Submitted by Tyler Durden – ZeroHedge
When it comes to the Ukraine proxy war, which started in earnest just about one year ago with the violent coup that overthrew then president Yanukovich and replaced him with a local pro-US oligarch, there has been no ambiguity who the key actors were: on the left, we had the west, personified by the US, the European Union, and NATO in general; while on the right we had Russia. In fact, if there was any confusion, it was about the role of that other “elephant in the room” – China.
To be sure, a question few asked throughout the Ukraine civil war is just whose side is China leaning toward. After all the precarious balance of power between NATO and Russia had resulted in a stalemate in which neither side has an obvious advantage (even as the Ukraine economy died, and its currency hyperinflated, waiting for a clear winner), and the explicit or implicit support of China to either camp would make all the difference in the world, not to mention the world’s most formidable axis.
Today we finally got the answer, and the winner is… this guy:
Xinhua reported that late on Thursday Qu Xing, China’s ambassador to Belgium, was quoted as blaming competition between Russia and the West for the Ukraine crisis, urging Western powers to “abandon the zero-sum mentality” with Russia.
Cited by Reuters, Xing said that Western powers should take into consideration Russia’s legitimate security concerns over Ukraine.
Reuters’ assessment of Xing speech: “an unusually frank and open display of support for Moscow’s position in the crisis.”
At least it is not a warning to the US to back off or else. Yet. Continue reading
Say what you want about the CPI as it relates to inflation, the actual calculation is set up to measure essentially what GDP measures. That is why economists take their calculations of “inflation” as almost literal substitutes for actual economic activity. There is little denying the close correlation between economic activity especially in recession and the dramatic slides in CPI figures.
In the history of the CPI going back to 1960 when economists Paul Samuelson and Robert Solow first proposed the “exploitable” Phillips Curve whereby monetary authorities could “buy” lower unemployment with higher inflation, there have been exactly nine negative months (out of 661). Eight of those came in 2009, starting at the very trough of the Great Recession in March of that year. The ninth was January 2015.
The only way that Janet Yellen can justify raising interest rates is by ignoring the current and conspicuous failure and calling it temporary or “transitory.” In the recent past, such declines in the CPI have immediately preceded QE episodes, meaning that though those were also called “transitory” they clearly had an effect on policymakers and their actual, as opposed to public, thoughts on the economy.
The most important number in today’s Q4 GDP update was 2.3%. That’s the year/year change in real final sales from Q4 2013. As an analytical matter it means that the Great Slog continues with no sign of acceleration whatsoever.
Indeed, the statistical truth of the matter is that this year’s result amounted to a slight deceleration—–since the Y/Y gain in real final sales for Q4 2013 was 2.6%. But beyond the decimal point variation the larger point is this: Take out the somewhat jerky quarterly impacts of inventory stocking and destocking, and view things on a year/year basis to eliminate seasonal maladjustments and data collection and timing quirks, such as the double digit gain in defense spending during Q3 and the negative rate for Q4, and what you get is a straight line slog since the recession ended in 2009.
Thus, the year/year gain in real final sales for Q4 2012 was 2.1%; and was 1.5% and 2.0% for the years ended in Q4 2011 and 2010, respectively. Its a 2% world. Period.
The questions thus recurs as to what in the world the Fed’s massive money printing spree had to do with this tepid performance. The answer is nothing at all, and that “tepid” and “slog” are exactly the right words to characterize these numbers. After all, the plunge in GDP during 2008 and the first half of 2009 was the deepest since WW II. By all prior norms, therefore, the bounce back should have been exceptionally strong.
For instance, real final sales dropped by 3% during the Great Recession—–far more than the 1.1% decline during the deepest prior post-war downturn of 1981-1982. However, during the next five years of rebound, real final sales grew by 26% or nearly 4.7% per year. That’s more than triple the 8% cumulative rebound from a far deeper hole in June 2009.
So the case for the Fed’s massive money printing campaign has now been flat-out obliterated. As I documented in the Great Deformation, the short but deep recession of 2008-2009 represented a sharp liquidation of excess inventories and labor that had built up in the main street economy during the Greenspan-Bernanke housing and subprime credit bubble. But that one-time liquidation was over by June 2009; the economy was not sinking into a black hole. Continue reading
At a recent conference hosted by a major global bank in London I sat on a panel alongside a macro investment strategist who referred to the euro as a ‘Trojan horse’ intended to force fiscal austerity on traditionally profligate countries such as Greece. While that is true, I believe there is also a second euro Trojan horse, this one intended to force through greater fiscal, banking and political integration, enabling the creation of a European ‘superstate’ to rival the US and China in economic and political power. What we are witnessing now is the inevitable battle between the two horses to win over German public opinion, on which the euro’s future most depends. In my opinion the battle will have several national casualties, resulting in a smaller but more competitive euro-area. While this could be negative for European government bonds, it could be supportive of stocks, eventually.
THE FOUNDATION OF EURO MACRO STRATEGY
Although my career in international finance began in New York, in 1995 I moved to Germany. By that time it was generally assumed that European Monetary Union (EMU) would begin, more or less as planned, in 1999. In my role as a macro investment strategist it thus became necessary to develop a methodology for asset valuation and investment strategy in the presumed future single-currency area.
This required first an aggregate economic statistical dataset for the future euro-area taking many months to develop, with the greatest challenge finding ways to harmonise differing national calculation methodologies for key aggregates. But by focusing as we did primarily on the larger prospective members: Germany, France, Italy, Spain and the Netherlands, the goal was nevertheless achievable and in early 1998 we presented our harmonisation methodology, initial dataset, model suite and key investment recommendations on a ‘roadshow’ to major investors in Europe and around the world. (Subsequently I presented regular updates on these data and associated thoughts on European macro investment strategy on a financial television show jointly hosted by the Wall Street Journal and CNBC Europe, The Eurozone Barometer.)
Now it wasn’t exactly easy to get investors’ full attention in early 1998 due to the Asian currency crises unfolding at the time. Nor did it become any easier as the year went on. In August, Russia defaulted. In the fall, the massive hedge-fund Long-Term Capital Management blew up, with the Fed brokering a deal to contain the substantial potential fallout. But there was sufficient interest in EMU as a historic international monetary development that we nevertheless managed to get meetings with senior officials at many major central banks and other financial institutions who would be the amongst the largest future holders of euro-area sovereign debt. They wanted to know how to value and estimate the risks of such debt, issued by sovereign borrowers with the power to tax but lacking a national central bank to set interest rates and serve as a potential ‘lender of last resort’ in a crisis. Continue reading
The pace of new home sales continues to be stuck right below that 500k SAAR, a flattening of activity that dates back really to January 2013. The data has at times peaked above 500k only to be revised subsequently lower, which does not provide a whole lot of confidence about recent months. January’s level was slightly below December, but volatility (including revisions) prevents any kind of interpretation about the shortest term.
Looking at it year-over-year, it is clear that the trend in sales matches closely the NAR’s version of resales. Existing home sales there nearly collapsed last winter before rebounding through the summer; only to fall back again this winter. New home sales seem to confirm that interpretation of the housing “market”, as there was certainly an initial decline, temporary rebound and what looks like a resumption of “winter.” Continue reading
We want to focus on a specific aspect of the current money supply expansion in this part. The topics of “price inflation”, as well as investment and production will be discussed in a follow-up post shortly.
Let us consider the mechanics of past boom-bust cycles in the US. In “normal” booms, banks expand credit to companies and households, with the former employing the funds mainly for investment and the latter for consumption. Banks that don’t have sufficient reserves will borrow them in the interbank market (Federal Funds market), where the Fed stands ready to satisfy any excess demand for reserves that threatens to push the overnight Federal Funds rate above its administered target rate. In short, monetary inflation is driven by bank credit expansion and accommodated by the central bank. To the extent that the Fed-administered target rate manipulates market interest rates below the natural rate dictated by society-wide time preferences, this seemingly “harmonious” inflationary process will promote ever more malinvestment of scarce capital as well as overconsumption. Eventually the central bank becomes worried that the credit expansion may push consumer prices above its arbitrary target for CPI and begins to hike rates – then the artificial boom falters with a lag and a bust ensues. The central bank thereupon lowers rates again. Lather, rinse, repeat.
Image credit: mevans
As a rule, the impoverishment caused by this boom-bust cycle doesn’t leave society worse off at the end of the bust than it was on the eve of the boom. Instead, the outcome is simply a lot less satisfactory than it would have been without central bank intervention. During the boom, the stock market will attract a lot of investment as well. Stocks are titles to capital, and capital tends to become mispriced when interest rates are artificially lowered. These price distortions are then rectified during the bust. Falling stock prices don’t “cause” economic depressions. They merely mirror and/or anticipate changing economic and monetary conditions. Continue reading
Ambassador Jack Matlock made an important speech at the National Press Club on February 11. Matlock served as US ambassador to the Soviet Union during 1987-91. In his speech he describes how President Reagan won the trust of the Soviet leadership in order to bring to an end the Cold War and its risk of nuclear armageddon. http://www.larouchepub.com/eiw/public/2015/2015_1-9/2015-08/pdf/10-14_4208.pdf
Reagan’s meeting with Gorbachev did not rely on position papers written by staff. It relied on a hand-written memo by Reagan himself that stressed respect for the Soviet leadership and a clear realization that negotiation must not expect the Soviet leaders to do something that is not in the true interest of their country. The way to end the conflict, Reagan wrote, is to cooperate toward a common goal. Matlock said that Reagan refused to personalize disagreements or to speak derogatorily of any Soviet leader.
Matlock makes the point that Reagan’s successors have done a thorough job of destroying this trust. In the last two years the destruction of trust has been total.
How can the Russian government trust Washington when Washington violates the word of President George H.W. Bush and takes NATO into Eastern Europe and places military bases on Russia’s border?
How can the Russian government trust Washington when Washington pulls out of the Anti-Ballistic Missile Treaty and places Anti-Ballistic Missiles on Russia’s border?
How can the Russian government trust Washington when Washington overthrows in a coup the elected government of Ukraine and installs a puppet regime that immediately expresses hostility toward Russia and the Russian-speaking population in Ukraine and destroys Soviet war memorials commemorating the Red Army’s liberation of Ukraine from Nazi Germany?
How can the Russian government trust Washington when the President of Russia is called every name in the book, including “the new Hitler,” and gratuitously accused of every sort of crime and personal failing? Continue reading
Finance ministers in the Eurozone appear to have had a free lesson in game theory from Professor Yanis Varoufakis, the Greek finance minister. At the time of writing Greece’s future in the Eurozone is far from secured, but it appears that Greece has achieved something.
He gave his fellow finance ministers a deal they dared not refuse, though it still has to be ratified by some parliaments, including Germany’s today. Varoufakis almost certainly understands that the Eurozone is in a weaker position than the bureaucrats and finance ministers themselves believed. It was important for them to become aware of this reality, which was central to his approach. It appears that under the Lisbon Treaty, Eurozone states cannot expel Greece: she can only leave with everyone’s unanimous agreement, including her own. And they probably didn’t realise that playing hardball against Greece would force the ECB to write off debts approaching ten times her equity capital of only €10.8bn. This would require all member states to increase their capital subscriptions, including the other Eurozone states subject to austerity packages.
Equally, Varoufakis would have known that he could not push his opposite numbers too far because the Brussels establishment also have their national parliaments to consider and the positions of Italy, Spain, Portugal and even Ireland. A revolt against previously-agreed austerity packages by any of these other states would have untold ramifications not only for the future of the Eurozone, but the euro itself. Continue reading
Yesterday in trying describe Janet Yellen’s testimony to Congress about the economy, pundits apparently were forced to concede that the “data won’t cooperate”, thus leaving the economy in Yellen’s head to be wholly different than anything described elsewhere outside the media echoes. Today’s release of durable goods provides yet another data point that “will not cooperate” with the dreamland of the Fed Chair. There is absolutely no way or means by which to interpret durable goods, and especially capital goods, as picturing an economy moving toward sustainable growth let alone already residing comfortably at that level.
The pace of activity is already within a well-defined “rut” which I have described as the modern, interest rate targeting era marvel of the now-elongated business cycle. With the mini-cycles contained within that trend, the most recent months show yet again the downside of the latest mini-cycle which is not unlike the first half of the Great Recession and very much like the year and a half between the Asian flu and the dot-com recession.
Submitted by Mark O’Byrne – GoldCore
– Greece warns may default on IMF loan next week
– Greek bank runs continue and deposits flee
– German Bundestag votes for bailout extension
– Syriza agree to a bailout extension of four months, in return for concessions yet to be approved by the EU
– Questions over Syriza negotiating a weak deal despite its strong position
– Greece and EU buying time to arrange orderly “Grexit”?
– Greece has printing presses poised to print newly designed Greek drachmas
– Greeks buying gold bullion
The Euro Working Group discussed Greece’s imminent funding problems yesterday amid mounting concern about how the country will meet its massive obligations.
Minister of State for Coordinating Government Operations, Alekos Flambouraris, suggested yesterday that Greece might delay payment to the IMF if it cannot find the necessary money. Greece is due to pay the IMF 1.6 billion euros next month but the Greek Minister said that Athens might ask to delay this payment for two months.
Kathimerini reports that “the possibility of Greece postponing the repayment of any debt tranches to the IMF is seen as “exceptionally complicated” with “many obstacles,” according to officials “familiar with the subject”. They stress that such a move would constitute a “clear default,” with consequences for a large number of other loans Greece has received.”
Yesterday the Bank of Greece presented its latest, January, bank deposit data and it shows bank runs continue in Greece. There was a record €12.2 billion monthly outflow of deposits. This is greater in absolute and relative terms than anything experienced during any of the previous Greek crises and bailouts. Continue reading