Greek Court Suspends Gravity

Submitted by Pater Tenebrarum  –  The Acting Man Blog

Take that, Einstein!

As is well known, we all labor under the irresistible force of gravity ever since Einstein heedlessly invented the stuff. Attempts to outlaw it have thus far failed to our knowledge, but maybe it’s just a matter of perseverance.

tsipras-2They did what? Alexis Tsipras learns that his government will need €1.5 bn. more per year according to Greece’s administrative court.

Photo credit: Angelos Tzortzinis / AFP

A Greek court has just decided on implementing a roughly equivalent ruling, by declaring the previous government’s pension cuts illegal and ordering the government to restore pensions to their height prior to the implementation of the last bailout agreement. AFP reports:

“Greece’s top administrative court on Wednesday ruled that pension cuts adopted in 2012 as part of the country’s tough bailout conditions were unconstitutional, and ordered the cash-strapped government to restore the payments to their previous levels.

The Council of State’s long-awaited ruling on private sector pensions comes as Greece’s anti-austerity government is locked in tense talks with international creditors over reforms in return for urgently-needed rescue funds, with pensions seen as one of the key sticking points.

The court’s decision, which is not retroactive, calls for the government to restore the pensions to the level they were at before a November 2012 law came into effect lowering main and supplementary pensions by five to 10 percent.

The Council of State has in recent years been asked to consider many of the painful austerity measures that caused widespread anger in Greece and helped bring the hard-left anti-austerity Syriza power to party in January.

The court last year found that wage cuts for police, the military and firefighters were also unconstitutional. But the previous government took several months to comply with the ruling and only partially restored the salary levels, citing budgetary constraints.

Wednesday’s pension ruling is expected to cost the state 1.2-1.5 billion euros ($1.3 billion to $1.7 billion) a year, according to Greek economic analysis site Macropolis.

We can understand that Greece’s pensioners are deeply unhappy. The fact of the matter is though that the Greek government is bankrupt. The court might as well have ordered birds to stop singing, or the sun not to shine. Things may have been different if a Greek default had been countenanced from the very beginning to liquidate unsound debt instead of piling even more debt atop it. However, even in that case, the Greek government would have had little choice but to embark on reforms, because it simply doesn’t have enough money to continue where Greece left off at the height of the last boom. Continue reading

PANIC BEFORE EVERYONE ELSE DOES

Submitted by Jim Quinn  –  The Burning Platform

For the lazy people who don’t like to slog through Hussman’s entire data laden weekly tome, I’ve picked out the most pertinent sections. For the really lazy, I’ve bolded the most important sentences. When everyone on Wall Street is using the same algorithms in their HFT supercomputers, and John Q. Public isn’t even in the market, who will these supercomputers sell to when they all get the sell signal at the same time? When that time comes, and it won’t be long, I’ll be munching popcorn and watching the festivities unfold. The talking heads, government apparatchiks, and Ivy League educated big swinging dicks on Wall Street will declare a national emergency and demand another bailout. Will we be stupid enough to fall for it again, or will we start hanging bankers? 

The higher the price an investor pays for a given stream of expected cash flows today, the lower the return that an investor should expect over the long-term. As detailed below, investors have responded to zero interest rates by driving stock valuations up to the point where expected market returns over the coming decade are also zero. Given that outcome, one is quite free to say that stocks are reasonably valued “relative” to zero interest rates, but one should still expect zero 10-year returns on stocks.

My impression is that’s not how investors are thinking. Particularly at market peaks, investors seem to believe that regardless of the extent of the preceding advance, future returns remain entirely unaffected.The repeated eagerness of investors to extrapolate returns and ignore the Iron Law of Valuation has been the source of the deepest losses in history.

Current valuations are above the 2007 peak, and are now within about 15% of the 2000 extreme.

What we haven’t seen at any point in history is the combination of dismal projected returns for the S&P 500 coupled with a similarly dismal yield-to-maturity on bonds. The coming decade will be an underfunding disaster for corporate pension plans, endowments, and municipalities, most that still typically plan around an assumed rate of return closer to 8%. The most reliable measures we identify suggest that nominal total returns on a conventional asset mix are likely to be closer to 1% annually. Quantitative easing has already given investors, at least on paper, the gains that they would otherwise have waited years longer to achieve (again, at least on paper). Particularly in equities, investors who do not have a very long horizon and cannot actually tolerate a 50% loss should consider realizing those paper gains now and cutting exposure to a tolerable level. That’s not market timing – it’s sound financial planning that may be quite overdue. My impression is that the window of opportunity is closing quickly.

Recall that the 2000-2002 and 2007-2009 collapses were accompanied by Fed easing, not tightening. “Following the Fed” would have been disastrous in each case, as the Fed cut rates persistently and aggressively as the market lost half its value. Indeed, the Fed began cutting rates several weeks before the 2007 peak. The Fed also did not tighten within a year of the 1929 peak.

How many investors do you suspect will be available to absorb your shares at current price levels once they begin trying to exit simultaneously? Continue reading

The Warren Buffett Economy – Why Its Days Are Numbered (Part 3)

During the last 27 years the financial system has ballooned dramatically while the US economy has slowed to a crawl—–a divergent trend that has intensified with the passage of time. For instance, since Q4 2000, nominal GDP has expanded by just 70% compared to a 140% gain in market finance (i.e. the value of non-financial corporate equity plus credit market debt per the Fed’s Flow Of Funds report).

The Warren Buffett Economy Part 1
The Warren Buffett Economy Part 2

As a consequence, and as we previously demonstrated, the ratio of finance to economic output has soared to nearly 540% of national income compared to a historic norm of about 200%. Had even the stabilized ratio of 240% that the Volcker sound money policy had put in place by 1986, for example, remained at the level, total credit market debt and equity finance would be $50 trillion lower than today’s gargantuan $93 trillion total.

Total Marketable Securities and GDP - Click to enlarge

Even when you purge the cumulative price inflation out of the above picture, the story does not remotely add-up. That is, while real median household income has not gained at all since the late 1980s, and thus currently stands at just 1.03X of its 1987 value, the GDP deflator-adjusted value of corporate equities and credit market debt outstanding stands at 8.0X and Warren Buffett’s real net worth at 19.0X.

Needless to say, that’s not capitalism at work; its central bank driven bubble finance. So the question remains why did the Fed expand its balance sheet by 22X over the past 27 years (from $200 billion to $4.5 trillion)? After all, the empirical result was a sharp slowing of main street growth, a massive financialization of the US economy and monumental windfalls to financial speculators who surfed on the $50 trillion bubble.

And let’s first sharpen the financial surfer point. Warren Buffett is not a genius and did not invent anything, even a unique method of investing and allocating capital. He may have read Graham and Dodd as a youthful investor, but his nominal net worth did not grow from $3.4 billion in 1987 to $73 billion at present by following the old fashioned precepts of value investing.

Instead, he bought the obvious consumer names of the baby boom demographic wave like Coke and Gillette; had a keen ear for buying what he believed slower footed investors would also be buying later; appreciated the value of banks and other companies that suckled on the public teat; and mainly rode the 27-year wave that caused finance to soar from $12 trillion to $93 trillion after Greenspan took the helm at the Fed.

Stated differently, under a regime of honest money and free market finance no mere insurance company portfolio manger could make 19X in real terms in 27 years. Yes, perhaps a real inventor of something fundamentally new and economically transformative could—-such as Thomas Edison, Henry Ford or Bill Gates.

But the better part of St. Warren’s fortune was manufactured in the Eccles Building. Even he backhandedly admitted as much in his famously gratuitous letter thanking the Fed for bailing out the financial system (and his investment in Goldman, Well Fargo and other financial institutions) during the so-called financial crisis.

The mythology of Buffett’s purported investment prowess, however, is just emblematic of the larger narrative that obfuscates the destructive monetary regime that has been in place since Greenspan’s accession. As the mainstream narrative has it, the $50 trillion bubble embedded in the above graph is completely natural and a sign of long-term progress—-even if its expansion has thus far been interrupted by thundering meltdowns in 2000-2001 and 2007-2008. Continue reading

China At Odds With QE

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

With every piece of “unexpected” weak data from China, the calls for more “stimulus” grow louder and more desperate. And still the PBOC sits on the sidelines with only minor adjustments. The latest of those has been what amounts to a muni swap, with banks eligible to pledge municipal government debt as collateral in repurchase operations, SLF’s, MLF’s and even the relatively new PSL (the acronyms are almost unimportant as they all amount to the same type of liquidity scheme). The intent is not to boost banking, “money supply” or any of the broader kinds of monetarism that had been projected in the past, only to offer limited ability to channel some monetary favor into fiscal projects (as muni borrowers are expected to swap high yield bonds obligations for those with much more comfortable terms).

Reform continues, instead, through the PBOC’s restraint where it has proved it will only act in very narrow and what it has determined as useful conduits. The resolve to do so seems only to strengthen despite what is clearly a looming economic crisis, one that gets closer with every data release.

China’s inflation in May came in lower than expected, offering more evidence that Asia’s largest economy is stalling and suggesting more easing may be on the way.
“We haven’t really seen any stabilization for growth in China yet,” Johanna Chua, head of Asia economics and market analysis at Citigroup, told CNBC. “Even though lending rates are coming down, they need to come down lower to support growth.”

China may well be beyond the point of “stalling”, landing hard already in the actual recessionary category. Still, that remains no reason to expect “more easing may be on the way” but rather its opposite. While the PBOC’s economics forecasting team recognized the difficulties here, they only proceeded to cut their economic assessments (in the form of the highly pliable GDP figure) from 7.1% to 7.0%. They did lower inflation estimates for CY2015 to 1.4% from 2.2%, which is as much reality if still somewhat optimistic about H2.

ABOOK June 2015 China CPI

We already know the sordid state of external “demand”, the once primary export sector which no longer provides enough emphasis to arrange all economic and monetary orientation – the entire point of monetary reform in the first place. While outwardly officials suggest that China will instead reposition its economy toward more internal channels, that may be just more hopeful projection.

Vehicle sales in China fell for a second straight month in May, the first such consecutive drop since late 2011, highlighting the weakness in the world’s second biggest economy.
Passenger and commercial vehicle sales in China totaled 1.9 million vehicles last month, falling 0.4 percent year-on-year and following on a 0.5 percent fall in April, the China Association of Automobile Manufacturers (CAAM) said at a Beijing news briefing on Wednesday.

Continue reading

Cyberwarfare Threat To Nuclear, Banking and Financial System

Submitted by Mark O’Byrne  –  GoldCore

Legacy of stuxnet is risk posed to technology dependent world
20 countries have launched cyberwarfare programmes since exposure of stuxnet in 2010
Stuxnet virus targeted safety mechanisms in Iran’s nuclear reactors in 2010
Virus launched to sabotage Iran’s nuclear program was also used for mass spying
All types of digital systems at risk, including financial, banking and gold providers
Direct ownership of physical gold, unlike digital currency, not vulnerable to cyber warfare

20 Countries Have Announced Digital Warfare Programs

A new book detailing the development, operation and ramifications of the deployment of the notorious Stuxnet virus shows that it has created a far more risky world.

The book, Countdown to Zero Day, by Wired magazine writer Kim Zetter, shows that – apart from being an extremely irresponsible and dangerous act of sabotage – the deployment of Stuxnet against Iran has led to an acceleration in development of cyberwarfare.

In a must read article in the Irish Times, respected technology journalist, Karlin Lillington reviews the book which presents some fascinating insights into the whole Stuxnet affair which she describes as “the world’s first digital weapon”.

Wired Magazine writer Kim Zetter

Most unnerving is the fact that twenty different countries have announced digital warfare programmes since the exposure of Stuxnet in 2010.

The U.S. had been demanding that other countries refrain from engaging in cyber warfare techniques until it emerged that the U.S. itself, along with Israel, had deployed the extremely destructive virus against Iran. The NSA had been authorised to launch Computer Network Attacks (CNA’s) for over a decade.
Zetter’s book gives a fascinating insight into how the virus operates. It was launched via a USB key rather than via the internet. The developers had identified glitches in Microsoft’s operating systems which were not publicly known and used these flaws against their target.

The virus secretly collected data on the operation of centrifuges in nuclear reactors for thirty days. Then it began interfering with the operation of the centrifuges in such a way that it would damage the reactors while reporting back the data of the previous thirty days so that engineers could not identify any problem. Continue reading

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

Peak America: Our Run Is Over (Paul B. Farrell)
American Dreaming, From G1 to Bilderberg (Pepe Escobar)
US Is Still Drowning In Mortgage Debt (MarketWatch)
The Warren Buffett Economy – Why Its Days Are Numbered-Part 3 (Stockman)
Myopic US Policies Pave Way For China’s Dominance (MarketWatch)
China’s Answer to Europe’s Needs (Bloomberg)
The World’s Worst Investment Bubble Will Burst Soon (MarketWatch)
Demands On Greece Will Yield The Opposite Of What They Promise (FT)
Varoufakis: ‘Contrary To Stubborn Rumours, We Never Gambled’ (Bloomberg)
Greek Pension Mess Shows There’s No Easy Way Out of Impasse (Bloomberg)
German Government Consulting On What To Do If Greece Goes Bankrupt (Reuters)
Keeping Greece in the Euro May Have Nothing to Do With … Euros (Bloomberg)
EU Issues Final Warning To Greece As Last-Ditch Talks Achieve Nothing (AEP)
IMF To Alexis Tsipras: ‘Do You Feel Lucky, Punk?’ (Guardian)
The Slow Transformation Of The IMF (Rochon)
Stupidity Is The Biggest Problem In The Housing Debate (Pickering)
A Bitcoin Start-Up Has Made Exchanging Currency Free (CNBC)
Italian Statistics Agency Validates Citizens Income Proposal (M5S)

Much more here: Debt Rattle June 12 2015 – TheAutomaticEarth.com