Finally Retracement

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

When the FOMC came out and said the economy was good enough for them to begin raising interest rates, the eurodollar funding market did the opposite of what would be expected of that situation. Not only did the market move in the “wrong” direction, it did so with a great deal of conviction.

Today’s jobs report moved the eurodollar market also with conviction, though now back in the other direction from the FOMC. As a result, we have returned to January levels of rate “interpretations”, though still with the requisite flattening in the outer years.

ABOOK Feb 2015 Eurodollar Jobs

Ultimately, I don’t believe these markets, including treasury rates, are factoring anything different than what they had been doing almost uninterrupted since November 20, 2013. Rather, I think given all the dramatic bearishness imbedded within these levels, especially since December 1, a retracement was long overdue. The 10-year CMT rate fell from 2.27% back on Christmas Eve all the way to 1.68% a few days ago almost without pause; the 30-year went from 2.85% to 2.29%.

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After 12 Years of Persecution and Imprisonment Professor Sami Al-Arian Escapes US DOJ Gestapo

Submitted by Dr. Paul Craig Roberts – Institute for Public Economy

 

After 12 Years of Persecution and Imprisonment Professor Sami Al-Arian Escapes US DOJ Gestapo

“I came to the United States for freedom, but four decades later, I am leaving to gain my freedom.”

The Internet site, The Intercept, provides the exclusive interview below with Professor Sami Al-Arian. I reported on the totally false and trumped-up case brought against this good and innocent person by the US Department of Justice (sic) in The Tyranny of Good Intentions (2008), coauthored with Lawrence M. Stratton.

The false case that the DOJ concocted in order to ruin an innocent man’s life shows that the DOJ has no integrity. The case reveals that the DOJ is so arrogant that the DOJ has no concern for its reputation among the legal profession at home and abroad. The DOJ proves its lack of concern about its integrity time and time again. For example, the imprisonment of former Alabama Democratic governor Don Siegelman was achieved on the basis of brute force. Everyone knows that, including President Obama. Yet Siegelman remains in prison.

The DOJ no longer makes any pretense of representing justice or respecting truth, constitutional protections or even its own word. After coercing Al-Arian into a plea agreement, the DOJ then reneged on the word of the US government. In effect, the DOJ told Al-Arian: “Ha Ha, you trusted our word and now we have you!”

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Empirical Refutation To Redistribution

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

At the same time the Bank of Japan cut its outlook for “inflation” last month, seriously violating the standard set at the beginning of QQE to meet its target within 2-years, they also raised their growth predictions for the coming fiscal year (starting in April). Nobody seems to have appreciated the irony of that since almost all of the increase in expectations for real growth was due to nothing more than that lowered expectation of “inflation.” It may only be GDP but it is more than a little amusing, after insisting over and over that inflation is some kind of cure, that missing their inflation target raises their own GDP estimates.

In its updated price and growth projections for the next two years, the bank cut its median forecast for the average rise in the consumer-price index in the year starting April to 1.0% from the previous 1.7%.
The sharper-than-expected cut, made for the second time in a row, is still fairly bullish considering the recent drop in the inflation rate to well below 1%. The central bank revised up its price forecast in the following year, a sign of confidence that cheaper energy costs will provide a major boost to firms and households, stimulating their spending and leading to a rise in prices.

I guess that means growth is expected to take place regardless of price instability, with the price level itself nothing more than a marginal piece of intensity. This idea about inflation as a cure is making even less sense now than it had when QQE was first announced as an excluding condition. Part of that is no doubt related to how the Japanese economy itself has done nothing that was expected, often acting, like exports and wages, in the contrary and more harmful fashions.

Less attention was paid to the “unexpected” recession in calendar year 2014 that was finally admitted, as GDP expectations, already cut prior to just +0.5%, were trimmed to -0.5%. Writing off 2014 as a lost year due to the tax increase, economists view a looming recovery. The latest data from Japan, including trade data released prior, again might beg to differ.

ABOOK Feb 2015 Japan HH Income

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A Very Pernicious Partnership: Keynesian Money Printers And Wall Street Gamblers

No sooner than the January jobs report was released than the Wall Street Journal posted a succinct headline: “Hiring, Wages Pick Up as Job Market Nears Full Health”.

Whether the job market is actually as red hot as the BLS’ headline numbers is a debatable topic, but it is absolutely clear that the “emergency” the Fed cited 73 months ago when its pegged the money market rate a zero has long since vanished. Indeed, by the standards of all prior history, ZIRP was a death bed remedy. Prior to December 2008, the Fed had never, ever pegged the funds rate at zero—not even during the Great Depression.

So if the US economy did generate new jobs at the 4 million annual rate implicit in the November-January average, how is it that not only is the money market still pinned to the zero bound, but that the Fed continues to energetically waffle over how many more months it will remain there? Don’t these people know what the words “emergency” and “extraordinary measures” mean in plain English?

Not that it really matters. The truth is, the stubborn and unaccountable continuance of a crisis era monetary policy in the face of a purportedly booming labor market reflects something altogether different than economic common sense. Namely, it is the product of a pernicious partnership of convenience between the Keynesian money printers who dominate the Fed and the gamblers who inhabit the Wall Street casino. Together they virtually smoother any recognition that the current juxtaposition is just plain nuts.

As it happened, not more than 60 minutes after the WSJ headline appeared the usual suspects were at work explaining a condition that seemed anomalous even to the cheerleaders on CNBC. Continue reading

Central Bank Madness is Contagious

Submitted by Pater Tenebrarum  –  The Acting Man Blog

Central Bank Madness is Contagious

Lately central banks around the world are busy slashing interest rates (if they still have any to slash), or printing money more or less outright if they have bumped into the much-dreaded zero-bound. In fact, the newest fad is to cut interest rates even if there aren’t any left to cut. The minus sign on the keyboard has turned out to be useful after all!

Not only are the Keynesian dunderheads running the SNB at it (there is absolutely no reason to elevate them to quasi-sainthood just because they kicked an untenable peg out from under the euro), but lately also Denmark’s central bank. Note here that Denmark is home to one of the biggest household and mortgage debtbergs on the planet, relative to economic output. We somehow doubt that the credit bubble will be kept in check by slashing interest rates to minus 75 basis points.

1-Denmark, Household debt to GDP-annThe Danish situation – Denmark’s household debt to GDP ratio and the central bank’s crazy negative benchmark interest rate. Note how two tiny baby-step rate increases were enough to send the credit bubble into wobble mode – click to enlarge.

As an aside to this, Denmark is also considered a major showpiece of socialism. If you feel the urge to let the State nanny you from the cradle to the grave and take most of your income if you dare to earn more than three crowns, Denmark is the place for you (some additional color on this topic can be found here: “Socialism’s Prize Nation Slave State”). The Danes, incidentally, seem to be very nice people. We know a handful of Danes personally, and they are all intelligent, witty and extremely likeable. It could of course well be that we simply know the wrong Danes, this is to say, atypical ones. Nevertheless, we keep wondering how their country landed in this socialist mess.

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We Stand with the Communists!

Submitted by William Bonner, Chairman – Bonner & Partners

Reluctant Tourist

We stand with the Communists!

That’s right – shoulder-to-shoulder, singing “The Internationale” with Syriza, the ruling party of Greece, after an election campaign marked by an unusual degree of honesty.

At least, one party was telling the truth when it sent an “open letter” to the voters of another nation! More on that in a minute.

First, let’s follow up on our travel memoirs. We are a reluctant tourist; wherever we go, nothing quite measures up to Baltimore. Once you have come to know Charm City, well, there’s nothing else like it.

Which is too bad for a rogue economist, condemned to wander the earth in search of fleeting insights. He sees the most bizarre, appalling, and often fetching, things… and they all remind him of home.

 

bailout

A Gardener’s Paradise

What struck us most about Lake Arenal in the northern highlands of Costa Rica was that it was as though there had been a breakout from a garden store. At night, after the guards had gone home, the plants must have escaped and run wild, rooting themselves all over the valley.

Flowers and bushes, carefully locked up in garden centers in Maryland, are bought and planted around the house for the deer to eat. At Lake Arenal they all are on the loose. Huge rhododendron, azaleas, bougainvillea, crepe myrtle – you name it. You have to name it, because we don’t know the names!

All we know is that these plants look familiar. Along with a lot of plants we’ve never seen before. It must be a gardener’s paradise. Now, after an uncomfortable overnight flight from Panama City, we’re in Brazil, where we are beginning an intensive course of Portuguese.

Initial investigation reveals that the grammar is familiar and many of the words could pass for Spanish, but the initial matches are misleading. On the streets of São Paulo, the sentences rush by like Chinese tourists: Each one resembles the other ones, but they are all strangers to us.

Berlitz is supposed to help us distinguish one from another. We’ll let you know how it goes …

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“Forgive Us Our Debts” – Debt Forgiveness Only Way To Prevent Economic Meltdown

Submitted by Mark O’Byrne  –  GoldCore

– Europe and western world is in a debt-fuelled deflation which is spiralling out of control

– Global debt has risen a massive $57 trillion or more than 25% in 7 years since the crisis of 2008

– Managed debt forgiveness is essential now to avoid chaos of defaults, mass unemployment depression and economic collapse

goldcore_1_06-02-2015
And forgive us our debts, as we also have forgiven our debtors” – Matthew

The bully tactics employed by the ECB against the newly elected government in Greece demonstrates once again how the ECB and the entire European project puts the interests of banks and political elites over those of the average citizen.

Certainly, it is necessary to take a tough stance regarding fiscal responsibility and discipline. Very few people suggest otherwise.

However, the ECB maintains a different set of standards when it comes to supporting the banking system as demonstrated by its imminent initiation of quantitative easing (QE).

QE has failed in Japan and only had a degree of success in the UK and the U.S. Even Alan Greenspan admitted that it has been a “terrific success” for the rich but had failed to meet its stated objectives. Continue reading

Sovereign Bonds

Submitted by Alasdair Macleod – FinanceAndEconomics.org

Today’s obvious mispricing of sovereign bonds is a bonanza for spending politicians and allows over-leveraged banks to build up their capital. This mispricing has gone so far that negative interest rates have become common: in Denmark, where the central bank persists in holding the krona peg to a weakening euro, it is reported that even some mortgage rates have gone negative, and high quality corporate bonds such as a recent Nestlé euro bond issue are also flirting with negative yields.

The most identifiable reason for this distortion of free markets is bank regulation. Under the Basel 3 rules, a bank with sovereign debt on its balance sheet is regarded by bank regulators as owning a risk-free asset. Unsurprisingly, banks are encouraged by this to invest in sovereign debt in preference to anything else. This leads to the self-fulfilling second reason: falling yields. Central bank intervention in the bond markets through quantitative easing and commercial bank buying leads to higher bond prices, which in turn give the banks enormous profits. It is a process that the banks wish would go on for ever, but logic says it doesn’t.

Don’t think that there is an economic justification for negative bond yields: there isn’t. Even if price inflation goes negative, interest rates in a free market will always remain positive. The reason for this cast-iron rule is interest rates are an expression of time-preference. Time preference is the solid reason that possession of money today is more valuable than a promise to give it to you at some time in the future. The future value of money must always be at a discount to cash-in-the-hand, or put the other way, to balance the value of cash today with cash tomorrow always requires a supplementary payment of interest. That is always true so long as interest rates are set by genuine market factors and not set by a market-monopolising central bank, and then distorted by banking regulations.

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Made In The USA

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

There is still no evidence that the US economy is doing anything but continued sputtering. This is not news to the rest of the world, however, as the persistent lack of actual American “demand” has been felt nearly everywhere. Domestic economists, and a great many foreign counterparts, continue to see the US as the sole engine of economic hope. But even just writing that doesn’t make sense, as how can every other place in the world be in economic trouble when the one place that drives economic activity in the rest of the world is “booming?”

Most attention as it relates to this deficiency fixes squarely upon China, being conditioned as the world’s economic transition. And that is largely right, as the Chinese sit squarely between end “demand” in the US, Europe and now Japan (thanks to Abenomics) and the resource economies at the beginning of the supply chain. The Baltic Dry and other shipping rates have been absolutely pummeled lately and the only connection that is made in mainstream economic commentary is the PBOC and the Chinese housing bubble.

But even that is derivative. The Chinese housing bubble exists only because China is not the manufacturer of its own “demand.” The PBOC entered heavy monetarism because the US (and Europe) fell into the Great Recession. And then they “had” to do it all over again because the US economy (and Europe) slowed once more in 2012.

The idea of monetary “stimulus” is to create demand for the sake of demand in order to bridge the divide between recession and recovery – filling in the troughs. We know clearly of Chinese “reform” that they no longer view naked monetarism as even a partial solution, having wasted so much resources and getting nothing much out of them. But the second part of “reform” is the admission that the PBOC was building a financial bridge to nowhere; and thus the expected and intended US recovery simply never came.

ABOOK Feb 2015 Global Economy US Imports China

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China’s Monumental Debt Trap—-Why It Will Rock The Global Economy

Bloomberg News finally did something useful this morning by publishing some startling graphs from McKinsey’s latest update on the worldwide debt tsunami. If you don’t mind a tad of rounding, the planetary debt total now stands at $200 trillion compared to world GDP of just $70 trillion.

Source: McKinsey

The implied 2.9X global leverage ratio is daunting in itself. But now would be an excellent time to recall the lessons of Greece because the true implications are far more ominous.

Today’s raging crisis in Greece was hidden from view for many years in the run-up to its first EU bailout in 2010 because the denominator of its reported leverage ratio—national income or GDP—–was artificially inflated by the debt fueled boom underway in its economy.

In other words, it was caught in a feedback loop. The more it borrowed to finance government deficit spending and business investment, whether profitable or not, the more its Keynesian macro metrics—-that is, GDP accounts based on spending, not real wealth—-registered a falsely rising level of prosperity and capacity to carry its ballooning debt.

Five years later, of course, the picture is much different. Greece’s GDP has now shrunk by more than 25%. The abysmal picture depicted in the graph below explains what really happened. Namely, that the bloated denominator of GDP came crashing back to earth, exposing that Greece’s true leverage was dramatically higher than the 100% ratio reported in the years before the crisis.

In economic terms, the graph below simply documents how the false prosperity from Greece’s hand-over-fist borrowing binge was purged from the GDP accounts after the debt party came to a halt in 2009. Needless to say, the reason the Greek story is so relevant is that this condition is nearly universal, meaning that the 2.9X leverage ratio for the global economy pictured above is also drastically understated.

Historical Data Chart

The fact is, since 2010 Greece’s total debts outstanding have risen only modestly. The reason that the debt-to-GDP ratio shown below has gone parabolic is that Greece’s phony boom time GDP has been sharply deflated.

Historical Data Chart

To be sure, today’s Keynesian pettifoggers insist these pictures reflect a big policy mistake. Namely, that the consequence of “austerity” policies forced on Greece by the Germans was the evisceration of its “aggregate demand” and therefore an unnecessary intensification of its debt burden. By allegedly causing Greece’s GDP to fall, austerity policies forced its leverage ratio to keep rising—-even after a lid was placed on its borrowing.

That contention is not just baloney; its a stark example of the incendiary circular logic by which the Keynesian apparatchiks of the world’s governing class and their fellow travelers on Wall Street are pushing the global economy and financial system to the brink of disaster.

Put a ruler from the beginning to the end of the graph above, and you get a doubling of nominal GDP and a 14-year CAGR of 5.5%. That’s probably more nominal growth than could reasonably have been expected from the Greek economy at the turn of the century—–given the debilitating inefficiency and corruption of its long standing crony capitalist oligarchy and Athens’ devotion to mercantilist waste, bloated state payrolls and unaffordable welfare state pensions, among countless other economic sins.

Accordingly, the huge bulge in reported GDP from 2001-2009—reflecting a 13% annual gain—–did not even remotely reflect sustainable output growth; its was merely the feedback loop of exuberant debt financed spending that had not been earned by new inputs of labor, productivity and entrepreneurial activity.

Accordingly, the big hump of GDP recorded during the pre-crisis boom was phantom GDP; it was not remotely sustainable, and it most surely does not represent “aggregate demand” lost owing to “austerity” policies. Instead, the subsequent deflation merely tracks the permanent evaporation of public and private spending that could not be supported by current production and income.

The truth of the matter is that production and income come first. “Spending” or GDP growth can only exceed production growth when leverage ratios are rising. Indeed, the very concept of “aggregate demand” is nothing more than an academician’s word trick. It has no substance beyond the sum of changes in production and changes in leverage.

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The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

Deflation Risk in U.S. Seen Rivaling Euro Area (Bloomberg)
Stocks Will Be ‘Ripped To Smithereens’: Albert Edwards (CNBC)
Oil Heading For $30, Currency War Coming (CNBC) Is China Preparing for Currency War? (Pesek)
China’s Monumental Debt Trap – Why It Will Rock The Global Economy (Stockman)
Conquering China’s Mountain of Debt (Bloomberg)
The Debt Write-off Behind Germany’s ‘Economic Miracle’ (France24)
Why Deutsche Bank Thinks Europe Will Fold (Zero Hedge)
Time for #GreekLivesMatter (Naked Capitalism)
Greek Leaders Return Home for Rethink After Rebuff From Germany (Bloomberg)
ECB Said to Allow Greek Banks €59.5 Billion Emergency Cash (Bloomberg)
Greek Debt Drama Is ‘Theater,’ But Stakes Are High (CNBC)
Greece and Varoufakis Need Supporters Not Sympathisers (Guardian)
The Lazard Banker Shaping Greece’s and Ukraine’s Financial Fate (WSJ)
Banker to the Broke: Lazard Advises Greece, Ukraine (Bloomberg)
Abenomics Leaves Japan’s Poor and Elderly Behind (Bloomberg)
Is Denmark Facing A Speculative Attack? (CNBC)
Australia Central Bank Acting Like It ‘Just Woke Up’ (CNBC)
Oz PM Abbott Fights for Political Life as Colleagues Seek Ouster (Bloomberg)
Venezuela Oil Deal Hits Caribbean Hard (CNBC)
John Kerry Rated Worst Secretary Of State In 50 Years (MarketWatch)

Continue Reading: Debt Rattle February 6 2015 – TheAutomaticEarth.com