Tag: finance

Submitted by Mike Krieger of Liberty Blitzkrieg blog,

Recently, the FBI made a significant change to its self-proclaimed primary focus in its fact sheet from “law enforcement” to “national security.” This change merely confirms what I and countless others have claimed to be true for quite some time. That the entire regulatory, security and intelligence apparatus of these United States has been redirected away from protecting the Constitution and the rule of law, toward a narrow focus on protecting the economic and social positions of the oligarch class at all costs under the guise of a “war on terror.” We have seen many signs of cronyism at the FBI for decades now, something most accurately pointed out in the priceless image “All My Heroes Have FBI Files.”

While this change to the FBI fact sheet is just confirmation of something we already knew, it’s still mind-boggling to see it shoved right in our faces:

TechDirt covered this story well. Here are some excerpts:

A couple years ago, it was revealed that the FBI noted in one of its “counterterrorism training manuals” that FBI agents could “bend or suspend the law and impinge upon the freedoms of others,” which seemed kind of odd for a government agency who claimed its “primary function” was “law enforcement.” You’d think that playing by the rules would be kind of important. However, as John Hudson at Foreign Policy has noted, at some point last summer, the FBI quietly changed its fact sheet, so that it no longer says that “law enforcement” is its primary function, replacing it with “national security.”

 

Of course, I thought we already had a “national security” agency — known as the “National Security Agency.” Of course, while this may seem like a minor change, as the article notes, it is the reality behind the scenes. The FBI massively beefed up resources focused on “counterterrorism” and… then let all sorts of other crimes slide. Including crimes much more likely to impact Americans, like financial/white collar fraud.

 

So… what has the FBI been doing? Well, every time we hear anything about the FBI and counterterrorism, it seems to be a case where the FBI has been spending a ton of resources to concoct completely made up terrorism plots, duping some hapless, totally unconnected person into taking part in this “plot” then arresting him with big bogus headlines about how they “stopped” a terrorist plot that wouldn’t have even existed if the FBI hadn’t set it up in the first place. And this is not something that the FBI has just done a couple times. It’s happened  over  and  over  and over  and  over  and  over  and  over  and  over  and  over  and  over  and  over  and  over  and  over again. And those are just the stories that we wrote about that I can find in a quick search. I’m pretty sure there are a bunch more stories that we wrote about, let alone that have happened.

 

All of these efforts to stop their own damn “plots” screams of an agency that feels it needs to “do something” when there’s really nothing to be done. Thousands of agents were reassigned from stopping real criminals to “counterterrorism” and when they found there were basically no terrorists around, they just started making their own in order to feel like they were doing something… and to have headlines to appease people upstairs. The government seems to have gone collectively insane when it comes to anything related to “terrorism.”

Once again ladies and and gentlemen: USA! USA!

Full article here.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/GjFbf6k2QKo/story01.htm Tyler Durden

While Abe begs (and cajoles) business leaders to raise wages (whether it makes economic sense or not), his plunging approval rating could have something to do with the ongoing squeeze the average gadget-freak Joe-san consumer is experiencing. Bloomberg reports, for the first time in 21 years, mobile phone prices are rising. The typical deflationary path of technological improvement is being overwhelmed by JPY weakness. “Inflation is spilling across a range of products,” warns a Dai-Ichi economist, adding that the weakening yen is driving up prices as “Japan is importing more final goods as production shifts overseas.”

 

 

Chart: Bloomberg

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Some simple bond math: rising rates means lower prices. Holders of rate products, once they anticipate that future prices will fall, sell today to minimize losses. So the question: when the selling of the world’s debt begins (and accelerates), especially with everyone urged by central bankers to shun bonds and go for “undervalued” stocks, who buys? We ask because, as the chart below shows, there is quite a bit to sell…

Source: JPM

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Submitted by Shannon Tiezzi via The Diplomat,

 

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A record 21 million applications were run through the National Instant Criminal Background Check System (NICS) last year – an 8% increase over 2012 and, as The Washington Times reports, the 11th straight year that the number has risen. Background checks serve as a proxy for the number of gun sales, which soared in the months immediately after Sandy Hook (but notably fell in the last 2 months of 2013 as the Newtown and ‘fear of Obama’ effect wore off). “2013 was the best year for firearm sales (commercial, domestic) in history — period!” notes the president of the independent firearm owners association, adding that “Ammunition will still be very strong in 2014 as it hasn’t caught up nationally with the demand.” This could become a problem since, in what many believe was an attempt to ‘crowd out’ private buyers, the Homeland Security Department bought 1.6 billion rounds alone.

 

 

 

 

Via The Washington Times,

Gun records checks, fueled by a post-Newtown boom of gun sales, hit a new high in 2013, and industry analysts expect ammunition to be the big seller this year as consumers catch up to all of those firearms purchases.

 

More than 21 million applications were run through the National Instant Criminal Background Check System last year, marking nearly an 8 percent increase and the 11th straight year that the number has risen.

 

…

 

“2013 was the best year for firearm sales (commercial, domestic) in history — period! That’s true for NH to Hawaii,” said Richard Feldman, president of the Independent Firearm Owners Association in Rindge, N.H. “Ruger alone sold well over one million guns this year.”

 

Mr. Feldman said to expect the next surge to be in bullets.

 

“Ammunition will still be very strong in 2014 as it hasn’t caught up nationally with the demand,” he said.

 

…

 

“I think there are a few downward pressures acting on the NICS checks,” he said. “Not just the Newtown effect wearing off, but the ‘fear of Obama’ effect wearing off.”

 

If ammunition does become the focus for gun owners, that could become another hot-button topic.

 

Last year, the Homeland Security Department had to explain to Congress its contracts to buy up to 1.6 billion rounds of ammunition.

 

Some gun owners believed the department was trying to crowd out private consumers in the ammunition market, but federal officials said their purchases amounted to a tiny fraction of the ammunition produced every year.

 

…

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From Guy Haselmann of Scotiabank. As a reminder, exhibiting decidedly non-Keynesian cult attributes as a member of the sellside is generally frowned upon.

“Bubbles Always Pop”

The world has been kept on life support mostly by government spending of trillions of dollars  and central bank printing of trillions more. Both have boosted asset prices and given the allure of economic progress. Over-zealous regulators, market rule changes, and aggressive policy stimulus have temporarily stabilized markets. Market vigilantes have been hibernating, because unclear investment rules and uncertainties around the ultimate magnitude of stimulus have prevented them from attacking bad policies or distorting asset price valuations.

It is difficult to know the extent that markets and the global economy have benefited from official policy stimulus; however, five years after the crash, economic growth and the labor recovery remain subpar. Strong growth should have been ignited by now.

Most economists still believe in the ‘official position’ that growth is edging sustainably higher and that interest rates will slowly rise to reflect it. They could be correct, but should it fail to unfold as expected, confidence in the efficacy of official policy will diminish and the social contract will break down further. Since markets require confidence, they will also react accordingly.

Some argue that economic benefits to stimulus have run its course, while the costs from looming unintended consequences have not yet been unleashed. Many believe (and I am one) that the risks and costs of current Fed policy outweigh the benefits.

It is difficult to know the extent that markets and the global economy have benefited from official policy stimulus; however, five years after the crash, economic growth and the labor recovery remain subpar. Strong growth should have been ignited by now.

Most economists still believe in the ‘official position’ that growth is edging sustainably higher and that interest rates will slowly rise to reflect it. They could be correct, but should it fail to unfold as expected, confidence in the efficacy of official policy will diminish and the social contract will break down further. Since markets require confidence, they will also react accordingly.

Some argue that economic benefits to stimulus have run its course, while the costs from looming unintended consequences have not yet been unleashed. Many believe (and I am one) that the risks and costs of current Fed policy outweigh the benefits.

* * *

The Fed’s asset purchase program (QE) and Zero Interest Rate Policy (ZIRP) are the foremost factors that have widened wealth inequalities. The richest few have benefited the most, simply because the 10% richest Americans own 80% of US stocks. The FOMC believe that its asset-price-inflation-trickle-down-policy leads to spending which ultimately leads to job creation, especially for the poor.

However, several FOMC members themselves have questioned Fed policies, citing that they have not worked as well as had been hoped, and pointing out that aggregate demand has been weak throughout the recovery. To his credit Fed Governor Jeremy Stein broached the subject of unintended consequences of Fed policies when he mentioned in his February paper, “A prolonged period of low interest rates, of the sort we are experiencing today, can create incentives for agents to take on greater duration or credit risk, or to employ additional financial leverage in an effort to ‘reach for yield’”.

Zero interest rates have incentivized corporations to issue debt in order to capitalize on the historically low interest rates; however, corporations have primarily used the money to pay greater dividends, buyback shares, or modernize plant and equipment. There is a strong case to be made that holding interest rates at zero for a prolonged period is actually counter-productive to the Fed’s efforts to achieve either of its dual mandates. This is because increasing productivity through modernization typically exposes redundancies: it allows firms to lay-off workers, while the improvement in competitiveness allows firms to drop prices.

Furthermore, and as I referenced in my 2013 paper, “Should the marginal propensity to consume of creditors exceed that of debtors, the net effect of redistribution could be to lower household spending rather than raise it. There are some conservative savers who have a predetermined goal in mind for the minimum amount of savings they wish to accumulate over time. Those investors may refuse to move out the risk curve in search of higher yields (likely widening the wealth divide). To them, lower interest rates simply mean a slower rate of accumulation, which likely will jeopardize their minimum goal. The only recourse for this investor is to save more, which is the exact opposite intention of the Fed’s policy. For example, if interest rates fall from 4% to
3%, an investor would have to increase savings by more than 20% each year to reach the same goal over 30 years.”

Another negative result of ZIRP is that banks and other lenders are discouraged from lending due to puny return levels; and, therefore, the Fed’s desire to expand lending is compromised. Are lower (or negative) interest rates supposed to increase the incentive to lend money? To assume such is absurd. Although somewhat counter-intuitive, if interest rates rose, then the supply of money willing to be lent would increase due to wider interest margins.

Policies are so unprecedented and unproven that it is possible that the Fed itself has now become a source of financial instability. This could be the case either through the potential fueling of asset bubbles, through its compromised ability to conduct future monetary policy (due to it  unwieldy $4 trillion balance sheet), or due to “unknown unknowns.”

* * *

In a low to zero interest rate policy (ZIRP) environment, investors desperately search for yield. This frequently chases investors into assets to which they are ill-suited and to which they will miscalculate liquidity and downside potential. Under ZIRP paradigms, riskier assets become the best-performing. Credit spreads collapse and equities soar.

Massive monetary ‘printing’ by global central banks has not just emboldened investors, but these actions have collectively changed their behavior and psychology. There is evidence that policies have led to mis-allocation of resources. Investors are emboldened to take what many critics believe is inappropriate or reckless levels of risk. The motto, “Don’t fight the Fed” has taken on added meaning. Moral hazard and a deep-seated bullish psychology have become rampant.

Extended Fed promises of lower rates and a continuation of asset purchases even as the economy heals, are conspiring to propel prices ever-upward. Investing today has become mostly about seeking relative yield, rather than assessing value or determining if the investment’s return is sufficient compensation for the risk.

Simply stated, investors and speculators receive ever-lower returns for ever-higher levels of risks. Over time, the ability of an investor to assess an asset’s fundamental value becomes ever-increasingly impaired. It should a warning sign to portfolio manager’s fiduciary responsibility to maximize return per unit of risk (see market liquidity section).

There have been persistent cycles of asset booms (bubbles) that eventually turned to ‘busts’. Very low or negative real rates (seen recently) always create economic distortions and the mispricing of risk, thereby creating asset bubbles. Each ‘boom’ had some differences, but the common factor has always been easy money which the Fed was too slow to withdraw. Providing liquidity is always easier than taking it away, which is one reason why the Fed has hit the “Zero Lower Bound” in the first place.

Eventually (un-manipulated) asset prices always return to their fundamental value, which is why bubbles always pop. The FOMC has backed itself into a corner. Current changes in policy are being designed around efforts to manage the unwind process seamlessly. Central bank (and government official’s) micro-management appears based on a belief that they can exert an all-encompassing central control over markets and peoples’ lives. Those in power have come to believe that policies have a precise effect that can be defined and managed. This is highly unlikely.

In ‘normal’ times there is a more discernable connection between cause and effect. However, the usual relationships particularly break down during periods of over-indebtedness, unprecedented regulatory changes, and official rates reaching the zero lower bound. Today, the world is far from ‘normal’. It is not difficult to imagine the looming fallout from policies that have promoted asset price inflation, and which have materially compromised market liquidity.

In the long run, policies that punish savers at the expense of helping risk-takers and speculators are bad long-run policies for any country. It would be better to transform the country into net savers, rather than to continue to promote policies where growth is reliant on overly-leveraged consumers or speculators, and is micro-managed by attempts of central-control.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/_RHfT0KVsdo/story01.htm Tyler Durden

From Guy Haselmann of Scotiabank. As a reminder, exhibiting decidedly non-Keynesian cult attributes as a member of the sellside is generally frowned upon.

“Bubbles Always Pop”

The world has been kept on life support mostly by government spending of trillions of dollars  and central bank printing of trillions more. Both have boosted asset prices and given the allure of economic progress. Over-zealous regulators, market rule changes, and aggressive policy stimulus have temporarily stabilized markets. Market vigilantes have been hibernating, because unclear investment rules and uncertainties around the ultimate magnitude of stimulus have prevented them from attacking bad policies or distorting asset price valuations.

It is difficult to know the extent that markets and the global economy have benefited from official policy stimulus; however, five years after the crash, economic growth and the labor recovery remain subpar. Strong growth should have been ignited by now.

Most economists still believe in the ‘official position’ that growth is edging sustainably higher and that interest rates will slowly rise to reflect it. They could be correct, but should it fail to unfold as expected, confidence in the efficacy of official policy will diminish and the social contract will break down further. Since markets require confidence, they will also react accordingly.

Some argue that economic benefits to stimulus have run its course, while the costs from looming unintended consequences have not yet been unleashed. Many believe (and I am one) that the risks and costs of current Fed policy outweigh the benefits.

It is difficult to know the extent that markets and the global economy have benefited from official policy stimulus; however, five years after the crash, economic growth and the labor recovery remain subpar. Strong growth should have been ignited by now.

Most economists still believe in the ‘official position’ that growth is edging sustainably higher and that interest rates will slowly rise to reflect it. They could be correct, but should it fail to unfold as expected, confidence in the efficacy of official policy will diminish and the social contract will break down further. Since markets require confidence, they will also react accordingly.

Some argue that economic benefits to stimulus have run its course, while the costs from looming unintended consequences have not yet been unleashed. Many believe (and I am one) that the risks and costs of current Fed policy outweigh the benefits.

* * *

The Fed’s asset purchase program (QE) and Zero Interest Rate Policy (ZIRP) are the foremost factors that have widened wealth inequalities. The richest few have benefited the most, simply because the 10% richest Americans own 80% of US stocks. The FOMC believe that its asset-price-inflation-trickle-down-policy leads to spending which ultimately leads to job creation, especially for the poor.

However, several FOMC members themselves have questioned Fed policies, citing that they have not worked as well as had been hoped, and pointing out that aggregate demand has been weak throughout the recovery. To his credit Fed Governor Jeremy Stein broached the subject of unintended consequences of Fed policies when he mentioned in his February paper, “A prolonged period of low interest rates, of the sort we are experiencing today, can create incentives for agents to take on greater duration or credit risk, or to employ additional financial leverage in an effort to ‘reach for yield’”.

Zero interest rates have incentivized corporations to issue debt in order to capitalize on the historically low interest rates; however, corporations have primarily used the money to pay greater dividends, buyback shares, or modernize plant and equipment. There is a strong case to be made that holding interest rates at zero for a prolonged period is actually counter-productive to the Fed’s efforts to achieve either of its dual mandates. This is because increasing productivity through modernization typically exposes redundancies: it allows firms to lay-off workers, while the improvement in competitiveness allows firms to drop prices.

Furthermore, and as I referenced in my 2013 paper, “Should the marginal propensity to consume of creditors exceed that of debtors, the net effect of redistribution could be to lower household spending rather than raise it. There are some conservative savers who have a predetermined goal in mind for the minimum amount of savings they wish to accumulate over time. Those investors may refuse to move out the risk curve in search of higher yields (likely widening the wealth divide). To them, lower interest rates simply mean a slower rate of accumulation, which likely will jeopardize their minimum goal. The only recourse for this investor is to save more, which is the exact opposite intention of the Fed’s policy. For example, if interest rates fall from 4% to
3%, an investor would have to increase savings by more than 20% each year to reach the same goal over 30 years.”

Another negative result of ZIRP is that banks and other lenders are discouraged from lending due to puny return levels; and, therefore, the Fed’s desire to expand lending is compromised. Are lower (or negative) interest rates supposed to increase the incentive to lend money? To assume such is absurd. Although somewhat counter-intuitive, if interest rates rose, then the supply of money willing to be lent would increase due to wider interest margins.

Policies are so unprecedented and unproven that it is possible that the Fed itself has now become a source of financial instability. This could be the case either through the potential fueling of asset bubbles, through its compromised ability to conduct future monetary policy (due to it  unwieldy $4 trillion balance sheet), or due to “unknown unknowns.”

* * *

In a low to zero interest rate policy (ZIRP) environment, investors desperately search for yield. This frequently chases investors into assets to which they are ill-suited and to which they will miscalculate liquidity and downside potential. Under ZIRP paradigms, riskier assets become the best-performing. Credit spreads collapse and equities soar.

Massive monetary ‘printing’ by global central banks has not just emboldened investors, but these actions have collectively changed their behavior and psychology. There is evidence that policies have led to mis-allocation of resources. Investors are emboldened to take what many critics believe is inappropriate or reckless levels of risk. The motto, “Don’t fight the Fed” has taken on added meaning. Moral hazard and a deep-seated bullish psychology have become rampant.

Extended Fed promises of lower rates and a continuation of asset purchases even as the economy heals, are conspiring to propel prices ever-upward. Investing today has become mostly about seeking relative yield, rather than assessing value or determining if the investment’s return is sufficient compensation for the risk.

Simply stated, investors and speculators receive ever-lower returns for ever-higher levels of risks. Over time, the ability of an investor to assess an asset’s fundamental value becomes ever-increasingly impaired. It should a warning sign to portfolio manager’s fiduciary responsibility to maximize return per unit of risk (see market liquidity section).

There have been persistent cycles of asset booms (bubbles) that eventually turned to ‘busts’. Very low or negative real rates (seen recently) always create economic distortions and the mispricing of risk, thereby creating asset bubbles. Each ‘boom’ had some differences, but the common factor has always been easy money which the Fed was too slow to withdraw. Providing liquidity is always easier than taking it away, which is one reason why the Fed has hit the “Zero Lower Bound” in the first place.

Eventually (un-manipulated) asset prices alw
ays return to their fundamental value, which is why bubbles always pop. The FOMC has backed itself into a corner. Current changes in policy are being designed around efforts to manage the unwind process seamlessly. Central bank (and government official’s) micro-management appears based on a belief that they can exert an all-encompassing central control over markets and peoples’ lives. Those in power have come to believe that policies have a precise effect that can be defined and managed. This is highly unlikely.

In ‘normal’ times there is a more discernable connection between cause and effect. However, the usual relationships particularly break down during periods of over-indebtedness, unprecedented regulatory changes, and official rates reaching the zero lower bound. Today, the world is far from ‘normal’. It is not difficult to imagine the looming fallout from policies that have promoted asset price inflation, and which have materially compromised market liquidity.

In the long run, policies that punish savers at the expense of helping risk-takers and speculators are bad long-run policies for any country. It would be better to transform the country into net savers, rather than to continue to promote policies where growth is reliant on overly-leveraged consumers or speculators, and is micro-managed by attempts of central-control.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/_RHfT0KVsdo/story01.htm Tyler Durden

With manufacturing and non-manufacturing PMIs disappointing, and the nation’s banking system still stuck in the thralls of a liquidity crisis (each time the PBOC removes the punchbowl), Michael Pettis’ warnings are becoming increasingly likely (even though consensus remains that China will save the world somehow – as it transitions ‘smoothly’ to a consumer-based economy).

 

Excerpted from Michael Pettis’ China Financial Markets blog (author of “Avoiding The Fall”),

What has been surprising to me is that many analysts – some of whom, but not all, recognize how difficult implementation is likely to be – expect that the reforms will unleash such a burst of productivity that growth rates in China will be maintained or even raised from the current GDP growth target of 7.5%.

…

This, I think, is extremely implausible. Much of what I have written in recent months concerns the difficulty Beijing will face in switching from one growth model, in which rapid growth disproportionately benefits the elite at the expense of ordinary households, to its alternative, in which much slower growth will disproportionately benefit ordinary households at the expense of the elite.

…

 I am convinced that analysts who predict that we are about to embark on a decade of 7-8 % growth both misunderstand the nature of China’s transformation and ignore the history of previous similar growth miracles.

It is almost impossible – in my opinion – that GDP growth rates over the rest of this decade remain at or close to current levels.

…

To explain why, I want to list three of the thoughts I came away with from the general reaction to the Plenum.

First, while many analysts hailed the reforms proposed during the Plenum as extraordinarily “bold” and “innovative”, in fact Chinese economists have been debating these very reforms for a long time – even before March 2007, when then-Premier Wen Jiabao famously described China’s economy as “unsteady, unbalanced, uncoordinated and unsustainable.”

…

To resolve this problem China must implement reforms that increase investment efficiency. This includes diverting resources from the state sector to small and medium businesses. Beijing must also increase the consumption share of demand, which requires above all an increase in the household share of GDP.

Boiled down to their essentials, the economic reforms proposed during the Third Plenum would do just that – by reforming the currency and interest rate regimes, changing the allocation of credit in the financial system, spurring innovation, reforming land ownership and residency requirements, imposing stronger rule of law, and perhaps even partially distributing state assets to households. There is nothing surprising or unexpected about any of these proposals.

…

The second thought I came away with from the consensus reaction to the Plenum is, as I have said many times before, that historical precedents suggest that the greatest challenge facing Beijing is not in identifying the right set of reforms but rather in implementing them. The reforms are relatively easy to prescribe, but political opposition to the reforms is likely to be very strong.

[Policies]  resulted in at least two decades of solid and healthy growth, the state sector and the economic elite benefitted disproportionately from the combination of rapid growth and implicit transfers from the household sector. In fact the GDP share retained by ordinary Chinese households shrank dramatically over the past three decades, while the share retained by the state grew commensurately, of course, and income inequality widened. This has nearly always been the case in the early stages of the investment-led growth model – the state and the elite benefit disproportionately.

Now that soaring debt is forcing China to abandon the model, the relative distribution of economic benefits must be reversed. Ordinary Chinese households must retain a growing share of future economic growth, while the state and the economic elite must, almost by definition, retain a shrinking share. This is ultimately what it means to rebalance the economy and – as happened in other countries that followed this growth model – this is why the reforms are likely to be politically difficult. After thirty years in which the interests of the elite were positively aligned with the interests of the country, the reforms now imply a negative alignment of their interests.

…

My third thought, and this is the most important point, is about the pace of post-reform growth. Many economists believe that a successful implementation of reforms must guarantee growth of 7% or more during the rest of this decade, but this probably represents the greatest piece of confusion about China’s adjustment.

There are however at least three very strong reasons, I think, to argue that as the reforms are implemented, growth rates must drop sharply.

1.  Growth rates underpinned by tremendous credit expansion, which acts to increase demand, are unlikely to be maintained in a period of relative deleveraging, during which demand is reduced.

It is widely acknowledged that perhaps the most important reason to change the Chinese growth model is its excessive reliance on debt to generate growth. Debt has soared in recent years, to the point where many economists simply look at credit growth in the current quarter in order to determine what GDP growth over the next few quarters are likely to be.

But as China deleverages, growth in demand must drop sharply. After all if economic growth over the past several years has been goosed by rapid credit expansion, deleveraging must have the opposite effect. It is strange that economists who acknowledge that the current growth model is overly dependent on debt have failed to understand that its reversal will have the opposite impact. If it did not, it is hard to explain why anyone would consider debt to be a problem in the first place.

2.  The failure by Chinese banks to recognize misallocated investment must overstate past GDP growth, in the same way that this overstatement must be reversed in the future, either because the bad debt is explicitly recognized, or because it is implicitly written down over the debt repayment period.

If China currently has wasted significant amounts of investment spending, it is clear that much of the accompanying bad debt has not been written down correctly. Bad loans are almost non-existent in the banking system – that is they have not been recognized in the form of reserves or write-downs – and there have been no significant bankruptcies.

There may be good reasons for this. If a loan has been made to fund a project whose economic value is less than the economic cost of the investment, economists should treat it as a bad loan whose negative present value must be written down. However if the lending bank believes that the government implicitly or explicitly backs the loan, the bank does not need to write it down.

But while the bad loan might not represent a loss to the bank, it does represent a loss to the country, and the amount of that loss should be deducted before the country’s GDP is calculated. If Chinese banks have not correctly written down the bad debt, however, past GDP growth must be overstated by an amount equal to all the bad loans that have not been written down – a fairly large number that may amount to as much as 20-30% of GDP.

But the failure to recognize the loss does not mean that the loss does not exist. The losses implicit in the bad loans must (and will) be written down over the future, either explicitly, in which case they will result in a direct deduction to GDP growth, or implicitly, in which case they will require implicit and hidden transfers from one part of the economy or another (usually the household sector) to cover the gap between the “real” cost of capital and the nominal (subsidized) cost of capital. This transfer must reduce future growth.

The point here is that if credit is a problem in China – something no one doubts – it must be a problem because of wasted investment that has yet to be recognized, otherwise it would have resulted in negative GDP growth today. Failure to recognize the investment losses will, of course, artificially boost GDP growth today, but it must also artificially reduce GDP growth tomorrow as the recognition of those losses is simply postponed, not eliminated. The failure of many economists to recognize that wasted investment has a cost – even as they recognize that investment has been wasted – has caused them both to misunderstand the relationship between wealth creation and GDP and to understate the future impact of this overstated GDP.

Debt matters, and the only time it can be safely ignored is when debt levels are so low, and the borrower is so credible, that it creates no financial distress costs and has a negligible impact on demand. Neither condition applies in China, and so any prediction that ignores debt is likely to be hopelessly muddled. In fact I would like to propose a simple rule. Any model that predicts China’s future GDP growth must include, if it is to be valid, a variable that reflects estimates of the amount of hidden losses buried in the banks’ balance sheets. If it does not, it cannot possibly be a valid model to describe China’s economy, and its predictions are useless.

3.  The same mechanisms that forced up China’s growth rates created China’s imbalances, and reversing the latter means also reversing the former.

China’s astonishing growth during the past three decades is partly the result of a system that subsidized growth with hidden transfers from the household sector. These transfers are at the root of the current imbalances, and once reversed, so that China can rebalance its economy towards healthier and more sustainable sources of demand, the very processes that turbocharged growth will no longer do so.

If growth has been healthy and sustainable, in other words, there would be no need for Beijing to change its growth model – in fact it would be foolish to do so. If growth has not been healthy and sustainable, this is almost certainly because it has been artificially propped up, and if the reforms are aimed at unwinding the mechanisms that artificially propped up growth, then subsequent growth rates must be substantially lower.

Low interest rates, low wages, an undervalued currency, nearly unlimited access to credit for state-owned enterprises, a relaxed attitude to environmental degradation, and other related conditions were both the source of China’s ferocious growth as well as of China’s unprecedented economic imbalances. Reversing these conditions will rebalance the economy, but will do so while lowering growth in the obverse way that these conditions had accelerated growth.

One of the most obvious places in which to see this is in excess capacity in a wide range of businesses. It is clear that Beijing recognizes the problem of excess capacity. Here is Xinhua on the subject:

Tackling excess capacity will be one of the top tasks on China’s economic agenda in 2014, as the issue becomes a major challenge to maintaining the pace and quality of economic growth. “The Chinese economy still faces downward pressure next year,” the Central Economic Work Conference pointed out on Friday, citing the capacity issue weighing down some sectors as one of the major challenges facing the world’s second-largest economy.

It should be obvious that building excess manufacturing capacity, like building up inventory, is a way of propping up growth numbers today at the expense of tomorrow’s growth numbers. Closing down excess manufacturing capacity must be negative for growth in the same way that building it was positive.

These three conditions, which are the automatic consequences of the reform process – deleveraging, writing down unrecognized investment losses, and reversing policies that goosed growth rates – must lead to much slower growth.

…

GDP growth rates of 7% or more, on the other hand, will suggest that credit is still rising too quickly and that China has otherwise been unable to implement the reforms, in which case China is likely to reach debt capacity constraints more quickly. Growth of 7% for the next few years, in other words, is almost prima facie evidence that China is not adjusting.

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

With manufacturing and non-manufacturing PMIs disappointing, and the nation’s banking system still stuck in the thralls of a liquidity crisis (each time the PBOC removes the punchbowl), Michael Pettis’ warnings are becoming increasingly likely (even though consensus remains that China will save the world somehow – as it transitions ‘smoothly’ to a consumer-based economy).

 

Excerpted from Michael Pettis’ China Financial Markets blog (author of “Avoiding The Fall”),

What has been surprising to me is that many analysts – some of whom, but not all, recognize how difficult implementation is likely to be – expect that the reforms will unleash such a burst of productivity that growth rates in China will be maintained or even raised from the current GDP growth target of 7.5%.

…

This, I think, is extremely implausible. Much of what I have written in recent months concerns the difficulty Beijing will face in switching from one growth model, in which rapid growth disproportionately benefits the elite at the expense of ordinary households, to its alternative, in which much slower growth will disproportionately benefit ordinary households at the expense of the elite.

…

 I am convinced that analysts who predict that we are about to embark on a decade of 7-8 % growth both misunderstand the nature of China’s transformation and ignore the history of previous similar growth miracles.

It is almost impossible – in my opinion – that GDP growth rates over the rest of this decade remain at or close to current levels.

…

To explain why, I want to list three of the thoughts I came away with from the general reaction to the Plenum.

First, while many analysts hailed the reforms proposed during the Plenum as extraordinarily “bold” and “innovative”, in fact Chinese economists have been debating these very reforms for a long time – even before March 2007, when then-Premier Wen Jiabao famously described China’s economy as “unsteady, unbalanced, uncoordinated and unsustainable.”

…

To resolve this problem China must implement reforms that increase investment efficiency. This includes diverting resources from the state sector to small and medium businesses. Beijing must also increase the consumption share of demand, which requires above all an increase in the household share of GDP.

Boiled down to their essentials, the economic reforms proposed during the Third Plenum would do just that – by reforming the currency and interest rate regimes, changing the allocation of credit in the financial system, spurring innovation, reforming land ownership and residency requirements, imposing stronger rule of law, and perhaps even partially distributing state assets to households. There is nothing surprising or unexpected about any of these proposals.

…

The second thought I came away with from the consensus reaction to the Plenum is, as I have said many times before, that historical precedents suggest that the greatest challenge facing Beijing is not in identifying the right set of reforms but rather in implementing them. The reforms are relatively easy to prescribe, but political opposition to the reforms is likely to be very strong.

[Policies]  resulted in at least two decades of solid and healthy growth, the state sector and the economic elite benefitted disproportionately from the combination of rapid growth and implicit transfers from the household sector. In fact the GDP share retained by ordinary Chinese households shrank dramatically over the past three decades, while the share retained by the state grew commensurately, of course, and income inequality widened. This has nearly always been the case in the early stages of the investment-led growth model – the state and the elite benefit disproportionately.

Now that soaring debt is forcing China to abandon the model, the relative distribution of economic benefits must be reversed. Ordinary Chinese households must retain a growing share of future economic growth, while the state and the economic elite must, almost by definition, retain a shrinking share. This is ultimately what it means to rebalance the economy and – as happened in other countries that followed this growth model – this is why the reforms are likely to be politically difficult. After thirty years in which the interests of the elite were positively aligned with the interests of the country, the reforms now imply a negative alignment of their interests.

…

My third thought, and this is the most important point, is about the pace of post-reform growth. Many economists believe that a successful implementation of reforms must guarantee growth of 7% or more during the rest of this decade, but this probably represents the greatest piece of confusion about China’s adjustment.

There are however at least three very strong reasons, I think, to argue that as the reforms are implemented, growth rates must drop sharply.

1.  Growth rates underpinned by tremendous credit expansion, which acts to increase demand, are unlikely to be maintained in a period of relative deleveraging, during which demand is reduced.

It is widely acknowledged that perhaps the most important reason to change the Chinese growth model is its excessive reliance on debt to generate growth. Debt has soared in recent years, to the point where many economists simply look at credit growth in the current quarter in order to determine what GDP growth over the next few quarters are likely to be.

But as China deleverages, growth in demand must drop sharply. After all if economic growth over the past several years has been goosed by rapid credit expansion, deleveraging must have the opposite effect. It is strange that economists who acknowledge that the current growth model is overly dependent on debt have failed to understand that its reversal will have the opposite impact. If it did not, it is hard to explain why anyone would consider debt to be a problem in the first place.

2.  The failure by Chinese banks to recognize misallocated investment must overstate past GDP growth, in the same way that this overstatement must be reversed in the future, either because the bad debt is explicitly recognized, or because it is implicitly written down over the debt repayment period.

If China currently has wasted significant amounts of investment spending, it is clear that much of the accompanying bad debt has not been written down correctly. Bad loans are almost non-existent in the banking system – that is they have not been recognized in the form of reserves or write-downs – and there have been no significant bankruptcies.

There may be good reasons for this. If a loan has been made to fund a project whose economic value is less than the economic cost of the investment, economists should treat it as a bad loan whose negative present value must be written down. However if the le
nding bank believes that the government implicitly or explicitly backs the loan, the bank does not need to write it down.

But while the bad loan might not represent a loss to the bank, it does represent a loss to the country, and the amount of that loss should be deducted before the country’s GDP is calculated. If Chinese banks have not correctly written down the bad debt, however, past GDP growth must be overstated by an amount equal to all the bad loans that have not been written down – a fairly large number that may amount to as much as 20-30% of GDP.

But the failure to recognize the loss does not mean that the loss does not exist. The losses implicit in the bad loans must (and will) be written down over the future, either explicitly, in which case they will result in a direct deduction to GDP growth, or implicitly, in which case they will require implicit and hidden transfers from one part of the economy or another (usually the household sector) to cover the gap between the “real” cost of capital and the nominal (subsidized) cost of capital. This transfer must reduce future growth.

The point here is that if credit is a problem in China – something no one doubts – it must be a problem because of wasted investment that has yet to be recognized, otherwise it would have resulted in negative GDP growth today. Failure to recognize the investment losses will, of course, artificially boost GDP growth today, but it must also artificially reduce GDP growth tomorrow as the recognition of those losses is simply postponed, not eliminated. The failure of many economists to recognize that wasted investment has a cost – even as they recognize that investment has been wasted – has caused them both to misunderstand the relationship between wealth creation and GDP and to understate the future impact of this overstated GDP.

Debt matters, and the only time it can be safely ignored is when debt levels are so low, and the borrower is so credible, that it creates no financial distress costs and has a negligible impact on demand. Neither condition applies in China, and so any prediction that ignores debt is likely to be hopelessly muddled. In fact I would like to propose a simple rule. Any model that predicts China’s future GDP growth must include, if it is to be valid, a variable that reflects estimates of the amount of hidden losses buried in the banks’ balance sheets. If it does not, it cannot possibly be a valid model to describe China’s economy, and its predictions are useless.

3.  The same mechanisms that forced up China’s growth rates created China’s imbalances, and reversing the latter means also reversing the former.

China’s astonishing growth during the past three decades is partly the result of a system that subsidized growth with hidden transfers from the household sector. These transfers are at the root of the current imbalances, and once reversed, so that China can rebalance its economy towards healthier and more sustainable sources of demand, the very processes that turbocharged growth will no longer do so.

If growth has been healthy and sustainable, in other words, there would be no need for Beijing to change its growth model – in fact it would be foolish to do so. If growth has not been healthy and sustainable, this is almost certainly because it has been artificially propped up, and if the reforms are aimed at unwinding the mechanisms that artificially propped up growth, then subsequent growth rates must be substantially lower.

Low interest rates, low wages, an undervalued currency, nearly unlimited access to credit for state-owned enterprises, a relaxed attitude to environmental degradation, and other related conditions were both the source of China’s ferocious growth as well as of China’s unprecedented economic imbalances. Reversing these conditions will rebalance the economy, but will do so while lowering growth in the obverse way that these conditions had accelerated growth.

One of the most obvious places in which to see this is in excess capacity in a wide range of businesses. It is clear that Beijing recognizes the problem of excess capacity. Here is Xinhua on the subject:

Tackling excess capacity will be one of the top tasks on China’s economic agenda in 2014, as the issue becomes a major challenge to maintaining the pace and quality of economic growth. “The Chinese economy still faces downward pressure next year,” the Central Economic Work Conference pointed out on Friday, citing the capacity issue weighing down some sectors as one of the major challenges facing the world’s second-largest economy.

It should be obvious that building excess manufacturing capacity, like building up inventory, is a way of propping up growth numbers today at the expense of tomorrow’s growth numbers. Closing down excess manufacturing capacity must be negative for growth in the same way that building it was positive.

These three conditions, which are the automatic consequences of the reform process – deleveraging, writing down unrecognized investment losses, and reversing policies that goosed growth rates – must lead to much slower growth.

…

GDP growth rates of 7% or more, on the other hand, will suggest that credit is still rising too quickly and that China has otherwise been unable to implement the reforms, in which case China is likely to reach debt capacity constraints more quickly. Growth of 7% for the next few years, in other words, is almost prima facie evidence that China is not adjusting.

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

Promises, Promises!

By

Cognitive Dissonance

 

Even when we know otherwise we still tend to think about big picture problems (i.e. The Fed’s money printing, out of control US Government debt, student loan bubble/defaults, corporate/governmental corruption etc) as if they are being rained down upon us and not as if we are in any way responsible for the problems or the solutions. In other words we tend to see the world and its troubles from the point of view of a victim rather than a participant, let alone a partially responsible party.

There is no doubt that the sociopaths are now running the insane asylum and that we are entering the parabolic blow off phase of social and financial dysfunction. And I would also agree that sociopaths in general are an opportunistic lot and will actively seek out and exploit strife, stress and social dysfunction wherever they can find or foment it. Simply put they strike while the iron is hot and light fires when it is not.

But there are always sociopaths lurking in the shadows of society waiting to pounce whenever there is an opening. Even during the best of times they are salted throughout business, academia, government and politics, always working people and situations to their advantage. That’s just who they are and what they do. So why do we seem to have a bumper crop growing amongst us at this point in time?

It is said that power abhors a vacuum, that in the absence of an expressed or perceived form of ‘leadership’ (it doesn’t matter in what structure it presents, albeit monarchy, republic, dictatorship etc) one will quickly form or appear to fill the void. The same might be said for sociopaths filling the (increasing) void, but what exactly is this so called ‘void’ and how does it form?

Codependent dysfunction

Several weeks back I returned to the Northern Virginia/DC area on business and stopped to visit an elderly family friend who was recovering in a rehabilitation center after falling and severely injuring herself. For the sake of clarity and flow let’s call my friend Diane.

When I visited Diane she was three weeks removed from her accident and rehabbing well……or at least as well as can be expected from someone in her mid 80’s with a multitude of chronic health issues. But she was in good spirits and her only real complaint was with the food and a few less than attentive nurses.

However she was quite concerned about her daughter (let’s call her Sue) who has been visibly and openly angry with Diane over the circumstances of her fall. Without going into details while Sue might be factually correct regarding her mother’s fall and fading cognitive facilities, Sue’s continuing angry response appeared a bit irrational and misdirected. After talking to my friend for a while and reading between the lines I felt I better understood the underlying issue behind Sue’s anger.

It seems that well over twenty years ago Sue made a solemn promise to her mother, one that was repeated often both publically and privately. Sue promised she would never allow her mother to be sent to a nursing home to live out her remaining days and that she would always take care of her mother. Of course, Sue’s promise was made when Sue and Diane were both in good health, totally independent and self sufficient.

But times and circumstances have changed dramatically for mother and daughter, in particular because Diane and Sue are both struggling with health and financial issues. With it now clear that Diane can no longer safely live alone it is time for Sue to keep her promise and take her mother under her wing. And to her credit Sue was already taken steps to do precisely that when her mom is released from rehab in a few weeks. But it seems the tension between the two is thick and unsettling.

In my opinion the issue was obvious though neither really wanted to talk about it to the other. And the solution, or at least the only solution they could see, was unthinkable to both parties. Since neither could go there, both were triggered by what neither wanted to talk about. To be fair Diane was fairly coherent in her thinking, at least when she was discussing this with me. As well, I was not able to speak privately with Sue to sound her out. But I suspect that given the chance Sue would also unburden herself and speak plainly and frankly with me. Of course I wasn’t the one she needed to talk to.

The End Game

From my point of view the dysfunctional energy was coming from both sides. While Sue was sincere when her promise was made (and constantly reaffirmed) all those years ago, and her intention to honor it now is equally sincere, the strain to do so is at times psychologically and emotionally overwhelming. While she believes she wants to keep her promise (because that’s what you do when you make a solemn oath, especially to a loved one) in truth she doesn’t really desire to do so because of her own serious personal issues.

Worse, the amount of the ‘due bill’ has been building for years as her mom’s health steadily declined and the need for Sue to ‘pay off’ on her promise became ever more apparent. Simultaneously with Diane’s increasing ‘need’ Sue’s ability to ‘pay’ declined as the years progressed. And both parties recognized this, both on a conscious and subconscious level.

When the promise was made to Diane all those years back, while she was grateful and a bit relieved since she was single with no plans to remarry, she still had many years ahead of her and didn’t seriously consider the gravity of the promise made. However as the years progressed she began to count on Sue being there when she needed her.

In fact, knowing that her daughter’s safety net was there allowed Diane to splurge quite a bit more beyond her original plans during her late 60’s and 70’s and travel around the USA and several foreign countries. I suspect she spent more money than she would have if Sue’s safety net had never been offered.

So here we are at the end game. Diane is now at that point in her life where she needs ever increasing assistance with several aspects of daily living. While she informed me that it would be OK if she did not move in with her daughter she did not have all the financial resources to pay for the care she needed. She didn’t wish to be a burden, but either she moved in with another family member or friend or she required additional financial assistance to purchase the care she needed from professionals.

The bottom line was that Diane really did want her daughter to keep her promise since Diane had counted on it being kept. Sue was facing the pressure created by her promise and the added stress from this predicament was enormous when added to her ‘normal’ daily issues. These cognitive disconnects were creating a growing neurosis within both of them which if not settled now, would only grow and fester until it blew up and out.

Truth and Reconciliation

Earlier I mentioned that power abhors a vacuum. In the case of Diane and Sue the term vacuum or void is better conceptualized if we see it as an unbalanced equation or energy level. If Diane did not need ‘help’, starting from this point right up to when she eventually died, there would be no ‘need’ for Sue (or anyone else for that matter) to fill, no vacuum or void to equalize. It is Diane’s ‘need’ that creates the imbalance in the present status quo, in the level of power, in the equation. That giant sucking neurosis was air rushing into the vacuum to equalize the pressure.

It is this powerful imbalance that is creating (or more accurately fanning the flames of) the cognitive dissonance in both of them, this desire both to do and not to do what each feels compelled by conflicting desires to follow. This in turn is fostering the neurosis that presents as anger and psychological discord. Left to fester in this state for too long, serious dysfunctional behavior eventually expresses. What is rarely discussed is how this core cognitive dissonance affects in ways large and small nearly all aspects of a person’s ability to live a happy and healthy life.

We cannot ‘make’ another person ‘willingly’ change (the only type of change that is transformative and lasting) without their consent. We can force their body and condition their mind, but a true metamorphosis only occurs when we willing participate for our own inner reasons. However, we can be a catalyst for another person’s change, especially if we are part of the problem. But this requires that first we transform ourselves and most importantly our transformation cannot be initiated for others or with the intent to influence others.

What Diane and Sue are unable to see is that they are both locked into a narrow behavioral range; their choices are limited by the promise. Since neither can ‘change’ the other, the only way out is to make the decision to break out of the box and face what they are both avoiding. Neither can fundamentally change the fact that Diane is elderly and unable to fully care for herself. The only thing they can ‘change’ is how they perceive and then react to this reality.

Once they cease pounding on the locked door directly in front of them and look around they will find dozens of others doors unlocked and available…..including the formerly locked door they were just pounding on. These alternatives have been there all along; it is our narrow range of perceptual vision that blinds us to the blatantly obvious and sorely needed.

Free Yourself

After Diane had finished unburdening herself to me she fell silent for a moment, and then quietly asked what I thought she should do. Instantly I knew what to say, but hesitated for a moment because I did not expect my answer to be welcomed. “You must release your daughter from her promise. Only you can do this. I know it’s difficult and unfair, but Sue is unable to find the courage to ask to be released and the burden of the promise is too great for her and you to carry.”

I paused and waited for Diane to protest, but she remained silent, seemingly willing to hear more. “It will be extremely difficult for both of you. Sue will insist that she keep her promise; you must insist that the promise has already been discharged so there is nothing to keep. Most likely Sue will not accept your release and that’s OK, since the real purpose of your release is not to free Sue, but to free yourself from the burden of the false hope that what was promised can and will still be delivered.”

Once again I paused and this time Diane replied. “But I’ve told her several times that she doesn’t have to take me in, that I could find somewhere else to live.”

Her facial expression was almost childlike, hoping that her answer was enough to satisfy me while at the same time knowing it would not. It was a response I was expecting. False hope binds us to impossible situations and accepting that we are not being, and have not been, truthful with our ‘self’ often dies a hard and painful death.

I slowly took a deep breath, gathered up my own courage and pressed on. No one wants to tell anyone what they don’t want to hear. “Was it a sincere offer? Were you ready and willing to find another place if she accepted or were you simply saying it to help both of you feel better about the burden you believe you’re placing on her?” Diane winced when I said that and I immediately wished I had been gentler. Honesty was needed, but bluntness was not and being so can at times be cruel.

“Before you say anything to Sue you must be completely settled with yourself on this matter and be willing to accept any and all consequences of your actions, even if that means moving into a state paid nursing home or seriously damaging the relationship with your daughter. I paused to gauge her response, and then continued on when she said nothing.

If you cannot find peace with this before speaking with her you will not be able to fully and completely release yourself, and by extension her, from the damaging hold the promise has on both of you. You must become willing and able to do what at this moment you are unwilling to do. Consider how much power this has over you if you can’t bring yourself to release its grip. Then consider how free you will be once you have dismissed the promise that binds you to your distress.”

After a few moments of silence I gently changed the subject. Diane will have plenty of time to wrestle with her demons after I am gone. No sense forcing the issue anymore. Truth is instantly recognizable for its self evident nature. The difficulty isn’t in knowing what to do; the difficulty lay in doing what needs to be done.

Self Betrayal

During my six hour drive home I had plenty of time to mull over my visit and what I had said. I was struck by the parallels between Diane and Sue and the promises made by society to society, oftentimes hidden in the guise of public government or private corporation’s promises to “We the People”.

Regardless of whether the promises come in the form of financial, governmental, regulatory, judicial or political, they have not and will not be fully kept from this point on. We cannot force those who have no intention to keep them or can’t keep them to perform even if they actually wanted to do so. Nor would shaking awake the slumbering majority to the approaching crisis force the promises to be kept. If anything that would just accelerate the crisis since the entire system operates as a confidence game. Shake confidence and you break the game board.

The exponentially increasing Federal government’s (and private corporation’s) spying on its own citizens, public and corporate corruption and crony capitalism, glaring judicial injustice, blatant police state tactics and escalating social safety net breakdowns are the symptom, not the disease. ‘We the People’ have known for decades, or should have known if we had not outsourced our own personal responsibility to know what was being done (or not done) in our name, that promises were being made that could not be kept.

Rather than step forward and demand accountability from our so called ‘leadership’, something that also demands accountability from ourselves for believing the lies of the sociopaths that it will all work out if we just leave it to them (when obviously it would not), ‘We the People’ pursued a policy of don’t ask, don’t tell and narcissistic naval gazing while growing fat and increasingly unhappy. The neurosis feeds upon itself in a positive feedback loop until it reaches the blow off phase and the social organism collapses. This is the disease.

The runaway train has now reached the terminal fascism phase and the collective and individual courage to step onto the tracks and meet the problem head on is lost and nowhere to be found. The general public, including you and me (I do not exclude myself from blame) have resigned ourselves to our lot in life and are hunkering down (or exploiting the final frenzy for personal gain) to wait out the explosive destruction with the hope of surviving to live another day. Once again it is selfish pursuits that stand in the way of solutions.

In the face of mass self betrayal, all you and I can hope to do is work towards releasing ourselves from ourselves. We must release ‘them’ from the false promises they have made so that we may release ourselves from the anger, resentment and false hope that currently has us all tied up in neurotic knots and dysfunctional depression. We must release ourselves from the past in order to move each other forward into the future.

It all begins within.

 

01-07-2014

Cognitive Dissonance  

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