum deficit in real dollars at $8.05b in March
• Petroleum exports rose in real dollars to $9,193b in March after $9,033b in Feb.
• Oil imports from Saudi Arabia rose 18.5m barrels

Keep a close eye on US oil imports because if as the pundits say US shale production is indeed declining, the US will have no choice but to revert to its old model of importing its oil needs at least until such time as shale is once again back online.

via http://ift.tt/21wrkEB Tyler Durden

Despite a very modest beat of expectations US worker productivity fell for the 2nd quarter in a row (down 1.0% vs 1.3% QoQ), the two-quarter-average output per hour isdown 1.4% – the worst slump since 1993. Unit labor costs rose by a better than expected 4.1% (helped by a downwardly revised 2.7% rise in Q4), the highest since Q4 2014.

America’s productivity slump is the biggest in nearly a quarter century…

 

As Bloomberg notes, the confluence of falling productivity, higher labor costs and an economic slowdown are putting a dent in companies’ bottom lines, with earnings among S&P 500 Index members projected to slip for the fourth straight quarter.

As we detailed previously, there are numerous reasons for this plunge in worker-productivity, from perverted inventives not to work to unintended consequences of monetary policy enabling zombies, but perhaps the most critical driver is exposed in the following dismal chart…

51% of total time spent on the Internet is on mobile devices – in 2015, first time ever mobile is #1 – to make a total of 5.6 hours per day snapchatting, face-booking, and selfying…

Source: @kpcb

So, while every effort can be made by Ivory Tower academics to solve the problem of American worker productivity, perhaps it can be summed up simply as "Put The Smart-Phone Down!"

As we detailed previously, adjusting for the WWII anomaly (which tells us that GDP is not a good measure of a country’s prosperity) US productivity growth peaked in 1972 – incidentally the year after Nixon took the US off gold.

The productivity decline witnessed ever since is unprecedented. Despite the short lived boom of the 1990s US productivity growth only average 1.2 per cent from 1975 up to today. If we isolate the last 15 years US productivity growth is on par with what an agrarian slave economy was able to achieve 200 years ago.

In addition, the last 15 years also saw an outsized contribution to GDP from finance. If we look at the US GDP by contribution from value added by industry we clearly see how finance stands out in what would otherwise have been an impressively diversified economy.

With hindsight we know that finance did more harm than good so we can conservatively deduct finance from the GDP calculations and by doing so we essentially end up with no growth per capita at all over a timespan of more than 15 years! US real GDP per capita less contribution from finance increased by an annual average of 0.3 per cent from 2000 to 2015. From 2008 the annual average has been negative 0.5 per cent!

In other words, we have seen a progressive (pun intended) weakening of the US economy from the 1970s and the reason is simple enough when we know that monetary policy broken down to its most basic is a transaction of nothing (fiat money) for something (real production of goods and services). Modern monetary policy thereby violates the most sacred principle in a market based economy; namely that production creates its own demand. Only through previous production, either your own or borrowed, can one express true purchasing power on the market place.

The central bank does not need to worry about such trivial things. They can manufacture the medium of exchange at zero cost and express purchasing power on the same level as the producer. However, consumption of real goods and services paid for with zero cost money must by definition be pure capital consumption.

Do this on a grand scale, over a long period of time, even a capital rich economy as the US will eventually be depleted. Capital per worker falls relative to competitors abroad, cost goes up and competitiveness falls (think rust-belt). Productive structures cannot be properly funded and the economy must regress to align funding with its level of specialization.

In its final stage, investment give way for speculation, and suddenly finance is the most important industry, pulling the best and brightest away from every corner of the globe, just to find more ingenious ways to maximise capital consumption.

As the slave economy got perverted by incentives not to work, so does the speculative fiat based economy, which consequently create debt serfs on a grand scale.

via http://ift.tt/1NVCYq8 Tyler Durden