Tag: news

The solid US jobs report that saw the world’s largest economy add a little more than 200k net new jobs and the unemployment rate fall three tenths of a percent to 7.0%, even with the participation rate ticking up got some chins wagging about that the Federal Reserve tapering at its next FOMC meeting on December 17-18.

 

Even the usually astute Financial Times jumped all over the story with its page three story “US jobs boost raises speculation on Fed taper”.  Not once in the article did the reporters note that US bond yields actually slipped after the jobs report or that the dollar fell.  The speculation that it refers to was not found in price, but in one economist it cited.

 

Those inclined to the Fed tapering in December seem myopic.  The employment was not the only economic report that was released before the weekend.  The US also reported that the Fed’s preferred measure of inflation, the deflator for core personal consumption expenditures, which slipped to 1.1%, the slowest pace in more than 2.5 years.  The FT thought this was worth a single paragraph it is report on the prospects of tapering.

 

The Financial Times did not see fit, though, to even recognize in passing,  the fiscal uncertainty that hangs over the market. Recall that the lack of fiscal clarity influenced the Fed’s decision not to taper in September. Although December 13 is a self-imposed deadline for an agreement, the heightened tensions, especially in the aftermath of the Senate Democrats parliamentary maneuver that allows the filibuster to over ridden on presidential appointments with a simple majority, and the usual brinkmanship tactics warns that a final deal may be elusive until closer to the next legislative deadline in mid-January.

 

Nor do most observers take seriously the institutional interests of the Federal Reserve.  We have argued that the seven person Board of Governors is going to see significant changes in the months ahead.  The Fed’s forward guidance that is to replace QE as the main policy tool will be more credible if issued by the next Fed chairman not the soon-to-leave current chairman.  Yellen-led tapering will build her (and the new Fed’s) credibility and help correct perceptions that she is a super-dove.  The macro-economic impact of waiting a month or two before reducing asset purchases by $10 bln or $15 bln is minor at best.

 

More importantly, investors appear to be accepting the Fed’s argument in a way that it had not done so previously:  tapering is not tightening.  The US 2-year yield was above 50 bp in early September as many expected tapering.  It was more than halved and now is near 30 bp, despite ideas that tapering could be imminent.

 

The German 2-year yield fell to 5 bp in early November as many took seriously the possibility that the ECB could soon adopt a negative deposit rate.  As ECB officials played down the risk of deflation and the a negative deposit rate seemed remote, the German 2-year yield jumped and was near 25 bp before the weekend (settling near 22 bp).  This saw the 2-year interest rate spread, which the euro-dollar exchange rate is sensitive to, fall below 9 bp to stand near the lowest levels since last February.  

 

The 10-year interest rate differential between the US and Germany rose above 100 bp.  This is near the highest since before the crisis.  Yet, it offered the dollar little support.  The euro finished at its best level since the end of October and appears poised to re-challenge the $1.3830 2-year high set on October 25.

 

This analysis helps explain why the US dollar is not rallying on good economic news and why an uptick in retail sales, the economic highlight of the week, may not stop led the greenback much support.  Separately, the flow of funds report on Monday is likely to show a new record high household wealth; completely recouping the sharp drop triggered by the crisis.  Sharp gains in equity prices and more modest gain real estate have been experienced, but the holdings are highly concentrated.  

 

Europe reports industrial production figures.  A strong German report is possible, despite the weakness in orders data before the weekend.  Survey data suggests a re-acceleration of the German economy in Q4.  To be sure, it is not the poor growth prospects that incite the ECB to act, but the disinflationary forces, the increased volatility of short-term interest rates as excess liquidity evaporates, and small and medium sized businesses remain locked out from finance.  Separately,  the industrial dispute in a large refinery in Scotland warns of potential disappointment with the UK’s figures.    

 

Sweden reports November CPI figures and this is the last important report ahead of the Dec 17 Riksbank meeting.   Poor economic data has fanned speculation of a rate cut, though the market seems a bit divided, with some looking for the central bank to stand pat until early next year.  

The Swiss National Bank and the Reserve Bank of New Zealand meet this week.  Neither is likely to change policy.  The latter is expected to hike rates toward the end of Q1 14.  The former is likely to reaffirm its CHF1.20 floor for the euro and a 0-0.25% target for 3-month LIBOR. 

 

Japan is expected to report a current account surplus in October after a seasonally adjusted deficit in September early Monday in Tokyo.  It will also report revisions to Q3 GDP.  These revisions are likely to be to the downside and quarterly annualized growth is expected to slow to 1.6% from the initial estimate of 1.9%, and down from 3.8% in Q2.  More important will be the Oct machinery orders later in the week which will shed insight into capex in Q4.  

 

Australia reports Oct employment data in the middle of the week.  The consensus calls for a 10k increase after a 1.1k increase in September.  This understates the Sept weakness as nearly 28k full time positions were lost.   The Oct unemployment rate may tick up to 5.7% from 5.6%.  

 

China reports a host of data this week, including CPI early Monday, industrial production, new lending and retail sales.  Although there a number of factors behind the rise in Chinese bond yields, which as we noted, has become a more worrisome development for Chinese officials, can be largely accounted for by the rise in inflation.  The risk is for another rise to 3.3% from 3.2%, which would be the highest since April 2012.  

 

Over the weekend, China reported a much larger than expected trade surplus.  The $33.8 bln Nov surplus is the biggest since Jan 2009.  Exports jumped.  The 12.7% (year-over-year) increase was more than twice the rise reported in Oct.  Imports slumped.  The 5.3% increase is the smallest since June.  It compares with a 7.6% increase in Oct and consensus expectations for a 7% increase.  

 

The PBOC said recently that there was no longer a need to accumulate reserves.  Some observers took this to mean that it would no longer do so and that this was negative for US Treasuries.  We are less sanguine.  . The combination of the trade surplus coupled with severe limits on the yuan and capital flows means that it will still be accumulating reserves.  

 

Finally there were two other notable developments over the weekend.  First, after much consternation, a World Trade Agreement was struck.  Critics will complain that the agreement is not ideal, as if any agreement is.  On balance, officials will embrace it in anticipation of boosting world trade and won’t refrain from making the good an enemy of the perfect.   

 

Second South Korea has announced an expansion of its air defense identification zone, which will now overall China’s newly declared zone.  The immediate market impact may be minimal, but the escalation of tensions as the year winds down is troublesome.  The animosity between Japan and South Korea seems to be preventing a coordinated response. This absence works in China’s interest. 

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

Following China’s unveiling of its air defense identification zone (ADIZ) in the East China Sea, overlapping a large expanse of territory also claimed by Japan, the Japanese media has, as The Japan Times reports, had a dramatically visceral reaction on the various scenarios of a shooting war. From Sunday Mainichi’s “Sino-Japanese war to break out in January,” to Flash’s “Simulated breakout of war over the Senkakus,” the nationalism (that Kyle Bass so notably commented on) is rising. Which side, wonders Shukan Gendai ominously, will respond to a provocation by pulling the trigger? The game of chicken between two great superpowers is about to begin.

Via The Japan Times,

Five out of nine weekly magazines that went on sale last Monday and Tuesday contained scenarios that raised the possibility of a shooting war.

 

…

 

First, let’s take Flash (Dec. 17), which ran a “Simulated breakout of war over the Senkakus,” with Mamoru Sato, a former Air Self-Defense Force general, providing editorial supervision. Flash’s scenario has the same tense tone as a Clancy novel, including dialog. On a day in August 2014, a radar operator instructs patrolling F-15J pilots to “scramble north” at an altitude of 65,000 feet to intercept a suspected intruder and proceeds from there.

 

Sunday Mainichi (Dec. 15) ran an article headlined “Sino-Japanese war to break out in January.” Political reporter Takao Toshikawa tells the magazine that the key to what happens next will depend on China’s economy.

 

“The economic situation in China is pretty rough right now, and from the start of next year it’s expected to worsen,” says Toshikawa. “The real-estate boom is headed for a total collapse and the economic disparities between the costal regions and the interior continue to widen. I see no signs that the party’s Central Committee is getting matters sorted out.”

 

An unnamed diplomatic source offered the prediction that the Chinese might very well set off an incident “accidentally on purpose”: “I worry about the possibility they might force down a civilian airliner and hold the passengers hostage,” he suggested.

 

In an article described as a “worst-case simulation,” author Osamu Eya expressed concerns in Shukan Asahi Geino (Dec. 12) that oil supertankers bound for Japan might be targeted.

 

“Japan depends on sea transport for oil and other material resources,” said Eya. “If China were to target them, nothing could be worse to contemplate.”

 

In an air battle over the Senkakus, the Geino article continues, superiority of radar communications would be a key factor in determining the outcome. Japanese forces have five fixed radar stations in Kyushu and four in Okinawa. China would certainly target these, which would mean surrounding communities would also be vulnerable.

 

One question that seems to be on almost everybody’s mind is, will the U.S. military become involved?

 

Shukan Gendai (Dec. 14) speculated that Chinese leader Xi Jinping might issue an order for a Japanese civilian airliner to be shot down. As a result of this, a U.S. Navy aircraft carrier would come to Japan’s aid and send up fighters to contend with the Chinese.

 

“Unlike Japan, the U.S. military would immediately respond to a radar lock-on threat by shooting down the Chinese planes,” asserts military analyst Mitsuhiro Sera. “It would naturally regard an aircraft flying overhead as hostile. They would shoot at it even if that were to risk discrediting the Obama administration.”

 

“With the creation of Japan’s National Security Council on Dec. 4, Japan-U.S. solidarity meets a new era,” an unnamed diplomatic source told Shukan Gendai. “If a clash were to occur between the U.S. and China, it would be natural for the Self-Defense Forces to provide backup assistance. This was confirmed at the ‘two-plus-two’ meeting on Oct. 3.”

 

“China is bent on wresting the Senkakus away from Japan, and if Japan dispatches its Self-Defense Forces, China will respond with naval and air forces,” Saburo Takai predicts in Flash. “In the case of an incursion by irregular forces, that would make it more difficult for the U.S. to become involved. Japan’s Ministry of Foreign Affairs would protest through diplomatic channels, but China would attempt to present its takeover as a fait accompli.

 

“China fears a direct military confrontation with the U.S.,” Takai adds. “A few days ago, two U.S. B-52s transited the ADIZ claimed by China, but the flights were not for any vague purpose. I suppose the Chinese tracked the flights on their radar, but the B-52s have electronic detection functions that can identify radar frequencies, wavelength and source of the signals. These flights are able to lay bare China’s air defense systems. It really hits home to the Chinese that they can’t project their military power.”

 

Which side, wonders Shukan Gendai, will respond to a provocation by pulling the trigger? The game of chicken between two great superpowers is about to begin.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/NAmz3NEOvTs/story01.htm Tyler Durden

Following China’s unveiling of its air defense identification zone (ADIZ) in the East China Sea, overlapping a large expanse of territory also claimed by Japan, the Japanese media has, as The Japan Times reports, had a dramatically visceral reaction on the various scenarios of a shooting war. From Sunday Mainichi’s “Sino-Japanese war to break out in January,” to Flash’s “Simulated breakout of war over the Senkakus,” the nationalism (that Kyle Bass so notably commented on) is rising. Which side, wonders Shukan Gendai ominously, will respond to a provocation by pulling the trigger? The game of chicken between two great superpowers is about to begin.

Via The Japan Times,

Five out of nine weekly magazines that went on sale last Monday and Tuesday contained scenarios that raised the possibility of a shooting war.

 

…

 

First, let’s take Flash (Dec. 17), which ran a “Simulated breakout of war over the Senkakus,” with Mamoru Sato, a former Air Self-Defense Force general, providing editorial supervision. Flash’s scenario has the same tense tone as a Clancy novel, including dialog. On a day in August 2014, a radar operator instructs patrolling F-15J pilots to “scramble north” at an altitude of 65,000 feet to intercept a suspected intruder and proceeds from there.

 

Sunday Mainichi (Dec. 15) ran an article headlined “Sino-Japanese war to break out in January.” Political reporter Takao Toshikawa tells the magazine that the key to what happens next will depend on China’s economy.

 

“The economic situation in China is pretty rough right now, and from the start of next year it’s expected to worsen,” says Toshikawa. “The real-estate boom is headed for a total collapse and the economic disparities between the costal regions and the interior continue to widen. I see no signs that the party’s Central Committee is getting matters sorted out.”

 

An unnamed diplomatic source offered the prediction that the Chinese might very well set off an incident “accidentally on purpose”: “I worry about the possibility they might force down a civilian airliner and hold the passengers hostage,” he suggested.

 

In an article described as a “worst-case simulation,” author Osamu Eya expressed concerns in Shukan Asahi Geino (Dec. 12) that oil supertankers bound for Japan might be targeted.

 

“Japan depends on sea transport for oil and other material resources,” said Eya. “If China were to target them, nothing could be worse to contemplate.”

 

In an air battle over the Senkakus, the Geino article continues, superiority of radar communications would be a key factor in determining the outcome. Japanese forces have five fixed radar stations in Kyushu and four in Okinawa. China would certainly target these, which would mean surrounding communities would also be vulnerable.

 

One question that seems to be on almost everybody’s mind is, will the U.S. military become involved?

 

Shukan Gendai (Dec. 14) speculated that Chinese leader Xi Jinping might issue an order for a Japanese civilian airliner to be shot down. As a result of this, a U.S. Navy aircraft carrier would come to Japan’s aid and send up fighters to contend with the Chinese.

 

“Unlike Japan, the U.S. military would immediately respond to a radar lock-on threat by shooting down the Chinese planes,” asserts military analyst Mitsuhiro Sera. “It would naturally regard an aircraft flying overhead as hostile. They would shoot at it even if that were to risk discrediting the Obama administration.”

 

“With the creation of Japan’s National Security Council on Dec. 4, Japan-U.S. solidarity meets a new era,” an unnamed diplomatic source told Shukan Gendai. “If a clash were to occur between the U.S. and China, it would be natural for the Self-Defense Forces to provide backup assistance. This was confirmed at the ‘two-plus-two’ meeting on Oct. 3.”

 

“China is bent on wresting the Senkakus away from Japan, and if Japan dispatches its Self-Defense Forces, China will respond with naval and air forces,” Saburo Takai predicts in Flash. “In the case of an incursion by irregular forces, that would make it more difficult for the U.S. to become involved. Japan’s Ministry of Foreign Affairs would protest through diplomatic channels, but China would attempt to present its takeover as a fait accompli.

 

“China fears a direct military confrontation with the U.S.,” Takai adds. “A few days ago, two U.S. B-52s transited the ADIZ claimed by China, but the flights were not for any vague purpose. I suppose the Chinese tracked the flights on their radar, but the B-52s have electronic detection functions that can identify radar frequencies, wavelength and source of the signals. These flights are able to lay bare China’s air defense systems. It really hits home to the Chinese that they can’t project their military power.”

 

Which side, wonders Shukan Gendai, will respond to a provocation by pulling the trigger? The game of chicken between two great superpowers is about to begin.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/NAmz3NEOvTs/story01.htm Tyler Durden

As we reported yesterday, something odd is happening in the US, which supposedly is deep in a “housing market and economic recovery” – foreclosures on ultraluxury homes, those worth $5 million and over, have soared by 61% in 2013 (even as overall foreclosures continue to decline due to the well-known and much discussed “foreclosure stuffing” process, which means millions of properties are held in bank shadow inventory just waiting for the moment to be unleashed and end the implicitly home price subsidy abused by banks for the past three years). Granted, the overall sample is relatively small, with fewer than 200 properties in the ultraluxury category compared to 1.2 million for all properties tracked, but as RealtyTrac notes, “each of these high-value properties represents a much bigger potential loss for the foreclosing lender compared to a median priced property.”

Additional thoughts from RealtyTrac:

This trend may indicate lenders are now financially stable enough to more comfortably weather the big-ticket losses that these properties potentially represent. In addition, an improving housing market means more prospective buyers, even for these ultra high-end homes. A bigger buyer pool translates into higher sales prices on these properties, allowing lenders to recoup more of their losses on these jumbo loans gone bad.

 

“A home selling for $5 million or above represents the ultra-luxury end of the market, and so far in 2013 we’ve had 34 properties close over that price with the average sale being $7.7 million,” said Emmett Laffey, CEO of Laffey Fine Home International, covering the five boroughs of New York.  “Any foreclosure properties in this type of ultra-luxury market usually get purchased very quickly since there is one thing all super rich buyers want – an outstanding deal on a real estate transaction, and in most cases foreclosures of this magnitude come with several million more dollars of built-in value.”

Regardless of the arbitrage opportunities available to “all cash” buyers, who would be happy to park some cash in real estate, the fact that ultraluxury foreclosures are soaring also means that even the “1%” is starting to succumb to reality and beginning to feel the pressure of a financial reality in which only the “too biggest” can never fail.

So what are the properties in question? The photo gallery below, courtesy of RealtyTrac, shows just where any given $5 million + property stopped making its mortgage payments.

MONTAGE, IRVINE, CA 92614

This home nestled on a bluff overlooking the ocean was listed for sale at $15.9 million but the foreclosure judgment amount at the foreclosure auction scheduled in November was $12.8 million.

PACIFIC COAST HWY, MALIBU, CA 90265

This foreclosure auction property is located right on the water on Pacific Coast Highway in Malibu. It features two detached units and was listed for $9.5 million, but the opening bid at the foreclosure auction in November was $8.8 million.

CUESTA LINDA, PACIFIC PALISADES, CA 90272

Built in 1990, this 5 bed, 6 bath estate was scheduled for foreclosure auction in November with an opening bid of $4.1 million, although the assessed value of the property is $5.5 million.

 

KIMRIDGE RD, BEVERLY HILLS, CA 90210

This beautifully remodeled 5 bed, 7 bath estate was scheduled for foreclosure auction in October with a foreclosure judgment amount of $7.5 million. The grounds feature panoramic views of the ocean, a putting green, and stunning pool area.

 

COLONY VIEW CIR, MALIBU, CA 90265

A beach lover’s dream! This pre-foreclosed, 5 bed, 5.5 bath single-family residence was custom built in 2001. A Notice of Default was filed in October with a default amount of $200,000, meaning the owner was behind that amount on mortgage payments.

 

BUSCH DR, MALIBU, CA 90265

This pre-foreclosed French Country hillside residence features 6 beds, 7 baths and sits on 8 acres.A Notice of Default was filed on this property in June, and at that time the homeowner was an estimated $125,000 behind on mortgage payments.

 

S OCEAN BLVD, DELRAY BEACH, FL 33483

Listed for sale at $13.5 million, this exquisite single-family residence in Florida is in the first stage of foreclosure. A dramatic and elegant floor plan makes this 6 bed, 9.5 bath home perfect for entertaining. The initial foreclosure notice was filed in July.

 

SANCTUARY DR, BOCA RATON, FL 33431

Beautiful single-family “sanctuary” in pre-foreclosure. It features 5 beds, 10 baths and has a fantastic pool and patio area with tranquil views. The pre-foreclosure notice was filed in September with an estimated total outstanding loan balance of $8.1 million.

 

SEA RIDGE DR, LA JOLLA, CA 92037

This 5 bed, 4.5 bath fully-furnished home was scheduled for foreclosure auction in November with an estimated total outstanding loan balance of $5.5 million. It features remarkable panoramic views and is located near many of La Jolla’s unique shops.

 

ARROWWOOD CIR, HOUSTON, TX 77063

This bank-owned property was repossessed by the bank via foreclosure back in April 2013 for an estimated $6.3 million. It features 8 bedrooms, 13 baths and is situated on over 23,000 sq/ft.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/m1p6G6y5Ekw/story01.htm Tyler Durden

As we reported yesterday, something odd is happening in the US, which supposedly is deep in a “housing market and economic recovery” – foreclosures on ultraluxury homes, those worth $5 million and over, have soared by 61% in 2013 (even as overall foreclosures continue to decline due to the well-known and much discussed “foreclosure stuffing” process, which means millions of properties are held in bank shadow inventory just waiting for the moment to be unleashed and end the implicitly home price subsidy abused by banks for the past three years). Granted, the overall sample is relatively small, with fewer than 200 properties in the ultraluxury category compared to 1.2 million for all properties tracked, but as RealtyTrac notes, “each of these high-value properties represents a much bigger potential loss for the foreclosing lender compared to a median priced property.”

Additional thoughts from RealtyTrac:

This trend may indicate lenders are now financially stable enough to more comfortably weather the big-ticket losses that these properties potentially represent. In addition, an improving housing market means more prospective buyers, even for these ultra high-end homes. A bigger buyer pool translates into higher sales prices on these properties, allowing lenders to recoup more of their losses on these jumbo loans gone bad.

 

“A home selling for $5 million or above represents the ultra-luxury end of the market, and so far in 2013 we’ve had 34 properties close over that price with the average sale being $7.7 million,” said Emmett Laffey, CEO of Laffey Fine Home International, covering the five boroughs of New York.  “Any foreclosure properties in this type of ultra-luxury market usually get purchased very quickly since there is one thing all super rich buyers want – an outstanding deal on a real estate transaction, and in most cases foreclosures of this magnitude come with several million more dollars of built-in value.”

Regardless of the arbitrage opportunities available to “all cash” buyers, who would be happy to park some cash in real estate, the fact that ultraluxury foreclosures are soaring also means that even the “1%” is starting to succumb to reality and beginning to feel the pressure of a financial reality in which only the “too biggest” can never fail.

So what are the properties in question? The photo gallery below, courtesy of RealtyTrac, shows just where any given $5 million + property stopped making its mortgage payments.

MONTAGE, IRVINE, CA 92614

This home nestled on a bluff overlooking the ocean was listed for sale at $15.9 million but the foreclosure judgment amount at the foreclosure auction scheduled in November was $12.8 million.

PACIFIC COAST HWY, MALIBU, CA 90265

This foreclosure auction property is located right on the water on Pacific Coast Highway in Malibu. It features two detached units and was listed for $9.5 million, but the opening bid at the foreclosure auction in November was $8.8 million.

CUESTA LINDA, PACIFIC PALISADES, CA 90272

Built in 1990, this 5 bed, 6 bath estate was scheduled for foreclosure auction in November with an opening bid of $4.1 million, although the assessed value of the property is $5.5 million.

 

KIMRIDGE RD, BEVERLY HILLS, CA 90210

This beautifully remodeled 5 bed, 7 bath estate was scheduled for foreclosure auction in October with a foreclosure judgment amount of $7.5 million. The grounds feature panoramic views of the ocean, a putting green, and stunning pool area.

 

COLONY VIEW CIR, MALIBU, CA 90265

A beach lover’s dream! This pre-foreclosed, 5 bed, 5.5 bath single-family residence was custom built in 2001. A Notice of Default was filed in October with a default amount of $200,000, meaning the owner was behind that amount on mortgage payments.

 

BUSCH DR, MALIBU, CA 90265

This pre-foreclosed French Country hillside residence features 6 beds, 7 baths and sits on 8 acres.A Notice of Default was filed on this property in June, and at that time the homeowner was an estimated $125,000 behind on mortgage payments.

 

S OCEAN BLVD, DELRAY BEACH, FL 33483

Listed for sale at $13.5 million, this exquisite single-family residence in Florida is in the first stage of foreclosure. A dramatic and elegant floor plan makes this 6 bed, 9.5 bath home perfect for entertaining. The initial foreclosure notice was filed in July.

 

SANCTUARY DR, BOCA RATON, FL 33431

Beautiful single-family “sanctuary” in pre-foreclosure. It features 5 beds, 10 baths and has a fantastic pool and patio area with tranquil views. The pre-foreclosure notice was filed in September with an estimated total outstanding loan balance of $8.1 million.

 

SEA RIDGE DR, LA JOLLA, CA 92037

This 5 bed, 4.5 bath fully-furnished home was scheduled for foreclosure auction in November with an estimated total outstanding loan balance of $5.5 million. It features remarkable panoramic views and is located near many of La Jolla’s unique shops.

 

ARROWWOOD CIR, HOUSTON, TX 77063

This bank-owned property was repossessed by the bank via foreclosure back in April 2013 for an estimated $6.3 million. It features 8 bedrooms, 13 baths and is situated on over 23,000 sq/ft.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/m1p6G6y5Ekw/story01.htm Tyler Durden

Submitted by Adam Taggart of Peak Prosperity,

 

 

A further excerpt:

….

Chris Martenson: Okay. So which comes first, then – low oil prices or low oil supplies leading to higher prices? Which do you see is driving the future here?

Gail Tverberg: I see government problems that are being brought on by oil as being the next step. And the government problems will bring the oil prices down. So as oil prices come down, then that brings the supply down. But it is the government problems that are the intervening step in there. It is the fact that the governments are put in a position where they need to support all of these people who cannot find work, and this is related to the high price of oil. And also, it is supporting promises that we have made over the years.

There is also the debt part of it. We depend on very low interest rates to keep the cost of that debt low right now. But the debt has been escalating since 2008, the federal debt has. And so the government is in a very tight situation, and it is the government problems that have the potential to spill over into the rest of the world situation. And it is through that mechanism that we will see the decline in oil supply. That is the way I see it going.

Chris Martenson: All right, so make sure I have got this: Because the government has taken on a whole lot of debt, it is trying to support a lot of people who are out of work; the economy is basically moribund because of high oil prices, so there is a little self-feedback loop in there. But ultimately, it is going to be the fiscal condition of the government – let’s say the U.S. government?

Gail Tverberg: It is going to be the fiscal condition of the U.S. government, and it is going to be all of the debt outstanding. It is going to be the fact that we cannot keep those interest rates low permanently. We cannot keep this quantitative easing up. And what is going to happen is the interest rates will rise, and that will cause a big problem. Or at least that is one scenario. There are so many different scenarios that could cause a problem. That is just one of them, anyhow.

Chris Martenson: You are talking about all of this leading to a deflationary outcome at some point. The Federal Reserve obviously is working double-overtime to prevent that outcome exactly. A lot of people have staked complete faith that the Fed has this all in hand and will lead to an inflationary outcome, I believe. World bond market prices, equity pricings, resurgence in real estate values, things like that are all collectively telling me that the bet has been made. The Fed will not lose this battle. Do you think they might?

Gail Tverberg: What happens is all of the extra money from the quantitative easing is going into speculation. And it is pumping up the prices of the stock market, the bond market, housing prices, farm prices, you name it. And so it is off in these places where it is not Main Street, it is not doing things that are getting people jobs. And so we have this temporary bubble on assets that cannot stay there if interest rates go up.

Chris Martenson: That is the big “if” in this story. Well, for me, it is a “when” – when interest rates go back up. We have hundreds of years of history on interest rates. And right now, I believe the U.K. or English gilts are at a 400-year low in terms of interest rates. So you might say there is a small chance of reversion to the mean in that story.

Good chance that might happen, and yet, we have this collective bet on such an outcome not happening. People are really hoping for something other. This is, I think, the heart of what you write about a lot – this idea that capital formation is a very different process from printing money. And I have seen otherwise very well-credentialed economists mixing those two things up, using the words interchangeably, that the Fed is basically creating capital. In my mind, capital is something that happens after you have performed some useful economic activity and there is a surplus left over. And then, that capital can be saved and that savings can go back into investment. That loop seems to be pretty well broken, as far as I can tell.

When we look at capital expenditures by corporations, we look at infrastructure spent by the Federal government. Very much a decade of lows. So we are not plowing any of this money back in. It is being used instead for speculation.

But the common story right now says that hey, high asset prices are a cure; they work. High housing prices, prices going up, that cr
eates a wealth effect.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/38WvU3hO6Hg/story01.htm Tyler Durden

Submitted by Adam Taggart of Peak Prosperity,

 

 

A further excerpt:

….

Chris Martenson: Okay. So which comes first, then – low oil prices or low oil supplies leading to higher prices? Which do you see is driving the future here?

Gail Tverberg: I see government problems that are being brought on by oil as being the next step. And the government problems will bring the oil prices down. So as oil prices come down, then that brings the supply down. But it is the government problems that are the intervening step in there. It is the fact that the governments are put in a position where they need to support all of these people who cannot find work, and this is related to the high price of oil. And also, it is supporting promises that we have made over the years.

There is also the debt part of it. We depend on very low interest rates to keep the cost of that debt low right now. But the debt has been escalating since 2008, the federal debt has. And so the government is in a very tight situation, and it is the government problems that have the potential to spill over into the rest of the world situation. And it is through that mechanism that we will see the decline in oil supply. That is the way I see it going.

Chris Martenson: All right, so make sure I have got this: Because the government has taken on a whole lot of debt, it is trying to support a lot of people who are out of work; the economy is basically moribund because of high oil prices, so there is a little self-feedback loop in there. But ultimately, it is going to be the fiscal condition of the government – let’s say the U.S. government?

Gail Tverberg: It is going to be the fiscal condition of the U.S. government, and it is going to be all of the debt outstanding. It is going to be the fact that we cannot keep those interest rates low permanently. We cannot keep this quantitative easing up. And what is going to happen is the interest rates will rise, and that will cause a big problem. Or at least that is one scenario. There are so many different scenarios that could cause a problem. That is just one of them, anyhow.

Chris Martenson: You are talking about all of this leading to a deflationary outcome at some point. The Federal Reserve obviously is working double-overtime to prevent that outcome exactly. A lot of people have staked complete faith that the Fed has this all in hand and will lead to an inflationary outcome, I believe. World bond market prices, equity pricings, resurgence in real estate values, things like that are all collectively telling me that the bet has been made. The Fed will not lose this battle. Do you think they might?

Gail Tverberg: What happens is all of the extra money from the quantitative easing is going into speculation. And it is pumping up the prices of the stock market, the bond market, housing prices, farm prices, you name it. And so it is off in these places where it is not Main Street, it is not doing things that are getting people jobs. And so we have this temporary bubble on assets that cannot stay there if interest rates go up.

Chris Martenson: That is the big “if” in this story. Well, for me, it is a “when” – when interest rates go back up. We have hundreds of years of history on interest rates. And right now, I believe the U.K. or English gilts are at a 400-year low in terms of interest rates. So you might say there is a small chance of reversion to the mean in that story.

Good chance that might happen, and yet, we have this collective bet on such an outcome not happening. People are really hoping for something other. This is, I think, the heart of what you write about a lot – this idea that capital formation is a very different process from printing money. And I have seen otherwise very well-credentialed economists mixing those two things up, using the words interchangeably, that the Fed is basically creating capital. In my mind, capital is something that happens after you have performed some useful economic activity and there is a surplus left over. And then, that capital can be saved and that savings can go back into investment. That loop seems to be pretty well broken, as far as I can tell.

When we look at capital expenditures by corporations, we look at infrastructure spent by the Federal government. Very much a decade of lows. So we are not plowing any of this money back in. It is being used instead for speculation.

But the common story right now says that hey, high asset prices are a cure; they work. High housing prices, prices going up, that creates a wealth effect.

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