“Democracy Is Overrated” Doug Casey’s Top 5 Reasons Not To Vote

Submitted by Doug Casey via InternationalMan.com,

Democracy is vastly overrated.

It's not like the consensus of a bunch of friends agreeing to see the same movie. Most often, it boils down to a kinder and gentler variety of mob rule, dressed in a coat and tie. The essence of positive values like personal liberty, wealth, opportunity, fraternity, and equality lies not in democracy, but in free minds and free markets where government becomes trivial. Democracy focuses people's thoughts on politics, not production; on the collective, not on their own lives.

Although democracy is just one way to structure a state, the concept has reached cult status; unassailable as political dogma. It is, as economist Joseph Schumpeter observed, "a surrogate faith for intellectuals deprived of religion." Most of the founders of America were more concerned with liberty than democracy. Tocqueville saw democracy and liberty as almost polar opposites.

Democracy can work when everyone concerned knows one another, shares the same values and goals, and abhors any form of coercion. It is the natural way of accomplishing things among small groups.

But once belief in democracy becomes a political ideology, it's necessarily transformed into majority rule. And, at that point, the majority (or even a plurality, a minority, or an individual) can enforce their will on everyone else by claiming to represent the will of the people.

The only form of democracy that suits a free society is economic democracy in the laissez-faire form, where each person votes with his money for what he wants in the marketplace. Only then can every individual obtain what he wants without compromising the interests of any other person. That's the polar opposite of the "economic democracy" of socialist pundits who have twisted the term to mean the political allocation of wealth.

But many terms in politics wind up with inverted meanings. "Liberal" is certainly one of them.

The Spectrum of Politics

The terms liberal (left) and conservative (right) define the conventional political spectrum; the terms are floating abstractions with meanings that change with every politician.

In the 19th century, a liberal was someone who believed in free speech, social mobility, limited government, and strict property rights. The term has since been appropriated by those who, although sometimes still believing in limited free speech, always support strong government and weak property rights, and who see everyone as a member of a class or group.

Conservatives have always tended to believe in strong government and nation­alism. Bismarck and Metternich were archetypes. Today's conservatives are some­times seen as defenders of economic liberty and free markets, although that is mostly true only when those concepts are perceived to coincide with the interests of big business and economic nationalism.

Bracketing political beliefs on an illogical scale, running only from left to right, results in constrained thinking. It is as if science were still attempting to define the elements with air, earth, water, and fire.

Politics is the theory and practice of government. It concerns itself with how force should be applied in controlling people, which is to say, in restricting their freedom. It should be analyzed on that basis. Since freedom is indivisible, it makes little sense to compartmentalize it; but there are two basic types of freedom: social and economic.

According to the current usage, liberals tend to allow social freedom, but restrict economic freedom, while conservatives tend to restrict social freedom and allow economic freedom. An authoritarian (they now sometimes class them­selves as "middle-of-the-roaders") is one who believes both types of freedom should be restricted.

But what do you call someone who believes in both types of freedom? Unfortunately, something without a name may get overlooked or, if the name is only known to a few, it may be ignored as unimportant. That may explain why so few people know they are libertarians.

A useful chart of the political spectrum would look like this:

A libertarian believes that individuals have a right to do anything that doesn't impinge on the common-law rights of others, namely force or fraud. Libertarians are the human equivalent of the Gamma rat, which bears a little explanation.

Some years ago, scientists experimenting with rats categorized the vast major­ity of their subjects as Beta rats. These are basically followers who get the Alpha rats' leftovers. The Alpha rats establish territories, claim the choicest mates, and generally lord it over the Betas. This pretty well-corresponded with the way the researchers thought the world worked.

But they were surprised to find a third type of rat as well: the Gamma. This creature staked out a territory and chose the pick of the litter for a mate, like the Alpha, but didn't attempt to dominate the Betas. A go-along-get-along rat. A libertarian rat, if you will.

My guess, mixed with a dollop of hope, is that as society becomes more repressive, more Gamma people will tune in to the problem and drop out as a solution. No, they won't turn into middle-aged hippies practicing basket weaving and bead stringing in remote communes. Rather, they will structure their lives so that the government—which is to say taxes, regulations, and inflation—is a non-factor. Suppose they gave a war and nobody came? Suppose they gave an election and nobody voted, gave a tax and nobody paid, or imposed a regulation and nobody obeyed it?

Libertarian beliefs have a strong following among Americans, but the Liber­tarian Party has never gained much prominence, possibly because the type of people who might support it have better things to do with their time than vote. And if they believe in voting, they tend to feel they are "wasting" their vote on someone who can't win. But voting is itself another part of the problem.

None of the Above

Until 1992, when many decided not to run, at least 98% of incumbents typically retained office. That is a higher proportion than in the Su­preme Soviet of the defunct USSR, and a lower turnover rate than in Britain's hereditary House of Lords where people lose their seats only by dying.

The political system in the United States has, like all systems which grow old and large, become moribund and corrupt.

The conventional wisdom holds a decline in voter turnout is a sign of apathy. But it may also be a sign of a renaissance in personal responsibility. It could be people saying, "I won't be fooled again, and I won't lend power to them."

Politics has always been a way of redistributing wealth from those who produce to those who are politically favored. As H.L. Mencken observed, every election amounts to no more than an advance auction on stolen goods, a process few would support if they saw its true nature.

Protesters in the 1960s had their flaws, but they were quite correct when they said, "If you're not part of the solution, you're part of the problem." If politics is the problem, what is the solution? I have an answer that may appeal to you.

The first step in solving the problem is to stop actively encouraging it.

Many Americans have intuitively recognized that government is the problem and have stopped voting. There are at least five reasons many people do not vote:

  1. Voting in a political election is unethical. The political process is one of institutionalized coercion and force. If you disapprove of those things, then you shouldn't participate in them, even indirectly.
  1. Voting compromises your privacy. It gets your name in another government computer database.
  1. Voting, as well as registering, entails hanging around government offices and dealing with petty bureaucrats. Most people can find something more enjoyable or productive to do with their time.
  1. Voting encourages politicians. A vote against one candidate—a major, and quite understandable, reason why many people vote—is always interpreted as a vote for his opponent. And even though you may be voting for the lesser of two evils, the lesser of two evils is still evil. It amounts to giving the candidate a tacit mandate to impose his will on society.
  1. Your vote doesn't count. Politicians like to say it counts because it is to their advantage to get everyone into a busybody mode. But, statistically, one vote in scores of millions makes no more difference than a single grain of sand on a beach. That's entirely apart from the fact that officials manifestly do what they want, not what you want, once they are in office.

Some of these thoughts may impress you as vaguely "unpatriotic"; that is certainly not my intention. But, unfortunately, America isn't the place it once was, either. The United States has evolved from the land of the free and the home of the brave to something more closely resembling the land of entitlements and the home of whining lawsuit filers.

The founding ideas of the country, which were highly libertarian, have been thoroughly distorted. What passes for tradition today is something against which the Founding Fathers would have led a second revolution.

This sorry, scary state of affairs is one reason some people emphasize the importance of joining the process, "working within the system" and "making your voice heard," to ensure that "the bad guys" don't get in. They seem to think that increasing the number of voters will improve the quality of their choices.

This argument compels many sincere people, who otherwise wouldn't dream of coercing their neighbors, to take part in the political process. But it only feeds power to people in politics and government, validating their existence and making them more powerful in the process.

Of course, everybody involved gets something out of it, psychologically if not monetarily. Politics gives people a sense of belonging to something bigger than themselves and so has special appeal for those who cannot find satisfaction within themselves.

We cluck in amazement at the enthusiasm shown at Hitler's giant rallies but figure what goes on here, today, is different. Well, it's never quite the same. But the mindless sloganeering, the cult of the personality, and a certainty of the masses that "their" candidate will kiss their personal lives and make them better are identical.

And even if the favored candidate doesn't help them, then at least he'll keep others from getting too much. Politics is the institutionalization of envy, a vice which proclaims "You've got something I want, and if I can't get one, I'll take yours. And if I can't have yours, I'll destroy it so you can't have it either." Participating in politics is an act of ethical bankruptcy.

The key to getting "rubes" (i.e., voters) to vote and "marks" (i.e., contribu­tors) to give is to talk in generalities while sounding specific and looking sincere and thoughtful, yet decisive. Vapid, venal party hacks can be shaped, like Silly Putty, into salable candidates. People like to kid themselves that they are voting for either "the man" or "the ideas." But few "ideas" are more than slogans artfully packaged to push the right buttons. Voting for "the man" doesn't help much either since these guys are more diligently programmed, posed, and rehearsed than any actor.

This is probably more true today than it's ever been since elections are now won on television, and television is not a forum for expressing complex ideas and philosophies. It lends itself to slogans and glib people who look and talk like game show hosts. People with really "new ideas" wouldn't dream of introducing them to politics because they know ideas can't be explained in 60 seconds.

I'm not intimating, incidentally, that people disinvolve themselves from their communities, social groups, or other voluntary organizations; just the opposite since those relationships are the lifeblood of society. But the political process, or government, is not synonymous with society or even complementary to it. Government is a dead hand on society.


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Hypocrisy Defined: Hank Paulson Tells China “Let Failing Companies Fail”

"Do as I say, not as I do" is the clear message of hypocrisy spewed forth by former US Treasury Secretary Henry Paulson this week. Having presided over the largest redistriubution of taxpayer funds to bailout the banking system, while exclaiming fire and brimstone should they not be saved, he now has some advice for an over-levered, over-capacity, systemically-stymied China"let failing companies fail."

Some other Paulson comments:

"As Americans, we shouldn't like bailouts. Where I come from, if someone takes a risk and they're going to make the profit from that risk, they shouldn't have the taxpayer pay for the losses."

 

"If the financial system collapses, it's really, really hard to put it back together again."

 

"What I've said repeatedly is, 'I think the auto industry is a very important industry.'"

But for China – screw them all…

"They can show right now they're very serious about dealing with inefficient state-owned enterprises as they take capacity out of the steel industry, coal industry and others by letting some failing companies fail," Paulson told CNBC's Squawk Box on the sidelines of an Institute of International Finance event organized in conjunction with the G20 meeting in Shanghai.


 

Of course this is exactly what China 'should' do – just as America 'should' have faced up to its own malinvestment boom, dealt with the bust, and moved on to renewed growth. But that would have meant the elites lost… and that can never happen.

Just remember, risking US taxpayer money to fill a bottomless pit of bank balance sheets was "for your own good."


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How The Seeds Of Revolution Take Root

Submitted by Charles Hugh-Smith via PeakProsperity.com,

That the dramatic upheavals of war, pestilence and environmental collapse can trigger social disorder and revolution is well-established. Indeed, this dynamic can be viewed as the standard model of social disorder/revolution: a large-scale crisis—often a bolt-from-the-blue externality—upends the status quo.

Another model identifies warring elites and imperial meddling as a source of revolution: a new elite forcibly replaces the current elite (known colloquially as meet the new boss, same as the old boss) or a dominant nation-state/empire arranges a political coup to replace the current leadership with a more compliant elite.

A third model was described by David Hackett Fischer in The Great Wave: Price Revolutions and the Rhythm of History. By assembling price and wage data stretching back hundreds of years, Fischer found that cycles of economic growth spawn population growth, resulting in more workers entering the market economy. Their earnings trigger a demand-driven expansion of essential commodities such as grain and energy (wood, coal, oil, etc.).

In the initial phase, wages rise and commodity prices remain stable as supplies of essential goods expand and the demand for labor pushes up wages.

But this virtuous cycle reverses when the supply of essentials no longer keeps pace with rising population and demand: the price of essentials begin an inexorable rise even as an oversupply of labor drives down wages.

Fisher found that this wage/price cycle often ends in transformational social upheaval.

While proponents of these models have a wealth of historical examples to draw upon, these models miss a key factor:  the vulnerability or resilience of the nation-state facing crises.

Some nations survive invasions, environmental catastrophes, epidemics and inflation without disintegrating into disorder. Something about these nation’s social/ economic /political order makes them more resilient than other nations.

So rather than accept the proximate causes of disorder as the sole factors, we should look deeper into the social order for the factors behind a nation’s relative fragility or resilience.

The Decline Of Shared Purpose

Historian Peter Turchin defined a key factor in the resilience of the social order as "the degree of solidarity felt between the commons and aristocracy," that is, the sense of purpose and identity shared by the aristocracy and commoners alike.

As Turchin explains in War and Peace and War: The Rise and Fall of Empires:

"Unlike the selfish elites of the later periods, the aristocracy of the early Republic did not spare its blood or treasure in the service of the common interest. When 50,000 Romans, a staggering one fifth of Rome’s total manpower, perished in the battle of Cannae, the senate lost almost one third of its membership. This suggests that the senatorial aristocracy was more likely to be killed in wars than the average citizen…

 

The wealthy classes were also the first to volunteer extra taxes when they were needed… A graduated scale was used in which the senators paid the most, followed by the knights, and then other citizens. In addition, officers and centurions (but not common soldiers!) served without pay, saving the state 20 percent of the legion’s payroll…

 

The richest 1 percent of the Romans during the early Republic was only 10 to 20 times as wealthy as an average Roman citizen.

Roman historians of the later age stressed the modest way of life, even poverty of the leading citizens. For example, when Cincinnatus was summoned to be dictator, while working at the plow, he reportedly exclaimed, 'My land will not be sown this year and so we shall run the risk of not having enough to eat!'"

Once the aristocracy’s ethic of public unity and service was replaced by personal greed and pursuit of self-interest, the empire lost its social resilience.

Turchin also identified rising wealth inequality as a factor in weakening social solidarity. By the end-days of the Western Roman Empire, elites held not 10 times as much wealth commoners but 10,000 times as much as average citizens.

Wealth inequality is both a cause and a symptom: it is a cause of weakening social resilience, but it also symptomatic of a system that enables the concentration of wealth and power in the hands of the few at the expense of the many.

Diminishing Returns On Complexity & Expansion

Thomas Homer-Dixon’s excellent book The Upside of Down: Catastrophe, Creativity, and the Renewal of Civilization  outlines two systemic sources of increasing fragility: diminishing returns on complexity and the rising costs of continuing strategies that worked well in the past but no longer yield positive results.

Successful economies generate surpluses that are skimmed by various elites to support new layers of complexity: temple priests, state bureaucracies, standing armies, etc.

All this complexity adds cost but beyond the initial positive impact of rationalizing production, it reduces productivity by draining potentially productive investments from the economy.

Building temple complexes and vast palaces for the aristocracy appears affordable in the initial surge of productivity, but as investment in productivity declines and the population of state dependents expands, surpluses shrink while costs rise.

Meanwhile, strategies that boosted yields in the beginning also suffer diminishing returns. Conquering nearby lands and extracting their wealth paid off handsomely at first, but as the distance to newly conquered territories lengthen, the payoff declines: supplying distant armies to maintain control over distant lands costs more, while the yield on marginal new conquests drops.

Expanding land under production was easy in the river valley, but once water has to be carried up hillsides, the net yield plummets.

What worked well at first no longer works well, but those in charge are wedded to the existing system; why change what has worked so brilliantly?

As the costs of complexity and state dependents rise, productive people grow tired of supporting an economy suffering from terminal diminishing returns.

Empires do not just suddenly collapse; they are abandoned by the productive citizenry as the burdens become unbearable. The independent class of tradespeople (a.k.a. the middle class), driven into serfdom by taxes, lose their shared identity with the aristocracy. Beneath the surface, social cohesion frays. Once the benefits of the status quo no longer outweigh its costs, the system is vulnerable to an external disruption that would have been easily handled in previous eras.

The Suppression Of Social Mobility

There is another key factor in the resilience or fragility of social order: the permeability of the barrier between the ruling class and everyone below. We call this permeability social mobility: how easy is it for a working class family to rise up to the middle class, and how easy is it for a middle class family to enter the political and financial aristocracy?

I recently read Venice: A New History, a fascinating account of Venice's rise to regional empire and its decline to tourist destination.

What struck me most powerfully was Venice's long success as a republic: it was the world's only republic for roughly 1,000 years.

How did the Venetians manage this?  Their system of participatory democracy accreted over time, and was by no means perfect; only men of substance had much of a say. But strikingly, key political turning points were often triggered by mass gatherings of craftsmen and laborers.

Most importantly, the system was carefully designed to enable new blood to enter the higher levels of power. Commoners could rise to power (and take their families with them if their wealth outlasted the founding generation) via commercial success or military service.

The Republic also developed a culture that frowned on personal glorification and cults of personality: the nobility and commoners alike deferred to the Republic rather than any one leader.

In Venice, the political leadership (the doge and the Council) were elected via a convoluted series of steps that made it essentially impossible for one clique to control the entire process.

The doge was elected for a term, not for life, and he had to be acceptable not just to the elites but to the much larger class of movers and shakers–roughly 1,000 people in a city of at most 150,000.

Venice's crises emerged when the upwelling of social and financial mobility was capped by elites who were over-zealous in their pursuit of hegemony: all those blocked from rising to power/influence became the source of political revolt.

If you cap the volcano, eventually the pressure beneath rises to the point that the cap gets blown off in spectacular fashion.

The suppression of social mobility and the monopolization of power by the few at the expense of the many are universal dynamics in social orders.

Broadly speaking, Venice's 1,000-year Republican government, with its complex rules to limit concentrations of power and insure the boundaries between elites and commoners were porous enough to diffuse revolution and social disorder, speak to what is once again in play around the world: social unrest due to the concentration of power and the suppression of social mobility.

I don't think it's a stretch to say that the greater the concentration of power, the lower the social mobility, the greater the odds that the system will collapse when faced with crisis.

When the entire economy is expanding faster than population, and this tide is raising all ships, the majority of people feel their chances of getting ahead are positive.

But when the economy is stagnating, and those in power are amassing most of the gains, the majority realizes their chances of securing a better life are declining. This is the pressure that is being capped by the status quo that first and foremost protects the privileged.

How porous are the barriers to social mobility in our society? That a few people become billionaires from technological innovations that scale globally is not a real measure of social mobility for the masses.

In Part 2 we identify the wellspring of revolution, and reach a conclusion that may surprise many.

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

 


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Vacancies Abound In These 5 American “Ghost Cities”

We’ve written quite a bit about the decline of America’s once proud manufacturing industry which is now but a shadow of its former self and long ago ceded its place in the public’s heart and mind to the service industry, as US citizens are far more concerned with whether they can get a $6 latte than with whether the economy provides enough breadwinner jobs to keep the majority of the population from having to… well, serve $6 lattes for a living.

And if it was already bad, it’s getting worse.

n fact, as we noted just days ago, the last time manufacturing was this bad in the US, Ben Bernanke introduced QE3. 

Make no mistake, the decline of American industry isn’t something that can be reversed.

In other words, no populist presidential candidate promising to “make the country great again” is going to turn this around – and it won’t be for lack of effort. It’s just economics. The jobs aren’t coming back from China and the “made in America” stamp is a relic a bygone era. The American economy is now a bartender and waiter creation machine and it’s come at the expense of the still declining manufacturing sector. 

Needless to say, this has gutted America’s Rust Belt, which is now nothing more than a now desolate reminder of a golden era in America’s history that has long since passed and as RealtyTrac reports, “among 147 metropolitan statistical areas with at least 100,000 residential properties, those with the highest share of vacant properties were [unsurprisingly] Flint, Michigan (7.5 percent), Detroit (5.3 percent), Youngstown, Ohio (4.4 percent), Beaumont-Port Arthur, Texas (3.8 percent), and Atlantic City, New Jersey (3.7 percent).”

Port Arthur has never been a bastion of stability and the decline of Atlantic City has been well documented, but the malaise in Flint, Detroit, and Youngstown clearly reflects the decline in American industry and suggests the pain (exacerbated by China’s acute overcapacity problem) is only beginning.

Below, find a graphic from RealtyTrac which documents the struggle:

*  *  *

Blame China? 


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The Week in Review for Financial Markets 2 26 2016 (Video)

By EconMatters

A positive week for risk assets, we consolidated recent gains and even finished the week higher in most risk assets. Gasoline had a stellar week, and points to a bottom in the Oil Market.

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“There’s A Feeling Of Bits Of Ice Cracking All At Once” – This Is The ‘Big New Threat’ To Oil Prices

One week ago, we reported that even as traders were focusing on the daily headline barrage out of OPEC members discussing whether or not they would cut production (they won’t) or merely freeze it (at fresh record levels as Russia reported earlier today) a bigger threat in the near-term will be whether the relentless supply of excess oil will force Cushing, and PADD 2 in general, inventory to reach operational capacity.

As Genscape added in a recent presentation, when looking specifically at Cushing, the storage facility is virtually operationally full (at 80%) with just 4-5 more months at current inventory build left until the choke point is breached, and as we have reported previously, storage requests for specific grades have already been denied.

Goldman summarizes the dire near-term options before the industry as follows:

The large builds in gasoline and crude stocks have brought PADD 2 storage utilization near record high levels. While the recent decline in Midcontinent refining margins should help avoid breaching storage capacity, by finally bringing gasoline back into deficit, this will likely only exacerbate the build in crude inventories in coming months and should require further weakness in PADD2 crude prices to spread this build to the USGC. Weaker gasoline demand/exports, or higher margins/runs or finally resilient crude imports/production, could create binding storage issues beyond the intermittent Cushing WTI cash price weakness observed so far, which would require another large leg lower in crude prices to shut production in the Midcontinent and Canada. As we have argued, this continued testing of storage constraints should keep price and margin volatility elevated.

However, while the threat from overproduction on soaring crude inventories, or in other words “supply”, has been extensively documented, far less has been said about another just as big problem: “demand”, or the potential supply-chain bottleneck that will hit the moment refiners finds themselves flooded with too much unwanted product, in turn telling producers they have to turn oil back simply because they have no more capacity.

Is this possible? It’s already happening.

As the WSJ reports in a piece titled “The Big New Threat to Oil Prices: A Glut of Gasoline“, refineries in the U.S. Midwest are losing their thirst for oil, posing a new risk for the battered crude market. The Midwest accounts for nearly a quarter of the crude processed in the U.S. and is home to shale producers that have few other outlets for their oil. But refiners there are already swimming in gasoline and other fuel, forcing them to cut back production until the excess can be worked off.

In other words, not enough intermediate demand in the supply-chain with the result the same as oversupply: more crude oil is available in the market, worsening a glut that has been undermining oil prices for the past year and a half. As the WSJ adds, “with U.S. crude inventories at the highest level in more than 80 years, some storage hubs have little room left to store oil.

This means that storage hubs are now being hit on both sides: from excess production in a global market oversupplied by 3 million barrels daily, and from collapsing demand by the refiners for whom operating at current prices has become uneconomical. The result is that refinery production capacity, while already running at record levels for this time of the year, has tumbled from 98.2% a month ago to just 92.9% last week.

This drop is significant because, as the WSJ explains, it marks the first time several refineries in the region have opted to reduce activity for economic reasons— a marked change after more than a year of refiners processing as much crude as possible.

Here is the problem illustrated: gasoline stocks are literally off the charts in terms of the past 10 year min-max range:

 

… as refineries operate at a record pace for this time of the year…

 

… while gasoline demand is well within its past decade range:

 

Which means refining production has no choice but to decline, which is precisely what it is doing. Three examples:

  • CVR Refining LP is among the companies that have scaled back. The company said recently that it reduced runs at its 70,000-barrels-a-day refinery in Wynnewood, Okla., by as much as 10,000 barrels a day. “It doesn’t make sense to process something when you’re not making anything on it,” Chief Executive Jack Lipinski said during a Feb. 18 earnings call.
  • HollyFrontier Corp. said Wednesday that it has trimmed production at refineries in Kansas and New Mexico due to lower margins.
  • PBF Energy Inc. Chief Executive Tom Nimbley said during a conference call on Feb. 11 that the industry “turned the dials to make more gasoline” in the last quarter of 2015 and overshot demand. “The gasoline is not going to the consumer,” he said. “It’s going into a tank.”

The first immediate consequence of overproduction are dropping margins as refiners try to sell their product into a glutted market, and sure enough refining margins are lower throughout the country this year, including in the Gulf Coast region, where more than 50% the country’s refining capacity is concentrated. But refiners there have more choices when it comes to buying crude oil and can substitute cheaper options if they become available. And they can put fuel on tankers to sell overseas if supplies build up too much.

In other areas, there are fewer viable options: recent cutbacks have been enough to nudge gasoline prices higher in the Midwest, though it’s still cheap in some places: Gas was selling for as low as $1.11 a gallon on Wednesday in Granite Falls, Minn., according to Gasbuddy.com. Gasoline futures for March delivery rose 4.6% on Wednesday to $1.0104 a gallon, up from a seven-year low hit earlier this month.

Which again brings us to the most important commercial hub in the US, located in the heart of the Midwest in Cushing, Oklahoma.

“Many industry players and analysts think refiners will ramp up production after spring maintenance and they expect activity to pick up in the summer as cheap gasoline spurs Americans to take more road trips. But for producers in the Midwest and Canada, any decline in Midwest refining activity is worrisome. The region is home to the crucial oil storage hub at Cushing, Okla.—the delivery point for the U.S. oil futures contract.”

Sellers in the futures market can either deliver physical crude or buy futures to offset their obligations. A lack of storage space can force buyers out of the market and supplies in Cushing are at their highest level ever. Analysts warn U.S. oil futures could fall further as Cushing nears full capacity.

This is precisely what we have been warning about for months, or as Paul Horsnell, global head of commodities research at Standard Chartered puts it, “There’s a feeling of various bits of ice cracking all at oncein the oil market, with both crude-oil and gasoline inventories at extremely high levels… People are worried about a short-term issue, particularly in the U.S., particularly at Cushing.

The good news is that we are likely very close to the worst case scenario playing out: refiners are unlikely to start buying more crude in the coming weeks. Instead, many will begin seasonal maintenance ahead of the busy summer-driving season. That could leave some oil producers scrambling to find places to store their output. Prices in some regions might have to drop sharply to justify the cost of shipping the oil to where it can be stored.

Which means there are just two options: find some undiscovered storage, or hope demand picks up.

On the first, there is always hope: “we’ll just look for every other nook and cranny throughout North America to stuff crude oil into,” said Andy Lipow, president of consulting firm Lipow Oil Associates in Houston. “The market is just not going to like it.”

However, it is the second that is the biggest wildcard: refiners profit on the difference between oil prices and fuel prices. Oil prices have dropped 70% since mid-2014 to around $32 a barrel currently, but robust demand for gasoline kept prices at the pump from falling as quickly last year, boosting refiner margins. However, analysts question whether demand will increase strongly this year, especially given broader concerns about sluggish economic growth. 

Which brings us to the punchline: on a four-week average basis, U.S. gasoline demand fell in January compared with the year before, according to Energy Information Administration estimates.

This despite the alleged increase in US consumer purchasing power or the so-called “tax-savings” from low gasoline prices, which should have boosted overall gasoline demand.

It has not.

Which is why with the market having debated the supply issue for over a year, and overanalyzed the OPEC and non-OPEC supply question to death, what virtually nobody has discussed is the just as important demand side of the equation, perhaps because nobody dares to admit the obvious: the much needed rebound in demand is just not there.

If that is indeed the case, expect a sharp, violent move lower in the price of oil in the coming weeks as the fundamental oil reality finally catches up with the imaginary world of stop-hunting, momentum-igniting, algorithmic daytraders.


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Dead Piglet Inscribed With “Mother Merkel” Found At Mosque Site

“In view of the circumstances it appears likely that this is a xenophobic act.”

That’s from a police spokesperson who spoke to dpa after a dead pig with Angela Merkel’s name “daubed on it” was discovered at a site where a mosque is being constructed in Leipzig.

“Mutti Merkel” was reportedly scribed on the animal’s corpse. “Mutti,” or “mom” is a term of endearment that’s been variously applied to the chancellor. When Merkel made the push to take in some 1 million refugees last year, she was dubbed a “kind hearted lion mother” by some Mid-East asylum seekers.

But “mother” Merkel’s reputation has suffered irreparable damage over the past six months thanks to her role in fueling the bloc’s worsening refugee crisis. Germany took in more than a million migrants in 2015 and reports of mass sexual assaults carried out by immigrants combined with ever-present concerns about terror have soured Europeans on the chancellor’s “yes we can” message.

Indeed, the narrative is increasingly “no we can’t, even if we wanted to.” In fact, the situation is so bad that EU migration commissioner Dimitris Avramopoulos warned on Thursday that if Turkey and Greece can’t work together on a solution to secure the bloc’s external borders, the entire project will collapse in the next 10 days.

Norwegian PM Erna Solberg is preparing her country for that eventuality by passing a new bill that will allow Norway to essentially lock down the borders and turn all comers away by force if necessary.

As NBC reports, it wasn’t exactly surprising that the pig turned up at the site. “In a 2013 incident after plans for the mosque became known, pigs’ heads were found at the same site. Police say no perpetrator has ever been found.”

“I see this as just a stupid act. I don’t know what they mean to say with this, but our mosque construction project will continue,” Dr Rashid Nawaz of the Leipzig branch of the Ahmadiyya Muslim Jamaat (AMJ) organization told The Local

Stupid act, yes. But we’re not sure what Dr. Nawaz is confused about what the “perpetrator(s) “mean to say.” They mean to send an anti-migrant, anti-Islam message. The piglet, Nawaz says, “was hurled into a patch of earth overnight.” 

“The planned mosque for 100 people would be the second newly built mosque to be constructed in eastern Germany,” Deutsche Welle reports. “The Ahmadiyya Muslim Jamaat (AMJ), a global Islamic community with 35,000 members in Germany, has built a new mosque in Berlin’s Pankow neighborhood.”

Leipzig mayor Burkhard Jung wasn’t particularly enamored with the display. “Insulting, reviling and smearing a whole religious community is narrow-minded and outrageous,” he said, adding that “leaving a dead pig with the words ‘Mutti Merkel’ on it isn’t just tasteless, but demonstrates fundamental failings of democratic education and conviction.”

It seemed to have escaped Jung that when you are mayor, “fundamental failings of democratic education” among the populace are ultimately your fault.

*  *  *

Below, find the original article from Leipziger Volkszeitung (Google translated)

Leipzig . The site for the new mosque of the Ahmadiyya community in Leipzig-Gohlis has been ruined again on Wednesday. As police spokesman Uwe Voigt told LVZ.de, found a passerby about 13 pm dead piglets in a bush, on the red paint “Mutti Merkel” was written. The perpetrators were not seen, but it was assumed that the animal has been filed on the day on the site at the corner Georg Schumann / Bleichertstraße.

Meanwhile, the state protection had been turned on. Investigators from a politically motivated act from, among others, it also go to an insult to the Chancellor, so Voigt further.

Construction in early September with religious leader

The Ahmadiyya community itself responded on Thursday with serenity the fact. “We will not be intimidated. What the perpetrators are hoping, will not happen: This has no impact on the construction process of our mosque, “spokesman Rashid Nawaz told LVZ.de. For discussions, community’m always ready to violence and attacks were not to be tolerated.

The Ahmadiyya plans to begin in early September with the construction of their new mosque. Approximately 700,000 Euro investments are planned for the project. “There are some other things that are now regulated. Then we hope the final construction permit, “Nawaz said. For groundbreaking ceremony then will also the London-based spiritual leader of the religious community, Mirza Masroor Ahmad, expected in the fair site, the spokesman said.

OBM Jung condemned fact – Man: “Another low point.”

Perella (SPD) responded on Thursday dismayed at the attack, “offend an entire religious community, to denigrate and insult is petty and despicable.The vast majority of Muslims, like most members of other religions also, peaceful believers who find in their denomination support and guidance, “said the Social Democrat.

For the member of parliament Holger man the perpetrators expose more clearly than democracy enemies. “A dead pig with red lettering, Mutti Merkel ‘store, is not only tasteless, but discloses basic lack of democratic education as conviction. Symbolically compare a man with pigs and threaten the Chancellor with death is another low point and evidence of the brutality of the political climate “, the SPD politician said.

The attack on Thursday was not the first attack on the planned Ahmadiyya Mosque in Leipzig. In November 2013 Unknown speared bloody pigs’ heads on poles, placed them along a beaten track that leads through the site and set fire to a garbage can. This attack sparked already nationwide revulsion.

In addition, there were months incitement and protests in the district against the planned mosque, led by the far-right NPD. In April 2014, the former NPD politician Alexander Kurth also tried to hand over a petition against the mosque properties on the city council. Mayor Jung refused to accept.Proponents of the sacred building had previously collected more than 6,000 signatures.


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Can Maduro Mayhem Last To 2017?

Submitted by Eugen von Bohm-Bawerk via Bawerk.net,

Things are turning increasingly ugly in Venezuela between President Maduro and the opposition MUD. The core political problem after December 2015 elections is the PSUV are now using the courts to neuter any opposition voices that formally hold a legislative majority to start holding the government to account.

Right on cue, Mr. Maduro just railed a decree through the Supreme Court (TSJ) giving him total control over budgetary measures, utilize any property, suspect constitutional rights and if needs be mobilize the military for a period of 60 days (effective from 15th January) with another 60 day extension not only ‘Constitutionally possible’, but increasingly likely. The ‘good news’ from that, is President Maduro is at least starting to take some tepid measures that might help to get Venezuela onto a more realistic track, including 37% devaluation with a view to bringing Venezuela’s three tiered exchange rate into a dual system.

Looks good on ‘paper’, but don’t be fooled. It merely leaves official rates of 10 bolivares to the US dollar, 200 bolivares (likely floated as the second tranche), compared to black market rates that’s more like 1000 to the greenback. Unsurprisingly, domestic price reforms got similarly ‘piecemeal treatment’, where memories of the 1989 Caracozo riots still ring loud in the PSUV’s ears. Going from 0.07 bolivar a litre to 1 bolivar sounds huge at 1,329% price hikes for 91 octane, but it still makes Venezuelan gasoline the cheapest in the world. PDVSA will only save around $800m from the move, and that’s assuming the government continues to adjust prices give Mr. Maduro’s measures will send inflation into the 1000% stratosphere. The IMF was already being very polite with 720% estimates on basic goods, including fabled toilet paper and condoms in increasingly short Venezuelan supply these days. 

Ven Bs per USD

 

But so much for the ‘economic story’, what about the political backdrop?

Unsurprisingly, Mr. Maduro’s Supreme Court stunt has left the opposition with little choice but to push for regime change at this stage. To be clear, the Venezuelan constitution is explicitly worded that any emergency Presidential enabling powers should have the approval of the Supreme Court and the National Assembly. The fact they’ve run roughshod straight over them and made up their own rules, basically renders the Assembly dead in the water at this stage. Regime change is the only card the MUD now have left to play.

The question is how to pull it off? The preferred option would almost certainly be to hold a constituent assembly to re-write the constitution, including shortening and limiting presidential terms. The snag is that the MUD needs a two-thirds assembly majority to do so. And it’s the same ‘super-majority’ the PSUV and TSJ evidently blocked from the December 2015 poll, which makes a so called ‘recall referendum’ the obvious plan B against Mr. Maduro in April 2016 once the President is officially half way through his term. The MUD will need to garner 25% of registered voters to trigger the process, in what’s then a five month ordeal from start to finish, with multiple National Election Board (CNE) hurdles along the way. It’s almost certain the CNE and Courts will drag their heels as long as they can, mimicking previous 2003-04 tactics to forestall Chavez’s removal.

The key reason for that is by early 2017, the PSUV can legitimately remove Maduro themselves where they could essentially put its own puppet back into office. And far more importantly, protect their own (and military) patronage networks in what’s left of an economically gutted Venezuela. The ailing bus driver soaks up all the bad PSUV news along the way, while the Party gets to work jailing more MUD figures, dividing and ruling all the way.

Whether things can realistically be strung out that far frankly remains contingent on the ‘Venezuelan street’, somewhat ironically mirrored by what’s happening within military elites, where the Generals are getting increasingly nervous they might have to oversee a ‘transitional’ period of military rule to safeguard their own interests. Try as his might, President Maduro can politically run, but he can’t economically hide from the fact that Venezuelan will see another 5% contraction this year, with around $20bn of debt payments due by the end of 2016 with little foreign reserves left to do it.

Ven FX res0

A third of that is owed by the Central Bank, a third owed by PDVSA, and another tranche directly payable to China under oil for loans. To its ‘credit’ Venezuela has tried to honour its international obligations, even to the point of squeezing imports to avoid the political embarrassment of tanker seizures to date. But under current benchmark prices, Venezuela will have to spend around 90% of oil export revenues purely servicing debts to get through the year. Our take is that’s going to be politically impossible to do given some of those scarce dollars will be needed to provide the most basic of basic goods. That means structural default is inevitable sooner or later, at least without any fundamental regime change to try and chart a new course.

Ven Ex Debt

 

On that ironic note, anyone expecting things to get better under a drastically fractured MUD consisting of 27 internal groups will prove very disappointed. Cut to the chase, and that ultimately leaves the ball in China’s court given its massive ($50bn) sunk costs in Venezuela where it’s thrown caution to the Caracas wind over the past decade. Sure, CNPC can directly tie new capital to its operations all it likes, but at some point, Beijing needs to decide between propping up the PSUV with more cash, or just let the house of cards fall and take their chances with a hostile MUD.

Then again, ‘plan C’ might prove the most attractive for Beijing: Ditch the democratic niceties and do what China does best, cut a deal with the military to maintain status quo interests. Either way, Beijing will have a key role on what does or doesn’t happen with Maduro’s Mayhem in 2016-17. Force us to make a call, Mr. Maduro ultimately won’t be part of the Sino script over the longer term….


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HSBC Looks At “Life Below Zero,” Says “Helicopter Money” May Be The Only Savior

In many ways, 2016 has been the year that the world woke up to how far down Krugman’s rabbit hole (trademark) DM central bankers have plunged in a largely futile effort to resuscitate global growth.

For whatever reason, Haruhiko Kuroda’s move into NIRP seemed to spark a heretofore unseen level of public debate about the drawbacks of negative rates. Indeed, NIRP became so prevalent in the public consciousness that celebrities began to discuss central bank policy on Twitter.

When we say “for whatever reason” we don’t mean that the public shouldn’t be concerned about NIRP. In fact, we mean the exact opposite. The ECB, the Nationalbank, the SNB, and the Riksbank have all been mired in ineffectual NIRP for quite sometime and the public seemed almost completely oblivious. Indeed, even the financial media treated this lunacy as though it were some kind of cute Keynesian experiment that could be safely confined to Europe which would serve as a testing ground for whether policies that fly in the face of the financial market equivalent of Newtonian physics could be implemented without the world suddenly imploding.

We imagine the fact that equity markets got off to such a volatile start to the year, combined with the fact that crude continued to plunge and at one point looked as though it might sink into the teens, led quite a few people to look towards the monetary Mount Olympus (where “gods” like Draghi, Yellen, and Kuroda intervene in human affairs when necessary to secure “desirable” economic outcomes) only to discover that not only has all the counter-cyclical maneuverability been exhausted, we’ve actually moved beyond the point where the ammo is gone into a realm where the negative rate mortgage is a reality. That shock was compounded by Kuroda’s adoption of NIRP and another cut from the Riksbank, and before you knew it, everyone was shouting what we’ve been shouting for more than seven years: the emperors have no clothes!

But central banks aren’t willing to surrender just yet. Admitting that this entire experiment has been a mistake would be a disaster at this juncture. And while some brave sellside desks are indeed going full-tinfoil-hat-fringe-blog by daring to suggest that this whole damn thing simply isn’t working when it comes to reviving aggregate demand and boosting inflation, there are still those who want you to know that the “gods” are not out of lightening bolts just yet. Take HSBC for instance, where the fixed income team is out with an excellent – if rather disturbing for its references to helicopter money and even negative-er-er rates – summary of “life below zero.”

First off, HSBC doesn’t buy the idea that rates can’t go lower – even given the constraint imposed by physical bank notes (that damn barbarous paper relic).

“The Swiss National Bank currently operates the most negative rate at -75bp (see table 2). If the costs incurred by Swiss banks – expressed as a proportion of total assets at the negative rate – were applied to the eurozone banking system, the ECB’s depo rate would be much more negative. A simple calculation would put the ECB’s repo rate at -180bp, assuming the current level of excess reserves would all be charged at the negative rat,” the bank writes.

HSBC then moves to address the constraints that keep central banks from taking rates even lower. Those contraints (in order) are:

  • Constraint 1: The ability to switch into cash, which yields zero
  • Constraint 2: Downward pressure on the earnings of banks
  • Constraint 3: Does it work? 

We’ve discussed all of this at length. The cash constraint is simply a function of the fact that physical cash makes it impossible for central banks to move too far into NIRP. At a certain point, they’ll be a bank run. Indeed, Japanese are already loading up on safes and 10,000 yen notes. 

The second constraint has already manifested itself in the steady grind lower in banks’ NIMs. Indeed, that’s one of the reasons investors are so concerned about European banks. With investment banking revenue constrained and NIM (i.e. traditional banking) hampered by NIRP, there’s no way for banks to cushion the blow from mountainous bad loans. 

HSBC goes on to ask “how much more accommodation is needed?” Amusingly, they don’t really answer their own question but they do note that Ray Dalio’s “beautiful deleveraging” is a myth. Plain and simple:

“Eight years after the financial crisis started, many global central banks are still looking to increase monetary accommodation. This follows 500bp of rate cuts by the Fed and BoE, 400bp by the ECB and rates held near zero at the BoJ. Add to this USD trillions of QE asset purchases and tightening moves that were subsequently reversed by a number of central banks. The challenge to the traditional central bank framework has come from the impact of structural factors, such as the debt overhang, which rather than disappearing over the last eight years, has actually got worse. If the role of ultra-loose monetary policy, combined with unconventional measures such as QE, was to facilitate an orderly deleverage, it has not worked.”

 

 

And while it’s impossible to quantify how much MOAR we need, what we do know is that inflation expectations are no longer responding (and that language assumes they “responded” at some point post-2008 which is itself a dubious proposition): 

And because you can count on policy makers to view this not as evidence that what they’re doing not only isn’t working but may in fact be contributing to deflation, but rather as proof of why they need to continue the experiment in an increasingly ludicrous example of Einsteinian insanity, you can bet that more accommodation is coming. The next to ease further will be the ECB and the Norges Bank (which, unlike other CBs, actually has a number of good reasons to cut) in March.

Of course none of this will work. The problem isn’t monetary conditions. There’s not a shortage of liquidity – well, actually there is, ironically courtesy of central bank asset purchases, but the point is, it’s not as though the financial sector doesn’t have access to cash. The problem is that somewhere along the way, weak global growth and trade became systemic rather than cyclical and because the “gods” can’t print trade, they’re going to need to figure something else out to boost aggregate demand. 

As for what that “something” is, we’ll simply close with one last quote from HSBC: “If central banks do not achieve their medium-term inflation targets through NIRP, they may have to adopt other policy measures: looser fiscal policy and even helicopter money are possible in scenarios beyond QE and negative rates.”


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“Peak Stupidity” – Where We Go From Here

Submitted by Thad Beversdorf via FirstRebuttal.com,

So I’m currently teaching applied financial modeling at Marquette University in the beautiful blue collar town of Milwaukee, WI; home of the Harley, the (Miller) High-Life and SummerFest.  It’s a great town and a great school.  A few years ago the business college brought in a pretty savvy guy called David Krause who then started a program called AIM, where the top finance students actually manage more than $2M.  Because of the program’s success US News & World Report ranked Marquette’s finance program 21st in the nation this year.  Not bad for a small Jesuit school in the midwest.

Now I mention this because after 15 years in banking, teaching financial modeling has forced me to reacquaint myself with some of the basic tenets of markets and valuation.  Such things tend to get lost in the midst of “getting the deal done” and chasing paper profits.  This reacquaintance process has been quite illuminating for me and I thought perhaps for others too.

A reminder of what the market actually represents is a good place to start.  The stock market is simply an asset with some intrinsic value based on an expectation of future free cash flows to equity holders.  Those cash flows are generated from revenues less costs of the underlying companies that make up the market.  Let’s use the Wilshire 5000 Full Price Cap Index as the proxy market for this discussion as it is the broadest measure of total market cap for US corporations.  It’s level actually represents market capital in billions.

Screen Shot 2016-02-25 at 8.29.51 PM

So the market has put a valuation on those expected future cash flows to equity holders (as of today) at around $19.7T (a 55% increase from Jan of 2012) down from around $22.5T (a 77% increase from Jan of 2012) at the market peak last summer.  So let’s take a look at the growth in cash flows of US corporations over that same period. 

We should expect to find a growth pattern in free cash flows similar to the above growth pattern in the overall market valuation (the Wilshire is a statistically large enough sample to be representative of total US corporations).  Let’s have a look…

Screen Shot 2016-02-26 at 11.53.09 AM

The above chart depicts corporate free cash flows (blue line) indexed to 100 in Jan 2012.  It is obtained by taking the BEA’s Net Cash Flow with IVA and CCAdj adding back depreciation and net dividends and subtracting net capex.  (The actual definitions of these can be found here.)

What we find is that while the current valuation of expected future free cash flows to equity holders (i.e. market cap of Wilshire) has increased by some 55% since the end of 2011, the actual free cash flows of US corporations have only increased by 4%.

This becomes a very difficult fact to reconcile inside the classroom.  Why would market participants be baking in so much growth when the actual data simply doesn’t support it?

Well there are plenty of potential explanations.  For instance, rarely are investors rational.  While buy low and sell high is rational investing behaviour, often market euphoria comes at the market top right before a major sell off, leading to a buy high and sell low strategy.  Another reason is that the Fed has been providing a free put to all investors for the past 7 years essentially significantly reducing naturally occurring risk factors.  But whatever the reason this dislocation between expected and realized growth begs the question, how long can it last?  So let’s explore this issue.

Below is a longer term growth chart of the Wilshire vs US corporate free cash flows to equity holders both indexed to 1995 (i.e. 1995 = 100).

Screen Shot 2016-02-25 at 7.31.21 PM

And so over the past 20 years we’ve seen this same type of dislocation three times.  That is, we see expectations of growth far exceeding actual growth of free cash flows to equity holders.  In the previous two dislocations we reached a peak dislocation (peak stupidity) followed by a reversion to reality (epiphany) where expected growth moves back in line with actual growth. Let’s have a closer look at specific indicators as to when the epiphany takes place.

Screen Shot 2016-02-25 at 8.12.12 PM

What we find is that the epiphany trigger occurs when YoY growth of free cash flows to equity holders drops down to or below zero.  The last two bubbles began their burst when medium term moving average of free cash flows dropped to zero.  We see the very same pattern occurring presently.  Today we appear to have just passed the peak stupidity inflection point as seen in the two charts above.

But let’s be sure not to ignore the technical patterns, so let’s do some charting.  If we look to volatility and price level patterns between our current market and the last bubble cycle (credit crisis) we find incredible similarities.

Screen Shot 2016-02-26 at 1.56.24 PM

The above chart depicts weekly high vs low intra-week price spreads and price level.  What we find is that at this point in the last bubble cycle we had a period of reduced volatility (small green box in 08) that followed a period of increased volatility as the market slowly rolled over.  Today’s bubble is just entering that period of reduced volatility following the period of increased volatility as the market rolled over.

And so what should we expect from here?

Well the fundamental charts above suggest we have significantly overvalued growth expectations and historically those over-inflated expectations can drop very sharply back in line with actual growth.  So from a fundamentals perspective we should expect a significant drop in overall valuations (i.e. market cap).

And from a technical perspective, if we are in fact following the previous bubble cycle pattern (which we seem to be), we should expect a nice bounce in price level from the recent lows (to perhaps somewhere between 2000 – 2030) accompanied by relative calm before an explosion of volatility and a market price plunge that sends us into the next crisis sometime around May (give or take).  Happy trading!


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