Duck And Cover – The Lull Is Breaking, The Storm Is Nigh

September 15, 2008 is the day that Lehman died and the moment that the world’s central banks led by the Fed went all-in. As it has turned out, that was an epochal leap into the most dangerous monetary deformation that the world has ever known.

It needn’t have been. What was really happening at this pregnant moment was that the remnants of honest capital markets were begging for a purge and liquidation of the speculative rot that had built up during the Greenspan era. But the phony depression scholar running the Fed, Ben Bernanke, would have none of it. So he falsely whooped-up a warning that Great Depression 2.0 was at hand—-sending Washington, Wall Street and the rest of the world into an all-out panic.

The next day’s AIG crisis quickly became ground zero—the place where the entire fraudulent narrative of systemic “contagion” was confected. Yet that needn’t have been, either. In truth, AIG was not the bearer of a mysterious financial contagion that had purportedly arrived on a comet from deep space. Continue reading

Can The US Bail Out Its Oil Industry?

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

Christopher Helin Fisk Service garage, San Francisco 1934

Interesting – if not outrageous – remarks today from Steen Jakobsen at Saxo Bank in Denmark, always good for some fresh insights, and a statement from him that I would like to decorate with a few question marks. As WTI oil looks threatening to break through $60 a barrel with another 5% loss today, let’s first take a look at Saxo’s, and hence Steen’s, Outrageous Predictions, via Tyler Durden. We can take it from there.

Saxobank’s 10 Outrageous Predictions For 2015 – A Reckoning’s Coming

Low volatility has given investors a false sense of security that could lead to the biggest upset in 2015. Central bankers meanwhile have become the generals in an economic war in which the final tool in the box – competitive currency devaluations – merely exports problems overseas. Nowhere exemplifies this better than Japan after the latest bazooka launch by Shinzo Abe threatens to become an out-of-control, inflation-stoking missile. Japan may have bought the global markets a further quarter or two of protection but the real world will have its say.

We saw it for one week of mayhem in October. If that’s anything to go by, we are in for a rollercoaster ride in 2015. Tangible assets and production sit at all-time lows. Paper money investment has crowded out productive capital while societies are dominated by hairdressers and bankers. We’re losing the art of manufacturing. Meanwhile the power of the US of A is waning as China rises and when the superpower pecking order changes, volatility and war ensue.

Nothing is ever given and Outrageous Predictions remains an exercise in finding ten relatively controversial and unrelated ideas which could turn your investment world upside. And we at Saxo Bank remain convinced higher volatility and a potential move towards a mandate for change is upon us as macro thinking enters a final fight to the death before we can again put our faith in people, ideas, education and change rather than hollow promises. 2015 will be a tough year but potentially also the year we look back at as the nadir.

That’s the intro, now let’s get to the predictions themselves, and I’ll give my version. Continue reading

Russia’s Unfazed by Falling Oil Prices

Submitted by Marin Katusa  –  Casey Research

Oil is not quite as powerful a weapon against modern-day Russia as one might think.

By arguing that the slump in oil prices will finish off Russia just like it did the Soviet Union, Ambrose Evans-Pritchard, writing in the Daily Telegraph, is forgetting how far Russia has come since those dark days.

It is true that the USSR couldn’t cope with falling oil revenues and that Saudi Arabia is credited with helping to break up the former empire by dramatically increasing oil production from 2 million to 10 million barrels per day in 1985.

And sanctions could make it harder for Russian firms to access Western know-how, and ultimately affect Russia’s oil output.

But that’s only if they drag on for years—which is doubtful, given the price the EU is already paying. A cut in global oil supply—and stronger global growth—will likely rebalance the oil market in the meantime.

A measure of Russia’s improved prospects is that the population is growing again for the first time since 1992. In fact, sanctions notwithstanding, Russia’s finances look pretty stable for now.

Russia has only about $678 billion in foreign debt, which it’s been vigorously paying down from the high of $732 billion reached at the end of 2013. (The US debt to foreigners has passed $6 trillion, and it’s growing.) It’s running a record-high budget surplus and a positive balance of payments. And it’s circumventing the dollar through trade deals. Even after spending $60 billion propping up companies starved of dollar liquidity, Russia has nearly $375 billion of foreign reserves.

Although GDP growth has slowed from 2012’s torrid 4.25% pace, it’s still projected to come in at 1%, no worse than 2013.

Furious about being locked out of SWIFT—the Society for Worldwide Interbank Financial Telecommunication, which helps facilitate international financial transactions—Putin has also ordered the Russian central bank to proceed with building its own national payment settlement system as an alternative. Continue reading

Monetarism Destroys Money

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

Most people have at least a passing familiarity with the basic concepts of finance. These are intuitive aspects that count almost like Platonic qualities of “truth”, existing as almost transcendent reality upon which human construction is based. In this particular case I am talking about money and time value.

The reason a yield curve takes the shape that it does is exactly that. The longer the term an obligor wishes to borrow, the greater the rate at which he will pay because there is opportunity cost and greater risk by sheer probability. Only later has financial dogma been attached to try to explain ex post facto the appearance of this, especially the Fisherian concept of stratified “premia.”

Regardless of the mathematics, the upward slope is supposed to be a constant whereby if it disappeared, a perfectly flat yield curve, it would denote a situation where time has no impact on risk. That can only mean the death of “money”, or more specifically the death of basic and intuitive finance.

When the LTRO’s were first introduced in Europe in late 2011, it was not uncommon to see yield curves in specific countries like Germany and Switzerland exhibit this kind of flatness out a few years. Not only were the curves flat but in the case of Switzerland nominal yields were also negative, leading to a flat, negative “curve” that insulted the very animalistic contours of risk. Continue reading

Defeat is Victory

Submitted by Dmitry Orlov  –  The ClubOrlov Blog

On the wall of George Orwell’s Ministry of Truth from his novel1984 there were three slogans:

WAR IS PEACE
FREEDOM IS SLAVERY
IGNORANCE IS STRENGTH

It occurred to me that these apply just a little bit too well to the way the Washington, DC establishment operates.

War certainly is peace: just look at how peaceful Iraq, Afghanistan, Yemen, Libya, Syria and the Ukraine have become thanks to their peacemaking efforts. The only departures from absolute peacefulness which might be taking place there have to do with the fact that there are some people still alive there. This should resolve itself on its own, especially in the Ukraine, where the people now face the prospect of surviving a cold winter without heat or electricity.

Freedom is indeed slavery: to enjoy their “freedom,” Americans spend most of their lives working off debt, be it a mortgage, medical debt incurred due to an illness, or student loans. Alternatively, they can also enjoy it by rotting in jail. They also work longer hours with less time off and worse benefits than in any other developed country, and their wages haven’t increased in two generations.

And what keeps it all happening is the fact that ignorance is indeed strength; if it wasn’t for the Americans’ overwhelming, willful ignorance of both their own affairs and the world at large, they would have rebelled by now, and the whole house of cards would have come tumbling down. Continue reading

THE GLOBALIZATION OF CENTRAL BANKS

Submitted by JC Collins  –  philosophyofmetrics

bank-of-england-lgDisclaimer:  The following material is written from the perspective of the global interests which are engineering the multilateral financial system and shifting the monetary frameworks away from the USD based system, and the imbalances that are inherent within that framework. In researching this material and structuring essays such as this one, it is challenging to coherently write from an opposing position, or even supporting position for that matter.  The material is presented in a neutral manner and the reader can make self determinations based on their own prejudices and analytical abilities.  Where I have expressed opposition should be obvious to the reader.

With the coming multilateral financial system the framework of global institutions such as the International Monetary Fund will have to be adjusted, which is what we are seeing with the now imminent implementation of Plan B for the 2010 IMF Quota and Governance Reforms. The reforms will restructure the institution to more accurately reflect the economic realities of the emerging economies, such as China.

As we discussed in the previous post, the shift towards the multilateral is in essence a shift away from the USD structured system. The current dollar based system has survived on a monetary policy framework which has focused on price stability and output growth, both of which affect financial stability through impacts on asset valuations, commodity prices, credit, leverage, and exchange rates. Continue reading

The ECB Boiler Room, Part 2

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

Just as China grapples with the scale of economic waste induced by heavy monetarism, Europe has that old 2011 feeling again of financial waste. Mario Draghi’s July 2012 promise to “do whatever it takes” was taken by banks and financial “investors” as a free-for-all to ride severely discounted sovereign debt to tremendous profit. They did so much of that the ECB got mad at them last year for “forgetting” to lend to anyone else.

So it was too for the poster child of all this European financial disharmony, Greece. However, under this new Draghi-regime where “reach for yield” is significantly boosted by “buy all PIIGS for price appreciation too” it’s as if this is a brave new world. When the Greek government somehow floated new bond issues only eight months ago, I said:

Greek bond yields have been steadily dropping ever since Draghi’s promise, but it strains reason to see new Greek bonds trade to the same yield as that of Hungary, Dominican Republic or even Sri Lanka. All three of those countries hold higher ratings than Greece (though the “big” news is that Moodys might upgrade Greece to less junk status), but far more importantly none of them have defaulted in the past three years. The Greek government managed to do it twice

In other words, there is tremendous political risk attached to the ability of Greece to repay debt, not the least of which is external. And that repayment itself is almost akin to a sanctioned check kiting. With another looming election, that can only rise, particularly with the opposition parties raising their standing in the polls.j

Continue reading

Avoid This “Hideously Expensive” Market

Submitted by Bill Bonner – Chairman, Bonner & Partners

The Dow plunged 51 points yesterday. Gold surged $37.10 – or 3.1% – to settle at $1,232 an ounce.

The US stock market is “hideously expensive,” says value investor James Montier at Boston-based investment firm GMO.

He’s not wrong about that. But we have a feeling it’s going to be even more hideous before this story reaches its end.

When it is so hideous that to look upon it sends us running to a public toilet and retching, that is when it will be most loved by everyone.

This is the story of human hubris (a classic in Greek drama), wherein man oversteps his boundaries and brings down upon himself the fury of wrathful gods.

Yellen, Draghi, Kuroda, Carney, Zhou – the protagonists think they are “wiser than God.”

They think they know that people would be better off spending their money rather than saving it… that prices should be rising not falling… and that, by propping up the price of financial assets with credit easing, they will cause real growth and real prosperity. Continue reading