Why a pan-European democracy movement?

Submitted by Yanis Varoufakis  –  The Yanis Varoufakis Blog

Yanis Varoufakis speaks to Nick Buxton, and Red Pepper, about why a pan-European movement for democracy is necessary

What do you see as the main threats to democracy today?

The threat to democracy has always been the disdain the establishment has for it. Democracy by its nature is very fragile and the antipathy towards it by the establishment is always extremely pronounced, and the establishment has always sought to undo it.

This story goes to back ancient Athens when the challenge to establish democracy was immense. The idea that the free poor, who were the majority, could be put in control of government was always contested. Plato wrote The Republic as a treatise against democracy, arguing for a government by the experts.

Similarly in the case of American democracy, if you look at the Federalist Papers and Alexander Hamilton you will see it was an attempt to contain democracy, not to bolster it. The idea behind a representative democracy was to have the merchants represent the rest because the plebs weren’t considered up to the task of deciding important matters of state.

The examples are countless. Just look at what happened to the Mossadeq government in Iran in the 1950s or the Allende government in Chile. Whenever the ballot box produces a result the establishment doesn’t like, the democratic process is either overturned or threatened with being overturned.

So if you are asking who are and have always been the enemies of democracy, the answer is the economically powerful.

This year it seems democracy is under attack from entrenched power more than ever. Is that your perception?

This year is special in this regard as we had the experience in Greece where in the elections the majority of Greeks decided to back an anti-establishment party, Syriza, which came to power ‘speaking truth to power’ and challenging the established order in Europe.

When democracy produces what the establishment likes to hear then democracy is not a threat, but when it produces anti-establishment forces and demands, that’s when democracy becomes a threat. We were elected to challenge the Troika of creditors and it was at that point the Troika asserted quite clearly that democracy cannot be allowed to change anything. Continue reading

Apple, FANGS And Monetary Fools

This week the great tree of Apple finally stopped growing towards the sky. During its latest quarter, in fact, i-Pad sales were down 25%, Mac volume came in 4% lower and even the i-Phone barely breached the flat line.

In all, Apple’s mighty machine of double digit growth posted a revenue gain of just 1.7% over prior year, while its net income was essentially flat. The real news, however, was that management is now projecting an actual 11% y/y decline in sales during the current quarter.

Don’t get me wrong. Apple has been the most awesome fount of product invention, global production and supply chain proficiency, logistics and marketing innovation and consumer brand value creation in modern history—-perhaps ever.

Its products—especially the smart phone—did fundamentally transform the daily life of the world. Apple’s installed base of one billion devices is a living testimonial to its fanatical focus on bringing to the consumer a truly transformative digital age experience.

Yet it all happened in well less than 10 years. Indeed, while the tech world was booming in the 1990s, APPL was struggling. Between 1990 and 2004, revenue grew at only 4% per annum and earnings did not increase by one thin dime.

That’s right. Apple’s net income stalled out at $500 million per year for a decade and one half—-or at a level equal to two days profits during the quarter just reported.

That wasn’t much to write home about under any circumstance, but was especially wimpy compared to Microsoft, where sales and net income grew at a 27% CAGR during that period; or Cisco, where sales and earnings soared by 50% annually for 15 years running.

And that brings us to the lunatic valuation of the FANGs (Facebook, Amazon, Netflix and Google), which was also on display again this week. To wit, 100X+ PE multiples are always and everywhere a deformed artifact of central bank driven Bubble Finance, not the emission of an honest capital market.

The fact is, the greatest technology-based businesses of modern times accomplished its dramatic growth spurt in just over 20 quarters between 2011 and 2015. That was after the i-Phone incepted and the i-Pad worked up a serious head of steam.

Now Apple is pancaking or worse, and it is hard to believe that gimmick products like Apple Watch or Oculus can fill the hole from the fast fading i-Pad and the stalling i-Phone. No harm done, of course, and its entirely possible the APPL will have another modest growth run.

But here’s the thing. Apple essentially proves you can’t capitalize anything at 100X except in extremely rare cases because of the terminal growth rate barrier. That is, after a few years of red hot growth almost every large company’s organic growth rate bends toward the single digit path of GDP.


Continue reading

The West Is Reduced To Looting Itself

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

Myself, Michael Hudson, John Perkins, and a few others have reported the multi-pronged looting of peoples by Western economic institutions, principally the big New York Banks with the aid of the International Monetary Fund (IMF).

Third World countries were and are looted by being inticed into development plans for electrification or some such purpose. The gullible and trusting governments are told that they can make their countries rich by taking out foreign loans to implement a Western-presented development plan, with the result being sufficient tax revenues from economic development to service the foreign loan.

Seldom, if ever, does this happen. What happens is that the plan results in the country becoming indebted to the limit and beyond of its foreign currency earnings. When the country is unable to service the development loan, the creditors send the IMF to tell the indebted government that the IMF will protect the government’s credit rating by lending it the money to pay its bank creditors. However, the conditions are that the government take necessary austerity measures so that the government can repay the IMF. These measures are to curtail public services and the government sector, reduce public pensions, and sell national resources to foreigners. The money saved by reduced social benefits and raised by selling off the country’s assets to foreigners serves to repay the IMF.

This is the way the West has historically looted Third World countries. If a country’s president is reluctant to enter into such a deal, he is simply paid bribes, as the Greek governments were, to go along with the looting of the country the president pretends to represent.

When this method of looting became exhausted, the West bought up agricultural lands and pushed a policy on Third World countries of abandoning food self-sufficiency and producing one or two crops for export earnings. This policy makes Third World populations dependent on food imports from the West. Typically the export earnings are drained off by corrupt governments or by foreign purchasers who pay little while the foreigners selling food charge much. Thus, self-sufficiency is transformed into indebtedness.

With the entire Third World now exploited to the limits possible, the West has turned to looting its own. Ireland has been looted, and the looting of Greece and Portugal is so severe that it has forced large numbers of young women into prostitution. But this doesn’t bother the Western conscience. Continue reading

China’s Three Dizzying Factors

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

It makes for quite the juxtaposition, though perhaps not so jarring given that global banks are still enormous and disparate operations. On the one hand, Citigroup’s CEO was eminently confident from within the confines of Davos and the status quo:

The market is “adjusting” to a series of headwinds that can be overcome, Citigroup CEO Michael Corbat said Thursday, a day after theS&P 500 fell to its lowest level in nearly two years.
“We view what’s going on really as more a repricing than any big fundamental shift,” he told CNBC’s “Squawk Box” at the World Economic Forum in Davos, Switzerland.

The question is who is the “we” to which he is referring? It was just a year ago that no bank would even contemplate the possibility of recession entering Janet Yellen’s perfect year, especially as it was setup by “unquestionable” growth in the middle of 2014 (best jobs market in decades). This January, however, while Citi’s CEO downplays recent turmoil, the staff inside his very own bank is thinking very much otherwise:

The global economy is on the brink of a recession, with central bank stimulus less forthcoming and growth weakened by the slowdown in China, Citigroup warned on Thursday.
The bank cut its 2016 global growth forecast to 2.7 percent from 2.8 percent and slashed its outlook for the U.S., U.K. and Canada, plus several emerging markets including Russia, South Africa, Brazil and Mexico. [emphasis added]

That’s a lot of slashing in order to be so sanguine. I don’t agree with the premise, namely that this is all or even mostly due to China (the Chinese sell their industrial production to whom?), but the condition of the Chinese economy offers more universal interpretations upon these kinds of circumstances. That starts with the idea that China is slowing but within a more cheering transition to consumer rather than investment-led activity and margins. It is this idea that manufacturing and production matter, but not nearly as much as they used to and thus not enough to make a full recessionary difference right now. Continue reading

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

• A Chinese Banker Explains Why There Is No Way Out (ZH)
• China GDP Growth 4.3%, Or Lower, Chinese Professor Says (WSJ)
• Yuan Vs. Yen: How China Figures Into Japan’s Negative Rates (WSJ)
• IPO Market Comes to a Standstill (WSJ)
• Greece’s Lenders To Start Bailout Review On Monday (Reuters)
• Milk Collapse Brings a 45% Pay Cut to England’s Dairy Farmers (BBG)
• ‘Peak Stuff’ And The Search For Happiness (Guardian)
• Merkel Says Refugees Must Return Home Once War Is Over (Reuters)
• 10,000 Refugee Children Are Missing, Says Europol (Observer)
• Aegean Sea Refugee Crossings Rise 35 Fold Year-On-Year In January (Guardian)
• Greeks Worry Threatened Closure Of EU Border ‘Definition Of Dystopia’ (Guar.)
• Europe’s Immigration Bind: Morals vs Votes (Guardian)
• 39 Greece-Bound Refugees Drown Off Turkish Coast (AP)

About Resuscitation and Reinstatement

Submitted by Doug Noland – Credit Bubble Bulletin 

“Shock and awe” is not quite what it used to be. It still carries a punch, especially for traders long the Japanese yen or short EM and stocks. The yen surged 2% against the dollar (more vs. EM) Friday on the Bank of Japan’s (BOJ) surprising move to negative interest rates. BOJ Governor Haruhiko Kuroda has a penchant for startling the markets. Less than two weeks ago he stated that the BOJ was not considering adopting negative rates. It wasn’t all that long ago that central bankers treasured credibility.

For seven years, I’ve viewed global rate policies akin to John Law’s (1720 France) desperate move to hold his faltering paper money and Credit scheme (Mississippi Bubble period) together by devaluing competing hard currencies (zero and now negative rates devalue “money”). It somewhat delayed the devastating day of reckoning. Postponement made it better for a fortunate few and a lot worse for everyone else.

Last week saw dovish crisis management vociferation from the ECB’s Draghi. Now the BOJ adopts a crisis management stance. The week also had talk of some deal to reduce global crude supply. Meanwhile, the Bank of China injected a weekly record $105 billion of new liquidity. Nonetheless, the Shanghai Composite sank 6.1% to a 13-month low. There was desperation in the air – along with a heck of a short squeeze and general market mayhem.

Markets these days have every reason to question the efficacy of global monetary management. It’s certainly reasonable to be skeptical of OPEC – too many producers desperate for liquidity. The Chinese are flailing – conspicuously. As for the BOJ’s move, it does confirm the gravity of global financial instability. It as well supports the view that, even within the central bank community, confidence in the benefits of QE has waned.

After three years of unthinkable BOJ government debt purchases, Japanese inflation expectations have receded and the economy has weakened. Lowering rates slightly to negative 10 bps (for new reserve deposits) passed by a slim five to four vote margin. With the historic global QE experiment having badly strayed from expectations, there is today no consensus as to what to try next.

Kuroda remains keenly focused on the yen. After orchestrating a major currency devaluation, there now seems little tolerance for even a modest rally. The popular consensus view sees BOJ policymaking through the perspective of competitive currency devaluation, with the objectives of bolstering exports and countering deflationary forces. I suspect Kuroda’s (fresh from Davos) current yen fixation is more out of fear that a strengthening Japanese currency risks spurring unwinds of myriad variations of yen “carry trades” (short/borrowing in yen to finance higher-yielding securities globally) – de-leveraging that is in the process of wreaking havoc on global securities markets. Continue reading

The FOMC Decision: The Boxed in Fed

Submitted by Pater Tenebrarum  –  The Acting Man Blog

An Imaginary Bogeyman

What’s a Keynesian monetary quack to do when the economy and markets fail to remain “on message” within a few weeks of grandiose declarations that this time, printing truckloads of money has somehow “worked”, in defiance of centuries of experience, and in blatant violation of sound theory?

In the weeks since the largely meaningless December rate hike, numerous armchair central planners, many of whom seem to be pining for even more monetary insanity than the actual planners, have begun to berate the Fed for inadvertently summoning that great bugaboo of modern-day money cranks, the “ghost of 1937”.


Bugaboo of monetary cranks
The bugaboo of Keynesian money cranks – the ghost of 1937.


As the story goes, the fact that the FDR administration’s run-away deficit declined a bit, combined with a small hike in reserve requirements by the Fed “caused” the “depression-within-the-depression” of 1937-1938, which saw the stock market plunging by more than 50% and unemployment soaring back to levels close to the peaks seen in 1932-33.

This is of course balderdash. If anything, it demonstrates that the data of economic history are by themselves useless in determining cause and effect in economics. It is fairly easy to find historical periods in which deficit spending declined a great deal more than in 1937 and a much tighter monetary policy was implemented, to no ill effect whatsoever. If one believes the widely accepted account of the reasons for the 1937 bust, how does one explain these seeming “aberrations”?


1-USDJIND1937crThe DJIA in 1937 (eventually, an even lower low was made in 1938, see also next chart) – click to enlarge. Continue reading

Death Throes Of The Bull

The fast money and robo-machines keep trying to ignite stock rallies, but they all fizzle because bad karma is beginning to infect the casino. That is, apprehension is growing among whatever adults are left on Wall Street that 84 months of ZIRP and $3.5 trillion of Fed balance sheet expansion, aka money printing, didn’t do the trick.

Not only is the specter of recession growing more visible, but it is also attached to a truth that cannot be gainsaid. Namely, having stranded itself at the zero bound for an entire business cycle, the Fed is bereft of dry powder. Its only available tools are a massive new round of QE and negative interest rates.

But these are absolutely non-starters. The former would provoke riots in the financial markets because it would be an admission of total failure; and the latter would provoke a riot in the American body politic because the Fed’s seven year war on savers and retirees has already generated electoral revulsion. Bernie and The Donald are not expressions of public confidence in the economic status quo.

So the dip buying brigades have been reduced to reading the tea leaves for signs that the Fed’s four in store for 2016 are no more. Yet even if the prospect of delayed rate hikes is good for a 50-handle face ripping rally on the S&P 500 index from time to time, here’s what it can’t do. The Fed’s last card—-deferring one or more of the tiny interest rate increases scheduled for this year——cannot stop the on-coming recession.

And it is surely coming. We got one more powerful indicator on that score in this morning’s data on core capital goods orders (i.e. nondefense excluding aircraft). Not only were they down sharply from last month, but at $65.9 billion were down 11% from the September 2014 peak, and are also now below the prior cyclical peaks in early 2008 and 2001.

In fact, core CapEx orders in December were at a level first reported in April 2000, and that’s in nominal dollars. In real terms, they are down nearly 25%.

Continue reading

F(r)actions of Gold

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

The simple fact of the matter is that gold is no longer money and hasn’t been treated that way in decades. It is a frustrating and often woeful outcome, but deference isn’t a reason to color judgement. As an investment, which is more like what gold has become, it isn’t all that straight, either. Gold behaves in many circumstances erratically; often violently so. In 2008, gold crashed three times; but it also came back (and then some) three times. The metal remains stuck in some orthodox limbo of duality, sometimes acting an investment while at others, more rarely, as almost reclaiming its former status.

The junction of that dyad format is wholesale collateral. It is a difficult and dense topic because it plumbs the very depths of the wholesale arrangement – factors like leasing, swaps and collateralized lending through binary bespoke arrangements. It is there that I think it helps to form the narrative, however, starting by reviewing what the BIS was up to in late 2009 and early 2010. I am going to borrow heavily from an article I wrote in April 2013 that describes the events in question but this is one of those times when you should read the whole thing.

Back in July 2010, the Wall Street Journal caused some commotion when it happened to notice in the annual report for the Bank for International Settlements the sudden appearance of gold swap operations to the tune of 346 tons. Subsequent investigation by media outlets, including the Financial Times, reported that the BIS had indeed swapped in 346 tons of gold holdings from ten European commercial banks. That was highly unusual in that gold swaps are typically conducted between and among central banks.
Included in that list of commercial banks were, according to the Financial Times, HSBC, BNP Paribas and Société Générale. The timing of the swaps was pinned down to sometime between December 2009 and January 2010 – just as the world was getting reacquainted with the Greek Republic.

In other words, “dollar” problems had been reborn despite QE1 and ZIRP (and the follow-on programs at the ECB, SNB and elsewhere) because European banks, in particular, had swapped “toxic” MBS collateral for “toxic” PIIGS sovereigns. Now, like MBS before it, even government bonds were becoming non-negotiable in repo (haircuts) and derivative collateral. Stuck not long after the last crisis, banks were in a tight spot since no central bank appeared ready to commit to another great effort so soon risking what they found a fragile but fruitful early revival. Banks then turned to the BIS in what only can be interpreted as great desperation for survivorship. Continue reading

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

• Bank Of Japan’s Negative Rates Are ‘Economic Kamikaze’ (CNBC)
• Negative Rates In The US Are Next (ZH)
• The Boxed-In Fed (Tenebrarum)
• Central Banks Go to New Lengths to Boost Economies (WSJ)
• China Stocks Have Worst.January.Ever (ZH)
• China’s ‘Hard Landing’ May Have Already Happened (AFR)
• China To Adopt 6.5-7% Growth Target Range For 2016 (Reuters)
• Junk Bonds’ Rare Negative Return In January Is Bad News For Stocks (MW)
• I Worked On Wall Street. I Am Skeptical Hillary Clinton Will Rein It In (Arnade)
• VW Says Defeat Software Legal In Europe (GCR)
• Swiss To Vote On Basic Income (DM)
• Radioactive Waste Dogs Germany Despite Abandoning Nuclear Power (NS)
• Mediterranean Deaths Soar As People-Smugglers Get Crueller: IOM (Reuters)

Is China About To Drop A Devaluation Bomb?

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

Though she had no intention of being funny, we laughed out loud, as undoubtedly many did with us, when incumbent and wannabe IMF head Christine Lagarde said last week in Davos that China has a communication issue. Of course, Lagarde knows full well that Beijing has much bigger problems than communication ‘with the market’. Or, to put it differently, if Xi and Li et al would ‘improve’ their communication by telling the truth about their economy, nobody would be talking about communication anymore.

Mixed signals from China, which is attempting to shift its economy away from exports and investment to a consumer-driven model, have deepened concerns about the outlook for world growth, she said. Uncertainty is “something that markets do not like”, Ms Lagarde told a panel of business leaders and economic regulators in the snow-blanketed Swiss ski resort. Investors have struggled with “not knowing exactly what the policy is, not knowing exactly against what the renminbi is going to be valued”, she said, referring to China’s currency. “I think better and more communication will certainly serve that transition better.”

The world’s second-largest economy this week announced its 2015 GDP growth as 6.9%, its slowest in a quarter of a century. The figure cast a shadow over the summit, where IHS chief economist Nariman Behravesh told AFP that Chinese policymakers had “fumbled” and had “added to the uncertainty and the volatility by their behaviour”. Mr Fang Xinghai, the vice-chairman of China’s securities regulator, said at the same panel that “in terms of communication, we should do a better job”. “We have to be patient because our system is not structured in a way that is able to communicate seamlessly with the market,” he added.

The real issue is what people would think if Beijing announced a more realistic 2% or less GDP growth number. The thought alone scares Lagarde as much as anyone, including the Politburo. The sole option seems to be to keep lying as long as you can get away with it. But how and where the yuan will be valued by China itself has become entirely inconsequential compared to how markets value the currency.

The PBoC spent a fortune trying to straighten the offshore and onshore yuan(s), only to see the two diverge sharply again, as Shanghai stocks posted the biggest loss on Tuesday, at 6.4%, since the ‘unfortunate’ circuit breaker incident. That puts additional pressure on the Hong Kong dollar peg, and ultimately on the mainland China peg to whatever it is they’re trying to peg to.

Beijing might solve some of these problems by devaluing the yuan by 30%, or even 50%, but it would invite a large amount of other problems in the door if it did. Like a full-blown currency war. Still, it’s just a matter of time till Xi and Li either do it voluntarily or are forced to by ‘the market’. Continue reading

Surprises in store

Submitted by Alasdair Macleod – FinanceAndEconomics.org

The month of January has been a wake-up call for complacent equity investors.

From the peaks of last year stock indices in the major markets have fallen 10-20%, give or take. On their own, these falls could be read as healthy corrections in an ongoing bull market, and doubtless there are investors hanging on to their investments in the hope that this is true.

The conditions that have led to the fall in equities are tied up in the realization that global economic activity has contracted sharply. This is now reflected in the performance of medium and long-dated US Treasury bonds, where yields have declined, despite a rise in the Fed Funds Rate. The problem equity markets face is not just a reaction to growing evidence of recession, it is that the normal Fed solution, lower interest rates, is exhausted. The Fed’s put option is now being questioned.

Far from this being an equity correction in the early stages of a credit cycle, which is what the small step towards normalization of US interest rates would have had us believe, the evidence points to a developing debt crisis, whose future course we can now tentatively map, though there are important differences to observe compared with a normal credit cycle.

In a normal credit cycle, bank credit stimulated by artificially low interest rates leads to rising consumer prices and rising bond yields. The recovery in nominal GDP growth supports equity prices, which will have already anticipated recovery, and benefited from the lower interest rates set earlier by the central bank. Eventually the equity bull market starts to lose momentum, when it becomes apparent that monetary policy favours tightening. Interest rates are then increased by the central bank to the point where demand for money is curtailed and the economy stops growing due to debt liquidation.

The dynamic that is missing from this simplistic description of an orthodox credit cycle is the level of outstanding debt. The higher it is, the less of a rise in interest rates is required to trigger a downturn in economic activity. So over a long period of increasing accumulations of outstanding debt, the levels of interest rate peaks on successive credit cycles will decline. This is clearly evident in the chart below of the yield on 13-week US Treasury bills.

Chart 1 28012016

The pecked line shows these declining peaks, and that a short-term interest rate of less than 3% today would now appear to be enough to trigger a downturn. With such a small margin for error, it is clear that any increase in the yield spread between this, the highest quality debt, and corporate debt yields could trigger a cyclical debt liquidation. Bear in mind that this credit cycle has seen an acceleration of corporate debt issuance, in order to enhance earnings to stockholders without requiring an underlying improvement in operating profits. The result of this financial engineering has been to increase the growth rate of corporate debt and significantly reduce the interest-rate level that will result in widespread corporate debt defaults. Continue reading