another site
Presented with little comment.. Compare this:
To the following chart…
It appears the “big lie” remains well and truly in place… Just keep repeating it…
Oh and as a follow-up, Lipton nails it on Mexico…
and then there’s this…
Chart: Bloomberg
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Submitted by Chris Andrew and Mustafa Zaidi of Clarmond House
List Interest…
The developed world is not currently in the grip of a major World War, however, the debt burden has increased as if it is. The general population may not be ready to suffer the further sacrifices that this massive deficit increase will lead to, and may unwillingly be becoming the ‘lost interest generation’.
“THE SINEWS OF WAR ARE INFINITE MONEY”.
Thus observed Cicero on the dual monopolies of the State, money and warfare. But how does the State amass this limitless largesse? It does so in three simple ways: taxation; debt issuance; and currency debasement.
When there is a war, the State issues debt to fund the conflict; citizens purchase this debt and await a future rise in taxation, a currency devaluation and a significant increase in the national debt. The contract between State and citizen is clear; in times of war, sacrifices are required, not only on battlefields but also in bond yields.
This can be seen time and time again, from the Prestiti, issued by Venice in the 1100’s, to the National Savings Movement in the British Empire for both world wars of the twentieth century. Indeed the slogans such as ‘Lend to Defend’ and ‘War Savings are Warships’ connected the population to the war and the national debt.
Disconnect
Over the last seven years citizens have lived through a wartime-like increase in national debt, but with no war to explain it. The population has been detached from this peacetime debt explosion, the purpose of which has been to maintain consumption, collateral and capital. These three C’s lack the somber seriousness of war. The citizen is justifiably confused, asked as they now are to bear the increased debt burden, paltry interest rates and possibly currency debasement.
Given the rise in global debt burdens, governments now rely upon low interest rates to keep the cost of interest payments to a minimum. Sorry citizens, the State has redefined the contract.
A tax by any other name
The sovereign debt of the developed world has risen from approximately 80% of GDP to 110%, an additional $12 trillion of debt, while interest rates have fallen to nothing. A ‘normal’ short term interest rate is one that is in line with inflation, which has been an average of 2% for the period 2007-2013. Therefore we can roughly calculate that ‘citizen-savers’ of the world have lost $1.75 trillion in unreceived interest. This is nothing short of being an undeclared tax levied by the State.
Modern day example
Has this ever happened before? Yes, in modern day Japan interest rates have been zero for 19 years. However, the important difference is that there has been deflation in Japan during this entire period, so the savers of Japan have kept purchasing power. Rather than trample the savers it was the asset markets that suffered, with the stock market and property prices taking the brunt of zero rates and credit contraction.
As commented on in an earlier piece (‘Golden Calf to Raging Bull’ – May 2013) Central Banks have placed the economic world on an ‘asset-price’ standard. Asset prices have become the collateral upon which credit is issued and therefore must be protected, even if this means sacrificing savers on the altar of zero interest rates. The chances of central banks allowing interest rates to be higher than inflation is remote.
A Forlorn Hope?
As the quantum of debt has increased, a rise in interest rates would bring hefty costs to the State; currently, interest outlay in the USA alone, at 2.5%, is $400 billion per annum. Any sustained interest rate rise with the continued level of deficit is not manageable without growth being greater than the yields paid. Simply put, interest rates cannot rise without high growth, therefore a ‘lost interest generation’ is unfolding.
The only growth lever left for the State is currency devaluation. As Ben Franklin stated “wars are not paid for in wartime, the bill comes later.” The State’s peacetime but warlike increase in debt awaits its tab.
Bill Please.
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Earlier today we pointed out a curious divergence: while owner equivalent rent, the measurement of imputed costs of renting, has risen to the highest since the Lehman failure, total non-shelter core CPI continues to decline. What is notable is that OER amounts to 23.9% of the CPI basket – as such it is the single largest determinant of inflation as measured by the BLS. And yet everything else, hedonically adjusted of course, keeps falling. By how much? And do you agree with the BLS’ estimates of inflation? To answer these not so important questions, here is the full CPI basket, broken down by weighings, and by annual change.
At first blush, a lot of the “inflationary” assumptions shown below make little if any sense, but then again who are we to argue with the Arima-X-1 seasonal adjustment juggernaut of a few good Econ PhDs.
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Many people have been speculating all day as to why Bitcoin is up so much. The guesses have ranged from oligarchs worried about governments freezing their global bank accounts, to the UK moving away from a Bitcoin trading tax. While both those things may have played a role, I think the primary driver might be be comments from Benjamin Lawsky, superintendent of New York’s Department of Financial Services, on the sidelines of a banking conference today.
I’m not sure what time these comments were made, but it appears Lawsky wants to make sure New York state ends up being a global center for Bitcoin trading. This seems like a big deal to me.
From the UK’s Telegraph:
The collapse of the bitcoin exchange Mt Gox is part of a struggle for survival that could ultimately strengthen the virtual currency industry, New York’s banking regulator has said.
“It’s on the one hand a setback, on the other hand it will cause further improvements in this industry and some more regulatory involvement,” Benjamin Lawsky, superintendent of New York’s Department of Financial Services, told Reuters.
“It’s part of [a] shaking out,” he said on the sidelines of a banking conference in the US.
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Submitted by Anatole Kaletsky via Evergreen-Gavekal,
Oscar Wilde described marriage as the triumph of imagination over intelligence and second marriage as the triumph of hope over experience. In finance and geopolitics, by contrast, experience must always prevail over hope and realism over wishful thinking. A grim case in point is the Russian incursion into Ukraine. What makes this confrontation so dangerous is that US and EU policy seems to be motivated entirely by hope and wishful thinking. Hope that Vladimir Putin will “see sense,” or at least be deterred by the threat of US and EU sanctions to Russia’s economic interests and the personal wealth of his oligarch friends. Wishful thinking about “democracy and freedom” overcoming dictatorship and military bullying.
Financial markets cannot afford to be so sentimental. While we should always recall at a time like this the famous advice from Nathan Rothschild to “buy at the sound of gunfire,” the drastically risk-off response to weekend events in Ukraine makes perfect sense because Russia’s annexation of Crimea is the most dangerous geopolitical event of the post-Cold War era, and perhaps since the Cuban Missile crisis. It can result in only two possible outcomes, either of which will be damaging to European stability in the long-term. Either Russia will quickly prevail and thereby win the right to redraw borders and exercise veto powers over the governments of its neighbouring countries. Or the Western-backed Ukrainian government will fight back and Europe’s second-largest country by area will descend into a Yugoslav-style civil war that will ultimately draw in Poland, NATO and therefore the US.
No other outcome is possible because it is literally inconceivable that Putin will ever withdraw from Crimea. To give up Crimea now would mean the end of Putin’s presidency, since the Russian public, not to mention the military and security apparatus, believe almost unanimously that Crimea still belongs to Russia, since it was only administratively transferred to Ukraine, almost by accident, in 1954. In fact, many Russians believe, rightly or wrongly, that most of Ukraine “belongs” to them. (The very name of the country in Russian means “at the border” and certainly not “beyond the border”). Under these circumstances, the idea that Putin would respond to Western diplomatic or economic sanctions, no matter how stringent, by giving up his newly gained territory is pure wishful thinking.
Putin’s decision to back himself into this corner has been derided by the Western media as a strategic blunder but it is actually a textbook example of realpolitik. Putin has created a situation where the West’s only alternative to acquiescing in the Russian takeover of Crimea is all-out war. And since a NATO military attack on Russian forces is even more inconceivable than Putin’s withdrawal, it seems that Russia has won this round of the confrontation. The only question now is whether the new Ukrainian government will accept the loss of Crimea quietly or try to retaliate against Russian speakers in Ukraine—offering Putin a pretext for invasion, and thereby precipitating an all-out civil war.
That is the key question investors must consider in deciding whether the Ukraine crisis is a Rothschild-style buying opportunity, or a last chance to bail out of risk-assets before it is too late. The balance of probabilities in such situations is usually tilted towards a peaceful solution—in this case, Western acquiescence in the Russian annexation of Crimea and the creation of a new national unity government in Kiev acceptable to Putin. The trouble is that the alternative of a full-scale war, while far less probable, would have much greater impact—on the European and global economies, on energy prices and on the prices of equities and other riskassets that are already quite highly valued. At present, therefore, it makes sense to stand back and prepare for either outcome by maintaining balanced portfolios of the kind recommended by Charles, with equal weightings of equities and very long-duration US bonds.
Looking back through history at comparable episodes of severe geopolitical confrontation, investors have usually done well to wait for the confrontation to reach some kind of climax before putting on more risk.
In the 1962 Cuban Missile Crisis, the S&P 500 fell -6.5% between October 16, when the confrontation started, and October 23, the worst day of the crisis, when President Kennedy issued his nuclear ultimatum to Nikita Khrushchev. The market steadied then, but did not rebound in earnest until four days later, when it became clear that Khrushchev would back down; it went on to gain 30% in the next six months.
Similarly in the 1991 Gulf War, it was not until the bombing of Baghdad actually started and a quick US victory looked certain, that equities bounced back, gaining 25% by the summer. Thus investors did well to buy at the sound of gunfire, but lost nothing by waiting six months after Saddam Hussein’s initial invasion of Kuwait in August, 1990.
Even in the worst-case scenario to which the invasion of Crimea has been compared over the weekend—the German annexation of Sudetenland in June 1938—Wall Street only rebounded in earnest, gaining 24% within one month, on September 29, 1938. That was the day before Neville Chamberlain returned from Munich, brandishing his infamous note from Hitler and declaring “peace in our time.” The ultimate triumph of hope over experience.
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The (ironically named) United Kingdom is the first to openly raise concerns over trade sanctions against Russia. As The Telegraph reports,
“Britain is preparing to rule out trade sanctions against Russia amid fears that the Ukraine crisis could derail the global economic recovery“
Perhaps it is the fear of a massive liquidity suck out from London’s real estate market (or its banking system) that has the Brits on edge. We suspect Germany will be close behind as they eye exploding gas and oil prices and their dependence on Russia’s marginal production.
It would appear, just as in the case of Syria, that Obama may find himself alone among his allies…
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The Cold War being back with a bang and somehow the world again finding itself on the verge of World War got you down? Don’t worry, there an insurance policy for that. Because life is unpredictable…
Life is unpredictable. Get some peace of mind: http://t.co/PMDosOjauN #TimeToEnroll
— Barack Obama (@BarackObama) March 3, 2014
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Having explained the Ukraine "situation" in one map, it appears the inter-connectedness of Ukraine and Russia is becoming any increasingly problematic part of the current crisis. As Reuters reports, absent Russian gas, Ukraine's natural gas stocks can meet just 4 months of demand. The modest silver-lining is that the stocks are generally in the west of the country (away from potential Russian intervention) but it bears noting that Ukraine meets around half its gas demand through Russian imports (and Russia has cut supplies in the past). The situatio is not just energy though as Bloomberg notes, that Ukraine relies on Russia for about 30 percent of its global trade activity, compared with Russia’s 6 percent dependency on Ukraine.
Sadly, everything you need to know about the crisis in Ukraine in one worrisome map which summarizes all the relevant "red lines."
To prepare for a potential disruption, Ukraine's gas transit monopoly Ukrtransgas has been increasing its gas imports from Russia in recent days, increasing its stocks which now stand at four months worth of supplies, several industry sources said.
Of Ukraine's 33 billion cubic metres (bcm) storage capacity, Gas Infrastructure Europe (GiE) data shows that around 80 percent is in its far west, so even in the case of a Russian intervention in Ukraine's predominantly Russian east, most storage assets would likely remain safe from seizure.
Analysts also say that a continuation of gas supplies was in the interest of all parties.
"Until a real war, I think that all sides (Russia, Europe and all parties in Ukraine) have a vested interest in flowing gas from Russia to Europe," said Thierry Bros, senior gas analyst at French bank Societe General.
"Russia needs the money from gas sales, Europe is 26 percent dependant on Russia for its gas consumption, and Ukraine need the money from the transit fees," he added.
Ukraine's Reliance on Russia goes far beyond just energy…
A conflict between Russia and Ukraine would have a more substantial impact on Ukraine in terms of trade dependency. Trade-flow data show that Ukraine relies on Russia for about 30 percent of its global trade activity, compared with Russia’s 6 percent dependency on Ukraine. The European Union overtook Russia as the larger destination for Ukraine’s exports in January 2013 on a 12-month rolling basis.
Still, more than a quarter of Ukraine’s exports are still consumed by Russia. Ukraine depends on Russia for about a third of its total imports. Russia’s reliance on Ukraine is much less, with 6 percent of the country’s exports being consumed by Ukraine and about 5 percent of Russia’s imports coming from Ukraine.
The chart illustrates how trade dependencies between Ukraine and Russia have changed during the past 10 years.
And it's not just Ukraine that faces a problem…
In western Europe, a mild winter and improved infrastructure mean Europe is less reliant on Russian natural gas pumped through Ukraine than in past years, easing worries that the escalating crisis in Ukraine could hurt supplies.
Despite the improved situation, analysts warned that a renewed disruption would hit Europe hard.
"Risks for Europe exist always, that is why it should pursue even more diversification projects further and develop liquefied natural gas (LNG) markets and new connectors in central and southeastern European regions," said Anna Bulakh of the International Centre for Defence Studies.
However, Ukraine has another big problem – while it would like $3bn in IMF loans, that will not even cover interest and principal payments through June…
What is perhaps most ironic is the mainstream media's attention to a 12% drop in the Russian stock market. If this occurred in the US, it would be the end of the status quo… Putin does not care about Russian stocks… all he cares about is the price of oil. Sanctions would merely raise oil prices as supply would be cut… raising the value of Russia's resources – and we are sure the Chinese would be more than happy to buy (in Yuan-terms) crude direct from Russia as the rest of the world shuns them (and faces crushing energy costs).
Source: Bloomberg
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Seth Klarman is one of the most talented fund managers of our time. I have been consistently awed by his intelligence and consistent performance, as well as a strong sense character and honestly.
ValueWalk just put together a synopsis of his latest investor letter, and there are some choice phrases in there. While I completely disagree with him on Bitcoin (he seems to see it as merely a currency rather than an efficient, global, P2P, decentralized payment system), I’m not going to hold that against him.
Now from ValueWalk:
Baupost Group, among the largest hedge funds in the world, returned $4 billion in assets to clients at the end of 2013 because it didn’t want to grow too quickly and dilute performance, according to an investor letter reviewed by ValueWalk. Seth Klarman’s fund, which in 2013 had a high of 50% of his portfolio in cash, up from 36% in 2012, posted 2013 returns in the mid-teens consistent with the fund’s nearly 22-year track record.
Like many of the best market analysts, Seth Klarman looks at both sides of the issue, the bull and bear case, in depth. “If you’re more focused on downside than upside, if you’re more interested in return of capital than return on capital, if you have any sense of market history, then there’s more than enough to be concerned about,” he wrote. Citing a policy of near-zero short-term interest rates that continues to distort reality and will have long term consequences, he ominously noted “we can draw no legitimate conclusions about the Fed’s ability to end QE without severe consequences,” a thought pervasive among many top fund managers. “Fiscal stimulus, in the form of sizable deficits, has propped up the consumer, thereby inflating corporate revenues and earnings. But what is the right multiple to pay on juiced corporate earnings?”
“In an ominous sign, a recent survey of U.S. investment newsletters by Investors Intelligence found the lowest proportion of bears since the ill-fated year of 1987,” he wrote. “A paucity of bears is one of the most reliable reverse indicators of market psychology. In the financial world, things are hunky dory; in the real world, not so much. Is the feel-good upward march of people’s 401(k)s, mutual fund balances, CNBC hype, and hedge fund bonuses eroding the objectivity of their assessments of the real world? We can say with some conviction that it almost always does. Frankly, wouldn’t it be easier if the Fed would just announce the proper level for the S&P, and spare us all the policy announcements and market gyrations?” he said in a somewhat hilarious moment that bears a degree of truth.
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Gold and crude oil prices rose steadily all day even as US equities oscillated around VWAP unable to break above Friday's lows (and trading in a narrow range) on heavier than normal volume. USDJPY and US equities remained roughly coupled but stocks auctioned up and down in search of stops with algos desperate to cling to VWAP on a big down day as a rally mid-afternoon reached the S&P into the green for 2014 and marked the top of the day. Gold ended at 4-month highs, the USD rose 0.4% (led by GBP and EUR weakness), WTI crude back over $104.50 (near 6-month highs), and Treasury yields dropped 5bps or so with 10Y back under 1.60% (2nd lowest yield close in 4 months). VIX jumped above 16% – 1-month highs but still the asset-gatherers demand we BTFWWIII…
S&P 500 Futures traded in a narrow range around VWAP unable to break Friday's lows (or hold YTD green levels)…
When Russia denied its ultimatum, USDJPY was ramped but stocks were not in the mood to play along…
The S&P 500 tagged its year-to-date unchanged levels and sold off…
VIX was well bid as managers reached for protection en masse
Treasury yields closed their lows of the day (with modest 30Y underperformance) as 10Y ended at the crucial 2.60% – its 2nd lowest yield close in 4 months…
Gold rallied all day – ending at 4-month highs
WTI Crude surged back over $104.50 – near 6-month highs…
The USD rose on the day led by weakness in EUR and GBP…
Charts: Bloomberg
Bonus Chart: It seems "investors" also sought the safety of Bitcoin…
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