The Future is Blivets

Submitted by Dmitry Orlov  –  The ClubOrlov Blog

If you have been paying attention, you may have noticed that the global financial markets are currently in meltdown mode. Apparently, the world has hit diminishing returns on making stuff. There is simply too much of everything, be it oil wells, container ships, skyscrapers, cars or houses. Because of this, the world has also hit diminishing returns on borrowing money to build and sell more stuff, because the stuff we build doesn’t sell. And because it doesn’t sell, the price of stuff that’s already been made keeps going down, lowering its value as loan collateral and making the problem worse.

One solution that’s been proposed is to convert from a products economy to a services economy. For instance, instead of making widgets, everybody gives each other backrubs. This works great in theory. The backrub industry doesn’t generate an ever-expanding inventory of backrubs that then have to be unloaded. But there are some problems with this plan. The first problem is that too few people have enough money saved up to spend on backrubs, so they would have to get the backrubs on credit. Another problem is that, unlike a widget, a backrub is not a productive asset, and doesn’t help you pay off the money you had to borrow to pay for the backrub. Lastly, a backrub, once you have received it, isn’t worth very much. You can’t auction it off, and you can’t use it as collateral for a loan.

These are big problems, and one proposed solution is to create good, well-paying jobs that put money in people’s pockets—money that they can then spent on backrubs. This is best done by investing in productivity improvements: send people to school, invest in high tech and so on. It’s an intuitively obvious idea: productive workers are easier to employ than unproductive workers, because the stuff they make ends up cheaper, and people can afford to buy more of it. Whether they do buy more of it is debatable, especially if there is more than enough of it already and nobody has any extra money saved. Still, the theory makes sense.

But this theory doesn’t seem to be working all that well: no matter how much money we put into automation—robotic assembly lines, internet-based virtualization, what have you—the number of unemployed workers isn’t going down at all. And it’s even worse with driverless cars. In theory, they are great: if the driver doesn’t have to do the driving, then she can spend the time giving her passengers backrubs. But no matter how much money we throw at driver-less cars, the number of unemployed drivers, or unemployed massage therapists, isn’t going down. Continue reading

Mutual Funds, ETFs at Risk of a Run Warns David Stockman

In one of his starkest warnings yet, Former White House Budget Director (Office of Management and Budget, OMB), David Stockman has warned that banks and the global financial system remain vulnerable and there is likely to be another global financial crisis which will be worse than the first involving “a run on mutual funds and ETFs.”

stockman

Stockman warns in a Bloomberg interview that Deutsche Bank

“has a $2 trillion balance sheet and they have a net tangible equity of $66 billion. So that is 3% – “they are leveraged 30 to 1 in terms of net tangible equity.”

“What is whirling around in that $2 trillion nobody knows but I do think that the banks have unloaded the worst of their stuff and today it is in mutual funds and ETFs, today it is in non bank financial institutions, like all these companies that have come up over night to make auto loans by selling junk bonds as a form of capital.”

This is reminiscent of the first financial crisis and the financial collapse wrought on the world with the subprime mortgage fraud as beautifully illustrated in the must see movie ‘The Big Short’.

Regarding how ‘mom and pop’ investors and pension owners are vulnerable, Stockman says

“The dangers of a run are far more serious now than it was with banks then. Back then, main street banks did not have to mark to market most of their assets and there never was a run on mainstreet banks, it was only on a few hedge funds  … 

This time you are going to have a run of $5 trillion or $6 trillion of mutual funds. This time you are going to have a run on the ETFs. There were only $1 trillion of ETFs in existence in 2008. There is over $3 trillion now and they are an accelerator mechanism.

When everyone sells their ETFs, the managers have to go out and liquidate assets by selling the underlyings. The underlying assets are not nearly as liquid as the offer that anytime you want to sell your ETF there is a bid. Anytime you want to sell your mutual fund share, there is a bid … and I will tell you what … that is where the collision is going to come in the market.”

In another must watch Bloomberg interview, the respected Stockman warned that Deutsche Bank is in difficulty and the CEO is likely lying:

“In my experience is that when the crunch comes, bank CEOs lie.”

Stockman reminded us of the deceit and denial that emanated from Morgan Stanley, Bear Stearns and Lehman Brothers before their collapse:

“I don’t trust Deutsche Bank. I don’t trust what they’re saying. And there’s reason why the banks are being sold all across the world… because people are realizing once again that we don’t know what’s there [on bank balance sheets].” Continue reading

ARE WE ON THE EVE OF WAR?

Submitted by J.C. Collins  –  philosophyofmetrics

For the first time in a long time I feel concerned and worried about the prospect of war.  The reaction of Saudi Arabia to the Russian intervention in Syria has always been the wild card in the shifting geopolitical power base in the Middle East.  Turkey and Israel, along with Saudi Arabia are the three countries with the most to lose because of a strong alliance between Syria, Iran, Hezbollah, and Russia.

These three traditional American allies have been accustomed to Western support in regards to their own specific regional goals and ambitions.  This support has been so staunch and counterproductive to regional stability that the growing comfort and alliance between Iran and the US should be both confusing and worrisome to Saudi Arabia and Turkey.

On the one hand the US is making agreements with Iran and lifting sanction while on the other hand it is indirectly supporting Saudi Arabia’s and Turkey’s proxy war against Syria. A war which Iran, along with the support of Russia and Hezbollah, are resisting and countering with massive aerial and ground support.

This contradiction is suggestive of another and more complex strategy which may be unfolding in the Middle East.  A strategy which is beginning to look familiar.

Back in 1990 when Saddam Hussein invaded Kuwait the state of the Iraqi dictator’s mind was both paranoid and desperate.  The once American supported leader at some point felt he would have the blessings of the US administration in his regional adventures.  The controversy surrounding US Ambassador April Glaspie’s comments to Saddam regarding having no interest in Iraq’s border dispute with Kuwait, and her later vindication by the release of a memo, is somewhat irrelevant as Saddam obviously felt the support was there.  Whether through direct and straightforward communication or through trickery.

Once Iraq invaded Kuwait the Western press mobilized and a massive propaganda campaign against Saddam Hussein commenced.  The once American ally was isolated on the world stage and suffered one of the worst military defeats in the history of warfare. Continue reading

Why Japan Went NIRP: No More Doubts About QQE

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

When real household spending fell by 4.6% in April 2014 it was cause for concern. That was the first month after the tax hike hit and the decline in spending was much larger than anticipated (by economists, at least). Despite the heavy toll, Bank of Japan officials remained (outwardly) wholly unconcerned over what was believed a minor setback on the road to raging inflationary success. With so much “stimulus”, including of the fiscal kind, there was no way Japan’s economy would fail to respond.

While spending had declined, “inflation” had ticked to its highest level since February 1991.

Japanese consumer prices showed that inflation picked up in April [2014], excluding the sales tax increase that started at the beginning of the month, government data showed Friday. The data was a welcome sign in the central bank’s battle to increase inflation to 2 percent.

Economists were overjoyed if somewhat cautious.

“Consumer spending has declined as expected in April, but this is likely to be minor blip and will not affect the ongoing recovery,” Martin Schulz, of Fujitsu Research Institute told the BBC.
“Both consumer spending and retail sales will start rising in the latter half of the year.”

By August 2014, Bank of Japan Governor Haruhiko Kuroda was quite confident and positive despite weakness in spending that persisted well beyond April 2014 (May was actually much worse).

In April last year [2013], the Bank of Japan introduced quantitative and qualitative monetary easing (QQE) to achieve the price stability target of 2 percent at the earliest possible time, with a time horizon of about two years. The last time I addressed you here was only a year ago. At that time, I mentioned that there was a positive turnaround in three areas since the introduction of QQE: in financial conditions, expectations, and economic activity and prices. Since then, QQE has been steadily having its intended effects, and the positive turnaround in the three areas has continued. Japan’s economy has been on a path suggesting that the 2 percent price stability target will be achieved as expected.

Continue reading

PhD Economists Ought to Know Better…

Submitted by William Bonner, Chairman – Bonner & Partners

Meltdown

MIAMI – On Thursday, the Dow rose 79 points – or about 0.5%. Nothing proved one way or the other. We told you about our visit with President Reagan’s former budget advisor and Wall Street veteran David Stockman.

Must-should-ought-large1Ought!

Unlike almost every other analyst or investor we know, David has been a true insider. He has seen how the system really works from within. He played critical roles at critical moments – in Washington and on Wall Street.

1-SPXS&P 500 Index: David Stockman’s positions are benefiting at the moment

So he understands, maybe better than anyone, how the game is played… and how the deck is stacked to favor the insiders, the elite, the cronies, and the Deep State.

David was cheerful when we met him on Wednesday. He makes “bubble finance” trades – shorting stocks that are overpriced, overhyped, and overdue a slide. Lately, he’s been making good money. And he’s looking forward to better times.

The cronies have gone about as far as they can, he said. He expects the markets to melt down and the credit bubble to burst – soon – marking the end of the Bubble Epoch. We’re not so sure…

The Deep State depends on bubble finance. It won’t give it up without a terrific fight. If the Bubble Epoch goes, it will be over the Deep State’s dead body. Which is the way we’d like it. But it won’t be smooth, easy, or fast.

Negative rates? A ban on cash? Helicopter money? Direct intervention in the markets? Depression? Hyperinflation? Dow 36,000? We’ll probably see it all before this is over.

And now… a Friday classic from the archives… Continue reading

The Daily Debt Rattel

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

• Europe’s Dead Cats Bounce, Deutsche Up 10% (BBG)
• Surging Credit Risk for Banks a Major Issue in European Markets (WSJ)
• Banks Eye More Cost Cuts Amid Global Growth Concerns (Reuters)
• Europe Banks May Face $27 Billion Energy-Loan Losses (BBG)
• European Banks: Oil, Commodity Exposure As High As 160% Of Tangible Book (ZH)
• Europe’s ‘Doom-Loop’ Returns As Credit Markets Seize Up (AEP)
• Options Bears Circle Nasdaq (BBG)
• Deutsche Bank’s Big Unknowns (BBG)
• The Market Isn’t Buying That Deutsche Bank Is ‘Rock Solid’ (Coppola)
• Deutsche Considers Multibillion Bond Buyback (FT)
• Distillates Demand Signals US Recession Is Imminent (BI)
• US Oil Drillers Must Slash Another $24 Billion This Year (BBG)
• Five Reasons Behind US Bank Stocks Selloff (FT)
• 10-Year Japanese Government Bond Yield Falls Below Zero (FT)
• EU Probes Suspected Rigging Of $1.5 Trillion Debt Market (FT)
• Italy, A Ponzi Scheme Of Gargantuan Proportions (Tenebrarum)
• Maersk Profit Plunges as Oil, Container Units Both Suffer (BBG)
• Australia Admits Recent Stellar Job Numbers Were Cooked (ZH)
• Pentagon Fires First Shot In New Arms Race (Guardian)
• NATO Weighs Mission to Monitor Mediterranean Refugee Flow (BBG)
• Border Fences Will Not Stop Refugees, Migrants Heading To Europe (Reuters)