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Insufficient Retirement Funds as Immanent Problem of Neoliberal Regime

Forced cruise to Frugality Island for victims of neoliberalism

Summing Up The American Dream (In One Cartoon)
Hat tip: ZeroHedge
News Casino Capitalism Economics Bookshelf Recommended Links Bulletin Rational Fools vs. Efficient Crooks: The efficient markets hypothesis Retirement Financial Security
Stock Market as a Ponzy scheme Economics of Energy Unemployment Inflation vs. Deflation Coming Bond Squeeze Notes on 401K plans Vanguard
401K Investing Webliography Retirement scams John Kenneth Galbraith Financial Sector Induced Systemic Instability Neoclassical Pseudo Theories The Great Stagnation Tax policies
Selected Reviews The Roads We Take 401K investment tips Casino Capitalism Dictionary Financial Quotes Financial Humor Etc

Due to the conversion of the society to neoliberal model started under Reagan, chances of "happy retirement" (aka "golden age") for lower 90% of world population (and probably 80% of US citizens) became slim. The key idea of neoliberalism is "Greed is good" -- if we increase inequality to max, we speed up growth (albeit mostly in financial sector ;-). And that means wealth redistribution that hurts middle class and decimates lower class. So 99% should be satisfied to get what trickle down from the top 1% and should not complain. The top 1% grabs lion share of nation wealth and almost all gains because it can (as is "Yes we can"). Corruption of regulators guarantee that in a process they never risk jail.

So "insufficient retirement funds" problem for, say, 90% of the population is a feature of neoliberal regime, not just an accidental result of 2008 financial meltdown. Investment banking has been ruthless in dumping risk on hapless 401K lemmings. The stock run of 2013 improved situation for the most reckless part of savers, who adhere to "stocks for a long run" philosophy (aka Naive Siegelism), but did not fundamentally changed it. Situation is worse for those whom the meltdown of 2008 frightened away from the stock market. People in retirement or close to retirement were disproportionally affected: as stocks are inherently riskier than other investments (and should be trimmed with age, as 100 - your_age rule suggests), but interest on bonds precipitously dropped during Helicopter Ben actions to save financial sector from complete meltdown.

Lack of retirement funds means that many seniors will be forced to work well past the traditional retirement age, if (big if) they can find employment. Living standards for for 90% of seniors will fall, and poverty rates will rise. It is important to understand that this is not an accident but the natural result of dominance of neoliberalism as a new social system. And the retirement crisis is the direct result of conversion of the state into neoliberal model. Such a conversion imply

Those factors of neoliberal conversion started under Reagan have been well documented individually. What is less appreciated is their combined ferocity. There are also some negative demographic factors:

In other words 401K Donors to Wall Street (which as a cruel joke are called 401K investors) are currently travelling on the Cruise Ship "Affluent Society" in Stormy Fiat Currency Waters to the final destination, which might be the Frugality Island:-). Fleecing by financial oligarchy of middle class retirements plans is the fact of the US life. Recent "crazy" run of S&P500 to 1800 eased the pain, but structurally the situation essentially remains the same and what rases fast falls even faster:

...America’s overall retirement system is in big trouble. ...
Many workers used to have defined-benefit retirement plans, plans in which their employers guaranteed a steady income after retirement. And a fair number of seniors ... are still collecting benefits from such plans.
Today, however, workers who have any retirement plan at all generally have defined-contribution plans — basically, 401(k)’s... The trouble is that at this point it’s clear that the shift to 401(k)’s was a gigantic failure. Employers took advantage of the switch to surreptitiously cut benefits; investment returns have been far lower than workers were told to expect; and, to be fair, many people haven’t managed their money wisely.
As a result, we’re looking at a looming retirement crisis, with tens of millions of Americans facing a sharp decline in living standards at the end of their working lives. For many, the only thing protecting them from abject penury will be Social Security. Aren’t you glad we didn’t privatize the program?

It's very probable that without new technological breakthrough the USA economy as well as all major Western economies are in "permanent stagnation" period. Stagnation of median wages may have been evident for longer in the US, but the Great Recession has led to declining real wages in many other first world countries. And semi-permanent rate lowering by FED and derivatives frenzy of major banks should probably be viewed as the last, desperate attempt, if not to provide growth, then to provide an illusion of growth. At any cost.

Generally, as return on investment in manufacturing diminishes more and more, money are chasing financial assets, creating one speculative boom after another. And each of them sooner or later ends in spectacular bust. Herbert Stein quote "If something can't go on forever, it will stop" (which sound more like Baby Ruth quote ;-) is fully applicable here. What is important to understand that "boom-bust" cycle now is the way neoliberal economy functions. They are not aberration, they are the immanent feature of the system. The side effect of fleecing 401K lemmings is in full accordance with the main idea of neoliberalism: redistribution of wealth between top 1% and the rest of population. And any attempt of more equitable sharing of wealth face huge, emotional resistance of "Masters of the Universe" one of which recently compared such attempts with Hitler's Kristallnacht (Progressive Kristallnacht Coming — Letters to the Editor - WSJ.com)

For an individual investor it is impossible to predict when such a bust happens. But it is reckless not to take into account this possibility, when financial assets appreciate like there is no tomorrow. Again for a regular investor the game now is not about the return on capital, but the return of capital.

This neoliberal invention called 401K is, in essence, a privatization of retirement plans. And instead of growing the funds, many people discovered that it actually impose a tax of savers because it offloads all kind of investment risks on the individual. It also created a huge and semi-parasitic industry of mutual funds, which try to lure 401K investors in stocks. Those who were saving in bonds, especially in bond mutual funds and ETFs now face dramatically lower returns due Bernanke helicopter money and bringing short term rates below inflation, In no way they are safe. See Coming Bond Squeeze.

Read Saving your 401K (or may be not now; when S&P500 is above 1700 most people would discard any such recommendations as junk ;-).

But the current value of S&P 500 that does not change general situation: what is proposed for lemmings in 401K plans is not investing, but gambling with Wall Street as a casino owner (aka Casino Capitalism). As such there is a distinct possibility to be a victim of computerized financial warfare of Wall Street with middle class. The financial elite also lusts after Social Security money, and would love to have it transferred over to them for 'safekeeping'. The news isn’t good about the shift from defined-benefit to defined-contribution pension plans for individual investors. Wall Street behavior is sticky. As John Kenneth Galbraith noted:

"People of privilege will always risk their complete destruction rather than surrender any material part of their advantage."

One important side effect of the transformation of the USA society into neoliberal society since 1970 was offloading risks on individuals. That's true for retirement too. Now with 401K plan it's individual who assumes the inflation risk, interest risk (See Bernanke stole your pension), market volatility risks and structural unemployment (rampant in the USA) risks. This neoliberal society now faces several major crises which lead to the loss of power and prestige and as such deeply affect the US economy:

For readers looking for a clear explanation of why the US government is detested and feared by much of the earth's population (Global South) should read Dilemmas of Domination The Unmaking of the American Empire, Nemesis The Last Days of the American Republic, or Suicide of a Superpower Will America Survive to 2025

When a large number of old people expect to receive certain amounts from their retirement portfolios, reductions in running yields end up reducing their monthly income. People were forcefully pushed into stock market casino, in which of course Wall Street is the winner and ordinary investors are the losers. Casino Capitalism, the internal version of neoliberalism the USA and Great Britain has been nurtured and encouraged by a series of government decisions. Of which creation of 401K plans was only one among many. There were also important decisions to deregulated financial markets and allow derivatives with the hope to replace income from manufacturing by income from financial sector. In other words its was a counter-revolution of the part of ruling elite that lost its influence in 30th (dismantling New Deal from above in the USA (Reaganomics) or Thatcherism in the GB). As Nancy Folbre is an economics professor at the University of Massachusetts wrote in her article Rowboats for Retirement (NYT, Jun 24, 2013)

It feels so good to row your own boat. You’re the captain. You can set your own course and speed. According to the boat advertisements, you are almost sure to reach your destination as long as you pay for good advice, rebalance and row hard. Sure, there may be big waves, but you can ride them out, and storms always subside.

A lot of people used to think of 401(k) retirement accounts this way. But in the last six years, most Americans have gained a new appreciation of financial bad weather and the threat of a perfect storm. Stock market volatility, low interest rates and a sagging bond market have discouraged retirement savings.

Persistent unemployment and stagnant wages have left many workers treading water, struggling so hard to stay afloat that they couldn’t open a retirement account even if they wanted to.

A new report from the National Institute on Retirement Security, based on analysis of the 2010 Survey of Consumer Finances, shows that about 45 percent of all working-age households don’t hold any retirement account assets, whether in an employer-sponsored 401(k) type plan or an individual retirement account.

Among those 55 to 64 years old, two-thirds of working households with at least one earner have retirement savings less than one year’s income, far below what they will need to maintain their standard of living in retirement. By a variety of measures, most households, even those with defined benefit pensions, are falling far short of the savings they will need.

At the same time, the amount of funds you need for retirement now it difficult to estimate as you now carry both inflation risk and market crash risks. That means that you need to put efforts in creating a model (using Excel) suitable for your situation to have a realistic assessment of what you need and can be adapted to the changing situation (for example ZIRP regime installed by Bernanke and Co.). More or less comfortable monthly income now approaches $4.5K a month for a couple of two, renting a modest two bedroom apartment, who wants and is able to travel (let's say one trip to children, one vacation and one other trip, $2000 each):

Item

Monthly Annual
Total expenses 4505 54060
Rent 1500 18000
Food 800 9600
Travel 666 8000
Suppl Medical Insurance 400 4800
Car amortization (two cars) 208 2500
Car insurance (two cars) 150 1800
TV 120 1440
Gas/transportation 120 1440
Heating/air conditioning 100 1200
Extra expenses 100 1200
Drugs and out-of-pocket med 100 1200
Electricity 60 720
Presents to relatives 50 600
Cloth, computer, furniture, etc 50 600
Internet 40 480
Cell phone 40 480

But to get those funds by growing your 401K investments is a difficult task. At minimum, if one of spouses SS is at max ($3K at age of 70) you need approximately $300K of your own funds to get from age 65 (or the time you lose your full time employment) to age 70. As many IT specialists who reached senior age lose full time employment much earlier and are underemployed since, you may need to dip at your 401K at some point of your life, so doubling this amount by shooting for $300K in 401K for each of spouses is prudent. That's not that much but few people have that at, say, 55. Generally it is realistic to assume that since 60 you will be underemployed and can't get more then 50% of previous salary. So you can't contribute to 401K any longer. Most of available jobs now are McJobs in service sector.

Yes, once in a while stock market performs a spectacular run and that can help. But the question is whether it last. Who would expect that when the USA economy is still in zombie state with high unemployment S&P 500 would reach 1667 as it did on May 17, 2013.

But for each 100 days then stocks are at their five year peak level, there are ten different years. And the key problem is that to one can predict when the fortune changes and at what level stock market will be when you desperately need to withdraw money. In any case, the events of 2000 and 2008 for many people were like losing half of money at a casino, then having the dealer smile at you and say "How about one more try. Trust us. This time it will be different..." At this point, relations of Wall Street and 401K investors look like in a classic scorpion and frog fable.

Boomers were brainwashed about "stocks for the long run" and now they see that returns are below expectations (as of Feb 25, 2013 S&P500 grew 15% less in comparison to the same investment to Pimco Total Return fund, if we invested from 01/01/1996 biweekly to Feb 2013). Of course, God knows what will happen with Total return fund after Bill Gross left, but still...  

As most 401K investors feel that they do not have enough money for retirement they tend to take outsized risks and recently jumped back to stocks and junk bonds (aka reaching for yield), because interest in regular bond funds and Treasuries disappeared (thanks to Bernanke Fed).  Wall Street is famous for royally fleecing such people.

As most 401K investors feel that they do not have enough money for retirement they tend to take outsized risks and recently jumped back to stocks and junk bonds (aka reaching for yield), because interest in regular bond funds and Treasuries disappeared (thanks to Bernanke Fed).  Wall Street is famous for royally fleecing such people.

Even the recent fuelled by Fed money printing boom in stock prices is no escape: in the current oil-constrained US economy stock prices have been sliding in real terms (inflation adjusted) since the 2000 peak, and every time after peak they suffer a collapse. Two most recent were in 2001 when S&P500 fall to 720 or so from 1460 and in 2009  when S&P fall to 670 or so.

You can't predict the time of the next collapse, but you can be sure that it will happen in the most inopportune moment then you vigilance is at low after a relatively long and steady period of growth of stock values. It can happen in 2015 it can happen in 2020 but generally each ten years there is a risk of such calamity.

When Wall-street pump-and-dump insiders start a dump phase, the Fed opens the credit tap to push them back up, thus the oscillating pattern around a downwards trend in 2000-2012 But at the end a stock crash occures that those who paniced give a lot of money to Wall street speculators. Can it modern method of redistirbution of wealth from lemming to Wall-street sharks, if you wish.

One positive for 401K investors trend is that S&P500 became like another government statistics. That means that it is the US government who now desperately wants to stop or slow the decline of the S&P500, because the S&P500 goes down, most pension funds and other insurers blow up... As Greenspan argued recently the main goal of FED policy is to boost stock prices (and house prices).

But at the same time ZIRP — the near zero percent rates sinking already retired Boomers retirement dreams and undermining prospects of happy retirement for those boomers who still work. Some can't bear the pressure and do move assets back into stocks reaching to yield. They can be lucky, but if they are not then the next crisis will wipe out that paper gains in no time like has happened in 2008. And there is no guarantee that the third great robbery of the century is far away: halfway across that stream, scorpion again will show the frog its true nature…

That's why the first thing in retirement planning is to learn Excel. Even with crappy rates your Social Security will kick in at 66. Your financial situation will be better if you can wait till 70 to start getting SS. In most cases this "66-70" increase in SS constitute tremendous help. In other words minimal size of 401K should give you the ability to postpone Social Security till 70.

Also with crappy interest rates you need to understand that your health is becoming your most valuable asset.

Minimal size of 401K should give you the ability to postpone Social Security till 70. Generally IT staff can't assume that they will be employed till 66, so it is better to reach this amount around 60. That means that you should strive to contribute the amount which at 60 "theoretically" makes you 401K sufficient to support "self-financed" retirement for 10 years. Assuming $60K a year and 3% return after inflation a year that comes approximately to $500K. With $12 a year ($6 an hour) supplementary income you need only $400K and with $24K ($12 an hour) supplementary income this amount drops to $300K.

It's not a rocket science to calculate approximate year-by-year expenses from the day of your retirement/unemployment to your longevity expectation date +7 (very few people exceed their longevity estimate obtained using Retirement & Survivors Benefits Life Expectancy Calculator by more then five years) .

This way you can see that you do you not really need to play in the stock market casino that much. And get an approximate calculated amount of safe funds (and your monthly contributions) that will allow you to live frugally, but securely without taking outsize investment risks. Here is an example of such a basic  estimate:

Life Expectancy Calculator

The following table lists the average number of additional years a male born in 1950, can expect to live when he reaches a specific age.
If you are at Age Additional Life Expectancy
(in years)
Estimated Total Years
63 20.5 83.5
66 18.3 84.3
70 15.5 85.5

The means that as you (and your wife) age, you better decrease your equity exposure to the level where your minimum life expenses are covered without your stock part of the portfolio.

For the examples table below shows minimum monthly expenses obtained by drastically downsizing retirement life style shown above:

Item Monthly Annual
Total expenses 2470 29640
Rent 800 9600
Food 800 9600
Travel 100 1200
Suppl Medical Insurance 0 0
Extra expenses 150 1800
Car amortization (one car) 100 1200
Car insurance (one car) 100 1200
Gas/transportation 60 720
TV 80 960
Drugs and out-of-pocket 100 1200
Cloth, computer, furniture, etc 50 600
Presents to relatives 50 600
Internet 40 480
Cell phone 40 480

This calculation means that you probably can survive on around 60% of your "desired" retirement income. Unfortunately this involves pretty big sacrifices in life quality. So in no way you can allow you next egg to drop 50% due to stock market calamities, as happened in 2008. So please remember that the game is rigged and it's you who might pay the price of all this gambling...

But here with almost no cushion you need to be aware about growing medical expenses. Like with older cars, maintenance became more frequent and more expensive with age probably doubling each ten years after 60.

In order to model your personal situation in Excel more realistically on year-by-year basis you need just a few inputs such as:

After that you need to create you first simple spreadsheet, with the columns such as Total assets, Interests income, SS income, Pension (if nay), Other sources and Expenses columns like listed above. Each row of the spreadsheet should correspond to one year. Some cells can be initially calculated manually. You will be surprised how much information you can get from this simple exercise.

In selecting you allocation try to fight greed and opt for security. That includes avoidance of anything that has a slightest shadow of possible scams involves. Stakes are just too high.

Warning ! Warning !Warning !

Please read section about retirement scams first !!! This is real danger for those close to retirement and all people already in retirement. Targeting is very sophisticated and the fact that you have a university diploma might not save you, unless you understand the risks.

Often scamsters are seniors themselves and live in the same community and/or attend the same church. Remember, if the investment it too good to be true it usually is.

Now in order to survive, many financial advisers are faced with tough choices. And this type of behaviors is no longer limited to sleazy "cold-call" financial advisors.

Moreover, there are three important factors that IMHO dictate extreme caution as for stocks holdings for people who are close to retirement (see discussion at Economist's View for more details)

  1. Stock market like Ponzi scheme depends in entering of new and new players for growth. That condition held true when baby boomers aged and stock market dramatically risen as self-fulfilling prophecy, but now is it less true and may even became false.
  2. Quality of corporate earnings is now extremely low. Most of this often sited "increased profitability" is just result of draconian cost cuts across the board. Large corporation are still shrinking their workforce in order to maintain the level of EBITRA earnings. This scorch land policies can't last indefinitely. I think without some kind of technological breakthrough, the situation can spin out of control in less then a decade. So far corporations did not shred "all the fat" but in some areas (for example IT) they are close.
  3. The current unemployment is structural. Computers and outsourcing really eat people jobs. They will never return, at least good paying portion of it which sustained the middle class. So there is big difference between "Clinton years" and "Obama years." During Clinton years many created jobs were relatively well-paid IT and financial sector jobs. Even later, during Bush II years, a lot of them were construction jobs. Right now most of newly created jobs are service-sector McJobs. That pay less then $15 per hour. This sad development impoverishes population and dampen consumption from the lower 60% of population considerably (although in the USA consumption is mainly top 10% game in any case; lower 60% simply does not matter; that why consumption is so resilient to economic slumps).
  4. Neoliberalism is now entered zombie phase and that creates some difficulties for the US government and US global corporations in pushing their agenda through the other countries throat. Those difficulties might increase in he future. Just count the number of left governments in Latin America now and in 1991. It can still attempt to expand, but in any case the gold years of neoliberalism after disintegration of the USSR with subsequent colonizing the new half-billion people economic space (the key source of Clinton's years prosperity) are over.

Inflation problem and the wisdom of deferring SS to age 70

Boomers not only can get clobbered by the impact of market volatility, they also can lose purchasing power due to inflation.  In other word the UIS elite offloaded the long term economic risks from states to individual. That offloading is the hallmark of neoliberalism as a "secular religion", the ideology that still is dominant in the USA.

This another reason why increasing the share of equities is a questionable solution to the problem of unsufficient retirement funds. A better solution is to think of retiring with a part-time job until age 70. Even McJob: one realistic plan to enhance your retirement financial security is to continue part time working till 70. That not only allows to maximize the Social Security pension but also allow you to dispose your unprotected from inflation assets in a shorter time frame, lessening the impact of inflation.

Getting part time job not only allows you to get supplementary income easing the requirements to the size of  your private retirements assets, but it permits some of us (especially for former office slaves, may be the first time in life) to realize untapped in regular work potential. The first $12K of income are generally tax free.

People do miss their jobs - even jobs they hated. I have never seen statistics, but my experience suggests at least 50% of those who quit without another job regretted the decision. One discussion list posted a note from a 40-something woman who had chosen enjoyable, low-paying jobs to "get most of her life". Now she is against the wall, with no nest egg to fund a career transition and no options. 

In any case don't be suicidal and try to compensate insufficient funds by buying some complex financial product from Wall Street. As one trader put it (naked capitalism, Aug 02, 2013):

“My advice to people dealing with the financial sector is: never buy anything that’s complex. Because the more complexity the more opportunities there are to screw you over. I just can’t get my mind around how banks can still call clients in the corporate world and say, look we’ve got this great idea that’s going to make you a lot of money.

I mean, what are they thinking? Nobody in the City can be trusted because they don’t work for you, they work for themselves.”/

For people who disregard 100-your age formula, mandatory 401K withdraval requirements can hit you hard

In 2005, nearly 5.5 million households were subject to mandatory withdrawal requirements for individual retirement accounts and 401(k) plans.  In 2008 they faced an problem. If you, for example need to withdraw $50K and all you holding are in S&P500, which is 50% down you instantly lose $25K.

The same is true for IRA which also has mandatory distributions after the age of 70 ans half.  See Publication 590 (2013), Individual Retirement Arrangements (IRAs)

This is not applicable to Roth IRA. There is no mandatory distributions from Roth IRA.


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Old News ;-)

[Oct 18, 2014]  Fear of  double dip is back

 Zero Hedge

From exuberant escape velocity 'expansion' hopes and dreams in June, to 'slowing' in September, and 'drastic downward revisions' in early October, the Goldman Sachs Global Leading Indicator has had a very troubled recent past (as QE is just 4 POMOs away from coming to an end). But nothing could prepare the avid reader for what happened to the infamous Goldman "swirlogram" this month - an epic, total collapse. As Goldman 'politely' notes, "the October Advanced reading places the global cycle deeper in the ‘Slowdown’ phase, with momentum (barely) positive and declining."

And just as amazing: the world has gone from Expansion and Recovery, to Slowdown and borderline Contraction in the span of just 3 months.

Manthong

Oh, and Rickards noted on a chart that the velocity of money now is almost identical in slope and duration to the months immediately preceding the 1929 crash.

Bell's 2 hearted

Channel stuffed. Wholesale inventories rising more than expected. NRF (national retail federation) reports record amount of imports for the holidays ... we just had a negative retail sales month. Blowing out of HY credit and more important OCC and FDIC have warned on subprime auto loans going sour.

Rising inventories + slowing demand = inventory correction (recession if bad enough ... it will be bad enough)


Renfield

Bells, I learn a lot from your comments, but I had to downtick you here for appearing to believe that the 'recession' ever ended.

Bell's 2 hearted

haha. I agree with you 100%. "official" recession ended june 2009

Glasnost

Probably deflation in some areas, hyperinflation in others. I think U.S. might be crazy enough to hyperniflate. Europe, China will probably deflate. Again. Russia could go either way, but with the current action in its currency, may inflate significantly. Unless Putin reveals some gold-backing...doubtful that he will, but it's a possibility as a 'stabilization measure' or something similar.

Pool Shark

Once a banker creates money out of thin air by lending it into existence, there are only 3 possible outcomes:

1) The borrower goes even deeper into debt while continuing to service the original debt (what's been happening over the last 30 years). This is necessary to the continuation of our existing Ponzi financial system, and is where inflation comes from. The Ponzi must always increase: money and credit must constantly be created, or the system implodes. Unfortunately, no Ponzi scheme can go on forever (See # 2 & 3 below:)

2) The debt is payed off. This destroys the money that was in existence and is deflationary.

3) The debt is defaulted. This destroys the value of the loan 'asset' on the bank's books and is also deflationary. This is what happened in 2008 resulting in a rapid downdraft of deflation, which was reversed only by the massive credit creation of the central banks. Note that the debts and bad assets never went away, they were merely 'papered-over.'

Because the US dollar is still the world's reserve currency, a hyper-inflation cannot happen. Hyper-inflation is a political, not an economic event.

The most likely outcome of the current mess is a replay of 2008 on steroids (i.e., initial defaults, followed by a 'hunt for liquidity' liquidation of assests to meet obligations, followed by an immediate slowdown in economic activity, resulting in a vicious-cycle feedback loop of debt destruction, asset price collapse and eventually depression). That will all be highly deflationary...



[We are all Japan. Cash, Bonds, Gold...]

JustObserving

Another few more cases of Ebola in the US and many people will stop flying, going to sporting events and restaurants, and heaven forbid, going to malls. With thousands of people being monitored for Ebola, we may be just a week or two away from this reality. Yellen better be ready to buy airlines and hotels and restaurants with a trillion or so in freshly-minted fiat.

Have not heard anything about Nina Pham's boyfriend who worked at Alcon and was allegedly admitted to a hospital for monitoring.

Ebola fears blamed for poor turnout at mainland's largest trade fair

Lack of buyers at the mainland's largest trade exhibition amid fears over disease and economy

The number of buyers attending the mainland's largest trade fair was down significantly yesterday, the first day of its autumn session, with the downturn attributed to fear of the Ebola virus and global economic gloom.

The opening of the fair coincided with reports the number of Ebola cases in West Africa could reach between 5,000 and 10,000 a week by December and that a second nurse who contracted the virus while treating a patient in Texas boarded a plane the day before she fell ill, sparking fears the disease could spread elsewhere in the US.

Exhibitors at the Canton Fair, held twice a year in eastern Guangzhou, said they had seen far fewer buyers yesterday than at the spring session in April.

"In the past the hall was full of people. There are fewer people this session, around half of that in the spring session this year," said Joyce Lin, a sales representative for Guangdong Kito Ceramics, which sells ceramics used for building materials. She said her company's exports had declined.

http://www.scmp.com/news/china/article/1617231/ebola-fears-blamed-poor-t...

Renfield

<<But given that it's all just bullshit anyway, they probably just do this to mix things up a bit>>

heh...how far does the the market have to fall before 'folks' start believing it's really down? I think the machines and printers may have a wee credibility problem with their market numbers, going up AND going down, these days. Nobody I've heard from thinks this fall is real...so far. Bet it'll take a lot bigger than 2008 to get a good panic going this time.

Trouble with believing the printers will always come to the rescue, is that this same belief leads to their inability to do so. It's just logic. You need some real, true believers in there to take the losses, in order to convince anyone that this is a real market.

But the jig is up. Every BTFATH moment of the last six years, has proven that this is nothing but printing. Delete risk, delete market. There are no market moves anymore, no charts to follow, no production to judge. There is only what the central planners do and don't do next. I think we're done here, at least with this economic iteration.

But then, I always was an optimist.

[Oct 18, 2014]  4 better alternatives to Bill Gross and Pimco - MarketWatch

Most of those funds use lower credit rating bonds.
Good alternatives to Bill Gross and Pimco
Fund Ticker Yield 1-Year Return 3-Year Return 5-Year Return Expense Ratio
DoubleLine Total Return Bond DLTNX 4.85% 6.24% 5.08% NA 0.73%
Fidelity Strategic Income FSICX 3.71% 9.09% 5.78% 7.73% 0.69%
Loomis Sayles Bond LSBRX 3.99% 12.87% 8.54% 10.62% 0.92%
Pimco Income PONDX 4.98% 11.11% 11.47% 13.20% 0.77%
Source: Yahoo Finance
DoubleLine Total Return Bond. Manager Jeff Gundlach may become the Bill Gross of his generation. (He’s 55.) After having a terrific decade at TCW Total Return bond fund, he started DoubleLine in 2010. DoubleLine Total Return has good, if not quite stellar, returns over nearly five years, though it has attracted more than $2.47 billion this year. Its yield is just below 5%. Turnover is only 14%

Fidelity Strategic Income. Joanna Bewick is the most low-profile manager in a group of heavyweights, but she has posted very good returns since taking over in 2008. Fidelity Strategic Income is small, giving her more leeway, and is invested heavily in U.S. and foreign government bonds. Turnover is a relatively high 135%. This is a good choice for people who have Fidelity accounts, though I might not go out of my way to buy it.

Loomis Sayles Bond. Another investing legend, Dan Fuss, co-manages this fund with Elaine Stokes and Matt Eagan. Fuss is 80, 10 years older than Gross, so I wouldn’t invest just because of him. But I’ve interviewed Eagan and found him very bright, and the fund’s performance is excellent. Turnover, at 28%, is also low.

Pimco Income. Co-managed by new CIO Ivascyn and Alfred Murata, who both won Morningstar’s Fixed-Income Manager of the Year in 2013, Pimco Income’s performance has smoked many other unconstrained bond funds over the last five years. Ivascyn probably won’t be as hands on as he used to be, so Murata will likely do more heavy lifting.

One reservation: The fund’s turnover rate was a blistering 251% — way too high! I’d wait a bit to see if the managers reduce that over the coming months. But if you’re in Pimco Total Return and want an alternative, look no further than this stellar next-door neighbor rather than following the once-great Bill Gross down his long, lonesome road.

Howard R. Gold is a MarketWatch columnist and founder and editor of GoldenEgg Investing, which offers simple, low-cost, low-risk retirement investing plans. Follow him on Twitter @howardrgold.

robert laden

Probably shouldn't blame Gross too much. It's tough to make money in the bond market when credit-worthy bonds are yielding zero after taxes and inflation.

"Unconstrained" bond funds sounds like it could be the new face of "mortgage backed securities", except that the "mortgage" part has probably been replaced by "sub-prime car loans".

Don Bowmore

@robert laden

and "student loan backed securities" ?

[Oct 18, 2014]  A quote from previous crisis

After a spectacular year-long rally in the stock market, investors are exuberant. Stock market bears have become an endangered species, but reports of their extinction are greatly exaggerated. Indeed, there are many reasons to believe that a return to bear market conditions may be imminent. If the markets turn down again, it won't be pretty but bearish investors may be able to harvest impressive profits by betting on lower prices.

Regardless of market conditions, most investors are overwhelmingly bullish. They have been trained to hold stocks through thick and thin. The bear market of 2000-2003 proved that the average investor will hold stocks through devastating declines, much like a deer in the headlights. Few investors are even aware of techniques such as short selling, put options, or inverse funds that allow profiting within bear markets. For savvy traders, a fast moving bear market can provide stellar profits using these techniques. But a bear market implies that most investors are losing. Severe losses can lead to extreme resentment against those traders who profit from these environments. If you are a profitable bear trader, you should be sensitive to those who are losing while you are winning. In a very real sense, the money that you are making is the money they are losing.

Cocktail conversations about stocks are typically brag sessions about being long a stock that went to the moon. When was the last time you heard someone brag about a spectacular short sale? The next time you are at a party, try telling your best short-sale story and see what kind of reaction you get. Hopefully, your friends will be polite.

The most popular form of bear market investing is short selling, a practice where the investor sells borrowed stock from a broker with the obligation to purchase it back later, presumably at lower price, with the profit being the difference between the sale price and the repurchase price. Even though there is nothing illegal or unethical about short selling, it is still regarded in popular culture as a rogue practice. Many people consider it unpatriotic to sell short the country's finest firms and profit from their troubles. Short sellers have always created resentment, particularly during bear markets when the majority of investors have lost large sums of money.

Stock investing is fundamentally an optimistic pursuit. Most people (particularly Americans) have a natural tendency to be optimistic. Short selling goes contrary to that natural tendency. This may be why short sellers are mistrusted. Short sellers are not necessarily pessimistic, they are just identifying a trend and profiting from it.

One of the most famous short sellers on Wall Street was Jesse Livermore who emerged from the 1929 crash with almost $100 million. Jesse certainly caused a lot of resentment among all of the ordinary people who had lost fortunes in the crash. Some even blamed Jesse and other short sellers for the crash. In response to investor outrage, the stock exchanges enacted rules to limit short selling that remain to this day. After the crash, Livermore often received personal threats and was forced to hire bodyguards. Sadly, Jesse lost his entire fortune in a mistimed investment strategy a few years later and eventually committed suicide. The tragic story of Jesse Livermore has become a parable for the "evils" of short selling.

Other well-known bears have been teased and ridiculed during bull markets, then shunned and reviled when their bearish predictions came true. Bearish analyst Jim Grant endured years of ribbing by Louis Ruckeyser on the Wall $treet Week television show during the long bull market. The same Mr. Ruckeyser fired "permabear" analyst Gail Dudack just months before the stock market peak in April 2000. The unfortunate Ms. Dudack disappeared into obscurity just as her bearish forecasts proved correct. Professional stock analysts know that a bearish outlook may permanently ruin a promising career. This may be why bullish analysts vastly outnumber bearish ones. There is little room on Wall Street for a bear.

Stock market bears are always in a battle with a perpetually bullish "Wall Street Industrial Complex". These institutions are designed to sell securities to the public so they are always promoting stocks as safe and sound places to invest capital. Trading commissions by short sellers generate little revenue for the brokerage industry. In fact trading commissions in general are only a small part of investment industry profits. Management fees, investment banking, research, media, and a plethora of related activities make up the big money the investment industry. These institutions need a constant inflow of new capital to survive. Only a continuously bullish marketing message can lure investors to buy these products and services.

This bullish message is reinforced by the financial media who receive the bulk of their advertising revenue from the same industry that is after your investment dollars. They have created 24-hour "news" channels that are really nothing more than non-stop infomercials for stock investing. Most people get their financial information exclusively from these tainted sources. Financial media influence is powerful and pervasive. Most common investors simply reflect the bullish perspective of the information they receive from the media.

It is not the purpose of this article to discourage purchasing stocks. Quite the contrary. Stock investing is an essential part of a healthy economy. But there is a time to buy and a time to sell. The media will tell you that anytime is the right time to buy but will never tell you when to sell. Successful investors listen to the message of the markets, not the talking heads on the cable news network. The financial media will give no comfort or assistance to short sellers or any other species of the bear family. Short sellers must think independently and not be influenced by the media-controlled stock market pop culture.

It is important to remember that other investors may deeply resent all of the money you have made selling their favorite stocks short. You are on the other side of most investor's trades and making all of the money that they are losing. Be careful how you describe your investment success. Be sensitive and generous to those who are losing. Don't brag about your short-selling triumphs.

A bear market usually implies economic distress. Those who profit from this distress have an obligation to give back to society and help those who have been hurt by deteriorating economic conditions. Bear investors in particular should give generously to charity and work for the public good. This is not only for good karma, but to diffuse any resentment that would be generated by profiting from a bear market.

 

[Oct 12, 2014]  Here We Go Again Greece Will Be In Default Within 15 Months, S&P Warns

Collapse without triggering CDS as that would end the Eurozone’s amusing monetary experiment and collapse the Deutsche Bank $100 trillion house of derivative cards

Zero Hedge

Remember Greece: the country that in 2010 launched Europe's sovereign solvency crisis and the ECB's own helpless attempts at intervention, which later was "saved", only to default shortly thereafter (but without triggering CDS as that would end the Eurozone's amusing monetary experiment and collapse the Deutsche Bank $100 trillion house of derivative cards), which later was again "saved" when every single global central bank made sure Greek bonds became the only yield-generating securities in the world? Well, the country which at last count was doing ok, is about to not be ok. Because according to none other than S&P, at some point over the next 15 months, Greek debt is about to be in default when the country is no longer able to cover its financing needs. In other words, back to square one.

As Bloomberg reports, citing Real News, S&P analyst Marie-France Raynaud said Greece can’t cover its own financing needs.

How is that possible? Isn't Europe so fixed, it no longer has anything to worry about except deflation, pardon, inflation?

Guesst not. According to Bloomberg, S&P estimates Greek financing needs for the next 15 months to be at EU43 billion.

This is a problem because even if Greece sells bonds this year and next, sales won’t be enough to cover net financing needs. So maybe Greece will sell more bonds? Well, the problem with that is that the second the LIFO paradigm of bond investing no longer works, and the last guy in may be stuck holding the bag, nobody will want to buy 1 penny in debt issued by Greece.

The specifics: S&P estimates Greece will draw EU5 billion from intl bond sales, EU20 billion from internal mkt, EU12 billion from official lenders inluding the IMF in next 15 mos. S&P also forecasts Greece will repay EU3 billion in bonds held by investors who refused to participate in 2012 debt writedown, and if it doesn't then Greece will following Argentina in being held in "contempt to court" for cramming down foreign law covenants. Just kidding: that would mean the global legal system actually works instead of serves merely to make the rich richer. 

      • ucgsblog says:
        It’s the latter. Here’s the gist of what happened:

        Let’s say that you’re making $90k a year, and you run three companies: tourism, ship construction and warehousing, You want to expand, so you take out a loan. Each one of those, (for simplicity’s sake,) makes $100k and costs $70k. So to expand, you take out a loan, say $300k apiece. You’re making a profit, everything’s going great, and you’re looking to expand again. Even better news, someone offers you unlimited credit to expand. What do you do if you’re optimistic and have unlimited credit? You overexpand. Instead of taking $300k on $30k profit, you take $3 mil. And then the crisis hits. So now you have a lot of debt, a lot of workers, and no one wants to buy your original product, nevermind your expanded products.

        On top of that, you have to subject your company to austerity. The problem is that if you’re running tourism and subject your workers to austerity, tourism fails. That’s what happened to Greece in a nutshell; by adopting the Euro, the Greek government went on an uncontrolled spending spree. When you have your national currency, you’d either have to buy Euro reserves, (or Dollar reserves,) with your currency. If your currency is fucked, you cannot borrow more currency. If the Dollar’s at 100 of YCU (your currency units), you cannot get it for 50. Unless you’re a member of the Euro Zone. Since the Euro is backed by Germany, and thanks to loose restrictions and creative financing, http://www.bloomberg.com/news/2012-03-06/goldman-secret-greece-loan-shows-two-sinners-as-client-unravels.html, the Greek government breached their currency safety wall. This means that Greece has a debt that they cannot pay back.

        The financial machinations continued, but the point is that Greece still cannot pay back their debt. If I make $30k and I’m $3 mil in debt, can I pay that back? On top of that, Greece was hit hard with austerity, which further destroyed their ability to pay back the debt that they couldn’t pay in the first place. It’s going to be a fall into the abyss for Greece, so the EU is, allegedly, applying pressure to credit agencies to be nicer to Greece, meaning that those projections are the most optimistic that S&P could manage to run on their simulators.

        What’s going on in Greece is certainly interesting from an analytical perspective, i.e. “what happens when a country breaches its currency safety wall”, but for the average Greeks they really suck. Greece can default now or Greece can default later. Add Russian sanctions in response to EU sanctions on top of that, and, well, poor Greece. In more ways than one.

 

[Oct 10, 2014] Illusionary Growth by PAUL CRAIG ROBERTS

Cult of GDP existed in the USSR and served the same purpose: to hide real problems and stagnation of the  economy... Without new technological breakthrough, it doubtful the this period of stagnation will end by itself. Money printing since 2008 allowed to make the shock milder (and conceal the death of neoliberal doctrine), but at one time chickens might come to roost.
Oct 3, 2014 | counterpunch.org

Poverty Report Contradicts GDP Claims

It is amazing how the government manages to continue selling Brooklyn  Bridges to a gullible public.  Americans buy wars they don’t need and economic recoveries that do not exist.

The best investment in America is a highly leveraged fund that invests only in large cap companies that are buying back their own stocks.  Many of the firms repurchasing their stocks are borrowing in order to push up their stock prices, executive “performance bonuses,” and shareholders’ capital gains.  The debt incurred will have to be serviced by future earnings.  This is not a picture of capitalism that is driving the economy by investment.

Neither is consumer spending driving the economy.  The US Census Bureau’s 2013 Income and Poverty Report concludes that in 2013 real median household income was 8 percent below the amount in 2007, the year prior to the 2008 recession and has declined to the level in 1994, two decades ago!  Even though real household income has not regained the pre-recession level and has declined to the level 20 years ago, the government and financial press claim that the economy has been in recovery since June 2009.

Neither is an increase in consumer debt driving the economy.  The only growth in personal debt is in student loans.

Real retail sales (corrected with a non-rigged measure of inflation) remain at the level of the bottom of the recession in 2009.  Macy’s , J.C. Penny’s, and Sears store closings are further evidence of the lack of retail sales growth, as is the fact that two of the three dollar store chains are in trouble. Walmart’s sales are declining.

The basis of auto sales hype is subprime loans and leases taken by those who cannot qualify for a loan to purchase.

Housing starts remain far below the pre-recession level, which is not surprising when available jobs are part-time with no benefits.  Such jobs cannot support the formation of households and purchase of homes.

Where does the government’s second quarter 2014 real GDP growth rate of 4.6 percent come from?  It comes from an understated inflation measure and jiggled numbers.  It is not a correct figure.  Nothing has occurred in the economy to turn it from a first quarter decline of more than 2 percent into a second quarter growth of 4.6 percent.

The 4.6% number is pulled out of a hat to set the stage for the November election.

It is extraordinary that economists and the financial media permit the government to get away with its false economic reporting.  Of course Wall Street likes good news . . .  but fake news that misleads investors and covers up economic policy mistakes?

Clearly, something is wrong with the government’s economic reporting.  It is not possible to have real GDP growth when real median family incomes are declining and business investment consists of corporations buying back their own shares.  Either the government’s GDP estimate is incorrect or the Census Bureau’s Income and Poverty report is incorrect.  Apparently Washington doesn’t understand that if it is going to rig the numbers, it must rig all the numbers.

The rigged inflation measures create illusionary real GDP growth.  They also block cost-of-living adjustments to Social Security pensions.  Indeed, the main purpose of the rigged inflation measures is to get rid of “socialistic” Social Security by allowing inflation to gradually erode away the real values of “entitlements.”  Republicans always want to cut “entitlements” that people have paid for over their working lifetime with the payroll tax.  But Republicans never want to cut the payroll tax.  They need the revenues in order to bail out the big banks and to pay for never-ending wars.

Washington has been conducting needless wars abroad for 93 percent of the 21st century at a cost of trillions of dollars.  More trillions have been wasted bailing out banks that deregulation permitted to become “too big to fail.”  During the past seven years, millions of Americans have lost their jobs and their homes, and food stamp rolls have reached record numbers.  These hurting Americans have been ignored by policy-makers in Washington.

Clearly, government in America is focused on something different from a healthy economy and the well being of citizens.  We call it democracy, but it’s not.

Paul Craig Roberts is a former Assistant Secretary of the US Treasury and Associate Editor of the Wall Street Journal. Roberts’ How the Economy Was Lost is now available from CounterPunch in electronic format. His latest book is How America Was Lost.

[Oct 09, 2014] U.S. stocks, dollar sink as global growth woes multiply

It might well an end to the created by FED money printing period of irrational exuberance" where all those "mad money" instead of going to infrastructure went to speculation and propelled S&P500 to 2000.
finance.yahoo.com

Wall Street slumped on Thursday as anxieties about global economic growth smothered a short-lived, Federal Reserve-sparked rally in equity markets around the world.

The dollar gave up some gains from a remarkable three-month run-up and U.S. benchmark bond yields touched one-year lows as investors shrugged off encouraging U.S. jobless data.

Oil prices, deeply affected by the dollar's value, tumbled to near a two-year low.

Energy stocks were big losers on Wall Street, where leading indices were off sharply at mid session. The MSCI index of world stocks was off 0.9 percent at 407.53.

The Dow Jones industrial average (.DJI) fell 311.82 points, or 1.83 percent, to 16,682.4, the S&P 500 (.SPX) lost 36.73 points, or 1.87 percent, to 1,932.16 and the Nasdaq Composite (.IXIC) dropped 83.10 points, or 1.86 percent, to 4,385.49.

The S&P Energy Index (.SPNY) was down 3.5 percent on Thursday, a day after investors gave the U.S. stock market its best day of the year as Fed meeting minutes suggested the central bank would not rush interest-rate hikes.

European shares hit a fresh two-month low as German exports fell 5.8 percent in August, the worst decline since January 2009. The data from Europe's biggest economy fed anxieties about recession in the euro zone.

Brent oil fell below $90 a barrel. Prices have been hurt by a supply glut and concerns about global economic growth and are now down 20 percent from June.
 

[Oct 09, 2014] The Greatest Trick Mr. Market Ever Played by Bill Bonner via Acting-Man blog,

Zero Hedge
The Mantra

Yesterday, gold climbed back above $1,200 an ounce. US stocks went nowhere. Meanwhile, a chill went down our spine. A sense of dread filled our frontal cortex.

We read a report that was designed to give investors courage and hope. Instead, it felt to us like a guilty verdict in a murder trial. Even with good behavior, our sentence would probably last longer than we would.

A chart told the story. It showed three bull markets over the last 20 years. In the 1990s, the S&P 500 total return was 227%. Then from 2002 to 2007, another bull market. The total return this time: 108%. And from 2009 to 2014, the S&P 500 returned another 195%.

The lesson is unmistakable. It tells you to get in stocks… and stay in. If the market has a fainting spell, don’t get dizzy. Stick with stocks!

1-SPX

Don’t let the occasional 50-60% crashes disturb your peace of mind! You will always win in the long run! Long term bear markets don’t exist…well, maybe except in Japan. And much of the 18th century. But other than that, nothing can go wrong – click to enlarge.

Buy the Dips?

“Yes, we’ve seen some weak periods,” say the wealth managers, investment counselors and stockbrokers. “But they’ve always been followed by even greater strength. Each high has led to an even higher high.”

This is the message taken on board by a generation of investors. And if you go back further, you will find the same lesson learned by their fathers… even their grandfathers.

Since the end of World War II, there have been up markets, down markets and sideways markets. But if you had just gotten in and stayed in over any substantial length of time, you would have done well.

That is true for almost all financial assets – at least over the last 35 years – and true for stocks, especially, over the last 70 years. In 1960, the S&P 500 was 59. Yesterday, it was 1,964.

The lesson is now imbedded in our race memory… in our collective unconscious… and in our brains, our culture and our muscles. Even after a stroke or Alzheimer’s… after senile dementia and adult diapers… we will recite it on our deathbeds: “Buy the dips.”

We don’t have to think about it. We may fear the next recession… or the next sell-off on Wall Street… but we are confident the darkest night will always be followed by a bright dawn – always has!

And always will. At least, until it doesn’t.

 

2-Nikkei, Long term

A picture of the “impossible” – a stock market that remains 60% below its peak value almost a full 25 years later. It frequently paid to buy the dips, but there was never a full retracement of the lost ground – click to enlarge.

Mr. Market’s Biggest Coup

But what if Mr. Market is about to pull his biggest coup? What if the next dark night lasts 10… 20… 30 years? What if the experience of the last 70 years was sui generis? What if it was the result of particular conditions, which have now changed… and can’t be repeated? What if we are now looking at highs that we will never again see in our lifetimes?

Of course, what we don’t know about the future is encyclopedic. But wouldn’t it be a nice trick on Mr. Market’s part?

After World War II the US had the world’s largest economy – by far – and unlike its rivals in Europe, it was still intact. The GIs came home. They got married… they had the famous baby boom children… they started businesses and careers. Credit expanded – up 50 times since then.

And now, with interest rates lower than ever before, the credit expansion must be nearing its end. World War II vets are dying at the rate of about 1,000 a day. And their children are retiring… at a rate of 10,000 every day. The boomers are no longer adding to wealth; they’re subtracting from it.

They’re no longer expanding credit by borrowing to buy new houses and new cars; now, they’re living off their investments and Social Security, counting on their own savings or the kindness of strangers to see them through the rest of their lives.

You heard about the great jobs report on Friday. Some 248,000 new jobs were created. But wait… The real story is that of the 14 million people added to the adult population of the US since 2008, only 1 million have found real jobs.

That’s the important story: Growth is slowing. We have more people… but fewer of them paying the bills. Reagan’s former budget adviser David Stockman comments:

“Going back to September 2000, for example, there were only 76 million adults not in the labor force or unemployed, and that represented just 35.8% of the adult population of 213 million.

This means there has been a 26 million gain in the number of adults not working – even part-time – during that 14-year period. About 10 million of that gain is accounted for by retired workers on Social Security – a figure which has risen from 28.5 million to 38.5 million during the interim.

But where are the other 16 million? The answer is on disability (+4.5 million), food stamps (+25 million), survivors and dependents benefits, other forms of public aid, living in parents’ basements on student loans or not, or on the streets.

The employment ratio has plunged; full-time breadwinner jobs have actually shrunk; total labor hours employed have been stagnant; real GDP has grown at only 1.8% annually for 14 years – compared to 4% annually between 1956 and 1970; and real net capital investment is 20% below its turn-of-the-century level.

This isn’t at all like the postwar period. It is a whole different ballgame. We may never again in our lifetimes see stocks so high.”

3-labor force participation rate

Labor force participation is in a steep downtrend since the peak of the 1990s stock market mania – click to enlarge.

Charts by: BigCharts, St. Louis Federal Reserve Research

[Oct 08, 2014]  IMF warns period of ultra-low interest rates poses fresh financial crisis threat

Quote: "loose monetary policies also prompted investment in high-yield but risky assets and for investors to take bigger bets."
The Guardian

A prolonged period of ultra-low interest rates poses the threat of a fresh financial crisis by encouraging excessive risk taking on global markets, the International Monetary Fund has said.

The Washington-based IMF said that more than half a decade in which official borrowing costs have been close to zero had encouraged speculation rather than the hoped-for pick up in investment.

In its half-yearly global financial stability report, it said the risks to stability no longer came from the traditional banks but from the so-called shadow banking system – institutions such as hedge funds, money market funds and investment banks that do not take deposits from the public.

José Viñals, the IMF’s financial counsellor, said:

“Policymakers are facing a new global imbalance: not enough economic risk-taking in support of growth, but increasing excesses in financial risk-taking posing stability challenges.”

He added that traditional banks were safer after the injection of additional capital but not strong enough to support economic recovery.

Viñals said the IMF had analysed 300 large banks in advanced economies, making up the bulk of their banking system. It found that institutions representing almost 40% of total assets lacked the financial muscle to supply adequate credit in support of the recovery. In the eurozone, this proportion rose to about 70%.

“And risks are shifting to the shadow banking system in the form of rising market and liquidity risks,” Viñals said. “If left unaddressed, these risks could compromise global financial stability.”

The stability report said low interest rates were “critical” in supporting the economy because they encouraged consumers to spend, and businesses to hire and invest. But it noted that loose monetary policies also prompted investment in high-yield but risky assets and for investors to take bigger bets. One concern is that much of the high-risk investment has taken place in emerging markets, leaving them vulnerable to rising US interest rates.

“Accommodative policies aimed at supporting the recovery and promoting economic risk taking have facilitated greater financial risk taking,” the IMF said. As evidence it pointed to rising asset prices, smaller premiums on riskier investments and the lack of volatility in financial markets. In many cases, the IMF said the behaviour of investors was at odds with the state of the global economy.

“What is unusual about these developments is their synchronicity: they have occurred simultaneously across broad asset classes and across countries in a way that is unprecedented.”

The IMF said there was a trade-off between the upside economic benefits of low interest rates and the money creation process known as quantitative easing and the downside financial stability risks. While its report found that in some countries, including the UK and the US, economic benefits were becoming more evident, it warned that

“market and liquidity risks have increased to levels that could compromise financial stability if left unaddressed”.

It said developments in high-yielding corporate bonds were “worrisome”, that share prices in some western countries were high by historical norms, and that there were pockets of real estate over-valuation.

“The best way to safeguard financial stability and improve the balance between economic and financial risk taking is to put in place policies that enhance the transmission of monetary policy to the real economy – thus promoting economic risk taking – and address financial excesses through well-designed macroprudential measures.”

These include tougher supervision of banks, requirements on them to hold more capital, and curbs on lending to specific sectors such as housing.

Viñals said it was time for traditional banks to overhaul their business models. This would involve not only changing the focus of their lending, but also consolidation and retrenchment. “In Europe, the comprehensive assessment of balance sheets by the European central bank provides a strong starting point for these much-needed changes in bank business models,” he said.

elektrafortyseven, 08 October 2014 2:12pm

time for traditional banks to overhaul their business models.

In other news ... turkeys vote for Christmas.

phildigbybayliss  -> elektrafortyseven, 08 October 2014 5:25pm

This has got bog all to do with turkeys or christmas (i.e self regulation).

Larry Summers (ex Obama treasury guru) stated: if you are too big and too systemic to fail you need a too big and too systemic regulator to regulate you (see the video on http://www.nakedcapitalism.com/2011/04/your-humble-blogger-asked-larry-summers-a-question-he-did-not-like.html).

Bring back the Glass-Steagal Act which split commercial banking (read 'real world economy') from financial banking (read speculation) and made casino bets with customers funds illegal. Simple bit of regulation. But regulation is off the agenda.

Even the IMF who have stated the problem do not advocate a 'simple' political act to remedy the situation. Speculation is leading (has led) to risk taking (and high returns) in fracking, privatization of health, transport, energy........

Is there a political party in May 2015 who is willing to regulate the financial system? Vince Cable has threatened it (but has been very quite since); nothing from Labour and the Cons would cut their own throats before rejecting the Thatcher-Reagan mantra of the 'free market'.

As Piketty has so eloquently argued, inequality is a political issue, not an economic one.

Elbowpatch, 08 October 2014 2:28pm

These include tougher supervision of banks

There's a major downside to increasing regulation, often the very best model small regional banks and building societies are taken over by the big boys able to absorb the cost of regulation.

Instead, Govt should create incentives for small regional lenders to once more flourish because old fashioned building societies tend to be naturally responsible 'old fashioned' guardians of finance. Bet no one in the lofty corridors of Westminster has ever thought of this.

Germany is full of small regional lenders.

warmachineuk, 08 October 2014 2:29pm

Wow! When the IMF realises something is wrong, it's really obvious.

foolisholdman warmachineuk, 08 October 2014 3:15pm

Wow! When the IMF realises something is wrong, it's really obvious.

It is another case of "You saw it first on Max Keiser!" Really, it is the case, that he has been saying exactly these same things, in almost the same words, for about 4-5 years.

He also said, long before it was admitted, that LIBOR was being rigged.

Tiresius warmachineuk, 08 October 2014 10:39pm

What is obvious , but not yet on the radar of the IMF , is that grotesque income inequality also produces unproductive consumption and asset price inflation.

When wealth is so concentrated and real wages for most people so depressed this becomes further exacerbated. But as yet the IMF still believe in the idiocy of trickle down economics ..

tomsixty1, 08 October 2014 2:30pm

So why do they now recognise that the policies they supported are making what remains of the global economy unstable and unsustainable?

They are preparing us for more bail outs and austerity.

"The primary beneficiaries of these central bank money creation policies have been global very high net worth investors, their financial institutions, and global corporations in general.

 According to a study in 2013 by Capgemini, a global business consultancy, Very High Net Worth Investors increased their invest-able wealth by $4 trillion in 2012 alone, with projected further asset growth of $4 trillion a year in the coming decade. The primary financial institutions which invest on their behalf, what are called ‘shadow banks’ (i.e. hedge funds, private equity firms, asset management companies, and dozens of other globally unregulated financial institutions) more than doubled their total assets from 2008 to 2013, and now hold more than $71 trillion in invest-able assets globally.

This massive accrual of wealth by global finance capitalists and their institutions occurred in speculating and investing in offshore financial and emerging market opportunities — made possible in the final analysis by the trillions of dollars, pounds, Euros, and Yen provided at little or no cost by central banks’ policies since 2008. That is, until 2014.

That massive tens of trillions of dollars, diverted from the US, Europe and Japan to the so-called ‘Emerging Markets’ and China is now beginning to flow back from the emerging markets to the ‘west’.

Consequently in turn, the locus of the global crisis that first erupted in 2008 in the U.S., then shifted to Europe between 2010-early 2013, is now shifting again, a third time. Financial and economic instability is now emerging and deepening in offshore markets and economies—and growing increasingly likely in China as well."

Jack Rasmus February 2014.

Terpitude, 08 October 2014 2:55pm

How is it a "new global imbalance"? The shadow banking system has been in full flow for almost a decade and its activities make the majority of government attempts to stabilise the global economy almost pointless.

Johnny Kent, 08 October 2014 2:59pm

The UK and US, who seem to share identical ideals, unfortunately, stick with near zero rates for the benefit of stockmarket speculators, not the wider hard working public. High time this changed.

Beginner20 , 08 October 2014 3:02pm
International Monetary Fund: China Just Overtook The US As The World's Largest Economy

foolisholdman ruskiny, 08 October 2014 3:31pm

The US/UK ruined by the Neo Cons lets hope Germany can take centre stage and save us from the authoritarian Chinese regime and the religious fascists in the Middle East. Mutti we need you and your engineers we got rid of ours for City sharks.

The pinnacle of British engineering skills and training was Rolls-Royce. If you had worked for RR you could get an engineering job almost anywhere. So what did our brilliant government do? They sold it to the heirs of Joseph Goebels! If that wasn't treason, it bloody well should be!

ruskiny, 08 October 2014 3:19pm

You cannot create wealth from a Ponzi scheme. Over 1 million people using money given to them by the UK Gov. who have borrowed said money in the name of the rest of the UK , go to work in the City of London and prove this truth every day.

marcelprout, 08 October 2014 3:23pm

Private Eye on Tesco

“While earnings per share (EPS) – “the Number” that drives all things, especially management pay, had marched on upwards in the Leahy years, return on capital employed “ROCE” had declined. Tesco was generating insufficient free cash to invest and pay its dividend- the gap being filled by debt. And its definition of ROCE had changed eight times”

Cheap debt is ruining companies as their greedy CEOs do anything to boost EPS so they can get big bonuses.

The system is in serious trouble. EPS and low interest rates are right at the heart of it.

kimdriver Notbig Mick, 08 October 2014 4:45pm

Buying a share on the secondary market isn't the sort of investment the IMF is describing. They want investment in productive assets.

Sadly, with so much existing productive capacity and little growth in demand, nobody wants to invest.

Ron Jacobs, 08 October 2014 3:35pm

The capitalist system is now in the hands of the financiers. They will not make decisions that do not provide them with a means to make as much money as possible via their speculative practices. The rest of the world be damned.

richbandit, 08 October 2014 3:37pm

IMF ......almost 40% of total assets lacked the financial muscle to supply adequate credit in support of the recovery. In the Eurozone, this proportion rose to about 70%.
................
So that must leave the Basel III LCR stress test close to tatters which was supposed to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage. Fluidity in the system is obviously failing.

My take:-Western lander EU banks have a problem when compared to those in the FE and Asian pacific rim which are doing fine. The UK has a lender of last resort, i.e BoE; but for the rest of Eurozone only the EZB.

marcelprout  -> richbandit, 08 October 2014 4:46pm

Basel 3 is a joke. It's stupid to think individual CFOs in finance companies understand the risk on their books. They do not understand the risk posed by the system itself.

Stripping out all the margins that the boring previous generation left behind was the worst thing that ever happened to banking. Most if it was lost in speculation.

Following the Lehman collapse (Greenspan 'shocked' that free markets are flawed, November 23, 2008) Alan Greenspan told the New York Times “I made a mistake in presuming that the self-interest of organisations, specifically banks and others, was such that they were best capable of protecting their own shareholders.”

o572, 08 October 2014 3:54pm

Mind boggling.

The idiocy of the people that 'run' our economic 'systems' is beyond belief.

A layman can instantly see the insanity of printing infinite money, charging nothing for it and never expecting it to be paid back but those who operate it take 5 years to get an inkling it might not work.

Am I even living in the same reality as these sort of people, although I suppose when you are taking 10% of £infinite and pass it on your ability to suspend belief must be affected.

Notbig Mick  -> Halo572, 08 October 2014 4:01pm

Not sure you grasp this, tightening would be suicidal a la 1929. Central banks have modestly increased their balance sheets and the recession has not been bad. The exception being EZ, a reduction in balance sheet and chaos.

I'm sorry if people don't grasp this but back in 2008 I'd take the UK today in an instant, few understand how grim things could have been. EZ meanwhile.......................

Notbig Mick, 08 October 2014 3:58pm

Why not wind the IMF up by 2020.

Totally pointless and discredited if not self-serving organisation.

Governments may not ride so rough with their hairbrain schemes, act more conservatively with a view to long term sustainable progress. Their central bank is the correct backstop.

lellel , 08 October 2014 4:01pm
Was waiting for that... "we want interest rates to rise"

The "rich" don't care if inflation rises too.

Think about it, interest rates usually hover a % or two above inflation. (financial crash period excluded). The more money they have, the more money they make relatively, just by storing it.

The inflation hit is less relevant to them as a corporation doesn't rely on CPI and isn't really affected by the cost of milk.

IMF (september 30th)

"one of the few remaining policy levers available to support growth" – especially in the euro zone where despite accommodative monetary policy "there is still substantial economic slack, and inflation remains too low."

B-BU-BUT OUR GROWTH

The German government provisionally posted a 16.1 billion euros ($20.3 billion) surplus in the first half of 2014, despite faltering growth.

IMF are working for corporations?

Zakida , 08 October 2014 4:13pm
The whole Keynesian ponzi scheme will come crashing down.

The sooner it does and we get a system of sound money, the better off we will all be.

Elbowpatch Zakida , 08 October 2014 4:23pm 
The Puritans said the same hundreds of years ago. People always say Armageddon is just around the bend, yet we muddle through.

If this was 1973 you would be posting that OPEC is kicking off together with Iran Iraq war and third world war inevitable.

In 1977 Carters state of the nation address informed a sombre public that peak oil was upon them, to prepare for the worst. Then followed 20 years of boom. 

theonionmurders Zakida, 08 October 2014 6:27pm 

The whole Keynesian ponzi scheme will come crashing down.
The sooner it does and we get a system of sound money, the better off we will all be.

Keynesianism was actually premised on 1.5% monetary growth per year, as it tied in with annual increases in the physical amount of gold produced each year, thus tying in perfectly with the gold standard and tight state regulation over endogenous money creation.

The present system is premised far more firmly around monetarist policies - that is, providing liquidity to banks and financial institutions to increase the growth of money creation in the economy like we did over 2008-10. It is the idea that won Friedman his Noble Prize in 1974. QE is a Friedmanite idea first used in the mid 1970s and then in Japan from 1990.

Philip Pilkington: The New Monetarism Part I

Of course, this is completely useless in an economy where the cash leaks out to tax havens, or simply goes into speculation - particularly when a slump is entirely demand driven and hampered by vast inequalities.

Keynesianism would recommend public works programs and encourage 'the euthanasia of the rentier' and growth in infrastructure, not their empowerment to speculate away with QE and hold entire countries at ransom.

Also, your system of 'sound money' (which I presume is full reserve banking) would send the global economy into a twenty year slump - the key is to take full state control over the creation of credit/fiat and put it to more productive, rather than speculative, use. 

Fendercombo  -> Elbowpatch , 08 October 2014 11:43pm
Speaking as somebody who actually owns a small manufacturing business I can't say I blame you for not investing in a manufacturing start-up. It's not a safe investment. I was pretty lucky in that i've been building guitar amplifiers and effect pedals since about 14 as a hobby and I kind of grew that hobby into a business. The only investment i've ever taken was a startup loan in 2002 and I paid that back in 2010.

I think there are a couple of problems with British Business from my observation. Firstly a lot of senior management lack technical experience in the business sector their business is involved in. When I was at university I worked freelance as a web developer and I noticed that a lot of the MDs of these web development firms had no background in web design or development. Whilst i'd concede that it's not necessary to be an expert web developer to own web development firm i'd say it is necessary to have some technical competency otherwise how do you make appropriate decisions, you end up reliant on other people and usually those people have their own interests at heart not the interest of the business.

The other problem is again senior management not being able to accept responsibility or criticism. They pretend they're open to constructive criticism but as soon as somebody sticks their neck out the axe swings even if the criticism is valid. This is part of the reason I struck out on my own and tried to run my business differently, I got pissed off with not being able to challenge stupid decisions. Being a CEO or MD doesn't mean one is better than anyone else, nor are they infallible and the sooner people realise this the better. 

DaylitTunnel, 08 October 2014 4:25pm

Shadow banking system = organised crime. Or it would if the governments of the world legislated to outlaw antisocial banking activities. I don't hear ANY British political party standing for election in 2015 offering ANY redress, ANY shift in the balance of power to protect 'ordinary people'. So what is the point of voting?

The British political system needs urgent reform because as it stands it is undermining democracy and allowing a run-away corruption in 'shadow economies' to ruin our world.

Voltaire21, 08 October 2014 4:25pm

Thinking we could trust the people who f@#ked us over the first time is arguably the dumbest mistake our central governments could make. The low lending rates have been given to the banks with zero caveats to use it responsibly.

So they have done what they usually do...which is instead of working hard and doing the work they were asked to do, they have gone out and found the quickest way to make hay. The bankers are still playing on the stockmarket where they can easily make more than 0% interest.

The stockmarkets have been performing remarkably well despite a moribund economy in most countries. The stockmarket and the real economy have limited relevance yet the former is continually used as an indicator for the latter. This lie needs to stop, the reason the markets are performing well is the glut of cheap money parked into it by the banks. Half the world is in freefall but the world of high finance has nicely hijacked the funds to recover from it. Government should have by passed the funds and directly injected the money into the economy.

jayant, 08 October 2014 4:30pm

With near zero interest rates, it was clear that cheap money was there for asking. It is more profitable to engage in speculation than to invest in bricks-and-mortar businesses with human workers. It's too much trouble.

No wonder the stock exchanges are booming, take-overs are increasing and people are struggling because the real wages are stagnant.

dolly63, 08 October 2014 4:40pm

The cracks are showing and the full is beginning to happen! There is no golden egg, never have been, never will be. Just poverty to look forward to.

kykcrzy, 08 October 2014 4:44pm

Perhaps the fate of the modern economy is always going to be that of Japan, eventual stagnation and malaise.

mikedow, 08 October 2014 4:44pm

The IMF has lots to say.

The International Monetary Fund slightly lowered its outlook for global economic growth this year, but is optimistic about the next two years in the U.S. and Canada.

The IMF said Tuesday the global economy will grow 3.3 per cent this year, a drop from the 3.4 per cent it forecast in July, because of weakness in Japan, Latin America and Europe. In 2015, world growth could be 3.8 per cent, a reduction of two percentage points.

But it sees “firming momentum” in Canada and the U.S., led by buoyant domestic demand in the U.S. and export growth in both countries.

zelazny, 08 October 2014 4:48pm

The IMF, another cancer cell in the overall malignancy of financial capitalism, sees perpetual growth as the only solution to life.

Instead, the world needs a massive austerity program directed at the rich. Ban private jets. Ban cars, the cause of most wars for oil. Impose draconian taxes on wealth. Make the richest families pay reparations to those they have enslaved and abused. Hold war crime tribunals for all of the western leaders.

Many historians like to use the image of a human body to represent the body politic. In that image, the rich would appear as pustulant boils on the body's posterior, providing no benefit, but a lot of pain.

zelazny, 08 October 2014 4:51pm

Only perpetual war and authoritarianism holds financial capitalism together. Since 2008, the central banks have printed money to try to revive the decrepit body of capitalism, without success.

The cancer of perpetual growth must stop and the people should rise up and demand that the rich stop their predations. Rich people in their yachts and private jets provide nothing of value to society.

Michael York, 08 October 2014 5:14pm

<Almost zero borrowing costs has encouraged speculation rather than hoped-for pick up in investment, says Fund>

Well what a surprise! Who could have predicted that?

That's the problem with blackmail; after you pay them off, the blackmailer always wants more.

PeasantsRevolt, 08 October 2014 5:16pm

The Washington-based IMF said that more than half a decade in which official borrowing costs have been close to zero had encouraged speculation rather than the hoped-for pick up in investment.

No shit, Sherlock.

With governments of all hues singularly failing to rein in the pre-crash destructive habits of the banks, and prosecute those who took the global economy to the brink of annihilation, is it any wonder that said bankers feel free to return to their gambling ways, and shun the notion of lending to business and industry as a viable business model.

In the UK, this problem is being exacerbated by a government incapable of formulating anything close to an industrial policy, let alone facilitating a re-balancing of the economy away from financial services. GO's solution is to actively encourage a housing price bubble, and mass debt fuelled consumption as a means of boosting GDP - hence why most people don't feel any better off.

Those who ignore history are doomed to repeat it - and once again it will be the little people who pay the price.

jakedog, 08 October 2014 5:19pm

So the casino banking in the City by hedge funds and others is back in full flow - what a surprise!

After the financial crash of 2008, there was short period when greater regulation of the world's financial markets looked possible - but not for long. Only 6 months into 2009 and the Financial Times was calling for the blaming of bankers to stop, for business as usual to be reinstated, and unfortunately that is exactly what has happened.

For the IMF, the temple of free market, neo-liberal economic thinking, to be calling these warnings shows just how serious the situation is.

How much longer are we going to accept that unregulated financial markets are somehow of benefit to us all; how much longer before some contribution by rapacious hedge funds and the rest through a Tobin tax is imposed?

blueba, 08 October 2014 5:22pm

The IMF was founded to support the US Neoliberal Empire and its agenda is to promote its interests. Raising interest rates before there is employment recovery would be a disaster for the "real" economy where the bulk of people live and operate. It is just another Neoliberal concession to the oligarchs who have been screaming as loud as they can to raise interest rates as its in their best interest to own US Treasure paper with a good return and almost -0- risk.

Clearly, as we have watched the disaster of the "real" economy continue long past the recovery of the 1930s and policy makers making decisions only in the interests of the oligarchs and the banks and corporations they own we see IMF has supported the process throughout.

The US Neoliberal Empire and its globalization has done serious damage to civil and human rights as well as "corportized" the global economy.

No one should trust the solutions offered by this corrupt institution.

ID3839388, 08 October 2014 5:26pm

"IMF warns period of ultra-low interest rates poses fresh financial crisis threat" cries the headline... then we read down and find it's not actually low interest rates, but the choice of shadow banking institutions to go for excesses in financial risk taking in light of those ultra-low interest rates.


So in summary, greedy, high-risk investment by bankers chasing bonuses tanked the economy and interest rates had to drop to ensure the whole system don't come crashing down completely taking everything with it...

Then, 5 years or so later, the greedy, high-risk investments by bankers chasing bonuses threatens to destabilize the economy and cause a fresh financial crisis (even before we've recovered from the consequences of their last cluster-cuss).

Is anyone else spotting the common denominator here?

Low-interest rates are, thanks to the cost of housing relative to wages in most developed countries, about the only thing ensuring swathes of ordinary folks don't lose their homes at present and others aren't locked in to a largely unregulated, and mostly p*ss-poor value for money private rental sector.

Maybe, if low rates are being taken advantage of and abused by the financiers, the abuse and risk-taking should be looked at, instead of blaming low interest rates in themselves?

CrazyGuy, 08 October 2014 5:41pm

Greenspan is at fault for all of this nonsense - presiding over year after year of very low interest rates at the Fed so that Banks and Corporates took it for granted that money would always be cheap. As a result they developed long-term Business Models which required very cheap capital and very high margins - or, worse still, they chased after non-viable business such as Sub Prime Mortgages - and the rest is history.

This is all very well and it made a few people and enormous amount of money but the question remains as to what happens when the party is over? Adjusting your business model to make more normal profits - and foregoing huge bonuses is the right way but who in the City is going to do that? The mantra there is 'if I can take the money I will' - but amazingly with the Governments generous Quantitative Easing programmes they didn't have to come back to earth - and we are well on the way to Financial Meltdown 2 - the sequel - which will be much more dramatic - real 'end of the world as we know it stuff' - unless governments all around the world act to put in structural measures - with teeth - to change the way the Markets do business.

Which brings us to the punchline - why do governments not raise base rates to discourage this behaviour? Well. apart from the current government allowing their mates to stay on the Gravy Train a little/lot longer the real bombshell is that the Government is also in hock and working to a dodgy business model - there is a huge pile of Sovereign debt which was sold at very low rates of interest. If the Interest Rates on refinancing that debt were to rise even a couple of percentage points UK PLC would be properly invsolvent - in a way that even the IMF couldn't help us!

So we are stuffed and set on a long, hard road of reflation - hopefully led by economic growth to inflate away the debt - something the USA realised and accelerated 3 years ago - but don't hold your breath!

 

ChenaBaldEagle toadwarrior,
08 October 2014 8:35pm

Screwing up the economy?

What is wrong with pushing wages down to benefit the plutocrats and oligarchs? What is wrong with hollowing out the middle classes? Or transferring assets to the plutocrats and oligarchs, from the middle classes and also the poor? Or having the taxpayers indirectly subsidize the plutocrats and oligarchs, by providing the poor with safety nets?

Or ignoring the advice of Adam Smith, in his work, "The Wealth of Nations", that workers should receive good wages (well above living wages, which only create wage slaves), and that owners will or may be dissuaded from underpaying workers by patriotism and ethics. Many plutocrats and oligarchs today have no patriotism, being World Citizens, and justify paying low or minimum wages, because greater resulting profits benefit shareholders, which is their ethical duty, (and are not paid to their workers, who give them loyalty and create the profits),

Adam Smith realized that building the wealth of a nation required workers to have good wages (so that they may buy products of their labor and accumulate wealth). Today, that advice is ignored, and the wealth of many nations is being dissipated, for the benefit of the plutocrats and oligarchs. This process, which is a war on the middle classes and the poor, is not new. As Marie Antoinette advised, we should buy cakes. To date, the handmaidens of the plutocrats and oligarchs divert the attention of the rest of us with "infotainment", for the same purpose as the circuses of the Romans.

While there are patriotic and ethical millionaires and billionaires, to date they have not been able to enlighten the others. And the rest of us, even globally, do not know or understand what is, and has been occurring. The war on the rest of us, the middle classes, the poor and even the mere millionaires, will continue until reform or revolution.

Janet Yellen, the Fed Chair, at her confirmation hearing, stated she had not decided whether we are a capitalist democracy or had morphed into an oligarchy. She now might concur with my analysis, that we are now an oligarchy.

Cavirac, 08 October 2014 6:21pm

Its all the fault of the greedy American banks and insurance companies. Now they are trying and claw back the money they lost. The IMF is just their mouthpiece. Three five years ago the IMF said the Euro was finished, possibly within six weeks of making that statement. Guess which is the second most traded currency in the world, guess what is the second biggest currency in the world?

Lets not forget that these are the same 'experts' (if ever a word was used so badly out of context) that got us in all this crap in the first place.. They should be confined to the bin along with the credit rating companies.

nikkkkko, 08 October 2014 6:24pm

This is the expected result of trying to use monetary stimulus without a Keynesian fiscal stimulus. Keynes showed back in the 30's that demand drives supply, and not the other way around.

Beginner20, 08 October 2014 6:39pm

According to the report the IMF's World Economic Outlook, released on Tuesday, the world has got a new Group of Seven (G7)

The new G7 includes BRIC countries (Brazil, Russia, India and China) and the three countries of the so-called group of MINT (Mexico, Indonesia, Nigeria, Turkey), with the exception of Nigeria.

The total size of the GDP of the new G7 calculated by PPP, is 37.8 trillion dollars, while the total GDP of the "old» G7 (Canada, France, Germany, Italy, Japan, United Kingdom and United States) reaches only 34.5 trillion dollars.

At the same time, according to the report, the United States ceased to be the world economy №1 losing this place China.

MountainMan23, 08 October 2014 6:50pm

A prolonged period of ultra-low interest rates poses the threat of a fresh financial crisis by encouraging excessive risk taking on global markets, the International Monetary Fund has said.

The Washington-based IMF said that more than half a decade in which official borrowing costs have been close to zero had encouraged speculation rather than the hoped-for pick up in investment.

Who believed the "hoped-for pick up in investment" line? It was obvious from the outset, and even more obvious as the years wore on, that giving the big institutions "free money" to play with was only going to make matters worse. Of course they don't invest in the real economy. Why should they when they can "earn" much more money in derivatives, buy backs, corporate mergers, etc, ie ALL the bad "investments" that brought the economy down in the first place.

Beginner20 MountainMan23, 08 October 2014 7:04pm

If the stock market had not absorbed all the US dollars, today a loaf of bread would have cost thousands of dollars. Look how many shares of online companies that do not have any sort of assets and whose profits will never cover even their costs ... But it is a convenient mechanism of society control and the Government shifted this burden on private investors..

norecovery, 08 October 2014 7:02pm

For years, we have been screaming at the people holding the purse strings to put money into the real economy where it will boost real productivity and benefit all of society, instead of propping up the addictive financial gambling to benefit the infinitesimally few and imposing austerity on everyone else, but they will not listen nor will they learn from the errors of their ways.

As with climate change vis-a-vis the fossil fuel and military monopolies, only further disaster might bring about needed change in the financial system. Or maybe it will take mass revolt... take your pick, guys.

Beginner20 norecovery, 08 October 2014 7:09pm

Well, as it was so convenient to cut the property of the former Soviet Union and other development countries - crazy money and no work - that is all - shop is closed.

Blader, 08 October 2014 7:28pm

The US has a problem it has been ducking for years. One the one hand, real wages have been stagnant or dropping for many years (except for those at the top), yet the US economy depends heavily on consumer spending (69% of GDP according to the World Bank). Therein lies the problem: how do you keep consumer spending high while also reducing wages? First, offshore as much manufacturing as possible. This lowers product prices and eliminates the better-paying factory jobs at the same time, thus lowering wages. That's not enough though, to drive constant consumer spending. Here's the solution: sell everyone a house, thereby driving the housing market up. The paper value increases then serve a dual function: they form the basis for taking "equity" out by refinancing and higher real estate values result in higher property taxes, thus bringing in more revenue for towns and cities. Equity-out refinancing provides cash for consumer spending: everything from cars, appliances, clothes, to college tuition or vacations. Or even in speculative investing in the markets! As long as the housing market was going up, up, up this seemed to work just fine. I watched Jamie Dimon, head of JP Morgan, tell a Congressional committee that he "just never imagined the housing market would ever go down." But it did. The whole thing was a house of cards, a sort of Ponzi scheme that required ever larger numbers of homebuyers in order to stay afloat, and that in turn led to the more creative mortgage products: variable rate, interest only, liar loans, etc. And all of these were made possible because the secondary mortgage market (created conceptually by the big investment banks) led to very few banks holding mortgages. The notes and their accompanying mortgages were sold at a discount to bigger banks that then securitized them. This made it very easy for the institutions financing the actual real estate purchases to look the other way when it came to lending to unqualified borrowers, or taking advantage of inexperienced borrowers to sell them a mortgage product for which they qualified but which had a strong potential to fail. And of course in the end, the big banks learned nothing, because they were "too big to be allowed to fail" and likely because they have a practice of hiring their former regulators at peachy salaries (so how tough will those regulators be?)

The key to the whole thing was the idea that the US housing market had been "a sure bet" historically. Now there is another "sure bet" for banks: student loans. Here's the deal: US law prevents student loans from being discharged in bankruptcy! Those loans may go into default, but they can't be escaped from. If they do go into default, the borrower's ability to get a car loan or a house loan goes to nil. Although talking heads in the media keep talking about the housing market comeback, student loan debt is going to hurt those prospects, for a couple of reasons.

First, if recent grads (who would ordinarily be expected to begin focusing on buying a house) have large student loan debt to service, they will not have the cash to make mortgage payments. Second, mortgage lenders always want to have the "senior" debt. That way, if the bank has to foreclose on the borrower, the bank gets paid first. But if there's student loan debt, it could end up being "senior" to the mortgage bank's loan and if the borrower defaults on both then the student loan bank (for want of a better term) will get paid first from the proceeds of the foreclosure sale, meaning the mortgage lender may not recoup enough to cover what it's owed.

In the US college tuition costs have been skyrocketing - all out of proportion to other increasing costs. This suggests that there is a very large supply of "easy" money being made available for student loans, which in turn allows universities to increase their prices. We are now beginning to see cases where "for profit" colleges are springing up, and colleges in general are becoming more like processing plants rather than educational institutions. Along with this there is the longstanding belief that everyone should go to college. This sound familiar? Everyone should own a house - everyone should go to college. Same song, different key. And if you want to go to college, you most likely will have to take out loans. The ability to pay back those loans is predicated on an expectation that the graduate will be able to find employment with wages sufficient to service the loan. But that in turn is dependent on the labor market, and there are no guarantees (despite what education lenders say) that a graduate will in fact secure employment that pays enough to both service the loan and live independently.

It is getting dark. The chickens are headed home to roost. Maybe not today. But soon.












 

Asia Times Online Hidden damage

Hidden damage
By Martin Hutchinson

Last week's US inflation figures showed that the Federal Reserve's over-expansionary monetary policy wasn't revealing itself in inflation. But that doesn't mean it's doing no damage. Instead of in inflation numbers, the multiple years of ultra-low Fed interest rates are manifest in savings figures for both individuals and companies. Individual savings are at half the long-term average and corporate stock buybacks, together with dividends, are absorbing 91% of the Standard and Poor's 500's net income, according to the Financial Times.

Traditionally, fiat-money central banks were supposed to run the system with a view to keeping inflation as low as possible. In 1978, the Humphrey-Hawkins Act extended the Fed's remit to the "dual mandate", supposedly managing unemployment and inflation simultaneously.

Hard-money types have criticized this as sloppiness incarnate, allowing the Fed to pursue soft money policies even when inflation is rising, as in 2005-06. However, the Fed's period of extraordinary stimulus since 2009 has not been accompanied by an inflation upsurge. Far from it.

There appear to be a number of reasons for this. The link between money supply growth and inflation is nothing like as tight as Milton Friedman claimed, and his parallel assertion that inflation is "always and everywhere" a monetary phenomenon is nonsense.

Actually, we could tell that Friedman himself was losing confidence in his own theory during his last years when he gave encouragement to Alan Greenspan's sloppy monetary policy. With M3 money supply rising at close to 10% per annum, Friedman should, as a true monetarist, have condemned it. Friedman should, as a true monetarist, have condemned it.

Since 2008, money supply growth has risen at 6-7% per annum, but that's still a lot faster than nominal GDP growth, which has rarely touched 5%. Saying that monetary "velocity" has declined is in a sense tautological; if money supply consistently rises faster than GDP then monetary velocity must, as an arithmetic necessity, decline. But that says nothing about events in the real world, nor does it suggest that any real factor is causing monetary velocity to decline and GDP to increase more slowly than money supply.

Prices have become detached from money supply growth owing to a number of factors. The most prominent of these is modern telecoms: the communications revolution that has made it much easier and cheaper to construct global sourcing networks for goods and services. By these technologies, emerging markets labor has been put more directly in competition with Western labor, causing an arbitrage closing the differential between the two wage rates. That's why median incomes in the U.S. have declined a further 5% in real terms since 2010, even as economic growth has continued at a moderate pace.

The downward pressure on prices—both directly through competition from goods and services  produced in emerging markets and indirectly through lower domestic wages—has suppressed costs in the West in the 2010s just as an equivalent process of market opening to the world suppressed costs in Japan in the 1990s. Also, demographics haven't helped. As Western economies have aged, the downward wage pressure from semi-retired workers finding they need to continue working has been accompanied by downward price pressure as they and other disadvantaged consumers attempt to shop more cheaply.

If the Fed has no effect on inflation, then it is left simply with its unemployment mandate. That is completely unsatisfactory, because it causes the Fed to run policies of negative real interest rates long after there is any justification for them from the economic cycle. Normally, a burst of inflation would cut off this nonsense (as it did to some extent in 2004-06) but in this case, the inflation isn't happening, and the Fed's self-indulgence is thus uncontrolled.

Even though negative real interest rates aren't producing a surge in inflation (at present) they are having a number of other adverse effects on the economy. The most serious of these is that they are discouraging saving, to the extent that the U.S. savings rate (savings as a percentage of disposable income) has declined from an average of over 10% in 1929-94 to an average of just 5% since 1995. Even if everyone worked till they dropped without retiring, if savings are inadequate the economy is de-capitalized and living standards erode to poor-country levels.

The savings rate, measured by the Bureau of Economic Analysis since 1929, fluctuates considerably from year to year. Over the 84 years for which we have data, it has been at times very low, as in the early 1930s when incomes fell more than consumers were anticipating, and very high, as during World War II when the opposite process occurred and production shortages restricted purchases of many goods. However, if you divide the 1929-94 period into three roughly equal segments, 1929-45, 1946-71 and 1972-94 (the separator between the second and third being the breakdown of the Bretton Woods monetary system), you see an average savings rate that would round to 10% in each of the sub-periods. In other words, at least in the twentieth century, 10% has been the natural savings rate. Only extreme economic events have caused it to vary, and it quickly reverted to its long-term average after those ended.

The savings rate's descent to the 5% range after 1995 is thus highly significant. This is not solely a function of negative real interest rates. Real interest rates during the Greenspan bubble of the late 1990s were generally positive, yet the money supply was expanding much faster than the economy, and the savings rate correspondingly fell (with the impetus for the decline being the extraordinary rise in asset prices rather than ultra-low rates themselves). Then after 2002 the savings rate fell further, bottoming out at below 3% in the housing bubble in 2005-07. Its rebound in 2008-09, prompted by the collapse of housing and portfolio values in 2007-08, proved short-lived. Since 2010, it has once again languished around 5%.

The same dynamic has played out in the corporate sector. Here, profits in recent years have been running close to record levels in terms of GDP, but companies have not been using the extra money for long-term investment. Instead, they have been conducting stock buybacks, running at a record level of $338 billion in the first six months of 2014. Needless to say, since the U.S. stock market is at record levels, this is unlikely to be an efficient use of shareholder capital. Indeed, given that buybacks dropped off sharply in the bear market of 2008-09 and in several cases were replaced with emergency rights issues at low prices, shareholders have generally been penalized by management buying stock at high prices and selling at low prices (or at the very least, ceasing purchases when prices were low) thus producing almost perfect destruction of shareholder value.

Some of the largest companies have spent far more on buybacks and dividends (the preponderance on buybacks), with Hewlett-Packard spending almost double its profits in 2003-12 and Microsoft, Cisco and Intel all spending more than 100% of profits, according to the FT. Because all four companies are trading below their 2000 peaks—even though the S&P's 500 index is about 30% above its 2000 peak—the buybacks can be regarded as singularly inept investments. H-P, Cisco and Intel are almost certainly carrying a negative return even in nominal terms. It must be remembered that normal investors typically get no benefit whatever from buybacks, because they are not the ones tendering stock to the company. Management, which gooses the value of its stock options, is the only true beneficiary.

With the major tech companies of 2000 investing all their profits in share repurchases, it's not surprising that economic growth since 2000 has been anemic at best. The Fed, by encouraging cheap leverage and narrowing the capital cost differential between the U.S. and emerging markets, is largely responsible for this failure. It has left the behemoths of U.S. industry with huge domestic leverage, while they sit on pools of overseas cash that cannot for tax reasons be deployed in investment within the U.S.

When you look at corporate behavior, individual savings behavior and monetary policy, it becomes clear that the economy-wide dearth of savings is very largely the Fed's fault. Far from providing "stimulus" to U.S. economic growth, its over-expansionary policies have driven growth offshore while stunting the creation of the domestic capital essential to providing adequate living standards for the American people. The Fed's artificial stimulus has been anything but stimulating, except in the shortest term.

The solution is simple. Rather than targeting inflation or unemployment directly, the Fed should target the savings rate, which it has a much better chance of affecting through its interest-rate policies. By running the financial system with a high risk-free real rate of interest, it will quickly pull the savings rate back to 10%, while ensuring that corporations cease taking on unnecessary borrowing and instead focus on reducing their leverage and repatriating foreign cash pools. Initially this might cause deflation, as a 3% federal funds rate was accompanied by minus 2% inflation. But high real rates would soon create more capital in the economy, tending to increase genuine capital investment and pushing inflation back to positive territory.

Rather than praying for Keynes' "euthanasia of the rentier," the Fed should instead run its interest rate policy in the interest of rentiers until savings have recovered to their long-term average level. Not only will it be good for the economy's heath, it will be good for its moral probity. Speculation and leverage games will disappear, and long-term, steady wealth accumulation will return to fashion. Who knows, we may even get the bankers back into wing collars!


Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005) - details can be found on the website www.greatconservatives.com - and co-author with Professor Kevin Dowd of Alchemists of Loss (Wiley, 2010). Both are now available on Amazon.com, Great Conservatives only in a Kindle edition, Alchemists of Loss in both Kindle and print editions.

(Republished with permission from PrudentBear.com. Copyright 2005-14 David W Tice & Associates.)
 

 

8 Reasons Why The Long-Bond Is Going Under 2.50% Zero Hedge

Via Scotiabank's Guy Haselmann,

I’ve been a bond bull since February, frequently predicting that the 30 year would fall below 3% by the end of the year.  Last week, I said it would fall below 3% by Thanksgiving; a call I still standby.   For the reasons that I mentioned on a morning call, I will give the shortened version of a case why the long bond may even be headed toward 2.5% in 2015.

As the country managing the world’s reserve currency, the US needs to run a chronic current account deficit to supply the world with dollars.  Yet, in running a chronic perpetual deficit it undermines confidence in it.  This is what is known as the Triffin Dilemma.

Many believe QE3’s printing of $1 trillion per year (of a fiat currency) would be the tipping point that would debase the dollar.  Bitcoin become popular and Gold soared.  The world was flush in dollars.  EM corporates issued in dollars, expanding the outstanding float of such securities 7X, versus 2006 levels. The debasement never happened and now that the QE is ending, the world will have fewer dollars. In turn, the dollar soaring, while Gold is under pressure and the Bitcoin has collapsed (75%).

Most importantly, the shale revolution is structurally shrinking the size of the US current account and fiscal deficits.  The US is producing an extra million barrels of oil per year.  Throw in a looming interest rate hike and the dollar is rising (more demand than supply).   Since the US is exporting less capital, liquidity in being tightened abroad, particularly for countries whose currencies are tied to the dollar (China) or who depend on commodity production (EM). 

Reasons to like long Treasuries:

  1. To obtain more dollars, these countries can try to export more or they can deflate their currencies. Either result is deflationary for the US.
  2. Bank regulation means that new bank deposits are going into Treasuries and away from loans and credit securities.
  3. Rule changes from the PBGC will increase demand over time for long dated Treasuries (asset allocation shift away from equities) as penalties for under-funding become more punitive.
  4. Bad demographics and higher debt levels will act as economic growth headwinds.
  5. The falling fiscal deficit will result in less Treasury issuance going forward.
  6. The Fed owns over 40% of all secondary Treasury securities 10-years and longer, so there is a shortage of high quality longer dated securities.
  7. Geo-political tensions are the highest in decades.
  8. China is reeling in its credit and real estate bubbles further hurting commodity exporters.  (etc)

Equities and credit instruments will be hard pressed to justify valuations.  With little pricing power and economic growth that is likely to be modest at best, revenue growth and profits are unlikely to be adequate enough to justify lofty valuations.

I maintain my bullish view on long Treasuries and implore investors not to underestimate the upside potential (in price).  Almost everyone is expecting much higher yields in the near term, but a 30-year drop in yield toward 2.5% should be considered as a possibility

German factory orders had their sharpest drop

http://www.ibtimes.com/german-factory-orders-plunged-august-stoking-fears-european-economic-slowdown-1699784

German factory orders had their sharpest drop since 2009, Berlin’s Economy Ministry said Monday, erasing recent gains and adding to fears of a slowdown in Europe’s largest economy.

A big drop in international demand caused factory orders to fall by 5.7 percent in August from July and 1.3 percent from a year ago, Berlin said. Economists had expected a 2.5 percent monthly decrease, according to a Bloomberg survey. By contrast, orders from abroad drove a 4.6 percent increase in factory orders in July, the most in more than a year.

Orders from outside the euro zone fell 9.9 percent in August from July, orders from other countries in the euro zone fell by 5.7 percent, and domestic orders fell by 2 percent.

The “hesitant economic development” of the 18-nation euro zone and uncertainty introduced by “geopolitical events” weakened demand, the ministry said. The bloc of European countries is struggling to maintain economic momentum in a recovery while political tensions with Russia continue to escalate. International sanctions against Russia and a faltering Chinese economy have deteriorated business and investor sentiment in the euro area. Inflation in the region is at a five-year low, at 0.3 percent last month compared with the European Central Bank’s 2 percent target for price stability.

The European Union and the U.S. have imposed several economic sanctions against Russia over its involvement in the Ukraine crisis, and Moscow has retaliated by banning most food imports from the Western trade partners. Moscow is reportedly considering a ban on car imports and clothes from the West, which would hurt Germany’s Volkswagen and Mercedes-Benz manufacturers among others leading the country's industrial output. If the dispute with Russia over the Ukraine crisis hits Germany’s economy harder in the third quarter than the second, the German economy could fall into recession.  

[Sep 29, 2014]  Low Oil Prices: Sign of a Debt Bubble Collapse, Leading to the End of Oil Supply?

Quote: "I would argue that falling commodity prices are bad news. It likely means that the debt bubble which has been holding up the world economy for a very long time–since World War II, at least–is failing to expand sufficiently. If the debt bubble collapses, we will be in huge difficulty."
September 21, 2014  | ourfiniteworld.com

I would argue that falling commodity prices are bad news. It likely means that the debt bubble which has been holding up the world economy for a very long time–since World War II, at least–is failing to expand sufficiently. If the debt bubble collapses, we will be in huge difficulty.

Many people have the impression that falling oil prices mean that the cost of production is falling, and thus that the feared “peak oil” is far in the distance. This is not the correct interpretation, especially when many types of commodities are decreasing in price at the same time. When prices are set in a world market, the big issue is affordability. Even if food, oil and coal are close to necessities, consumers can’t pay more than they can afford.

Selected Skeptical Comments
Paul, September 21, 2014 at 10:32 pm

An excellent article – as usual.

“Prices of many commodities crashed in 2008, and it was only with massive intervention that prices were propped up to 2011 levels.”

That’s one of the hamsters we need to keep running on the wheel.

Looking at prices at the moment are the central banks losing control — or are they playing a game — do not intervene when the prices increase with the purpose being to encourage investment — but this of course destroys growth — so do they phase it down purposely — to prevent a collapse of the economy …. then phase it back up again before oil producers shut down….

Hopefully it is the latter — because if prices keep dropping and stay low — we have a problem.

I think the latter is more likely because otherwise we surely would see some sort of reaction out of the central banks to offset this drop — the reaction may find it is pushing on a string — but none the less — I can’t imagine that they would sit idly by and let oil tumble out of control…

Of course all of these measures are stop gap – there is no solution … at some point it all unravels and that is the end of oil and most other resources — they will simply remain in the ground

My position remains we end up with an ‘economy’ somewhere between a cave man and Mad Max.

Food will surely be the issue – not trying to tape together the detritus of a collapsed civilization and trying to keep vehicles on the road…

Stilgar Wilcox,

If Gail’s article is correct, we will be separated from non-conventional oil sources first as they become unaffordable, on down the line until we are mostly reliant on conventional oil which is already being taken out of the ground via horizontal super straws at an alarming rate of depletion.

At this point I’m very interested to see if oil price does go back up and how much, and for how long. There seem to be two peak oil camps; those that think oil price can go up to $130-200 a barrel and those that think the price is currently residing at the affordability ceiling, which is the camp I am in. Recently there was an article about the Saudi’s plan to cut back on oil production to get price back up, which should prove interesting to see if that works or not.

Paul, September 22, 2014 at 12:49 am

Stilgar – I think it was posted on this site something to the effect that oil over $50 is not really affordable… that the economy can only tolerate that for so long…

I think this all ties back to this:

HIGH PRICED OIL DESTROYS GROWTH According to the OECD Economics Department and the International Monetary Fund Research Department, a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices. http://www.iea.org/textbase/npsum/high_oil04sum.pdf

If that is the case then even $50 oil would be putting a significant drag on the economy …

I think to even stay afloat with 90 oil massive offsets must remain in place (stimulus, QE, ZIRP …) — of course these offsets cannot hold back the tsunami forever…

I really don’t think any of the numbers we are seeing are doable — and of course we can’t go back to 20 or even 50… because that the cost to pull much of the oil of the ground is well beyond that number…

Really a very bad situation… I remain amazed that they are able to hold this together

Gail Tverberg, September 22, 2014 at 9:28 am

If there is a price spike, I am expecting it will be a brief one.

Ghung, September 22, 2014 at 12:12 pm

BBC this morning: “Rockefellers to switch investments to ‘clean energy'”

“Heirs to the Rockefeller family, which made its vast fortune from oil, are to sell investments in fossil fuels and reinvest in clean energy, reports say.
The Rockefeller Brothers Fund is joining a coalition of philanthropists pledging to rid themselves of more than $50 bn (£31 bn) in fossil fuel assets…..”

http://www.bbc.com/news/world-us-canada-29310475

One wonders if this level of dis-investment will start a cascade of dis-investment resulting in an oil price spike-cum-crash, ala 2008. I speculated over at peakoil.com that this, on the surface, looks like a good thing for the growth of ‘green energy’ and the climate, but there may well be another side to this; disaster capitalism at its best. If the Rockefellers can spur an exit from fossil fuel investment on much of a scale, all hell could break lose in the oil markets as investors follow the ‘smart money’ out. As we’ve seen, major oil players are already selling assets to keep up profits and dividends. Of course, if you’re the Rockefellers and can risk a few $billion loading up on credit default swaps, etc., and position yourselves to buy back the peices, all-the-while investing heavily in alternatives, just the movie rights could be worth billions.

Nothing wrong with having a little fun with this stuff, eh?

Gail Tverberg, September 22, 2014 at 8:01 pm

I suppose that there may be some clean energy investment that sort of works–for example, geothermal in the right location. But there is an awfully lot that has no chance of being cost effective, and makes the electric grid less resilient. Such investment takes money away from where investment does (sort of) still work. It makes people feel like they are doing something useful, but it just makes the crash come sooner, as far as I can see.

PeterEV, September 23, 2014 at 9:44 am

I think this is a smart mover on the Rockefellers’ part. I was reading where in one of GM’s Labs they are getting their gray matter wrapped around the Lithium Sulphur battery technology and it appears that they have a battery in the lab that can store 1,000 wh/kg. This is about 10 times the energy density of Lithium Iron Phosphate batteries of the same weight. They showed a graph where there was very little capacity loss after 600 cycles. In other words, an EV pack with a 100 mile range is likely to be replaced with a pack of a 1,000 mile range. This, if there are no “side effects” (e.g., it’s not volatile, has a wide operating temperature range, long shelf life, long cycle life, etc.), is a real game changer.

The other game changer would be if there were economical photovoltaics with an efficiency of greater than say 45%. I wonder if they have gotten wind of something?

We sometimes look at something like this and say how wonderful life will be if this comes to pass. For some it will be. It always is. This will at least cut our fossil fuel usage out the tail pipe and maybe out the smoke stack.

I wonder if this is what some of the people who fought carbon capture were seeing: No one giving up their cars and hot showers but having them fueled by solar with excess solar energy stored in batteries.

I wonder what life would look like under a solar/battery epoch? What would we really need coal, oil, and natural gas for? What could not be done by energy stored in high energy batteries?

Paul, September 23, 2014 at 9:52 pm

Even if this worked out it is not a game changer – see Things Made from Oil http://www-tc.pbs.org/independentlens/classroom/wwo/petroleum.pdf

We need oil. Easy to extract oil. Unless someone comes up with something that is cheap and can do what oil does — then the discussion is not worth having

;PeterEV, September 24, 2014 at 6:13 pm

Hi Paul,

I read through your referenced list under Automotive. Gasoline was listed and EVs do not use gasoline.

If the fleet turnover is once every 16 years, then at the end of 16 years, there will be very little gasoline used. Also EVs do not use antifreeze, coolant ( not sure if this is redundant with antifreeze), motor oil, oil filters, fan belts, etc.). The amount of petroleum used in battery cases, bearing grease, traffic cones, brake fluid, windshield wipers, visors, etc. might be supplied from Colonel Drake’s original well either because the material does not wear out such as battery cases or the amount used is so minimal such as less than a teaspoon of grease every100+K miles, to the point we could be supplied with grease for an extremely long time.

After 16 years, the body of cars that used to use gasoline would be using electricity that could be supplied solar, wind, and hydro with excess stored in those batteries. Is that not a game changer? If the USA uses 180 million gallons of gasoline per day, that’s 10 million barrels of oil per day that are not used. Is that not a game changer??? We decrease oil usage to the point of becoming “energy independent”. Is that not a game changer???

The only ones I saw that might be a problem are asphalt and tires. The question back to you is how much asphalt do we use a year in barrels of oil? What substitutes could we use instead?

How many barrels of oil are used per day to make tires? What can be used as a substitute? When I posed this situation to my son, he said there are alternatives and he is in the tire business.

I see EVs in the form of cars and trucks as buying us a lot of time to find substitutes to make the adjustments we need. This is **not** BAU but an evolution into the next era. There may be less cars and more bicycles but then that is part of the evolution.

The discussion we need to have is what do we do with the remaining oil given our current infrastructure, resources, and our attitudes? We don’t need to be blinded by list of things that might disappear but to find substitute(s) or alternatives for those things. There are a lot of smart people out there who have solved problems and there are those that have said that man will never fly so why try. There have been a lot of people who have seen this coming and are finding and suggesting ways forward.

Jan Steinman, September 24, 2014 at 6:24 pm

It isn’t direct use of fossil sunlight that counts, it’s the pyramid-effect.

A modern, computer-controlled, high-tech EV essentially requires all of current human civilization in order to exist.

I think older EV technology could last for some time, but next to fossil sunlight, I think our biggest addiction is to “human exceptionalism,” the thought that our brains and our technology can get us past the basic laws of physics.

I would absolutely love it if some brave, daring individual would produce EVs using no technology that didn’t exist in 1950. That’s going to be the only way EVs can continue past the decline of fossil sunlight.

I’m currently working on a Vanagon re-powering, using flooded-cell NiCd batteries and a series-wound DC motor. That may have a chance of surviving a couple decades, but the sealed Curtis controller can’t be repaired if the semiconductor industry falters.

PeterEV , September 24, 2014 at 8:15 pm

What will be present in the future is hard to say. I can see the military trying to keep some facilities open to produce electronics. The spill over would be to produce controllers for various vehicles. Greer mentioned a stair step down scenario and I think I would agree. We may even go back to a Henney Kilowatt controller.

However, we are still producing and have access to FF of various types. We recycle CPUs and other electronic parts. Not sure of all that we can retrieve.

BTW, good luck with your Vanagon!!

Paul, September 24, 2014 at 8:42 pm

“I can see the military trying to keep some facilities open to produce electronics.”

Factories are not closed systems … they require inputs from BAU in order to produce electronics…

So to keep a factory operating you would also need to keep the mines open that supply the copper … the smelters open that smelt that refine the copper … you need mining equipment, spare parts etc… so you have to keep the factories that produce all of that open … you also need to transport stuff from one place to another etc…. etc…. etc… etc….

Basically if you want to keep even one electronics factory producing – you need a fully functioning global economy.

PeterEV, September 25, 2014 at 7:45 am

They are called contracts and the Gov’t will increase debt to pay for them. During the great depression, FDR created a number of civic projects and paid people to work them. It was not BAU but it was a way to prime the pump

If energy is represented by money and energy dwindles, then money dwindles. It is one of the reasons that the Gov’t has tax incentives on home owner solar energy projects. In the summer, I am basically energy neutral and can recharge an EV while others burn gasoline.

Gail Tverberg, September 26, 2014 at 7:56 pm

We need to keep the whole system operating. This means that we have to keep demand for oil high enough that the price stays (or rather, rises) high enough that we can actually get it out of the ground. Getting rid of all automotive uses is not necessarily helpful.

ordinaryjoe, September 24, 2014 at 10:35 am

‘Even if this worked out it is not a game changer’ I disagree. If the kind of battery advances he is talking about come to fruition then electrical vehicles become feasible. PV home systems become feasible. An army of segways. Sure the copper for the motors still has to be mined with fossil fuels. Sure the tractors and farm equipment will not be converted or replaced with electric. Batteries like he is talking about could extend BAU for a long time however. Thats a game changer in my book.

Gail Tverberg, September 25, 2014 at 3:39 pm

Even if these could be invented tomorrow, we are talking a minimum 20 year change-over time period, because current cars need to wear out before they are replaced. (We cannot afford the loss of value on existing cars.) We need to keep oil demand and oil prices high during that period, so that oil is available for other uses where it is still needed. We have to find ways to continue to produce electricity as coal is phased out and nuclear wears out. We need to maintain electrical transmission lines, or we won’t have electricity for recharging all of these vehicles.

We would need coal, oil and natural gas as before. In fact, we would need rising prices for these products, to make it worthwhile for producers to continue to extract them. Without fossil fuels, we could not make the cars or the new batteries or the new PVs.

kesar,September 25, 2014 at 4:05 pm

There are many calculations of the electric grid investment required to make that transition.
One of them (link below) says about $500 billion a year till 2050 across the globe. Other say even about $900 billion.

http://books.google.pl/books?id=MZ3DklIQuT0C&pg=PA1255&lpg=PA1255&dq=US+electric+grid+investment+2050&source=bl&ots=5Jn7h_I_1q&sig=tvl3aGBXvDcgJxiGcukaV-mVjgM&hl=pl&sa=X&ei=kn8kVKW9CoKd7gbj_IHgDQ&ved=0CCoQ6AEwAQ#v=onepage&q=US%20electric%20grid%20investment%202050&f=false

How any one could expect that humanity is able to raise all these investment projects in such long period of time? Stable economy is needed for once. And I do not even mention the money. There are resources (steel, copper, oil, coal and full Mendeleev’s periodic table considering current material/technological needs) behind all of these works. Where are we going to find and peacefully extract them? On Venus, Mars, Jupiter or Saturn? And the energy for that task comes from which natural resource? And please add the results of demographic bomb we are sitting on.
Oil is gone. Liebig’s LotM. The humanity will follow. Sorry.

an Steinman says: , September 25, 2014 at 7:40 pm

“we are talking a minimum 20 year change-over time period, because current cars need to wear out before they are replaced.”

Older vehicles with sound body, brakes, steering, etc. could be retrofitted to electric drive fairly simply.

I haven’t gone through a full emergy analysis, but I suspect that an electric drive retrofit would have less embedded energy than the original internal combustion engine. Plus, electric drive is simpler, and easier to maintain.

The rub is batteries. There are rumblings about “peak lithium,” should electric cars really take off. Lithium batteries require a lot of technology, too, and long supply lines.

I’m using NiCd, but they are horribly expensive, even though they have a very long life, compared to the lowest common denominator, lead-acid batteries, which are heavy and need to be replaced every few years — but they can be rebuilt using simple technology at the disposal of a large village or small town.

This situation isn’t going to change much. There are rumblings of better battery technology available Any Day Now™, but any highly advanced technology will require much of today’s civilization to maintain it. My vote is that lead-acid will be around for the long term.

fireofenergy says: , September 27, 2014 at 12:58 am

That battery thing is interesting. I do know that it takes about half the energy that a lead acid will ever store, just to make, that is energy stored on investment, ESOI, and that certain li-ions can achieve an ESOI of up to 10. However, I’m not sure if that includes the average of whatever gains gathered with recycling. So, imagine a solar panel with an EROEI of about 7 coupled with the lead acid. We need to store about 4/5ths of the energy for “later” (and for making more batteries and solar panels). Just not happening, because the battery eats fully half the energy (in this extreme case). Also not happening because we humans are just a little too impatient for all that, as we are used to extracting and consuming “instantly”.

O the other hand, imagine a (somewhat) clean source that doesn’t require 4/5ths storage, and a form of storage that has an ESOI of over 100. Also imagine the source itself having an EROEI of that of windpower or higher (>20). That would be nuclear, because the power of fission by far offsets the energy intensive process of mining and enrichment. Efficiency in energy gathering and storage (and usage) is key to surviving peak oil. What we need to do is make nuclear itself far more efficient. We do that by chemically reprocessing spent fuel. This voids the negative inputs to EROEI caused by both mining and enrichment. It also voids the need to mine for any extra uranium (or thorium) for many centuries!

Given a civilization powered almost completely by fission (and then fusion), there would be plenty of hydrocarbons for tires and roads, etc

[Sep 28, 2014] Ready Or Not... The Unsustainable Status Quo Is Ending

zerohedge.com

By The Numbers

Humans now number 7.1 billion on the planet and that number is on track to rise to 8 or 9 billion by 2050. Already 'energy per capita' is stagnant across the world and has been for a few decades. If the human population indeed grows by 15-25% over the next three and a half decades, then net energy production will have to grow by the same amount simply to remain constant on a per capita basis.

But can it? Specifically, can the net energy we derive from oil grow by another 15% to 25% from here?

Consider that, according to the EIA, the US shale oil miracle will be thirty years in the rear-view mirror by 2050 (currently projected to peak in 2020). And beyond just shale, all of the currently-operating conventional oil reservoirs will be far past peak and well into their decline. That means that the energy-rich oil from the giant fields of yesteryear will have to be replaced by an even larger volume of new oil from the energetically weaker unconventional plays just to hold things steady.

To advance oil net energy on a per capita basis between now and 2050, we'll have to fight all of the forces of depletion with one hand, and somehow generate even more energy output from energetically parsimonious unconventional sources such as shale and tar sands with the other hand.

These new finds...they just aren't the same as the old ones. They are deeper, require more effort per well to get oil out, and return far less per well than those of yesteryear. Those are just the facts as we now know them to be.

In 2013, total worldwide oil discoveries were just 20 billion barrels. That's against a backdrop of 32 billion barrels of oil production and consumption. Since 1984, consuming more oil than we're discovering has been a yearly ritual. To use an analogy: it's as if we're spending from a trust fund at a faster rate than the interest and dividends are accruing. Eventually, you eat through the principal balance and then it's game over.

Meanwhile, even as the total net energy we receive from oil slips and our consumption wildly surpasses discoveries, the collective debt of the developed economies has surpassed the $100 trillion mark -- which is a colossal bet that the future economy will not only be larger than it is currently, but exponentially larger.

These debts are showing no signs of slowing down. Indeed, the world's central banks are doing everything in their considerable monetary power to goose them higher, even if this means printing money out of thin air and buying the debt themselves.

Along with this, the demographics of most developed economies will be drawing upon badly-underfunded pension and entitlement accounts -- most of which are literally nothing more substantial than empty political promises made many years ago.

These trends in oil, debt and demographics are stark facts all on their own. But when we tie these to the obvious ecological strains of meeting the needs of just the world's current 7.1 billion, any adherence to the status quo seems worse than merely delusional.

Here's just one example from the ecological sphere. All over the globe we see regions in which ancient groundwater, in the form of underground aquifers, is being tapped to meet the local demand.

Many of these reservoirs have natural recharge rates that are measured in thousands, or even tens of thousands, of years.

Virtually all of them are being over-pumped. The ground water is being removed at a far faster rate than it naturally replenishes.

This math is simple. Each time an aquifer is over-pumped, the length of time left for that aquifer to serve human needs diminishes. Easy, simple math. Very direct.

And yet, we see cultures all over the globe continuing to build populations and living centers - very expensive investments, both economically and energetically – that are dependent for their food and water on these same over-pumped aquifers.

In most cases, you can calculate with excellent precision when those aquifers will be entirely gone and how many millions of people will be drastically impacted.

And yet, in virtually every case, the local 'plan' (if that's the correct word to use here) is to use the underground water to foster additional economic/population growth today without any clear idea of what to do later on.

The ‘plan’ such as it is, seems to be to let the people of the future deal with the consequences of today's decisions.

So if human organizations all over the globe seem unable to grasp the urgent significance of drawing down their water supplies to the point that they someday run out, what are the odds we'll successfully address the more complex and less direct impacts like slowly falling net energy from oil, or steadily rising levels of debt? Pretty low, in my estimation.

Conclusion

Look, it's really this simple: Anything that can't go on forever, won't.  We know, financially speaking, that a great number of nations are utterly insolvent no matter how much the accounting is distorted. Said another way: there's really no point in worrying about the combined $100 trillion shortfall in Social Security and Medicare, because it simply won't be paid.

Why? It can't, so it won't. The promised entitlements dwarf our ability to fund them many times over. There's really not much more to say there.

But the biggest predicament we face is that steadily-eroding net energy from oil, which will someday be married to steadily-falling output as well, can't support billions more people and our steadily growing pile of debt.

Just as there's no plan at all for what to do when the groundwater runs out besides 'Let the folks in the future figure that one out,' there's no plan at all for reconciling the forced continuation of borrowing at a faster rate than the economy can (or likely will be able to) grow.

The phrase that comes to mind is 'winging it.'

The wonder of it all is that people still turn to the same trusted sources for guidance and as a place to put their trust. For myself, I have absolutely no faith that the mix of DC career politicians and academic wonks in the Fed have any clue at all about such things as energy or ecological realities.  Their lens only concerns itself with money, and the only tradeoff concessions they make are between various forms of economic vs. political power.

If the captains supposed to be guiding this ship are using charts that ignore what lies beneath the waterline, then you can be sure that sooner or later the ship is going to strike something hard and founder.

I'm pretty sure the Fed's (and ECB's and BoJ's and BoE's) charts resemble those of medieval times, with "Here be dragons" scrawled in the margins next to a series of charts of falling stock prices and unwinding consumer debt.

So there we are. The globe is heading from 7.1 billion to 8 or 9 billion souls, during a period of time when literally every known oil find will be well past its peak. Perhaps additional shale finds will come along on other continents to smooth things out for a bit (which is not looking likely), but it's well past time to square up to the notion that cheap oil is gone. And with it, our prospects for the robust and widespread prosperity of times past.

Because all of this inevitably leads to some sort of time of reckoning, natural questions emerge: What might happen and when? What would that feel like?  How would I know it's started? Given the knowns and unknowns, are there any dominant strategies for mitigating the risks that I should undertake?  What are the challenges and what are the opportunities?

WayBehind

Ebola (and other viruses), wars and mother nature will take care of this overpopulation problem

X.inf.capt

you mean the 1% will fix over-population. after they extracted all the wealth from the 99%..
if they wont work, send them to the showers... god, these people are evil...

markmotive

Of course not. But don't pretend to know what's coming next. Because most don't even know how things work today.

Ray Dalio has a 'template' for understanding the world as it works and how he has avoided catastrophes in the past.

http://www.planbeconomics.com/2014/09/ray-dalio-on-how-the-economic-mach...
 

[Sep 19, 2014] Jesse's Café Américain

"The sudden explosion of European sovereign debt is the direct and indisputable result of all our political parties deciding they would safeguard their mates’ and their own personal wealth (it is the top 10% who hold the bulk of their wealth in the financial products which would be destroyed in a bank collapse. NOT the rest of us!) by bailing out the private banks and piling their unpaid debts on to the public purse.

So whatever the trigger of the next crisis may be, they know any solution which saves the wealth and power of the over-class will have to involve piling new, private-bank bad-debts on to already indebted sovereigns and that, our leaders must be keenly aware, will not be easy to force on an already angry public. They know a whole range of the assurances they might like to give us about what must be done when the next crisis hits and how those things will undoubtedly save us, will not be so easy to shove down people’s throats...

I think one of the cleverest things the 1% have done over the last few years is the way they have created a relentless public discourse, via their paid political front-men and women and their media empires, to insist on the need to ‘fix’ and protect the system, and the extreme danger to us all should the system not be ‘saved’. This has served as a perfect cover for making sure that not enough people have noticed that the system is, in fact, being gutted and replaced by something that better serves the interests of the 1%. We have not been fixing the banks, we have been feeding them."

Golem XIV, The Next Crisis Part One

Shale Fracking Is a “Ponzi Scheme” … “This Decade’s Version of The Dotcom Bubble” … “A Lot In Common With the Subprime Mortgage

I think everybody noticed a boom in junk bonds...

In 2011, the New York Times wrote:

 “Money is pouring in” from investors even though shale gas is “inherently unprofitable,” an analyst from PNC Wealth Management, an investment company,  wrote to a contractor in a February e-mail. “Reminds you of dot-coms.”

“The word in the world of independents is that the shale plays are just giant Ponzi schemes and the economics just do not work,” an analyst from IHS Drilling Data, an energy research company,  wrote in an e-mail on Aug. 28, 2009.

“And now these corporate giants are having an Enron moment,” a retired geologist from a major oil and gas company  wrote in a February e-mail about other companies invested in shale gas.

Deborah Rogers, a member of the advisory committee of the Federal Reserve Bank of Dallas, [and a]  former stockbroker with Merrill Lynch ... showed that wells were petering out faster than expected.

“These wells are depleting so quickly that the operators are in an expensive game of ‘catch-up,’ ” Ms. Rogers wrote in an e-mail on Nov. 17, 2009, to a petroleum geologist in Houston, who wrote back that he agreed.

A review of more than 9,000 wells, using data from 2003 to 2009, shows that — based on widely used industry assumptions about the market price of gas and the cost of drilling and operating a well — less than 10 percent of the wells had recouped their estimated costs by the time they were seven years old.

“Looks like crap,” the Schlumberger official wrote about the well’s performance, according to the regulator, “but operator will flip it based on ‘potential’ and make some money on it.”

In 2012, the New York Times pointed out:

The gas rush has ... been a money loser so far for many of the gas exploration companies and their tens of thousands of investors.

Although the bankers made a lot of money from the deal making and a handful of energy companies made fortunes by exiting at the market’s peak, most of the industry has been bloodied — forced to sell assets, take huge write-offs and shift as many drill rigs as possible from gas exploration to oil, whose price has held up much better.

Now the gas companies are committed to spending far more to produce gas than they can earn selling it. Their stock prices and debt ratings have been hammered.

Rolling Stone reported the same year:

Fracking, it turns out, is about producing cheap energy the same way the mortgage crisis was about helping realize the dreams of middle-class homeowners. For Chesapeake, the primary profit in fracking comes not from selling the gas itself, but from buying and flipping the land that contains the gas. The company is now the largest leaseholder in the United States, owning the drilling rights to some 15 million acres – an area more than twice the size of Maryland. McClendon [the CEO of fracking giant Chesapeake] has financed this land grab with junk bonds and complex partnerships and future production deals, creating a highly leveraged, deeply indebted company that has more in common with Enron than ExxonMobil. As McClendon put it in a conference call with Wall Street analysts a few years ago, "I can assure you that buying leases for x and selling them for 5x or 10x is a lot more profitable than trying to produce gas at $5 or $6 per million cubic feet."

According to Arthur Berman, a respected energy consultant in Texas who has spent years studying the industry, Chesapeake and its lesser competitors resemble a Ponzi scheme, overhyping the promise of shale gas in an effort to recoup their huge investments in leases and drilling. When the wells don't pay off, the firms wind up scrambling to mask their financial troubles with convoluted off-book accounting methods. "This is an industry that is caught in the grip of magical thinking," Berman says. "In fact, when you look at the level of debt some of these companies are carrying, and the questionable value of their gas reserves, there is a lot in common with the subprime mortgage market just before it melted down."

In February, Chesapeake announced that, because of low gas prices, its revenues will fall $3.5 billion short of its expenses this year

delivered

I'm by no means an expert but do understanding accounting and finance and would like to point out two key issues. First, the availability of cheap/easy capital as noted in numerous posts (driven by the Fed and other CBs) has certainly contributed to the perceived economic value of fracking. Hell, with free flowing money, just about any business can stay afloat for quite some time as rates, terms, struture, etc. are all extremely favorable during the "salad days". But once a business actually realizes that debt has to be, dare I mention, repaid, the combination of very highly capital expenditure requirements and debt service payments basically consume all cash/liquid resources.

Second, I've studied/analyzed a number of fracking company financial statements and have noticed that the annual capital expenditures (i.e., the cost of acquiring and drilling) compared to revenue growth and cash flow (both EBITDA and free) supports a number of the comments made in GW's article. That is, there is a constant need to drill more and more to maintain a base line production level so what I'm guessing is that the capitalized well devlopment costs are being "managed" by the accountants to keep an inflated asset on the books (which probably should be written down based on high production decline rates after 12 months). What would be interesting to evaluate is the actual oil production in units (or barrels) compared to production development costs over time. This might be the canary in the coal mine that really helps quantify the economics of the fracking industry.

So let's combine the end of easy/cheap money, with accountants "managing" fracking company assets, and a declining price of oil and most likely what you are setting up is a major shakeout in the industry. No doubt the weak are going to get creamed in this environment and the strong, just waiting to acquire resources but only at the right price, will get even stronger.

El Vaquero

Here is a talk from somebody who up until the beginning of this year was a bean counter for the oil industry:

http://energypolicy.columbia.edu/events-calendar/global-oil-market-forec...

You can say that it's from a .edu and question the source, but then you can go through his talk and presentation (there is a link to his slides) to see what the actual sources were, because the .edu was just a forum for presentation.

Magooo 

The economy is a surplus energy equation, not a monetary one, and growth in output (and in the global population) since the Industrial Revolution has resulted from the harnessing of ever-greater quantities of energy.

But the critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel.

http://ftalphaville.ft.com/files/2013/01/Perfect-Storm-LR.pdf

See:  the Killer Equation starting on p.59.... rather fascinating reading....

El Vaquero

The economy stops dead without energy, but the monetary side allows us to distort things. When those distortions become realigned with reality, it is going to be a violent process, because we're not looking to what the future actually has in store for us, but rather what we want the future to be. There's nothing wrong with trying to mould your own future, but we must be realistic about it.

zuuma

As soon as I saw: "New York Times wrote:"...

I lost faith in any objectivity. That rag is just a PR dump for obamunism.

Even if they occasionaly print something that's true, it's hard to accept - given their solid track record as lefty shills.

numapepi

Even a stopped clock is right twice a day.

AdvancingTime

Thanks for a very interesting look into this industry that has become another myth of hope.

As to the subject of the Ponzi Scheme I often forget that what may seem familiar to me and many Americans is not always common knowledge, the story behind the term is very interesting. To those who are unfamiliar with the term Ponzi Scheme or just would like to know more on where it originated and such see the article below that is titled Ponzi Scheme 101.

http://brucewilds.blogspot.com/2013/04/ponzi-scheme-101.html

Bangin7GramRocks

Big difference is the Dot-Com bubble left empty office space. Fracking leaves a scarred and polluted landscape that was mostly pure before the wells were built. Disgrace!

Felix da Kat

True B7. Take a look on Bing maps (satellite view) at the northern one-third (60 miles x 300m.) of Pennsylvania. What was once a nearly unbroken, deep and thick forest from New Jersey to Ohio, is now pock-marked with many hundreds of disgraceful fracking operations where large 25-50 acre areas are clear-cut along with crude access roads. This might as well be a war zone with bomb craters throughout. Enviromental concerns were the least of Dick Cheney's/Halliburton's heinous fracking invention. Pennsylvania was the pushover state selected to be the guinea pig. Fracking is a colossal failure, period.

givenoquarter

If a tree falls in the forest and no one is there to hear it, does it make a sound?

If a tree is cut down in the forest, and no one is there to see it, who gives a fuck if it is cut down to extract a needed commodity?

We have tons of trees. More oil please. All of my vehicles need a regular diet of delicious dinosaurs.

AdvancingTime

Sustainability means planning our future in a way that we do not set ourselves up to crash and burn at some future date. Long-term planning has not been something politicians excel at or are even good at. Our system is geared at getting politicians reelected and fulfilling the most pressing needs of today.

Things like profit, greed, and quenching our unrelinquishing desire for growth are placed in front of longer term issues and needs. Mapping out a logical and sustainable long-term plan requires delving into some rather hefty philosophical questions like what brings real happiness. More on this important topic in the article below.

http://brucewilds.blogspot.com/2014/04/planning-sustainable-future-for-m...


 


 

[Sep 19, 2014] Fed's Fisher Admits "Fed Has Levitated Markets", Warns Of "Signs Of Excess"

Sep 19, 2014 | zerohedge.com

FOMC voting-member Richard Fisher is among the sanest voices in the Eccles Building asylum and he is once again sounding alarms that all is not well in US financial markets:

*FISHER SAYS FED HAS 'LEVITATED' MARKETS, SEES SIGNS OF EXCESS IN FINANCIAL MARKETS

Furthermore, Fisher notes The Fed can't force companies to hire, and would like to see rate hikes as early as Spring 2015.

Manthong

Nothing irrational about this exuberance..

Unlike the dot com bubble, the Fed and its evil owner banks deliberately engineered this one.

Soon it will be time to deflate the bubble and steal the assets from the institutions (pension, mutual funds/401Ks etc.) at bargain basement prices.

clooney_art

He is the token Banker who plays the bad cop. It's all stage managed for the sheep.

FL_Conservative

Signs of excess? That's a sad fucking statement coming from a supposed Fed "hawk". Just another manipulator who wants to avoid fault when TSHTF. It's very sad that so many sell their principles and integrity for 15 minutes of power and a few extra sheckles.

Wait What

it's not a conspiracy until the sheeple find out. then everyone runs around screaming 'it was a conspiracy all along' long after all the pillaging has been accomplished.

speaking of conspiracies, it strikes me that ZH has been peppered with a lot of bias-confirming articles lately.

by that i mean a lot of 'the sky is blue, water is wet' type of articles... makes me wonder if that is for all of te newbs (to the eye-rolls of those who've been around a little longer, i imagine), or if Tylers have just said 'fuck it' like everyone else and started phoning it in.

LawsofPhysics

and there it is. I am telling you, the real inflationary forces of people on SNAP or medicare for simple survival is huge ;-). This real liability alone cannot be masked/hidden much longer in the west. Government paper must be bought because exponential equations (which are driving those real inflationary pressures) are a bitch.

That is my (what now appears to be a contrarian) hypothesis..

The recent increase in yields is nothing but a CB/government shakedown to get the weak hands out, it's about, and always has been about, maintaining power and control, period.

People still have faith in fiat, and so long as this is the case, this can continue, period.
 

[Sep 12, 2014] Oil Price Plunge It's The Global Economy, Stupid!

09/12/2014 | Zero Hedge

The decline in the price of oil - in the face of surging geopolitical pandemonium - has been lauded as indicative of both US' awesomeness in energy independence and a tax cut for Americans... but, as the following chart suggests, there may be another - much more realistic - explanation for why oil is plunging... demand!

World GDP expectations for 2014 just tumbled to their lowest since estimates started...

Maybe - just maybe - that explains the price of oil...

Charts: Bloomberg

Icahn, Soros, Druckenmiller, And Now Zell The Billionaires Are All Quietly Preparing For The Plunge Zero Hedge

Submitted by Tyler Durden on 09/03/2014 17:03 -0400

"The stock market is at an all-time, but economic activity is not at an all-time," explains billionaire investor Sam Zell to CNBC this morning, adding that, "every company that's missed has missed on the revenue side, which is a reflection that there's a demand issue; and when you got a demand issue it's hard to imagine the stock market at an all-time high." Zell said he is being very cautious adding to stocks and cutting some positions because "I don't remember any time in my career where there have been as many wildcards floating out there that have the potential to be very significant and alter people's thinking." Zell also discussed his view on Obama's Fed encouraging disparity and on tax inversions, but concludes, rather ominously, "this is the first time I ever remember where having cash isn't such a terrible thing." Zell's calls should not be shocking following George Soros. Stan Druckenmiller, and Carl Icahn's warnings that there is trouble ahead.

Billionaire 1: Sam Zell

On Stocks and reality...

"People have no place else to put their money, and the stock market is getting more than its share. It's very likely that something has to give here."

"I don't remember any time in my career where there have been as many wildcards floating out there that have the potential to be very significant and alter people's thinking," he said. "If there's a change in confidence or some international event that changes the dynamics, people could in effect take a different position with reference to the market."

"It's almost every company that's missed has missed on the revenue side, which is a reflection that there's a demand issue," he said. "When you got a demand issue it's hard to imagine the stock market at an all-time high."

He also lamented about how difficult it is to call a market top. "If you're wrong on when, that's a problem." His answer: "You got to tiptoe ... and find the right balance."

"This is the first time I ever remember where having cash isn't such a terrible thing, despite the fact that interest rates are as low as they are," he added.

On Obama and inequality...

"Part of the impact of these very, very low interest rates is that we've creating this disparity. The wealthy are benefiting from government policy and the nonwealthy aren't," he continued. "So we have a president who says we've got to fight this disparity and we have a Fed who's encouraging it everyday."

On Tax Inversion...

"This is both legal and accepted. If the government doesn't like the result, change the law," he said. "You have to have a rational tax policy." He said the top tax rate should be changed and the U.S. should not tax worldwide income.

Zell also said it's unfortunate that "this inversion thing has been captured as a political, electioneering item."

Source: CNBC

* * *

Billionaire 2: George Soros

Soros has once again increased his total SPY Put to a new record high of $2.2 billion, or nearly double the previous all time high, and a whopping 17% of his total AUM.

*  *  *

Billionaire 3: Carl Icahn

Ironically, Carl Icahn - poster-child of the leveraged financial engineering that has overtaken US equity markets on the back of Central Bank largesse - told CNBC that he was "very nervous" about US equity markets. Reflecting on Yellen's apparent cluelessness of the consequences of her actions, and fearful of the build of derivative positions, Icahn says he's "worried" because if Yellen does not understand the end-game then "there's no argument - you have to worry about the excesssive printing of money!"

*  *  *

Billionaire 4: Stan Druckenmiller

Simply put, Druckenmiller concludes, rather ominously, "I am fearful that today our obsession with what will happen to markets and the economy in the near term is causing us to misjudge the accumulation of much greater long term risks to our economy."

*  *  *

And here the BIS explains broken markets so easily, even a Janet Yellen can get it:

Financial markets have been exuberant over the past year, [...] dancing mainly to the tune of central bank decisions. Volatility in equity, fixed income and foreign exchange markets has sagged to historical lows. Obviously, market participants are pricing in hardly any risks.

Growth has picked up, but long-term prospects are not that bright. Financial markets are euphoric, but progress in strengthening banks’ balance sheets has been uneven and private debt keeps growing. Macroeconomic policy has little room for manoeuvre to deal with any untoward surprises that might be sprung, including a normal recession.

*  *  *

So now we have a quorum of billionaires and the BIS all flashing warning signals which can only mean one thing: stocks are undervalued so buy, buy, buy...

[Sep 04, 2014] The Bond Market Conundrum Redux

Sep 04, 2014  | naked capitalism
Lambert here: If the policymakers have turned the US into Japan, we’re looking at 20 years of a flatlined economy, punctuated (this being the US) by explosions. Could that be the why 5- and 10-year yields have diverged?

By Jérémie Cohen-Setton, PhD candidate in Economics at U.C. Berkeley and a summer associate intern at Goldman Sachs Global Economic Research. Originally published at Bruegel.

What’s at stake: Fed tapering was widely expected to push up US yields. Instead, US yields have fallen since the beginning of the year, raising the question of whether we’re seeing a new version of the Greenspan 2005 conundrum. Interestingly, a successful explanation of this new conundrum cannot just rely on a flight to safety explanation as it also needs to rationalize why 5-year yield and 10-year yield have diverged over the same period.

Ignacio , September 4, 2014 at 4:55 am  

“Another possibility is that more people are starting to take seriously the suggestion that we’re on a path now of secular stagnation with weak economic growth and poor investment opportunities over the next decade. But that’s hard to reconcile with the stock market, which climbed impressively this year.”

I think there is no need to reconcile that suggestion with the behaviour of the Great Casino.

[Sep 03, 2014]  How to shock the U.S. economy back to life

CBS News
Instead, as the following graph shows, although the economy is growing at roughly the same rate as before the crisis, the growth is from a much lower level of output:

New-Normal

Is this the "new normal" we hear so much about? Do Americans have no choice but to accept the lower level of output, and the lower level of employment and living standards that comes with it, or is there something we can do to push the economy back to the pre-Great Recession trend?

One solution is to increase government spending on America's roads, bridges and other infrastructure. But does infrastructure spending raise the level of GDP and employment while at the same time enhancing the prospects for future growth? Or does it simply crowd out other types of private sector spending so that, all told, there is little or no net stimulus?

Recent research from economists at the Federal Reserve Bank of San Francisco suggests that infrastructure spending on highways enacted with the stimulus package just after President Obama took office in 2009 might be just what the doctors ordered.

The researchers conclude that such spending "had a significantly positive effect on economic activity." Examining the broader economic impact of highway spending connected to the stimulus package, the researchers found that:

... states increased their highway spending more than dollar-for-dollar in answer to the federal stimulus authorized by the American Recovery and Reinvestment Act. Without these extra funds, we estimate that national spending on highways would have declined roughly 20 percent between 2008 and 2011, on par with the decline in state tax revenues. Given the large multiplier effect from infrastructure spending that past studies have documented, the additional spending on highways likely had a significantly positive effect on economic activity.

With interest rates still at rock bottom so that borrowing to pay for infrastructure is as cheap as it gets, and with so many idle resources -- the large number of unemployed in particular -- and with output running so far below the previous trend, it is an opportune time to undertake infrastructure projects. Even if the spending on infrastructure doesn't fully resolve the problem shown in the graph above and return us to a higher trend rate of growth, it will at least begin to overcome our large infrastructure deficit and provide employment for households still struggling to recover from the Great Recession.

 
[Sep 03, 2014]  PIMCO Investment Outlook - For Wonks Only​​​ by William H. Gross
pimco.com

A credit-based financial economy (as opposed to pure cash) depends on an ever-expanding outstanding level of credit for its survival. Without additional credit, interest on previously issued liabilities cannot be paid absent the sale of existing assets, which in turn would lead to a vicious cycle of debt deflation, recession and ultimately depression. It is this expansion of private and public market credit which the Fed and the BOE have successfully engineered over the past five years, while their contemporaries (the ECB and BOJ) have until now failed, at least in terms of stimulating economic growth.

The unmodeled (for lack of historical example) experiment that all major central banks are now engaged in is to ask and then answer: What growth rate of credit is enough to pay prior bills, and what policy rate/amount of Quantitative Easing (QE) is necessary to generate that growth rate? Assuming that the interest rate on outstanding debt in the U.S. is approximately 4.5% (admittedly a slight stab in the dark because of shadow debt obligations), a Fed governor using this template would want credit to expand by at least 4.5% per year in order to prevent the necessary sale of existing assets (debt and equity) to cover annual interest costs. That is close to saying they would want nominal GDP to expand at 4.5%, but that’s another story/ Investment Outlook.

How are they doing? Chart 1 shows outstanding credit growth for recent quarters and all quarters since January 2004. The chart’s definition of credit includes the standard Fed definition of private non-financial credit (corporations, households, mortgages), public liabilities (government debt), as well as financial credit. The current outstanding total approximates $58 trillion and has been expanding at an average annual rate of 2% for the past five years, and 3.5% for the most recent 12 months.

 

Put simply, if credit needs to expand at 4.5% per year, then the private and public sectors in combination must create approximately $2.5 trillion of additional debt per year to pay for outstanding interest. They are underachieving that target in the U.S., which is the reason why GDP growth struggles at 2% real or lower and nominal GDP growth seems capped at 4.5% or lower. Credit creation is essential for economic growth in a finance-based economy such as ours. Without it, growth stagnates or withers. Its velocity/turnover is critical as well.

The velocity/turnover of credit mentioned above, in turn, is a function of price or the yield of credit. No central banker knows what that appropriate yield/price is and so Yellen/ Carney/Draghi/Kuroda walk up forward interest rates carefully so as not to cause a credit collapse. As a general rule, the projected return on financial assets (relative to their risk) must be sufficiently higher than the return on today’s or forward curve levels of cash (overnight repo), otherwise holders of assets sell longer-term maturities and hold dollar bills in a mattress – lowering velocity and creating a recession/debt delevering. We are dangerously close to the crossing of the lines between long-term asset returns and forward levels of cash yields, which currently rest at 2.5%+ in 2017 and beyond. If the forward levels are not validated, however, the danger is lessened.

Today’s levels of interest rates and stock prices offer a historically unacceptable level of risk relative to return unless the policy rate is kept low – now and in the future. That is the basis for The New Neutral, PIMCO’s assumption that the fed funds rate peaks at 2% or less in 2017 versus others’ assumptions (Taylor, Fisher, Lacker, the market) that it goes much higher. BOE’s Carney, by the way, believes his country’s New Neutral is 2.5%, a level consistent with PIMCO’s 2% in the U.S. If so, existing asset prices in the U.S., while artificially high and bond yields artificially low, may continue to be so unless the Fed oversteps its interest rate line.

This global monetary experiment may in the short/intermediate term calm markets, support asset prices and promote economic growth, although at lower than historical levels. Over the long term, however, economic growth depends on investment and a rejuvenation of capitalistic animal spirits – a condition which currently does not exist. Central bankers are hopeful that fiscal policy (which includes deficit spending and/or tax reform) may ultimately lead to higher investment, but to date there has been little progress, as seen in Chart 2. The U.S. and global economy ultimately cannot be safely delevered with artificially low interest rates, unless they lead to higher levels of productive investment.

“For Wonks Only” Speed Read

1. Cross your fingers, credit growth is a necessary but not sufficient condition for economic growth. Economic growth depends on the productive use of credit growth, something that is not occurring.

[Sep 01, 2014] Franklin Roosevelt On Labor, Wages, and Confidence

Quote: "Although they rarely mention it in the history books, it is ironic that around this time the moneyed interests and neo-cons of Roosevelt's day were fomenting a domestic revolution, and investing heavily in European fascists whom they hoped would be obedient gangsters for crony capitalism."
Jesse's Café Américain
"A man must always live by his work, and his wages must at least be sufficient to maintain him."
 

Adam Smith

"The issue isn't just jobs. Even slaves had jobs. The issue is wages."

Jim Hightower

Some analysts are confusing higher wages with monetary stimulus. Nothing could be further from the truth, at least in the real world of today.

Monetary stimulus is what the Federal Reserve does, that is, increasing the money supply by expanding the monetary base. It is a non-organic growth of money.

I think it is a well-noted and oft-remarked upon feature that the monetary stimulus that the Fed is providing is being given directly and almost exclusive to the Banks, in order to shore up their damaged balance sheets and provide them an artificial stream of profits.

And of that stimulus, the bulk of it seems to be finding its way into financial speculation and a new bubble in paper assets, and the acquisition of more companies to build even greater monopolies.

Wage increases, that are not merely a secondary effect of a general monetary inflation, are indeed not useful, except that the workers at least keep pace with the rate of price inflation.  But I don't think that this is what anyone is recommending who talks about higher wages.  The Fed is not an actor on that stage.

The currently imbalanced and distorted financial system is taking the lion's share of all new growth, and continues to do so as it has been doing for the past twenty years.  This cannot last.

When consumers purchase things, they must either use cash or credit. And to obtain the cash they can work more hours, or have more family members working. To obtain more credit, they can mortgage their house, and increase their debts. 

We have seen the explosion of a consumer credit bubble in housing debt, facilitated and engineered by historic levels of financial fraud by the very Banks who are now taking their subsidies of monetary stimulus from the Fed.  It happened almost six years ago, but the economy remains in 'the new noe-feudal normal.'

At some point the long abused consumer says 'enough' and cuts back their purchasing to the barest of essentials.  And the economy grows stagnant at home, which gives the moneyed interests a strong incentive to seek captive markets overseas.  And so a new round of neo-colonialism is born.  Which in turn creates its own sets of problems, lies, and economic distortions.

The data indicates that we are now, at long last, finally at that point.

And corporate profit margins are at new highs.

And the one percent has never been richer, or had more influence with the political class.

How much is enough for them?   When will they be content?  With them it is with wealth as it is with power.

'Wir haben keine Hemmungen, und einen großen Magen.'

I think that the solution is rather obvious. We have been here before.

"After many requests on my part the Congress passed a Fair Labor Standards Act, what we call the Wages and Hours Bill.   That Act --applying to products in interstate commerce -- ends child labor, sets a floor below wages, and a ceiling over hours of labor.
 

Except perhaps for the Social Security Act, it is the most far-reaching, the most far-sighted program for the benefit of workers ever adopted here or in any other country. Without question it starts us toward a better standard of living and increases purchasing power to buy the products of farm and factory.

Do not let any calamity-howling executive with an income of $1,000.00 a day, who has been turning his employees over to the Government relief rolls in order to preserve his company's undistributed reserves, tell you -- using his stockholders' money to pay the postage for his personal opinions -- tell you that a wage of $11.00 a week is going to have a disastrous effect on all American industry.

Fortunately for business as a whole, and therefore for the Nation, that type of executive is a rarity with whom most business executives most heartily disagree...

Some of my opponents and some of my associates have considered that I have a mistakenly sentimental judgment as to the tenacity of purpose and the general level of intelligence of the American people.

I am still convinced that the American people, since 1932, continue to insist on two requisites of private enterprise, and the relationship of Government to it. The first is a complete honesty, a complete honesty at the top in looking after the use of other people's money, and in apportioning and paying individual and corporate taxes (according to) in accordance with ability to pay. And the second is sincere respect for the need of all people who are at the bottom, all people at the bottom who need to get work -- and through work to get a (really) fair share of the good things of life, and a chance to save and a chance to rise.

After the election of 1936 I was told, and the Congress was told, by an increasing number of politically -- and worldly-- wise people that I should coast along, enjoy an easy Presidency for four years, and not take the Democratic platform too seriously. They told me that people were getting weary of reform through political effort and would no longer oppose that small minority which, in spite of its own disastrous leadership in 1929, is always eager to resume its control over the Government of the United States.

Never in our lifetime has such a concerted campaign of defeatism been thrown at the heads of the President and the Senators and Congressmen as in the case of this Seventy-Fifth Congress. Never before have we had so many Copperheads among us -- and you will remember that it was the Copperheads who, in the days of the Civil War, the War between the States, tried their best to make President Lincoln and his Congress give up the fight in the middle of the fight, to let the Nation remain split in two and return to peace -- yes, peace at any price.

This Congress has ended on the side of the people. My faith in the American people -- and their faith in themselves -- have been justified. I congratulate the Congress and the leadership thereof and I congratulate the American people on their own staying power...

You will remember that from March 4, 1933 down to date, not a single week has passed without a cry from the opposition, a small opposition, a cry 'to do something, to say something, to restore confidence.' There is a very articulate group of people in this country, with plenty of ability to procure publicity for their views, who have consistently refused to cooperate with the mass of the people, whether things were going well or going badly, on the ground that they required more concessions to their point of view before they would admit having what they called "confidence."

These people demanded 'restoration of confidence' when the banks were closed -- and demanded it again when the banks were reopened.

They demanded 'restoration of confidence' when hungry people were thronging (the) our streets -- and demanded it again now when the hungry people were fed and put to work.

They demanded 'restoration of confidence' when droughts hit the country -- and demanded it again now when our fields are laden with bounteous yields and excessive crops.

They demanded 'restoration of confidence' last year when the automobile industry was running three shifts day and night, turning out more cars than the country could buy -- and they are demanding it again this year when the industry is trying to get rid of an automobile surplus and has shut down its factories as a result.

But, my friends, it is my belief that many of these people who have been crying aloud for 'confidence' are beginning today to realize that that hand has been overplayed..."

Franklin D. Roosevelt, Fireside Chat June 24, 1937

Although they rarely mention it in the history books, it is ironic that around this time the moneyed interests and neo-cons of Roosevelt's day were fomenting a domestic revolution, and investing heavily in European fascists whom they hoped would be obedient gangsters for crony capitalism.

[Aug 21, 2014]  Stocks Overvalued Anywhere Between 7% And 113% (But Cheap Compared To Dot Com Bubble)

zerohedge.com

Despite caution from Bob Shiller that stocks are "hovering at worrisome levels," the FOMC Minutes yesterday (and various Fed speakers and talking heads this morning) have reassured the investing public that stocks are "cheap" and it's credit and bonds that are rich and bubbly. However, as the following simple table from Bloomberg Briefs shows, concerns over "frothy" valuations is warranted - especially in light of P/Es above previous bubble peak levels.

Heat map

ebworthen

So the FED uses public debt to fuel the biggest ponzi rally in market history yet now they are worried about frothy valuations?

Like the Parent that funds little Johnny's heroin habit suddenly concerned about how high he is today.

S&P true valuation = 666.
 

[Aug 21, 2014]  Who Wins and Loses from Global Trade

After crisis of neoliberalism in 2008 global trade is under pressure. Countries are more protective about their markets in Great Recessions than before. And that speaks troubles for Germany and other countries that try to export their way out of recession
Economist's View

Why are most economists more in favor of free trade than the general public?

One reason may be that the models economists use to evaluate the impact of global trade often overlook some significant ways it affects jobs, income and social services.
 

STR Save_the_Rustbelt:

Tenured economists do not lose their jobs to free trade.

And they get lots more opportunities to fill journals, which is the primary metric of their promotions and pay raises.

Besides, the "average worker" always seems to be better off.

Michael:

I'm not sure it's valid to use "free trade" and "China" in the same sentence...

I think free trade works well when all participating countries have a comparable level of environmental and worker protection laws and exchange rates are allowed to float freely without any government intervention. But what we have now is a disgrace. Corporations and the 1% are making out like robber barons while the middle class gets decimated.

I guess that's what happens when unions go away and Democrats buy into supply-side economics.

pgl:

"Democrats buy into supply-side economics". You must be watching Governor Cuomo's recent political ads. Tax free zones is his way of promoting growth for the state. I guess that's why a lot of Republicans voted for him. Alas.

William Meyer:

Unfortunately, it seems clear that the gains of trade will never be redistributed from the current winners. The tendency of economists to always argue for a more open economy -- that is, one where international trade makes up a larger percentage of total economic activity -- thus turns out to be just one more justification for the status quo.

If economists don't want to be viewed as providing nothing but complex, mathematical excuses for the current distribution of money and power--which is largely how, I, at least, view them -- they need to stop discussing laughably counterfactual situations like "redistribution of the benefits of trade" and being more honest about the class war being waged by the wealthy and powerful on the rest of society in the USA.

At the moment, "technocratic expertise" just translates to "toadying to the rich." It would be refreshing to see mainstream people admitting this publicly, and quite possibly socially useful as well.

Lafayette:

{Why are most economists more in favor of free trade than the general public?}

My answer would be that economists are less likely to lose their jobs to foreign competition than the ordinary worker.

(Of course, I could be wrong ... ;^)

Catatonic:

"It's worth emphasizing this isn't the same thing as saying that expanding international trade is harmful. Specialization and trade produces overall gains for the U.S. economy according to both theoretical and empirical work."

It isn't harmful to Mark Thoma. It is harmful to a lot of people.

Nobody cares about the US economy. They care about their own job and wages.

And not everything shows up in the numbers. Trade updates the employer/employee power balance in favor of the employer.

And the view of people is not colored. It is the view of economists that is colored. Our view is crystal clear!
 

[Aug 21, 2014]  When the Music Stops

It's six yeas since the last market crash. Which started at autumn of 2008 with approximately the same level of prices for junk bonds.  In august 2008 few people worried. We can probably run another two years, or three years, or five years...  But who knows when the music stops and retail and 401K investors wiped out... 
Jesse's Café Américain
“When the music stops, in terms of liquidity, things will be complicated.

But as long as the music is playing, you’ve ot to get up and dance. We’re still dancing,"

Chuck Prince, CEO Citigroup, 9 July 2007

In this record inequality and atmosphere of serial policy errors by the privileged ruling class, the markets no longer need the broad, direct participation of the public.

The Fed is taking care of the moneyed interests, and the sycophants in government will do anything to smooth their way. 

[Aug 17, 2014]  Ukraine tensions spike Should investors worry ?

Aug 15, 2014  |  CBS News

The information war out of Eastern Europe kicked up a few notches on Friday, with Moscow, Kiev and the West trading accusations and claims.

With Russia's 300-truck-long "humanitarian" convoy parked near the Ukrainian border, British journalists reportedly witnessed a convoy of Russian military vehicles -- including 23 armored personnel carriers -- cross into Ukraine. This morning, Ukraine claimed to have destroyed part of this convoy, but Russia denies sending anything over, while Europe is furiously warning that any unilateral Russian military action would violate international law.

The renewed escalation of tensions has stocks on the slide again, putting an end to the two-week long rebound the market had been enjoying. After starting strong, the Dow Jones industrial average fell nearly 100 points in the afternoon before recovering some of its earlier gains. The blue-chip index closed at 16,656, down 58 points, 0r 0.3 percent. The S&P 500 and Nasdaq composite index were largely flat on the day.

The mixed trading reflects the confusion over exactly what is happening in Ukraine, with Ukrainian border guards apparently inspecting Russia's aid convoy in preparation of the move across the border.

For Russian President Putin, the stakes couldn't be higher. Serious economic sanctions have limited the ability of the Russian financial system to borrow money in Western currencies. But "surrender" would risk undermining his power and would abandon scores of ethnic Russians in the eastern and southern regions of Ukraine -- a matter that's close to his heart according to an interview with Time magazine, which named him Person of the Year in 2007.

So, further escalation looks likely before this is all done, which comes at a time of vulnerability for the economy and markets.

[Aug 14, 2014]  Here Comes The European Triple-Dip: Negative German GDP Sends Bunds Under 1% For The First Time Ever

08/14/2014

The hammer finally hit for Europe when overnight both Germany and France reported Q2 GDP prints that missed expectations, the first actually contracting at a 0.2% rate with consensus looking for -0.1%, while France remained flat vs expectations for a tiny 0.1% rise.

As a reminder, this GDP is the revised one, which already includes the estimated contribution of drugs and prostitution, suggesting the actual underlying economic growth is far worse than even reported.

Then again, this is hardly surprising considering all the abysmal data out of Europe and the rest of the world in recent weeks, and with the Russian trade war sure to trim even more growth, look for all of Europe to join Italy in its first upcoming triple-dip recession in history.

[Aug 02, 2014]  The "Do-Over" - Groupthink, Mass Delusion, And "Hell To Pay"

 "The apparent stability of the world financial system is superficial – financial asset prices are not real, the equilibrium is temporary, the lack of volatility is a trap, and when the whole thing goes haywire, there will truly be hell to pay."
Aug 02, 2014  |  zerohedge.com

"By all measures, the U.S. stock market is currently frothy," warns Paul Singer, founder of $24.8 billion hedge fund firm Elliott Management, ominously concluding, "The apparent stability of the world financial system is superficial – financial asset prices are not real, the equilibrium is temporary, the lack of volatility is a trap, and when the whole thing goes haywire, there will truly be hell to pay."

[Jul 29, 2014] Here's What Wall Street Bulls Were Saying In December 2007

07/28/2014  | zerohedge.com

The attached Barron’s article appeared in December 2007 as an outlook for the year ahead, and Wall Street strategists were waxing bullish. Notwithstanding the advanced state of disarray in the housing and mortgage markets, soaring global oil prices and a domestic economic expansion cycle that was faltering and getting long in the tooth, Wall Street strategists were still hitting the “buy” key.

In fact, the Great Recession had already started but they didn’t have a clue: "Against this troubling backdrop, it’s no wonder investors are worried that the bull market might end in 2008. But Wall Street’s top equity strategists are quick to dismiss such fears."

[Jul 08, 2014] Will Fundamentals Ever Matter Again?

07/08/2014 | zerohedge.com 

Will investing based on fundamentals eventually find favor once again with investors? The problem is that market participants no longer view the financial markets as a place to invest savings over the "long term" to ensure future purchasing power parity. Today, they view the markets as a place to "create" wealth to offset the lack of savings. This mentality has changed the market dynamic from investing to gambling. As Seth Klarman warned, "There is a growing gap between the financial markets and the real economy. Not surprisingly, lessons learned in 2008 were only learned temporarily. These are the inevitable cycles of greed and fear, of peaks and troughs." Simply put, fundamentals will matter, but only after the fact.

[Jul 06, 2014]  http://marknesop.wordpress.com/2014/07/05/no-way-to-slow-down-americas-foreign-policy-dilemma/#more-2994

...Here to help us understand the legislative framework that holds America together, and the foreign policy which results from the choices left to Americans, is the commenter I know only as UCG. University of California Graduate? Uruguayan Cowboy Groupie? No way to know, although he is clearly from California. I recommend you check out the other fine and perceptive discussions on hisblog – meanwhile, read on.

Surviving in the US

According to Indeed.com, the average salary in the US is $62,000.  Since that’s on the high end of the spectrum, let’s go with that, even though the Sacramento Bee places the average salary at $51,190.  And let’s take your average family, two parents, (both working,) and two kids. That’s $124,000. This seems like a lot of money, but it’s not.

... ... ...

But I don’t expect you to take my word for it, so let’s start with the family that I introduced earlier, 2 adults, 2 kids and $124,000 in income.

 First there’s the federal income tax of 25 percent, over a third of which goes to the military, perhaps to bomb a country you never heard of.  That’s $31,000.

Of course that number doesn’t include property taxes, sales taxes, other taxes, car insurance, home insurance, other insurances, etc, and that’s already $72,840. But hey, I said half, maybe they’ll get a tax rebate, so despite the tax and insurance burden clearly being more than half, let’s go with half. Now the family of four has a net income of $62,000.

The next two big items on the expenditure list are housing and food. People need a place to stay and a place to eat. However we’re talking about the middle class here, and they shouldn’t be living in Ghettoville, also known as Detroit. The median home price is $425,000. Presuming that they can get a decent rate, let’s say four percent, that their housing value does not decrease, (which usually isn’t the case in California, or at least wasn’t prior to economic crash, but hey, at least comedians got a good laugh out of Gore’s “locked box” speech, politician wants to do something good for the economy – hilarious!) and that they take out a 30 year housing mortgage, we’re looking at $24,000 in home payments. Of course there needs to be a fund for fixing the house, paying for utilities, etc. That can cost about $300 a month on average, so another $3,600.

After taxes, insurance and housing we’re left with $34,400 for the hardworking family of four, who probably need to eat. Presuming that they don’t end up eating junk food all of the time, the food would average out to be $60 a day for the family of four, one of the reasons being that the mom is working and thus cannot cook Monday through Friday. That’s $21,900. We’re left with $12,500. And I’m being generous, since I’m basing that sum on collegiate data.  

I’m also guessing that the parents might need a way to get to work, probably a car. In California you can get two decent cars for $25,000, and pay it off with $250 a month or $3,000 a year. But you also need to pay for gas and car repairs. I don’t drive as much as I used to and I still spend about $100 a month on gas, and half of that on other repairs. Thus the car bill, for the parents, assuming that they work fairly close to home and that they are safe drivers, is $6,600. We’re left with $5,900. -- [he forgot car insurance --NNB]

The charges still left include emergency situations, school supplies, clothes, toiletries, stuff that families can do on the weekends, etc, etc, etc. That’s Middle America. This is why people in the US are having one kid instead of two: they cannot afford two. That’s why the mom has to work, instead of staying at home and raising her kids. What’s that mean? The kid’s raised by school, TV, the Internet, and video games. Speaking of schools, most schools are not doing too well and quite a few are failing miserably.

Please note what I did: I took the highest Middle America salary I could find, I’ve applied the expenses generously and I still ended up with a loss. That’s why close to half of Americans are in debt.  Speaking of Americans being in debt, here’s what’s owed:

Total: $11.68 trillion in debt

[Jul 01, 2014] ISM Manufacturing index declined slightly in June to 55.3

calculatedriskblog.com
Sebastian, 7/1/2014 - 7:32 am 

(OT) (Reuters) - U.S. construction spending rose less than expected in May, which could prompt a further downgrading of second-quarter economic growth estimates.

Construction spending edged up 0.1 percent to an annual rate of $956.1 billion, the Commerce Department said on Tuesday. However, April's construction spending was revised up to show a 0.8 percent rise, taking some of the sting out of the report.

Economists polled by Reuters had expected construction spending to advance 0.5 percent after a previously reported 0.2 percent gain.

U.S. construction spending barely rises in May

Cinco-X, 7/1/2014

Rob Dawg

Inventories still rising, backlog of orders switched to declining. Lots of long tailed cats remain who still remember that room full of rocking chairs last time.

All true, but to me the graph just looks noisy...

[Jul 01, 2014]  SP 500 and NDX Futures Daily Charts - Rolling Thunder

And this market may look good, but deep down it is almost ugly as the characters that live off of it.

Jul 01, 2014 | Jesse's Café Américain

Bubbles ride the surface, but ugly cuts to the bone.

And this market may look good, but deep down it is almost ugly as the characters that live off of it.

That does not mean that it cannot continue on, with some pancake makeup and lipstick, for quite some time. There is some thought that nothing bad, barring the exogenous and unexpected, will happen before the midterm elections in November.

Have a pleasant evening.

Q1 GDP Revised Down to -2.9% Annual Rate

Hoocoodanode
Yoringe , 6/25/2014 - 6:11 am

1974 USSR: We are all equally poor
2014 USSA: We are all equally ponzis 

Bruce in Tennessee, 6/25/2014

Economic Calendar - Bloomberg

Highlights
Durables orders were much weaker than expected for May. Durables orders fell 1.0 percent in May after rising 0.8 percent in April. Analysts forecast 0.4 percent. Excluding transportation, orders slipped 0.1 percent, following a 0.4 percent gain in April. Market expectations were for 0.3 percent.

...No durable goods report this am, I expect....so here is the lead from Bloomie, who (I think) isn't jaundiced politically...

...Lunch is packed, and now I am off to the mountains..

later.

aleister perdurabo, 6/25/2014

Wealth inequality doubles among US households

"American families experienced significant losses in wealth during the Great Recession, and these losses were distributed very unequally," said Fabian Pfeffer, assistant research professor at the U-M Institute for Social Research.

In 2003, households at the top 5th percentile of wealth had 13 times more wealth than the median household, according to the analysis. By 2013, this gap nearly doubled to 24 times as much wealth.

While households at the top lost large amounts of wealth during the recession, those at the bottom of the wealth distribution lost the largest share of their total wealth.

sum luk, 6/25/2014

Short Side of Long | "When it's obvious to the public, it's obviously wrong."

Mary, 6/25/2014
How wrong you are 

ResistanceIsFeudal, 6/25/2014

aleister perdurabo wrote:

In 2003, households at the top 5th percentile of wealth had 13 times more wealth than the median household, according to the analysis. By 2013, this gap nearly doubled to 24 times as much wealth.

Winning the future!

lawyerliz, 6/25/2014

Well, I was right, alas.

Like the dope dealers, some of the very rich can neither effectively spend nor invest their wealth. Farr as I see, it exists to enforce their alphaness.

Rajesh, 6/25/2014

More unexpectedly!
U.S. durable goods unexpectedly fall in May | Reuters

The Commerce Department said on Wednesday durable goods orders declined 1.0 percent as demand for transportation, machinery, computers and electronic products, electrical equipment, appliances and components, and defense capital goods fell.

Orders for durable goods, items ranging from toasters to aircraft that are meant to last three years or more, increased by a revised 0.8 percent in April, when they were boosted by defense equipment.

[Jun 25, 2014] GDP Disaster Final Q1 GDP Crashes To -2.9%, Lowest Since 2009, Far Below The Worst Expectations

Zero Hedge

Remember when in January 2014, Q1 GDP was expected to rise 2.6%? Well, here comes the final Q1 GDP revision and it's a doozy: at -2.9%, far below the -1.8% expected and well below the -1.0% second revision, it is an absolute disaster, and is the worst print since Q1 2009.

And while a bad GDP print was largely expected, the driver wasn't: personal consumption expenditures somehow crashed from 3.1% to just 1.0%, far below the 2.4% expected, meaning that all hope of a consumer recovery is dead. Finally, as a reminder, US GDP has never fallen more than 1.5% except during or just before an NBER-defined recession since quarterly GDP records began in 1947. Good luck department of truth propaganda machine, because even assuming 3% growth every other quarter in 2014 means 2014 GDP will be 1.5% at best!

Shocker

Is this really a shocker?

Current Job Situation: http://www.dailyjobcuts.com

Millivanilli

For the idiocracy...

Ow my balls

http://www.youtube.com/watch?v=wAg1r6zw7Bg

[Jun 25, 2014] It looks like a peak Robert Shiller's CAPE is waving the caution flag

finance.yahoo.com

Major stock averages remain in earshot of all-time highs and this bull market has been nothing if not resilient, repeatedly defying predictions of its demise for five-plus years.

Still, Robert Shiller, Yale professor and Nobel prize winner, is "definitely concerned" about the outlook for stocks based on the cyclically adjusted price-to-earnings ratio (CAPE) he created. At 26, the so-called Shiller PE is currently well above its long-term average of 17 and approaching levels that previously presaged doom for equities.

Shiller has plotted CAPE going back to 1881 and notes (with some alarm) it has only been higher than current levels three times: In 1929, 2000 and 2007.

"It looks to me like a peak," he says in the accompanying video. "I would think there are people thinking 'it's gone way up since 2009, it's likely to turn down again.' That's what people might plausibly think."

Anecdotal evidence does indeed suggest people are thinking "the end" of this bull run is nigh. But if the market "climbs a wall of worry," that's arguably a bullish sign as my colleague Michael Santoli describes here.

And Shiller is quick to note the CAPE is not a market-timing tool and he remains in the market in his personal account. "We don't know what it's going to do," he says. "Realistically, stocks should be in one's portfolio but maybe lighten up."

Stocks should be in one's portfolio in part because interest rates are so low and "the fixed income market just doesn't look very attractive," Shiller says.

As for the idea, proffered here by Citigroup's Tobias Levkovich, that CAPE is flawed because it doesn't "normalize" for interest rates (as it does for earnings), Shiller says the following: "He's right the very low interest rates are a sign maybe you want to keep more invested in the [stock] market now rather than getting nothing [from bonds]. That ought to help explain the high CAPE but that doesn't mean the high CAPE isn't a forecast of bad performance."

So what does Shiller, whose books include Animal Spirits and Irrational Exuberance, make of the recent steep declines in trading volume and volatility? Watch the accompanying video to find out.

Aaron Task is the host of The Daily Ticker and Editor-in-Chief of Yahoo Finance. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com.

Roman

In addition to severe lagging and other shortfalls, I folks completely mis-use Shiller P/E. Robert Shiller linked the 10-year AVERAGE real P/E to subsequent 20y AVERAGE return (check his book, or Wikipedia for 'shiller p/e').

Therefore, we will know 20y average return staring this year ONLY in 20 YEARS. Instead, folks tend to incorrectly use it as predictor of mid-term or short-term stock market return. Shiller P/E is really only good as an ex-post metric, to make sense of history, not as a forward-looking measure of equity market valuation. For forward-looking measures, take a look at our approach modelcapitalmgmt.com

[Jun 22, 2014] The Guardian

Wall Street and Washington want you to believe the stock market isn't rigged. Guess what? It still is

Michael Lewis woke up Average Joe investors, but the fat cats are still trying to lull you into financial submission with their intellectual dishonesty

Most Americans don't think much about the stock market, and that's just fine with Wall Street. Because once you wake up to how screwed up the stock market really is, the financial industry knows you're likely to get very nervous and take your money out.

Many are catching on: between 2007 and 2014, investors pulled $345bn from the stock market. E-Trades are down and worries are up, with 73% of Americans still not inclined to buy stocks, five years after the financial crisis.

No wonder "investor confidence" – the mass delusion that the stock market is trustworthy – has been in short supply this year. Nothing has done more to decimate it than Michael Lewis's new book, Flash Boys, which focuses on the predatory behavior of high-frequency trading. Nobody – including Congress – cared much about the "high-tech predator stalking the equity markets" before Flash Boys hit the bestseller list, reaching beyond the walled garden of the financial industry into American dining rooms and Washington hearing chambers. It didn't leave all spring.

So last week, Washington featured a lot of handwringing, in two separate Congressional panels, about how to convince Average Joe investors that the stock market is their friend – even when it obviously isn't. And it's great that elected officials and Wall Street millionaires are talking about investor confidence. But they're not talking about what really matters: investor protection. Guaranteeing that everyone gets a fair shake. Un-rigging the stock market.

Yet in Congress, the worry is all about appearances.

"We've heard a consistent message, and that's that there is a lack of confidence in the [stock] markets," Senator Carl Levin said on Tuesday to open his Senate investigations subcommittee panel inspired by Flash Boys. New York Stock Exchange president Tom Farley echoed that sentiment, testifying that participation of US citizens in the stock market is at a 16-year low – and blaming regular investors for simply not believing enough: "We think the reason for that is [lack of] confidence in the markets."

Let's get one thing straight: Investor confidence is not the problem. The screwed-up stock market is the problem. It's time to break down the polite fiction that investing in the stock market is something that sane, rational, sensible people do. It is a high-risk contact sport for your money.

If you know that, you're ahead of the game.

And the more you read about the new game in town, the more nervous you should get about high-frequency trading (HFT).

Rich, elite traders are making millions of dollars in bonuses by using super-fast computers to swoop into the stock market and conduct trades in milliseconds, faster than even most professionals and certainly faster than any Average Joe. The HFT industry – a collection of stock exchanges, hedge funds, banks and others that has actually been around for six years – collects billions of dollars in profits: the kind of money you just can't earn unless you elbow someone else out of the way. Numerous studies show that Flash Boys-style trades affect stock prices and increase fees for long-term investors. The New York state attorney general even has a nickname for it – "Insider Trading 2.0" – and now would-be investors are starting to realize, once again, just how much the decks are stacked against them.

As Senator Elizabeth Warren noted at her Senate panel on Wednesday, one high-frequency trading firm, Virtu, made a profit on 1,237 out of 1,238 trading days. "You know, this isn't trading," Warren said. "Traders have good days and bad days... but high-frequency traders have only good days."

Nice work if you can get it.

murhill, 22 June 2014 1:11pm

There is a fundamental difference between the stock market, and the corn market or the oil market.

If the price of oil or corn goes up a bit, producers will produce more, and consumers will consume less. And conversely, if the price goes down. This tends to maintain the supply and demand in equilibrium.

If parties which are neither producers nor consumers try to manipulate the market, for example by forcing prices down, then the supply of product to the market will dry up. If the price of corn goes too far down, farmers will plant soybeans or wheat or canola or cotton instead. If the price of oil goes too far down, owners of old or expensive wells will abandon them. Supply will contract.

But in the stock market, if you can succeed in forcing the price down far enough - then bonanza, there is a huge burst in new supply at bargain prices. Companies are pursuaded, often against their best interests, and almost certainly against their existing shareholders' interests, to issue vast amounts of new shares, at low prices, to privileged parties. The supply vs price curve does not have the continuous and monotonic behaviour that the economists say that it should have. This does not happen, in the oil or corn market.

BruceMullinger, 22 June 2014 1:35pm

A stock market is but a glorified casino and there are those who would rather see a plane crash than a stock market crash.
That Wall St. is the centre of our economic universe is testament to just how warped and decadent "the economy" has become.
Unfortunately, most of the love in the world is the love of money and if money is indeed the root of all evil then the society is in a hell of a lot of trouble.

remarks, 22 June 2014 1:37pm

You seem to be effectively mixing up day trading/.short term trading of shares with long term buy and hold (investing). The former will wipe most people out, the latter has taken a knock but over the long term is not a bad way to save money.

Unlike the rigged pyramid house price taxpayer subsidised scheme, investing in shares is generally not taking away homes, as BTL and homeowner speculators do. And investing in shares of productive companies that employ people and who pay taxes why not, people should be encouraged to invest in such business and the tax system should be used to discourage speculation in the rigged housing market.

Bar some major external political or economic turmoil wouldn't be surprised if the FTSE hits 7500 this year.

[Jun 22, 2014] Inflation Is Rising, But No Sirens Ahead PIMCO Secular Forum

10 June 2014 | pimco.com

After this year’s Secular Forum, PIMCO adopted its New Neutral view: We expect global economies to converge to modest trend growth rates over the next few years. What does The New Neutral mean for inflation risk around the world?

Deputy Chief Investment Officer Mihir Worah, head of PIMCO’s real return and multi-asset portfolio management teams, discusses PIMCO’s expectation of low but rising inflation over the next three to five years, and what it means for investors.

[Jun 21, 2014] Retirees Suffer as $300 Billion 401(k) Rollover Boom Enriches Brokers

Bloomberg
While retirees can generally leave their savings in 401(k) plans, financial firms entice them with cold calls, Internet ads, storefront signs and cash incentives to switch to IRAs. They tout the advantage of the IRA’s wide variety of investment choices over the typical 401(k) plan’s limited menu.

Yet that appeal can also be a pitfall for retirees offered expensive and high-risk investments. IRAs often charge higher fees than those associated with 401(k) plans, giving brokers an incentive to promote rollovers.

“You’re going into the wild, wild west when you take your money out of a 401(k) and put it into an IRA,” said Karen Friedman, executive vice president and policy director of the Pension Rights Center, a Washington-based group representing retirees.

Tarr’s clients paid higher fees in their brokerage accounts than they would have in their AT&T plan. There’s no way of knowing exactly how they would have fared if they had left their savings behind. Employees in 401(k) plans, including AT&T’s, also faced losses during the 2008 financial crisis, though the market has since rebounded to reach new highs.

Tarr, who left Royal Alliance in 2010, stands by her advice, saying the investments held up well in a difficult market. She said she didn’t even know about the commissions each investment paid and wanted to do what was best for her clients.

‘Forever Besmirched’

In a more than two-hour interview, Tarr said she often tried to talk customers out of rolling over their pensions, but that many were eager to have the lump sum to generate higher returns and leave money to their children. She always made clear that she worked for Royal Alliance, not AT&T, she said.

“I am forever besmirched, and that is really hard for me,” said Tarr, fighting back tears. “I am a minister’s daughter and granddaughter. If anyone thinks I would do anything illegal, immoral or unethical, that hurts me where I live.”

Tarr’s strategy of focusing on one big company isn’t unusual. A broker for another AIG unit, FSC Securities Corp., cold-called employees of UPS (UPS), the world’s largest package-delivery company, in the area around its headquarters in Atlanta, according to a June 2013 complaint. Nine customers, including six UPS employees, lost more than $1 million when broker Brian G. Brown rolled over their retirement money into high-risk investments, including oil and gas private placements, they said.

Experienced Customers

AIG, based in New York, declined to comment on the complaint against FSC. In a filing responding to the allegations, FSC said most of the customers were multi-millionaires “with decades of investing experience” who understood the risks.

Brown left FSC in 2010 and works for another brokerage company in Atlanta.

The complaint “hasn’t been arbitrated, and all of it is not true,” he said in a telephone interview.

Federal regulators are targeting rollover abuse. Last year, the U.S Government Accountability Office, Congress’s investigative arm, found that a conflict of interest was fueling IRA growth. Financial companies that administer 401(k) plans misled GAO investigators posing as departing employees, telling them they would almost always be better off if they shifted to IRAs that the companies also managed.

Fiduciary Standard

The U.S. Labor Department has said it will propose rules in January that brokers and other advisers act in clients’ best interests during rollovers, a so-called fiduciary standard. The agency had announced a similar plan in 2010. Brokers are generally held to the lower standard of selling products that are suitable for their customers, meaning that they don’t have to put their clients’ interests first as long as they select appropriate investments. In January, Finra, the Wall Street self-policing group, warned members that it would heighten its scrutiny of IRA rollovers.

The Securities Industry and Financial Markets Association, which represents brokers, banks and money managers, opposes stricter regulation. It would hurt commission-based brokers, limiting consumer choice, according to the group. Disclosure rules are already sufficient to protect customers, said Ira Hammerman, the association’s executive vice president and general counsel.

“Let the customer decide,” Hammerman said.

Bank of America Corp (BAC).s’ Merrill Lynch and E*Trade (ETFC) Financial Corp. offer as much as $600 up front to anyone who rolls over a 401(k) into an IRA.

“If someone offers you $600 to roll over your IRA, you can be sure you are going to be paying a lot more additional expenses later,” said Mercer Bullard, an associate professor at the University of Mississippi Law School who heads Fund Democracy, an advocacy group for mutual-fund shareholders.

Incentives ‘Commonplace’

Kristen Georgian, a Bank of America spokeswoman, said such incentives are “commonplace for many leading brokerage firms.” The company informs clients about their options, “including keeping their assets in place,” she said.

“We believe strongly in rollovers,” said Mike Loewengart, E*Trade’s director of investment strategy. Clients benefit from more transparent fees and broader investment options in an IRA with E*Trade, he said.

In a 401(k), an employee sets aside money -- often with a company match -- in a menu of mutual funds, which aren’t taxed until withdrawal and, in some cases, at all.

Cheaper 401(k)s

Once workers exit a company, they generally can leave the money behind, roll it over into an IRA, transfer it to another 401(k) or cash out and suffer a huge tax hit. In a rollover, customers set up IRAs with financial companies, preserving their tax deferral.

Though 401(k)s offer fewer choices than IRAs, large companies such as AT&T negotiate for institutional discounts on the funds they select. As a result, 401(k) participants paid less than half the average 1.4 percent annual expenses charged to all U.S. stock mutual-fund investors, according to a 2013 study from the Investment Company Institute, a Washington-based mutual-fund industry trade group.

Still, almost 18 million U.S. households hold IRAs that include rollover money, estimated a recent report from the Investment Company Institute.

After he lost his job in 2009, Manuel Gonzalez Martinez, a mechanical engineer for Hewlett-Packard in Puerto Rico, rolled over $150,000 from a 401(k) and a lump-sum pension payment to an IRA with UBS AG (UBS), the Swiss financial-services company.

‘Stuck’ With Bonds

His broker, Luis Roberto Fernandez Diaz, recommended Puerto Rico municipal bond funds with a 3 percent upfront sales fee and 1 percent annual expenses, according to his arbitration complaint with Finra, which lists 17 customer disputes against Fernandez from 2009 through 2014. Six of them have been settled.

Financial advisers generally frown on investing an IRA in municipal bonds because their main advantage is tax avoidance, something that is already a feature of an IRA. Worse, the bonds plunged in value because of the deteriorating finances of Puerto Rico and are now worth only $90,000, Gonzalez said.

“I am stuck with the bonds,” said Gonzalez, 51. “They are a just a number on paper.”

UBS doesn’t comment on individual arbitration cases, said spokesman Gregg Rosenberg. In a filing responding to the allegations, UBS said Gonzalez “invested very profitably in the funds” for years before the municipal bond market deteriorated.

Fernandez now works as a broker for Popular Securities. Teruca Rullan, a spokeswoman for Popular Inc., the parent company, said he would not be available for comment.

Vulnerable Workers

At the time of leaving a longtime employer, workers are often confused and vulnerable to unsound financial advice. In 2010, Albert Grathwol stopped by a hotel to attend a seminar organized by Raymond J. Lucia Sr., a radio personality who also ran an investment firm. Grathwol was about to retire as a structural engineer for Marc Fagel, an attorney for Lucia, declined to comment because Grathwol’s complaint is still in arbitration.

Joseph Kuo, a First Allied spokesman, also said the company doesn’t comment on pending arbitration cases, while noting Lucia is no longer affiliated with the brokerage. In a filing responding to the allegations, First Allied said they were “baseless,” because the REITs were “only one part of a layered investment strategy” and the Grathwols were fully informed of the risks.

Employees at AT&T faced similar quandaries about where to entrust their savings.

AT&T Ranking

Based in Dallas, the telecommunications company, with 246,000 workers, is one of the largest private employers in the U.S. AT&T’s 401(k) ranks among the best 15 percent of U.S. plans in terms of fees, according to BrightScope, a financial information company that rates retirement offerings. AT&T funds, which are available only to employees, charge expenses as low as .01 percent.

Typically, when employees retire or lose their jobs, they have the option of rolling over their 401(k)s or, in most cases, leaving them behind in the same low-cost investments. At AT&T, they often have another big decision. Along with their 401(k), they can take a pension -- a monthly fixed payment for life -- or an equivalent payment that could amount to hundreds of thousands of dollars.

Business Opportunity

Sensing a business opportunity, broker Richard McCollam, a West Point graduate and former U.S. Army captain who had worked for insurer MetLife (MET) Inc., began marketing to AT&T employees with 401(k) rollovers and lump-sum pension payments.

Starting in 1994, McCollam worked for Royal Alliance, part of AIG’s Advisor Group, one of the largest networks of independent brokers in the U.S., with about 6,000 representatives. While McCollam handled the back office, Kathleen Tarr, who joined him as a broker in 2002, prospected for clients.

“If you are like most AT&T retirees, you probably feel that you are drowning in information that may be confusing and frustrating,” according to marketing material saved by a former customer.

Tarr had an unusual background for a financial adviser. She has a Ph.D. from the University of California at Berkeley, where she studied invertebrate physiology. She taught briefly at UC-Irvine before quitting to raise three boys. She then went back to work as a private-school teacher and then in finance after her husband lost his job as a biochemist.

Chaplain’s Daughter

Like many at Royal Alliance, Tarr and McCollam worked out of their homes, in Contra Costa County, near San Francisco. Tarr, who had just turned 50 when she teamed up with McCollam, had an easy manner with soon-to-be retirees. The daughter of an Army chaplain and granddaughter of a Congregational minister and missionary, she would invite clients to hear her sing at a local Episcopal church, where she led the soprano section.

Tarr won referrals by word-of-mouth, meeting clients both at their homes and, by appointment, at AT&T offices across the San Francisco area.

Mark Siegel, an AT&T spokesman, said the company provides information about benefits, but doesn’t endorse specific financial advisers, which aren’t affiliated with the company.

Siegel said the company periodically sends alerts to employees, such as an e-mail from last October, which warned: “You should research the individuals contacting you and their organizations before doing business with them.”

Non-Traded REITs

McCollam said they recommended that clients put 60 percent to 70 percent of their money in variable annuities. The balance would end up in non-traded REITs, including Oak Brook, Illinois-based Inland American Real Estate (IARE) Inc. The REITs generated dividends of 6 percent to 8 percent a year, providing an alternative to the vagaries of the stock market, Tarr said.

In variable annuities, customers invest in mutual funds within an insurance wrapper, which offers a death benefit, typically providing heirs a minimum payout. Earnings are tax-deferred.

Investing in a variable annuity within an IRA “may not be a good idea” because it provides no additional tax savings over an already tax-advantaged IRA, according to a Finra alert originally posted on its website in 2003 and updated in 2009. The annuities will increase costs, “generating fees and commissions for the broker or salesperson,” Finra says.

Variable Annuities

Customers often choose variable annuities because they offer a guaranteed minimum lifetime income, which is assured no matter how their investments perform, said Andrew Simonelli, a spokesman for the Washington-based Insured Retirement Institute, which represents companies that offer annuities.

“While tax deferral is certainly part of the value proposition of annuities, it’s not the only reason,” Simonelli said.

McCollam said he, Tarr and Royal Alliance would generally receive a total commission of as much as 6 percent or 7 percent of the money that clients invested in variable annuities. The mutual funds they selected would charge customers 2 percent to 3 percent a year in fees. Those fees were no higher than those of many mutual funds sold by brokers, Tarr said.

Broker Commissions

The brokers and Royal Alliance also received commissions totaling 6 percent to 7 percent for selling non-traded REITs, McCollam said. Typically, Tarr and McCollum kept 90 percent of their commissions, giving 10 percent to Royal Alliance, McCollam said.

Over time, the pair signed up as many as 500 customers, most from AT&T, McCollam said. Overseeing about $90 million in investments, their business generated about $600,000 to $700,000 in annual commissions -- and $1 million in its best year, he said. As the founder of the operation, he would keep 90 percent and Tarr, 10 percent, McCollum said. He said they won sales awards, with Royal Alliance sending one or both to resorts in the Bahamas; Boca Raton and Orlando, Florida; Arizona and Texas.

Doug Beal, a $32-an-hour mechanic specializing in air-conditioning and fire detection, heard about Tarr from his union steward. Tarr visited Beal in his shop, where he worked outside San Francisco.

“I wanted something where I wouldn’t lose a whole bunch if the market went crazy,” said Beal, a disabled Vietnam veteran.

When he retired in 2009, Beal invested $320,000 in variable annuities and REITs, rolled over from his pension and 401(k). He has since lost $60,000 because of a decline in the REITs’ value, said Frank Sommers of Sommers & Schwartz LLP in San Francisco, who represents 17 of Tarr’s former clients.

Paying Bills

Beal is deferring his dream of moving up to Spokane, Washington, where he hopes to set up a shop to tinker with motorcycles and old cars, including a 1926 Model T Ford in his garage.

“It’s making it a little harder to pay bills,” said Beal, 67, who also receives disability payments related to military service. “Thank God for my VA pension.”

Tarr cultivated some employees for years, such as Mae Holloway, who started her 40-year career at AT&T as a telephone operator and ended up overseeing maintenance in Oakland. Tarr would stop by Holloway’s desk, encouraging her to come up with a budget for her retirement.

In 2008, Holloway, then making $69,000 a year, decided it was time to leave. She was 62 and figured she needed her investments to generate $3,000 a month. So, hoping she could have money left for her children after she died, she turned down the guaranteed $2,500 a month pension and took a $600,000 lump sum payment from her pension and 401(k). She rolled it over into an IRA, invested in variable annuities and REITs.

‘No High Risk’

“If I do this, can you guarantee I won’t go broke before I leave this world?” Holloway remembered asking Tarr. “And she said yes. I told her no high risk. I didn’t want to be aggressive.”

Tarr said she would have never made that kind of statement.

“I used to call it the G-word,” she said. “I could never guarantee anything. That is the first rule of investing.”

Holloway lost about $90,000 because of the reduced value of her REITs, according to Sommers, her attorney.

“I’m losing sleep over it,” Holloway said. “I should have just left it. I wanted to leave money for my kids.”

Lew’s Mortgage

Lew, the former administrative assistant with the hole in her kitchen ceiling, has a more immediate worry: paying her mortgage. An immigrant from Central America, she retired from AT&T in 2003 with an IRA set up by Tarr. Afterward, they often discussed investments over coffee at Lew’s kitchen table, as her prized green parrot squawked in a cage with a sweeping view of the parched hills surrounding San Francisco.

Lew started her withdrawals at $2,000 a month, then bumped them to $2,500. Lew said Tarr blessed the move -- something Tarr disputes, saying she had warned against it.

By 2010, Lew noticed losses in her account. Her REITs have plunged $145,000, according to Sommers. To make ends meet, she is caring for neighbors’ children. She will run out of money in three or four years, which could force her to sell her house.

“I was old-fashioned like my mom about planning for the future,” said Lew, 61. “I never thought I’d end my years worrying about money.”

‘Good Advice’

McCollam said that Lew, Beal and Holloway showed modest gain in their account, when the dividends from REITs are taken into account.

“We feel like we gave as good advice as we could have given,” McCollam said.

In 2010, Royal Alliance dismissed Tarr and McCollam, citing a failure to follow a policy for pre-approval of variable annuities, according to a Finra filing.

“No client was adversely impacted by any omission by either Mr. McCollam or Ms. Tarr -- all transactions were ultimately reviewed and determined appropriate,” Linda Malamut, a Royal Alliance spokeswoman, said in a statement. “Further, the terminations were unrelated to any transaction by a client who filed a complaint with Royal Alliance.” Malamut declined to answer more detailed questions.

Tarr Dismissed

Before Tarr was fired, she said she had already left Royal Alliance to join a competitor because of frustration with the backlog in approving the annuities. Royal Alliance put a black mark on their record because the company was upset about losing their business, Tarr and McCollam said. Royal Alliance then contacted clients, sparking the flurry of arbitration complaints, which came after their dismissal, according to Tarr and McCollam.

As investments soured, 37 customers complained about Tarr to Finra, which logs disputes with brokers in public records. Fifteen of these complaints are pending, four were settled, and 18 were closed without action. The agency lists 11 complaints against McCollam. Eighty-eight percent of brokers do not have any complaints, disciplinary proceedings or other adverse actions listed with Finra.

Brokerage customers typically sign a contract giving up their right to sue in court and requiring them to submit to Finra arbitration. These proceedings are generally confidential. Sommers said ten of his clients have filed arbitration claims against Royal Alliance, Tarr and McCollam, and he expects at least two more will too.

Lawsuit Filed

Last week, seven of Sommers’ clients, including Lew, filed suit against Royal Alliance in state court in Alameda County, California. The complaint alleges breach of fiduciary duty, fraud and failure to supervise its brokers, leading to more than $1 million in damages. The former employees were placed “in totally unsuitable investments” that were “designed to maximize the commissions and fees” paid to the company and the brokers, according to the lawsuit.

In 2012, arbitrators awarded three former AT&T employees a total of $1.4 million in damages and interest from Royal Alliance, according to a filing with a California court, where the company unsuccessfully appealed. Darlene Peterson, Karen LaBuda and Sherry Leach-Warth each worked at AT&T for more than 30 years.

McCollam and Tarr said they did not appear at the arbitration to defend themselves and that losses suffered by the three customers were modest.

Tarr, 61, is now working as president of AeroComputers Inc., an Oxnard, California aviation company catering to law enforcement. She took over from her brother-in-law, who died in January.

Tarr said she believed in the products she sold at Royal Alliance, but would have changed course if the brokerage had objected.

“Royal Alliance could have said to me five years ago, we’ve been looking through your book of business, we think you’re a little heavy on variable annuities, let me suggest alternatives,” Tarr said. “They never said anything. Nothing.”

(An earlier version of this story was corrected to show that a payment is one-time, not annual)

To contact the reporter on this story: John Hechinger in Boston at jhechinger@bloomberg.net

To contact the editors responsible for this story: Daniel Golden at dlgolden@bloomberg.net Anne Reifenberg

[Jun 12, 2014] http://www.zerohedge.com/news/2014-06-12/now-time-prepare-next-crisis-says-world-bank-imf-warns-housing-crashes

IMF Warns Of Housing Crashes - World Bank Says 'Now Is The Time To Prepare For Next Crisis'

Yesterday, the IMF and World Bank issued warnings about the global economy.

The International Monetary Fund (IMF) warned that the world must act to contain the risk of another devastating housing crash. The World Bank warned that the anticipated rise in interest rates will hit global growth this year - and presumably house prices too.

"We are not totally out of the woods yet," Kaushik Basu, the World Bank's Senior Vice President and chief economist and he warned that "now is the time to prepare for the next crisis."

The warning from the IMF came as it published new data showing house prices are well above their historical average in many countries as covered in the Financial Times today. The data shows how an acceleration in house prices in many countries from already high levels has emerged as one of the major threats to global economic stability.


Financial Times

House prices “remain well above the historical averages for a majority of countries” in relation to incomes and rents, Mr Zhu said in a speech to the Bundesbank last week, which was only released on Wednesday because it clashed with a European Central Bank announcement. “This is true for instance for Australia, Belgium, Canada, Norway and Sweden,” he said.



Financial Times

In the wake of the global recession central bankers have cut interest rates to record lows, pushing house prices to a level that the IMF regards as a significant risk to many economies.

There was no mention of the housing bubbles in important financial centres such as New York or of the London property bubble. The clear warnings by the two institutions were not covered by much of the non specialist financial media and the majority of the public will not be aware of them - nor will at risk house buyers in many countries.

The World Bank’s chief economist is offering important advice to investors and savers when he said that "now is the time to prepare for the next crisis."

One important way to do that is to own gold in the safest way possible: 7 Key Allocated Gold Storage Must Haves

honestann

The world economy cannot survive WITHOUT a housing crash. Think about it.

A house is the number one expense for most families. Every extra dollar spent on a house is one less dollar for every other expense. And every other expense is a synonym for... the economy.

The only scumbags who benefit from higher home prices are banksters. Why? Because the more people cannot afford basic expenses, the more they borrow. Which means more money for banks, more people become debt serfs, and more generations of debt serfs into the indefinite future.

LOW PRICES ARE GOOD FOR THE ECONOMY.

And low prices on the biggest expenses are especially beneficial.

Thu, 06/12/2014 - 23:50 | 4851488 flacon
flacon's picture

Agreed! 100% correct! We need a massive housing BUST, and the sooner the better!

I live in the further Greater Toronto Area and it's fuking mad how many new developents are going up - tearing up farmland to build brand new cookie-cutter "homes" for God-knows who. Blackberry is defunct and they are still building like MAD in my city. It's fucking lunatic!

BeetleBailey

These fuckin guys are not on the same page

Here's Carney after todays "hawkish" BOE statement;

"Mark Carney told households, companies and financial markets that the tightening cycle “could happen sooner than markets currently expect”. Mr Carney also outlined that measures to cool down the housing market in the UK will act as a substitute for gradual rate rises.

...AND TO ADD ASININE TO THE ALREADY MORONIC....

Carney added, in an attempt to justify future rate hikes, that “growth has been much stronger and unemployment has fallen much faster than either we or anyone else expected.”

This, after the GBP went full retard at 4pm....bizarre that they would affect their own shit-currency after their markets are closed.

Look for some pissed off "Russell Crowes" AND HIS LAB RATS tomorrow morning in London

moneybots

"We are not totally out of the woods yet," Kaushik Basu, the World Bank's Senior Vice President and chief economist and he warned that "now is the time to prepare for the next crisis."

We are in the deep dark middle of the forest, not even close to getting out of the woods. Adding 30 trillion dollars to global debt digs a deeper hole in the middle of the dark forest.

The fault in our starry-eyed 'recovery': 2014 looks like we're going bust again

The Guardian

Forget the cheerleading from the White House. Nevermind the latest job numbers. Look at your wallets. Despite the persistent happy talk about a recovery, and the hundreds of charts that come along with it, the US economy is not getting better – it may actually be getting worse.

There are millions of Americans who hoped 2014 would be the year their financial lives would improve. After the struggle of a stagnant country since 2009, economic forecasts predicted that a real recovery was coming - that this this would be the year for a well-paying new job, a house, the year those Americans would pay off student loans or reduce their credit-card debt.

But nothing can really improve for us individually until everything improves for all of us economically. And, increasingly, that utopia looks distant. According to the numbers – and to an increasingly frustrated group of experts – the first few months of 2014 are turning out to be a bust, and there’s no reason to believe the rest of the year will be any better, for the haves or the have-nots.

First, there are the basics. This year has started with bad news for consumers: a weaker housing market, anemic employment with 10m people out of work and millions of others not even looking any more, plus economic growth that’s lower than it’s been in three years.

Guy LeBas, a managing director at Janney Capital Markets who called the GDP figures “an absolute tape bomb,” pointed out: “2014, what was supposed to be the ‘break-out’ year according to many optimistic forecasts, would be starting off with the weakest performance of any quarter since 2011.”

There are other, wonkier measures that fill out the picture: productivity, a measure of the robustness of the American workforce, dropped to 3.2% in April - the sharpest tumble since 2008. Personal spending is falling, into negative territory, because healthcare and high gas bills were the main things Americans were buying this winter, and they aren’t now.

To millions of Americans, this downward trend is no surprise, even if the numbers are new. The relentless cheerleading about the improving economy never really made sense for a large swath of Americans: those who were forced to take lower-paying jobs, had their houses foreclosed by banks, or were drummed out of the workforce into long-term unemployment.

What’s different this time is that the misery is starting to spread higher up.

The paradox of the “recovery” for the past five years has been that consumers suffered while corporations and Wall Street raked in profits unseen in their history. At the end of 2013, corporate profits hit an all-time high of $1.9tn. Those profits were largely achieved not by growing, but by cutting - cutting jobs, investment in research, and new projects. Banks benefitted, too, with their profits of the six largest US banks reaching $76bn last year - not so far from the record of $82bn in 2006. That was also based on cutting - mainly, on cutting out consumers from mortgages and other lending.

The corporate balloon is popping: trade deficits jumped to a two-year high, and once-bulletproof companies and banks are suffering as corporate profit margins fell 14% in the first three months of the year – at the expense of American workers, of course, with Goldman Sachs dispassionately declaring that “wage growth has shown little evidence of a pick-up”.

The negative economic data recently has been waved off by any number of economists, who dismissed the GDP drop into negative territory, for instance, as an anomaly. It’s the same way many economists have waved off America’s persistent unemployment crisis. The promise was that the economy was storing up all its energy, that consumers were temporarily holding back until they would be released - by weather, by credit, by sheer impulse - to go on economy-boosting spending sprees throughout the country.

For anyone paying attention, hearing these chipper decisions to ignore the data was like falling through the looking glass.

Lindsey Piegza, chief economist of Sterne Agee, was paying attention. Her prediction for GDP growth in the second half of the year is about 1.7% – less than half of what many others are predicting.

“The momentum that I found most economists pointing to, I wasn’t seeing that,” she told me. “A lot of economists were expecting this rebound in demand in the consumer sector, but it’s not as if consumers were at home twiddling their thumbs waiting to spend money.”

In her discussions with businesses, too, she gets the impression that “they’re trying to keep their heads above water. … I’m not seeing where the momentum is coming from.”

That will trickle down to workers and consumers. Guy Lebas, a managing director with Janney Capital Markets, says as long as companies are “finding it more productive to buy back shares than build new factories, productivity will remain at best stagnant.”

No wonder consumers – those engines of economic growth – don’t have much money. Income growth is at its lowest point since 2007. When people are shopping, they’re using borrowed money - “some of it credit, 401ks, investment portfolios”, Piegza says.

A good example: the boom in auto sales. GM, Ford and Chrysler have been selling cars at a rapid clip, despite the recall scandals. The reason? Auto loans are cheap and readily available, and the lenders aren’t too picky. The average auto loan is now about $28,000 a car, and one-quarter of new loans are being paid out over as much as seven to nine years. Lenders are also giving auto loans to people with bad credit - subprime consumers. Auto sales are booming purely on the back of the American willingness to go into unimaginable levels of debt with very little collateral.

For things that aren’t cars - houses, and clothes, and gadgets - Piegza says, “we have nowhere to go but waning consumption levels.”

Translation: expect people to squeeze their wallets shut, and hard.

To find out why, look to employment and housing, those two stalwarts of financial security for most people.

The job market is not yet secure. The real unemployment rate - not the one in headlines (6.3% in May, the US Department of Labor announced Friday morning), but the one that counts a fuller number of the unemployed as well - is around 12%. Companies are hiring, but it’s “temporary flexible labor,” and even though the economy is adding jobs, many of them are low-quality and low-paying.

Housing is also becoming weak, after false claims last year that a recovery was on the way.

The problem is simple: housing is too expensive for most people to afford, especially because mortgages are scarce. To paraphrase a New York political candidate, the mortgage is too damn high. Or, as Ian Shepherdson of Pantheon Macroeconomics puts it:

The end of the severe winter weather will not bring with it a sustained revival in the housing market. The real problem is last year's massive deterioration in affordability, the worst for 32 years. Housing is not going to drive the economy forward for the foreseeable future, and could easily be a net drag for some time yet.

This is not a permanent situation. The economy changes - monthly, weekly, and daily. It is volatile. It can turn around, but it would require something to create a giant shot of economic growth - a massive investment in infrastructure, for instance, or a sudden demand for US products. If US consumers aren’t buying, maybe Chinese consumers will get excited about spending again.

There’s no evidence that anything like that is in the works - and with an election coming in November, vast swaths of Washington lawmakers are happier to believe magical thinking that says the recovery is already here. Talk won’t fix the problem.

For the rest of us, there’s not much to do but be more careful with our money, work a little harder to keep our jobs, and not make any plans for big spending. It won’t improve the economy. But it will mean we won’t be surprised or particularly vulnerable if the bad times keep going just a little bit longer.

Celtiberico, 06 June 2014 1:50pm

The paradox of the “recovery” for the past five years has been that consumers suffered while corporations and Wall Street raked in profits unseen in their history. At the end of 2013, corporate profits hit an all-time high of $1.9tn. Those profits were largely achieved not by growing, but by cutting - cutting jobs, investment in research, and new projects.

Future historians will have a belly-laugh about those figures...

mcgill16 -> Celtiberico, 06 June 2014 2:02pm

It's incredible.

We hear daily on all the media, the elite speaking with great gravitas about economic reality, the way to success, the free market etc etc, and actually they are just a bunch of self interested, pretty thick wankers, who are completely winging it while they endeavour to fill their pockets, without a care for their fellow human beings.

Our institutions are indeed packed with Melbury's.

succulentpork, 06 June 2014 1:52pm

Consumers are not the engines of economic growth. That's the hangover of flawed Keynesianism speaking.

Producers are the engine of economic growth. Or more particularly, it is the entrepreneurs who find ways of configuring the capital structure more efficiently and better matched to what people want to consume, who drive innovation and thus growth.

Zakida succulentpork, 06 June 2014 1:56pm

Indeed, consumers are the result of economic growth.

succulentpork succulentpork, 06 June 2014 1:56pm

I Want to be a Consumer
“And what do you mean to be?”
The kind old Bishop said
As he took the boy on his ample knee
And patted his curly head.
“We should all of us choose a calling
To help Society’s plan;
Then what to you mean to be, my boy,
When you grow to be a man?”

“I want to be a Consumer,”
The bright-haired lad replied
As he gazed into the Bishop’s face
In innocence open-eyed.
“I’ve never had aims of a selfish sort,
For that, as I know, is wrong.
I want to be a Consumer, Sir,
And help the world along.”

“I want to be a Consumer
And work both night and day,
For that is the thing that’s needed most,
I’ve heard Economists say,
I won’t just be a Producer,
Like Bobby and James and John;
I want to be a Consumer, Sir,
And help the nation on.”

“But what do you want to be?”
The Bishop said again,
“For we all of us have to work,” said he,
“As must, I think, be plain.
Are you thinking of studying medicine
Or taking a Bar exam?”
“Why, no!” the bright-haired lad replied
As he helped himself to jam.

“I want to be a Consumer
And live in a useful way;
For that is the thing that is needed most,
I’ve heard Economists say.
There are too many people working
And too many things are made.
I want to be a Consumer, Sir,
And help to further trade.”

“I want to be a Consumer
And do my duty well;
For that is the thing that is needed most,
I’ve heard Economists tell.
I’ve made up my mind,” the lad was heard,
As he lit a cigar, to say;
“I want to be a Consumer, Sir,
And I want to begin today.”

Boghaunter, 06 June 2014 2:16pm

I think of conversations about Piketty's book (confession: I haven't read it yet) and that "profits" are being made by manipulating money rather than producing anything. Producers depend on consumers to buy their product and so production is a better gauge of reality than simply "profits". The current high stock market levels and profit claims are tied to the manipulation of money - not actual economic growth. Thanks, Heidi, for this column.

psygone, 06 June 2014 2:23pm

[.. the truth about the economy ..]

Obama's economic policies have failed the very people who voted for him at a rate of 90+ percent:

Minorities, university students and the millions of 30 somethings who live in the basement of their parents.

-- of course, after six years in office, our incompetent community organizer still has no clue on how a job is created, and has yet to take full ownership of the presidency because he likes to blame Congress and the previous administration for everything.

Hopie! Changie!

AnEmptyHourglass Heidi N. Moore, 07 June 2014 4:01pm

It's a good article, and a necessary article given all the government propaganda trying to trick people into thinking things will be/are improving.

Underneath all this lies a fundamental truth - the supply of energy is not now cheap enough for any recovery at all to the possible. This can be expected to worsen relatively rapidly year on year for the foreseeable future, making the question more one of when and how bad the next lurch down will be, rather than any speculation of recovery.

Anyone thinking we can power our way out with renewable energy might want to consider the EROI of the various options.

TerribleLyricist -> AnEmptyHourglass, 07 June 2014 8:02pm

a fundamental truth - the supply of energy is not now cheap enough for any recovery at all to the possible. This can be expected to worsen relatively rapidly year on year for the foreseeable future

Spot on. The kinds of technological shift we need take a long time to come about - like the proverbial supertanker. Cheap energy is in rapid decline, as are some minerals, such as phosphorus. To be clear, there is plenty of energy (and phosphorus, and all the rest), but they are in forms we do not have cheap access to right now. The incentive to develop the new technologies required are not yet strong enough, or, more often, are stifled by vested interests.

BenTrovata, 06 June 2014 3:35pm

...if you'll allow me to lend a hand... getting the $1 billion plan to support and train the armed forces of Nato states on Russian borders [...dailymail.co.uk/news...] ...plus the nearly $3 billion in grants annually to Israel [ ...wikipedia.com...], is nearly $4bn.back into the hands of U.S. consumers...See,that wasn't so hard to do...( But,of course,you have to * want to *...)

Felipe1st BenTrovata , 06 June 2014 4:29pm

Don't forget the $5bn coup in the Ukraine plus all the other little escapades around the world.

Adds up to a tidy sum not being spent on the people that gave it in the first place.

Daveinireland BenTrovata, 07 June 2014 10:37am

The US government will spend $3.7 trillion this year, those sums are less that the money it looses down between the couch cushions.

Whitt , 06 June 2014 5:03pm
The Continuing Lie of Falling Unemployment - The government announced this week that unemployment has dropped to a new post-recession low, allowing them to spout off yet again about the alleged (but for most people, non-existent) recovery. And so I update my usual post with the latest figures to show why this is just an enormous lie.

The official unemployment rate keeps dropping – 6.3% as of May 2014 – which gives people the illusion of an economy undergoing a jobs recovery:

From the US Bureau of Labor Statistics:

Nov 2007 - 4.7% (the month before the recession began)
Feb 2008 - 4.9%
Feb 2009 - 8.3%
Oct 2009 - 10.0% (the supposed bottom of the recession)
Feb 2010 - 9.8%
Feb 2011 - 9.0%
Feb 2012 - 8.3%
Feb 2013 - 7.7%
Feb 2014 - 6.7%
Jun 2014 - 6.3%

If you look only at the official unemployment number for that period, what you see is 10.0% for Oct 2009 and 6.3% for May 2014, which would lead people to think that we've supposedly seen a 37% drop in the unemployment rate over the last four-plus years.

But, as I frequently point out to people, you have to look beyond the unemployment number alone, which by itself is more than a little misleading. For one thing, any increase in the number of people considered to be "no longer looking for work" results in a decrease in the unemployment rate because of the way in which it's calculated. Thus the unemployment rate can actually drop even when the number of employed people is declining. And then there's the lesser-followed category of underemployed people, i.e. people who need full-time jobs but can only find part-time work but who are nonetheless counted as being employed.

The reality job-wise is that real employment hasn't budged. Let's look at the actual employed numbers as a percentage of the population, a much more accurate measure of who's actually working:

From the US Bureau of Labor Statistics:

Nov 2007 - 62.9% (the month before the recession began)
Feb 2008 - 62.8%
Feb 2009 - 60.3%
Oct 2009 - 58.5% (the supposed bottom of the recession)
Feb 2010 - 58.5%
Feb 2011 - 58.4%
Feb 2012 - 58.6%
Feb 2013 - 58.6%
Feb 2014 - 58.8%
Jun 2014 - 58.9%

This is what's really going on. In terms of real employment, the economy has been essentially dead in the water for the last four-plus years. After dropping for almost two years, it leveled off around Oct 2009 but has been stuck there ever since, with a tiny improvement only occurring in the last six months or so.

What this tells us is that:

(1) The jobs growth is more than a little anemic, just barely enough to keep up with the overall population increase so that the ratio of employed to total population remains static.

(2) The number of people deemed "no longer looking for work" is growing and growing steadily. In point of fact, the increase in this number is the _only_ reason that the official unemployment rate appears to be dropping as these people are no longer considered part of the labor pool and hence are not counted as unemployed. If they were included, the real unemployment rate would be around 10%, which would put us back where we were at the supposed bottom of the recession. It would also more closely fit what is reflected in the actual employment numbers.

(3) At this rate, we're not talking about years before the economy recovers in a way that will mean anything to most people - we're talking _decades_. Consider that in the last 4 years and 7 months (i.e. the period since the alleged bottom of the recession), the employment rate has only managed to rise by 0.4 points. At that rate, it will take some 45.8 years before we manage to get back to where we were in Nov 2007, just before the recession began.

Making the picture worse is the fact that the median wage for the US - which actually peaked back in 1999 - has continued to decline during that period, to the point that we're now where we were back in 1995. So what you have in the end is a lot of unemployed people who still cannot get work and even more working people being hit with stagnant and declining wages.

This makes the government's assertion that we've gained back most of the jobs lost in the recession even more egregiously deceptive. Most of the jobs that have been created in the last four years pay less than the ones that were lost. Which means that most people in truth have less than what they had before. Consider in plainer terms if you'd lost $10K back in 2008, had managed to recover $7K since then, but the government claims that all money that had been lost has been fully recovered by simply saying that part of a dollar amounts to a whole dollar. It's the same thing as saying that a job that pays $40K/year amounts to a job that paid $60K/year.

This is the reality that most people in the US are having to deal with.

Recovery, my ass!

WithoutMalice , 07 June 2014 3:28pm
You're right Heidi, the economy sucks, and it's been sucking for 14 years now. Bush's first term was the first full presidential term since Hoover that added no new jobs to the economy - actually we lost a quarter million. We needed to add six million during that time (Clinton added about 11.5 million in each of his terms) just to keep up with population growth; so that left us with a six million jobs shortfall. In Bush's second term, when all was said and done in Jan. of 09, we had added a grand total of about a million jobs. That's a shortfall of 5 million jobs. And since we've only managed to return to the job numbers we had in 08 that means we have shortfall of another 6 million jobs, for a total shortfall of 17 million jobs. Everyone bitches about the economy under Carter, but the truth is the man created 10.25 million jobs in his four years and he never had even one year where we lost jobs, while Reagan created about 1/3 of that in his first four years and only a quarter million more than Carter in his second term. I really don't know what to say when the greatest capitalist nation in the history of the world has not been able to add one new net job in over 14 years; about all you can say is yes, the economy sucks.
Harvestclubfounder , 07 June 2014 4:45pm
The main problem we have to creating solutions is that we are not measuring the right data. Forget "job" numbers. Focus on payroll dollars. These figures factor in market forces and combined with local and regional costs of living, provide a good idea of the amount of discretionary dollars (or any currency) available to drive the economy. If one follows this methodology, it becomes clear what is happening. The US economy is approximately 70% driven by consumer spending, hence less disposable income begats a weaker economic outcome.
libertate , 07 June 2014 8:41pm
And then there is this absolute gem from the NYT article:

“The Fed is making an important contribution to middle class and lower income folks’ welfare,” Mr. Bernanke said.

Right. Artificially suppressing interest to ridiculously low levels has the following effects:

1. Makes it impossible for millions of retired people to live off their life savings, forcing them to consume their principal and/or speculate in the stock market.

2. Makes saving money a fools game, since interest rates are lower than the (government caused) rate of inflation (which is also much higher than reported), turning everyone with extra money into speculators.

3. Incentivizes people to incur debt, and thus interest payments.

So it is that "monetary policy" creates a nation of insolvent debtors, most of whom are a paycheck away from penury and the dole.

Now, who actually benefits from such policies?

1. Government, which can borrow much more money that would otherwise be possible, thereby enriching themselves and their cronies at the expense of savers, and buying support from the gullible electorate with one boondoggle or another.

2. Banks, which can obtain newly created money for next to nothing and then lend it out via loans and credit facilities for much higher rates, thus making large profits for doing essentially nothing.

We the people are being fleeced six ways till Sunday so the Feds can make twice the average salary of the rest of us and the bankers can ride an endless debt-service gravy train.

This is the reality

[Jun 08, 2014] The Russian Gas Carousel: Who Wants Off, and Who Wants On

If this another financial speculative bubble ready to burst
May 21, 2014 | The Kremlin Stooge

And that’s assuming America’s shale reserves are as massive and bountiful as they would have you believe. Are they? Not according to the Energy Policy Forum, which reports – and I quote – “The recent natural gas market glut was largely effected through overproduction of natural gas in order to meet financial analyst’s production targets and to provide cash flow to support operators’ imprudent leverage positions…Wall Street promoted the shale gas drilling frenzy, which resulted in prices lower than the cost of production and thereby profited [enormously] from mergers & acquisitions and other transactional fees…U.S. shale gas and shale oil reserves have been overestimated by a minimum of 100% and by as much as 400-500% by operators according to actual well production data filed in various states…Shale oil wells are following the same steep decline rates and poor recovery efficiency observed in shale gas wells.”

[Jun 07, 2014] Conspiracy theory Half of Americans believe them, research shows

A very low figure: "25 percent believe the recent financial crisis was caused by the small cabal of Wall Street bankers". And this is not a conspiracy theory, this is a fact. Is this brainwashing or what ?
RT USA

According to Vedantam, the research suggests that not everyone harbors the same doubts, either.

“So 19 percent of Americans believe the U.S. government was behind the 9/11 attacks; 25 percent believe the recent financial crisis was caused by the small cabal of Wall Street bankers;

[Jun 03, 2014] SP 500 and NDX Futures Daily Charts

Jesse's Café Américain

They had to restate the PMI number a couple of times this morning before they got it right.

I had not realized that they seasonally adjust these surveys. Do they seasonally adjust opinion polls too?

These markets are already acting like the dog days of summer, with an upward bias on sleepy volume.

There is a yawning divergence between Bonds and Stocks. I suspect this might be due to Fed interference on the Bond side, which we know about, as well as some free range tinkering with values on the Stock side.

Either way, this is going to end badly. I have an open mind to a summer slump, but unless something happens to provoke more selling at higher volumes we may just muddle along until something more traditional in the autumn, and event inspired. This is a midterm election coming up after all.

I found these words from Daniel Ellsberg below ( http://www.youtube.com/watch?v=juLHho0qf5o&feature=player_embedded ) about Snowden and some other things to be worth hearing.

Have a pleasant evening.

The Arbiters of Value

Jesse's Café

"'When I use a word,' Humpty Dumpty said, in rather a scornful tone, `it means just what I choose it to mean -- neither more nor less.'

`The question is,' said Alice, `whether you can make words mean so many different things.'

`The question is,' said Humpty Dumpty, `to be master -- that's all.'"

Lewis Carroll, Through the Looking Glass

If you look at the metals calendar below, tomorrow is first notice day for June.

It is hard to tell, but I think the worst of the sell off for June option expiration is about done. But let's see what happens.

I must have heard ten times on the financial news, as they discussed the awful GDP revision, that there is no inflation because gold is down. Ron Insana said that since gold is down $35 the last couple of days, that shows that there is no inflation.

Well, this is all perception management. They took most of the damage in the GDP number now. Why didn't they take it in the upfront number? Because it was too close to the fact. In this second revision they took it down dramatically to the negative. But now it is further a long, and the story about the odd winter weather effect has had time to gain traction.

The net result is that the next number is now important, and we are not looking at what just happened because it is so two months ago. And the comparison is set rather low for the next quarterly number, which I predict will come in much higher. All hail The Recovery™, fait accompli, just in time to influence the midterm elections.

Here is a link to a nice, concise description of what the basic tenets that Modern Monetary Theory stands upon.

I think I have made my own analysis of the theory fairly explicit. It has been tried many times. The key phrase is 'a currency issuer can never run out of money.' This is true. They can print all that they want. The critical variable is the 'value.' And as for value, 'the Jobs Guarantee Wage determines the value of the dollar.' And the Jobs Guarantee Wage is a function of the government.

It is a self-referential fiat standard, in the manner of the Alice in Dollarland in which we are beginning to find ourselves today. It will stand only so far as the force of law can reach. Generally that ends at the borders, but one can always hope for a one world government that is able to dictate the value of everything to everyone at their own discretion.

It is not that we need better financial engineers, or more virtuous custodians of society, a kind of a priesthood of economic virtue, worthy of the burden of being benevolent tyrants. There is NO class that is capable of wielding such raw power, without falling into a destructive cycle of self-destruction.

As an elite impoverishes their homeland, they find it necessary to engage in various types of colonialism, to create new markets for their excess supply, since paying living wages to their people creates a blur in class distinctions.

How can I know I am sufficiently rich, unless many are exceptionally poor? This impulse to economic expansion and marriage of force and economics was the story of the British Empire. And it explains much of the otherwise odd behavior of this New American Century, and its many wars and adventures. They make a desert and they call it peace.

I hate to pick on MMT like this, because so many otherwise nice, sensible people seem to be drawn to it. But I can see such a revolutionary move is already in the cards from other corners. Nothing attracts the unworthy like the power to dictate and distribute wealth. And the more arbitrary it is, the greater the allure. As Abraham Lincoln said, it is the crux of human society.

"They are the two principles that have stood face to face from the beginning of time, and will ever continue to struggle. The one is the common right of humanity and the other the divine right of kings...No matter in what shape it comes, whether from the mouth of a king who seeks to bestride the people of his own nation and live by the fruit of their labor, or from one race of men as an apology for enslaving another race, it is the same tyrannical principle."

Abraham Lincoln, 1858

And like most utopian exercises, some of the well-intentioned may promote it, but the worst end up controlling it for their own ends and personal enrichment. We have seen this tendency so far, at the dawning of the sixth year of The Recovery™ from the Great Recession, which formally ended in June, 2009. And isn't life grand.

Have a pleasant evening.

[Jun 03, 2014] Washington‘s Shale Boom Going Bust

To read the headlines, it seems that the USA has emerged out of the blue to the point of becoming the world’s oil and gas production giant. All thanks to the Shale Revolution. Recently President Obama made various noises that the US could solve the Ukraine gas dependency on Russian gas because of the spectacular growth of extracting natural gas, and more recently, oil, from shale rock formations across the US. There’s only one thing wrong with this picture—“It ain’t gonna happen…”

New Eastern Outlook

The surface numbers are indeed impressive to a layman or politician. According to US Government Energy Information Administration data, between 2005 and 2010 the contribution from shale gas to total US marketed gas production rose from less than 2% to more than 20%. And 2011 set an all-time record for US production as the result of shale gas growth.

However the shale gas comes from a small number of areas with significant and viable shale rock formations that have trapped gas and oil in the interstices of the sedimentary shale rocks. The main shale gas areas are the Barnett shale in Texas’

Fort Worth basin; the Fayetteville and Woodford shales of the Arkoma basin in Arkansas and Oklahoma; the Haynesville shale on the Texas Louisiana boarder; the Marcellus shale in the Appalachian basin, and the most recently exploited, the Eagle Ford shale in southwest Texas.

Two metrics widely used in describing shale well performance are the initial production (IP) rate and the production decline rate which together determine the ultimate recovery (UR) from a well, an essential number in determining economic viability. A group at MIT university in Massachusetts carried out an analysis of production data from the major US shale regions. What they found is sobering. While initial production from most shale gas plays was unusually high, an essential component of the Wall Street shale gas bubble hype, the same gas regions declined dramatically within a year. They found “in general, shale well output tends to drop by 60% or more from the Initial Production rate level over the first 12 months. The second is that the available longer-term production data suggests that levels of production decline in later years are moderate, often less than 20% per year.”

Translated, that means on average after only four years, you have only 20% of your initial gas volume available from a given horizontal drilling investment with fracking. After seven years, only 10%. The real volume shale gas boom appeared in 2009. That means in the fields where significant drilling was present by 2009 are already dramatically depleted by 80% and soon by 90%. The only way oil or gas drillers have managed to maintain production volume has been to drill ever more wells, spending ever more money, taking on ever more debt in hopes of a sharp rise in the depressed US domestic gas price. As a whole shale energy companies spend more than they are making in net profit, creating a bubble of “junk” bond debt to keep the Ponzi game going. That bubble will pop the second the Fed hints interest rates will rise, or even sooner.

The industry tries hard to pump the prospects of the shale revolution. One of the most outspoken recently was the CEO of Conoco/Philips, Ryan Lance. Taking a baseball analogy, he recently told an energy conference in Houston that the shale gas “revolution” in the country is only just beginning and there should be several decades left of successful energy production: “We’re in the first inning of a nine-inning game on the shale revolution in the United States.” He did not make clear what the scientific connection between baseball and shale gas was.

The reality of the shale gas boom is increasingly being shown to be quite different. According to Arthur Berman, a petroleum geologist of 34 years’ experience who has studied production and other aspects of the shale gas and oil boom, “forecasts show production in shale plays from North Dakota’s Bakken to Texas’s Eagle Ford will peak around 2020. Those investing with the expectation that the boom will last for decades are “way out of line.”

To be concrete, the major shale formations in the US, and there are not that many geologically-speaking, will begin an absolute production decline in less than six or seven years. Unlike conventional gas or oil fields, shale is an unconventional and difficult way to extract energy by the highly controversial and toxic practice of “fracking” or hydraulic fracturing of the shale formations. As the shale runs horizontally, perfection of new horizontal drilling techniques in the 1990’s opened commercial prospects for shale gas for the first time.

Fracking the Bakken Formation in North Dakota

The hydraulic fracture is formed by pumping a fracturing fluid—typically highly toxic and exempt, thanks to then-Vice President Cheney’s Congressional influence, from EPA Clean Water Act regulations—into to the wellbore at a rate sufficient to increase pressure down-hole at the target zone. The rock cracks and the fracture fluid continues further into the rock, extending the crack still further, and so on. Often up to 70% of the toxic fracking fluids leak and in many cases in Pennsylvania and elsewhere seep into the ground water.

Even the US Government’s EIA projects that US oil output will peak at 9.61 million barrels a day in 2019. They see tight-oil or shale oil topping at 4.8 million barrels in 2021. That’s only seven years out. And if the US Government is trying to fast-track approval of LNG gas export terminals on coastal ports to allow US gas companies to export their gas, completion of such complex terminals including environmental impact approvals typically takes seven years. Hmmmm.

Wall Street easy money

No one expects the President of the US to have the time or the scientific background to delve into the geophysical complexities of shale energy. He naturally relies on competent advisers. What if the advisers, instead of being competent, like in so many government agencies today, are in the sway (and sometimes perhaps pay) of the shale energy companies and their Wall Street investment bankers who have hundreds of billions of dollars riding on promoting the shale hype?

The current US Shale boom is being sustained on steroids, otherwise known as the Fed’s never-ending Quantitative Easing zero-interest-rate policy, a stance that shows no sign of reverting to normal interest rate levels as the economy continues to be depressed since the collapse of the 2007 real estate mortgage securitization bubble. In effect, shale drillers are able to keep in business only because Wall Street and other investors continue to throw money at them like it was falling from trees. Tim Gramatovich, chief investment manager for Peritus Asset Management LLC, an $800 million fund, notes, “There’s a lot of Kool-Aid that’s being drunk now by investors. People lose their discipline. They stop doing the math. They stop doing the accounting. They’re just dreaming the dream, and that’s what’s happening with the shale boom.”

Given the endless zero interest rate regime of the Fed, investment funds are desperate to find investments that yield higher interest. They are so desperate they are pouring money into shale gas and shale or tight oil companies like never before. The companies are operating at losses, loaded with debt and the credit rating agencies rate their debt as “junk”, i.e. in a market downturn, likely to default. One such company, Rice Energy, sold its bonds in April with a rating of CCC+ by Standard & Poor’s, seven steps below investment grade. That is below the minimum risk/quality level that major investors, such as pension funds and insurance companies, are allowed to buy. S&P says debt rated in the CCC range is “currently vulnerable to nonpayment.” Despite that, Rice Energy was able to borrow at an astonishingly low 6.25 percent.

“This is a melting ice cube business,” said Mike Kelly, at Global Hunter Securities in Houston. “If you’re not growing production, you’re dying.” Of the 97 energy exploration and production companies rated by S&P, 75 are “junk” or below investment grade. The shale “revolution” is but a Ponzi Scheme disguised as an energy revolution.

F. William Engdahl is strategic risk consultant and lecturer, he holds a degree in politics from Princeton University and is a best-selling author on oil and geopolitics , exclusively for the online magazine “New Eastern Outlook”

[May 29, 2014] US economy contracted in first quarter of 2014 by Michelle Fleury

May 29, 2014 | BBC News

The US economy shifted into reverse in the first three months of 2014 shrinking by an annualised rate of 1%, official estimates have shown.

It is the worst economic performance since the first quarter of 2011.

It is also a big fall on the 2.6% rise in economic output in the final quarter of last year.

The US Commerce Department's first reading of gross domestic product (GDP) showed the economy grew at an annualised rate of just 0.1%.

The fall in output was blamed on an unusually cold and disruptive winter - one of the coldest in the US for 20 years - and a plunge in business investment.

Nobody thinks the US economy is slipping back into recession. Still it's a nasty reminder that instead of robust growth America's recovery is just ticking along.

Given the slow return to health, the recovery in American corporate profits since the financial crisis has been all the more remarkable. But has it finally peaked?

This release shows corporate profits fell 9.8% (non annualized) in the first three months of the year. There are plenty of reasons why they were squeezed, including the weather but it still bears watching.

... ... ...

The fall was also twice as big as economists expected. Most Wall Street analysts had forecast the economy to contract by around 0.5%.

[May 29, 2014] Putin's Audacious $400 Billion Gas Deal

nationalinterest.org

...American preeminence is triggering a balancing coalition.

The de geopolitical constellation--one in which the U.S. figures as the target of joint Russian and Chinese [responding to] Washington[s ill gotten belief it] could do whatever it wanted wherever it chose. No longer. What realists predicted would occur is indeed occurring. American preeminence is triggering a balancing coalition."

Obama was simply wrong, when he asserted that Russia is merely a regional power and that the U.S. is truly the [only] world power. The two are out maneuvering this country, despite our leaders denials of that fact.

Arti Fact • 3 days ago

It is good that this deal masquerades all other deals signed. Let you think we are gas station, let you:) But as for the text, IMHO it states obvious things, what was the purpose of writing it? Btw try to read newspapers and blogs and forums in China: the words used towards Russia is "neighbour", "friend", "ally". Words used towards US are in best case: "trade partner". Just to give some material for thinking.

[May 21, 2014] China, Russia sign $400 billion gas deal

The Washington Post

With the stroke of a pen, Russia significantly shifted its economic relations with its neighbors, creating a major new export market to the east and reducing its reliance on European customers at a time when its relations with the West are at their lowest point since the Cold War.

... ... ...

U.S. Treasury Secretary Jack Lew appealed to China in a visit last week to avoid actions that might limit the impact of recent Western sanctions against Russia. But a U.S. official, who was not authorized to speak by name, said the United States would distinguish between deals that have long been in the works — such as this one — and new agreements that seek to fill space left by U.S. and European Union sanctions.

... ... ...

Russian officials on Wednesday also hinted at a possible “prepayment” totaling $25 billion.

[May 21, 2014] China and Russia Reach 30-Year Gas Deal

NYTimes.com

Mr. Putin told reporters after the signing ceremony that the price of the gas for China was based on the market price of oil, just as it was for European countries.

“The gas price formula as in our other contracts is pegged to the market price of oil and oil products,” Itar-Tass quoted Mr. Putin as saying.

The deal is the largest ever for the Russian natural gas industry, he said.

Russia will invest $55 billion in infrastructure for transporting the gas to China, said Alexei B. Miller, the chief executive officer of Gazprom.

AK, US

This gas deal shows that the US attempts to isolate Russia economically are destined to fail. These attempts are getting little traction even in Europe. Nobody wants to take economic pain to help people in the State Department advance their agenda. And countries like China and India will absolutely refuse to treat Russia like a pariah state. These countries have their own economic and geopolitical interests. Working with Russia helps them further their interests. The relative economic power of these countries will continue to grow.

The US-centered world order established after the fall of the Soviet Union was never going to last. Instead of trying to maintain it, US policymakers should think about how to act in a multipolar world. Considering other countries’ interests – now, that would be a change!


Nick Wright, Halifax, Nova Scotia 4 hours ago

The geostrategic and environmental implications of this deal are huge.

The West, in a hamfisted continuation of the Cold War, has been trying to isolate and contain a resurgent Russia. However, it found itself strategically and tactically outplayed by Vladimir Putin as it blundered around in his neighbourhood--Ukraine, Syria and Iran--and its Cold War bluster and saber-rattling over military interference in sovereign nations just look hypocritical to educated people worldwide.

On the environmental front, China looks good for succeeding in lowering its reliance on energy from coal, while Europe--especially Germany--is building more coal-fired generating capacity, and Canada is offending the world with its determination to develop its massive, polluting oil sands. Western claims of superiority on the environmental front sound hollow by comparison.

Socially--from Ukraine, to Europe, to Canada, to the U.S.A.--the world is watching the rise of aggressive, intolerant, divisive parties of the extreme right in the West, raising the legitimate question of which of the world's regions are improving and which are in decline. Throw in Western levels of indebtedness, and the question becomes even more pointed.

And finally, Western chauvinism is pushing Asian countries into closer economic alliances--and who knows, perhaps eventually military ones as well. But it didn't have to turn out this way; we can change direction before things get worse; it's just a matter of political will.

Stephen Miller, Oakland

This deal is just the tip of the iceberg. Russia has astonishingly huge reserves of gas, and all those oil and coal burning plants are going to need to switch over in the coming years to reduce pollution and greenhouse gas emissions. Russia will become the undisputed energy superpower and likely overtake the US eventually.

As the easy oil disappears and energy demands continue to rise globally, prices will rise very dramatically. More gas and oil from fracking and tar sands and shale will slow the rise, but eventually the prices will go up.

The US and Europe can whine about Russian gas all they want, but in the end, everybody pays.

Quandry, is a trusted commenter LI,NY

Although this is very important to the US's and the world's survival from an environmental perspective, this is another faux pas upon Obama's and the EU's statecraft. The big winners in all of this are Russia who now can thumb its nose at the US, and even more China which who will pay less than the EU for its gas. Unfortunately, China has continued to prevail in its economic policy over the US from Iraq to Africa, while the US has paid in lives and unrequited financial aid. Our statecraft can use some changes and improvement.

Judyw, cumberland,

Congratulaton to our State Department who have made this deal possible. Oh yes our Congress helped out too. By our reckless of expansion of NATO we have driven the Russian into the army of China. I hope we are proud of ourselves for doing that.

I have never seen the US government make such a mess of Foreign Policy as this government has made. And I don;t mean to leave out the government from Bill Clinton forward - they have contributed to this mess with the the whole Kosovo creation.

It is important that we now recognize that we are driving countries away from the US who are sick of our efforts of trying to "run the world", be "the indispenable power" and all that malarky.

Our pivot to Asia seems more like it was Russia's pivot to Asia while we sat and watched. Perhaps it would be better if we did more watching and less acting. It seems that whenever we interfere, we create more hatred of the US and increase our separation from the world.

I hope this lesson on "the pivot to Asia" has taught us a lesson. We thought we could punish and sanctions Russia to behave as we dictated. We just found out we can't bully Russia. In the world today Sanctions have little meaning as they are easily broken by countries who have no interest in "toeing the US line".

We had wanted Russia as friend, but our actions have driven into the arms of China. Congratulations USA -- you just had another foreign policy failure.

Efren, Texas 6 hours ago

All of this is the result of not understanding that the world is headed to a multipolar world, and that the US must learn to deal with it (see conference of Bill Clinton in Davos). Why does US insist on destabilization of governments claiming democracy interests? Don't you remember all dictatorial regimes supported by the US in Latin America? Now, US is so engaged in bringing back the cold war. It's not only Russia-China being together now, most of main Latin American countries have leftist governments. Don't be surprised if they start achieving important deals with Russia and China.

Let's take it easy. No empire last forever. It would be better for US to respect others and try to build a leadership based on ethical and real reasons, not on bullying everybody else who thinks differently.

Smartlegov Oleg, Moscow 7 hours ago

This is an epic deal and just on time. Putin compromised the price, but showed how quickly he can respond in a big wave to US/EU symbolic sanctions.

Cato, California 5 hours ago

Another positive step by Russia and China in brokering a deal that doesn't involve the West. Please note that the almighty USD wasn't invited to this party. The deal, coupled with massive historic accumulations of gold by both countries, spells doom for the world's reserve currency. This will be over the next 10 years the nightmare of all nightmares for Americans when we lose world currency status. A word to America: Hope is not a strategy.

Edwin, NY 4 hours ago

China is learning how to do its things. I'm actually glad for them and for Russia also. I'm a citizen of the United States but I'm tired of foreign policies. Its time to realize that we are not the only kid in the block. Let them join in and play the game of capitalism. Focus our money and our strength our Nation in serving our people, in educating them, and helping them become more competitive in this global marketplace instead of throwing money and effort to keep others down while we stand at the top. Those days are over. Lets work together, accept our differences, and be the best we can be. Invest in healthcare, social programs, education, research, technology and we will remain at the top no matter what without the need to isolate or bomb everyone that stands on our way

Babeouf, Ireland 7 hours ago

The US desperately needs joined up thinking in it foreign policy. The US 'Pivot to Asia' to contain China may make sense. The US funding of the coup in Ukraine may make sense. Doing both at the same time doesn't make sense. It is US foreign policy which has provided the incentive for Russia and China to draw closer together. Of course for imperial powers foreign policy appears just another part of domestic policy.

With the result that, due to political competition in the US, a rational US foreign policy seems out of reach.

PuppetMaster11 -> FighTheBrainwashing

Even better. NYT, yesterday, already ran with the story of the failure of the gas deal.

http://www.nytimes.com/2014/05/21/world/asia/china-russia.html?google_editors_picks=true

China and Russia Fail to Reach Agreement on Gas Plan

I'd like to see them eat their hats.

PuppetMaster11, 21 May 2014 6:14pm

The US attempt to sever the economic tie between Europe and Russia forced Russian into an alliance with China.

Now, a lot depends on whether this rearrangement will congeal into a permanent line of confrontation, or the new Russia-China alliance will work as a leverage to entice Europe away from the confrontational US.

raindancer68, 21 May 2014 6:15pm

Energy makes the world go around, not money. The Russians are in a strong position, as the western world tries to make up for the falling energy dynamic in their economies by scrabbling around for fracked oil and gas.

structurequity, 21 May 2014 6:21pm

I find it of interest that no one is reporting on the meeting of nations where this sideline contract was signed, The CICA meeting is tremendously important for the entire world and seems not to be covered by Western press or its political drivers.
http://en.wikipedia.org/wiki/Conference_on_Interaction_and_Confidence-Building_Measures_in_Asia
and http://english.peopledaily.com.cn/n/2014/0521/c90883-8730684.html
but, am unable to access http://www.xinhuanet.com/english/ seems blocked at every road I travel to get to it.

titipap

21 May 2014 6:23pm

The price that Russia was formerly selling gas to Ukraine at was $268.50 per thousand cubic metres. Now, thanks to the so-called international community's destabilisation, Russia is selling its gas to China instead, and getting a 30 per cent higher price.

So, as less Russian gas is available to Europe, the Ukrainians and people in the rest of Europe can look forward to paying more. Well done, our leaders! But no doubt their masters in Saudi Arabia and Qatar will be able to provide supplies, at rather higher prices.

MyDown titipap, 21 May 2014 6:32pm

Not that simple. Urengoy from which gas goes to Europe is 5 thousand kms away from Yakutiya and 6 thousands kms away from Sakhalin from which gas will go to China.

Mr1Cynical, 21 May 2014 6:23pm

This has gone under the radar but Rouhani is also in China perhaps its to do with this ?
U.S. Issues Threats Over Pending Russia-Iran Oil Deal
FTMDaily.com – Russia and Iran are forging ahead with a controversial oil-for-goods deal that is being criticized by Washington as a violation of Iran’s interim nuclear agreement. .

Under an interim agreement reached with world powers last year, Iran is permitted to continue exporting no more than 1 million barrels a day of oil to six countries: China, India, Japan, South Korea, Taiwan and Turkey.

Now, Russia is offering to buy 500,000 barrels of Iranian oil per day, which Washington says will violate the terms of the interim agreement.
U.S. Secretary of State John Kerry has already begun threatening more ‘sanctions.
Iran’s response: The country refuses to ‘wait for America’s permission’ to increase its oil exports.
On the surface, Washington is pointing to Iran’s “violation” of the interim agreement. But, when you follow the money, you find something much different. Not only will a Russian-Iranian oil deal inject a massive amount of fresh revenue into Tehran while emboldening Russia, but the proposed oil deal will completely sidestep the U.S. dollar. rest of article

http://ftmdaily.com/daily-briefing/040914/

Will May 20th Go Down In History As the Day the U.S. “Petrodollar” Monopoly Was Finally Shattered?
May 21, 2014
The struggle over Ukraine has caused Russia to completely re-evaluate the financial relationship that it has russia-dollarwith the United States. If it starts trading a lot of oil and natural gas for currencies other than the U.S. dollar, that will be a massive blow for the petrodollar, and it could end up dramatically – and negatively – impacting the average American’s current standard of living. Let me explain.rest of article

http://www.munknee.com/will-may-20th-go-history-day-u-s-petrodollar-monopoly-finally-shattered/

ID5677229 Mr1Cynical, 21 May 2014 6:36pm

…The struggle over Ukraine has caused Russia to completely re-evaluate the financial relationship that it has russia-dollarwith the United States.

Nonsense! The West's reaction regarding Ukraine has been entirely immaterial. Putin has been committed to the geopolitical policy of Eurasianism for a decade, as have those in positions of power and influence around him.

Mr1Cynical ID5677229

Yes but i think you'll find Iran and Syria are a part of that plan Iran the wildcard I think they wanted the west to lift sanctions but realize now that the G5+ 1 are demanding that Iran gives up their ICBMS as part of the Nuclear deal it won't happen so Iran has joined the triparte and will now ignore sanctions. Iv'e heard they now have the S300 So Israel becomes less of a threat I think the US fck fest in the Ukraine has forced Russia China Iran to man up, and put the crazies from the shite house back in their boxes

John Mack, 21 May 2014 6:28pm

Truly ironic. Mich of the US long term strategy has been to prevent China from becoming dependent on Russia for energy. That was the point of the Iraqi war. The US feared a Russian-French plan to assassinate Saddam Hussein and replace him immediately with a stable military government that would agree to respect certain human rights an Shiite rights and Kurdish rights. That would have made Russia in control of the largest store of energy resources. The US feared that would mean that Russia gained a position where it vastly increase the costs of energy to China, Japan, and India, or even starve them at least partially of their energy needs, this crippling their economies or making them ally with Russia. So here we are, over Ukraine ...

elti97

Europe's long-term energy policy seems clear: reduce energy dependence on Russia. Fortunately there are good alternatives: oil and gas imports from the Middle East, Africa and North America, fracking, nuclear, renewables and increased efficiency.

With a little smart planning, in 5-10 years time, Russian threats to cut off the gas will be a mild annoyance. More importantly, a variety of competing suppliers will give European countries greater bargaining power.

AlexRussia elti97

If you decline dependence from Russia then you increase dependence from someone and it is not fact that the second is good for you

elti97 AlexRussia

Wrong. If you increase the number of potential suppliers, you gain bargaining power.

For example, if Estonia has the option to buy gas from Russia, Norway or the US, it is obviously in a better position than if it could only buy from Russia. That is exactly why a massive gas terminal is currently in construction in Estonia.

Estonia will probably still buy some gas from Russia, but at a better price.

Robert Sandlin elti97

Dream on.Estonia is one country Russia wouldn't mind seeing fall off into the Baltic Sea.

Robert Sandlin elti97, 21 May 2014 7:41pm

On yes,who would ever doubt that gas from North Africa and the Middle East wasn't a reliable source,cough,cough,Libya,Al Queda,cough. And were you talking about the DOA Nabucco pipeline.

But seriously, I have no doubt giving up Russian gas could be done. But the question is WHY in the first place give up a cheap easy supply. To pay out the a$$ for uncertain other supplies of gas.

kenlinuk, 21 May 2014 6:39pm

Russia tells the EU to go frack itself. China and Russia stand united against the US-EU sponsored fascist coup in Ukraine! UKIP landslide is a certainty. Good times for democratic freedom. Fuck the EU!

Kingston Elenwo kenlinuk, 21 May 2014 8:05pm

It's Frack the EU... If ur gonna say it, say it right:)

ID7776906, 21 May 2014 6:40pm

West always treated Russia like a dog anyways. They`re better off going East.

burnageblue11 ID7776906, 21 May 2014 7:09pm

I find it all very sad. I would much rather closer ties with Russia and see a declining US influence in Europe.

What we have done, is push an economic neighbor East. We are now fully dependent on US gas imports(with transit costs).We are now more dependent on the United States than ever.

Talk about cutting off your nose to spite your face.

Huge hike in Gas bills this winter.

indietinker

21 May 2014 6:41pm

this is all in the US plan for Russia and China am afraid to say.

http://thediplomat.com/2014/05/dont-contain-russia-push-it-east/

"Instead of containment, the US should block Russia’s ambitions in Europe while encouraging them in Asia".

Last month, The New York Times reported that in the wake of the Ukraine Crisis, U.S. President Barack Obama had decided to abandon the reset with Russia in favor of a policy of containment 2.0. According to the report

Given Russia’s intransigence, it’s completely understandable that Obama would be tempted to pursue this approach. It’s also a mistake. Instead of containing Russia completely, the U.S. should block its ambitions in Europe while encouraging it to turn eastward towards Asia.

Despite the hopes of many in the post-Cold War era, the U.S. and Russia are not going to have compatible interests in Eastern Europe anytime soon. Russia will always see this as its natural domain, which is a status that the U.S. is unwilling to grant Moscow, especially since NATO’s expansion over the past two decades. On the other hand, as John Allen Gay recently noted, American and Russian interests are almost perfectly compatible throughout Asia. It is in this region that the strategic rationale of the reset was always on the firmest ground.

The challenge is forcing Russia to turn eastward. Europe’s dynamism throughout the modern era has forced the Russian state to adopt a westward orientation. This is reflected in the country’s geography — with most of the major cities being located in western Russia — and deeply ingrained in Moscow’s strategic culture.

Over the long-term, it’s nearly inevitable that the Asian Century will force Russia to reorient itself towards the east. Indeed, as I have noted before, this is already taking place to a growing degree. Still, the question for U.S. policymakers is what actions can be taken to accelerate this natural progression?

The first step is blocking Russia’s ability to expand westward. This doesn’t mean that the U.S. and its NATO allies have to deploy troops to Ukraine. All that is required is to introduce greater uncertainty into Putin’s calculus about Russia’s ability to successfully expand westward. Most importantly, the U.S. must disabuse Putin of the notion that Russia could easily take and hold territory in Ukraine and Eastern Europe.

The more Putin fears that an invasion would expose the weaknesses of the Russian armed forces, and either fail completely or turn into a prolonged debacle in the mold of Afghanistan during the 1980s, the less likely he is to order Russian troops across the border. The good news is that Putin appears to already have these fears, as evidenced by his restraint in an overt invasion of eastern Ukraine.

In addition, the U.S. should continue underscoring its commitment to the securiSP 500 and NDX Futures Daily Charts They had to restate the PMI number a couple of times this morning before they got it right. I had not realized that they seasonally adjust these surveys. Do they seasonally adjust opinion polls too? These markets are already acting like the dog days of summer, with an upward bias on sleepy volume. There is a yawning divergence between Bonds and Stocks. I suspect this might be due to Fed interference on the Bond side, which we know about, as well as some free range tinkering with values on the Stock side. Either way, this is going to end badly. I have an open mind to a summer slump, but unless something happens to provoke more selling at higher volumes we may just muddle along until something more traditional in the autumn, and event inspired. This is a midterm election coming up after all. I found these words from Daniel Ellsberg below about Snowden and some other things to be worth hearing. Have a pleasant evening. member states, and intentionally create ambiguity as to how it might react to Russian expansion in non-NATO countries in Eastern Europe. This will increase Putin’s apprehension about becoming too adventurous in Europe. After all, he has already squandered Russia’s influence in most of Ukraine and can hardly endure another embarrassing international setback.

At the same time, the U.S. should encourage Russia to expand its influence in Asia, and thus give Putin an outlet in which to act upon his grand ambitions for Russia. The most immediate area of focus should be in Central Asia, where the U.S. is currently withdrawing from Afghanistan. Given Russia’s largely congruent interests with the U.S. in Central Asia, Moscow should be encouraged to play a leading role in helping to fill the vacuum the U.S. withdrawal is bound to create, as it is already starting to do with India in the region. Moscow and Delhi can help ensure a modicum of stability in Central Asia even as they cooperate in opposing radical Islamist terrorist groups. This would be entirely to America’s benefit.

Furthermore, as Russia has been focused elsewhere in recent years, China has quickly filled the role Moscow historically has played in Central Asia. Already, many analysts see China as the most important external actor in Central Asia, a position that Russia has held since the 19th Century. Beijing is in the process of trying to further entrench its new position further through organizations like the Shanghai Cooperation Organization (SCO) and its new Silk Road Economic Belt.

As Russia reengages in Central Asia, it will increasingly find itself clashing with China for influence in the region. This would inevitably create tensions in the increasingly close relationship between Beijing and Moscow. These tensions would force Russia to concentrate more on the long-term threat a rising China poses to its national security. In grappling with this challenge, Russia will naturally seek to assert itself more forcefully in Eastern Asia to hedge against China.

Mr1Cynical -> indietinker

To try and spin this as an American plan is wishful thinking I think you'll find the NYT is hailing defeat as victory. The Dollar as the worlds reserve currency has been in decline for many years this deal between Russia and China will hasten it The EU won't save the US, it will only ever be it's prostitute with little economic clout outside of Germany.

loveminuso -> indietinker, 21 May 2014 6:56pm

Yeah right...The only problem here is this shit might work in Africa and the ME, with one big difference...Russia and China have Nukes with the capability of strategic delivery...

"We have powerful enemies but we don't have powerful friends, that's why we need the support of such a giant as China," said Ruslan Pukhov, director of the Centre for the Analysis of Strategies and Technologies in Moscow.

Even the threat of use by this new alliance will set the American working class against it's 'leadership'; and the Americans know how to deal with criminals - even those in leadership positions...I think Obama, and those NeoCons who own him have huge problems right at Home suddenly. The Revolution is coming...

docrhw -> Mr1Cynical, 21 May 2014 7:01pm

I agree about the reserve currency thing. One day we Americans will wake up and discover that the dollar is now part of a basket of currencies needed to buy raw materials. It will happen gradually, but I think is inevitable. The sad thing is that Congress, the Fed, and of course the American public are completely oblivious to this issue. (At least the first two don't talk about it.) When that day comes it will be mighty ugly here.

Robert Sandlin indietinker, 21 May 2014 7:17pm

So basically what your saying is that since Russia is to feel nothing for Europe. Then in a crisis they'll have no remorse about destroying it in a nuclear holocaust. OK,maybe they'll get the point.Now me, if I was a European leader, I'd want to have Russia as friendly and connected to me as possible.

Because countries friendly and interconnected don't want to destroy each other. And with thousands of nukes, and a rightful paranoia about being attacked by the west, I'd want as much friendship as I could get with Russia.

But maybe I'm wrong, maybe the right thing is to slap Russia around like the EU is doing now. Spit in their face and all. After all just how mad would a country once ruled by Stalin get anyway. But then maybe dusting off the old bomb shelters might be prudent. Just encase following the US's advise isn't the best idea. It was Britain that followed the US into Iraq right. I forget,how did that work out anyway.

Mr1Cynical docrhw, 21 May 2014 7:20pm

A lot of American Patriots want the Dollar to collapse, to get rid of the Fed. introduce a new Currency, kick the thieves and jackals out ,rebuild the constitution,.and start afresh, these people who've run the US into the ground are neocon globalists inhuman completely without reason,barking mad Narcissists For all our sakes i hope you get rid of them.

ID075732, 21 May 2014 6:45pm

So the EU$A have blundered into the Ukrainian kitchen.

Vicky Nuland's half-baked attempt with the cookies was a failed recipe. Even Chaz has now brought his flaky biscuit to the table. The only question now remaining is who could believe any of them could make anything?

So it's not surprising Putin's gone to the Chinese!

kenlinuk, 21 May 2014 6:46pm

US loan repayments to China are going to end up in Russia. Sweet justice!

tfernando, 21 May 2014 6:54pm

I ask all Americans to read this article without burying head in sand.

http://www.munknee.com/will-may-20th-go-history-day-u-s-petrodollar-monopoly-finally-shattered/

The US really shot itself on the foot. This self-inflicted wound of interfering to destabilize other countries for its own interest, the US will only accelerate its decline that should/could have been avoided with sensible thinking.

I live in the US and, as it is, times are far from being good compared to what it was just ten years ago. And despite the fact there is not much indications the country’s economy is improving, the US wants to act as if no economic or financial crisis took place and wants to live on just ‘confidence’.

Well, I think it is very sandy ending for the people of this nation who, to begin with, has a tough me making ends meet.

lesnouveauxpauvre tfernando

There still is enough people with good jobs to keep the illusion afloat. I live in San Francisco and it's a bubble here in Silicon Valley. There are a lot of young people like myself and younger with good jobs making really good money. They have no concern about what you are talking about; and you could never convince them their bubble they are living in is not real.

They think this country is wonderful and so do all people here who still support Obama; including gays who don't care Obama has a 'kill list', and can imprison any American without cause; as long as he supports gay marriage they and a lot of people will support war crimes!?

It seems unbelievable but it is true. I have gotten into arguments with people about this; and I am gay.

burnageblue11, 21 May 2014 6:58pm

The USA can now fill that big void that is left in the gas market. It can supply Gas at vastly inflated prices knowing the EU,UK are now fully dependent on all they gas they can get

EU leaders want sacking for this.They are not looking after Europeans interests only those off the corporate USA.We will pay the price.

evolution2now burnageblue11, 21 May 2014 7:07pm

Europe getting American Natural Gas is fantasy. This is a fact for at least the next 10 years.

richiep40 burnageblue11, 21 May 2014 7:25pm

Despite the US pretends to be into free trade it is a lie, even though it basically runs WTO.

LNG exports from the US are not in a free market, they are restricted to only about 20 countries which the US classifies as FTA agreement countries. These FTA trade deals are almost as catastrophic for the client nations as the proposed TTIP deal with the EU.

I am a member of 38 degrees, I was surveyed yesterday by them about my views on TTIP. Although 38 degrees have many priorities, my vote was to put TTIP close to the top of their priority list ( I am only a member, nothing to do with those that run 38 degrees, so don't blame 38 degrees for my opinions).

JVC120, 21 May 2014 7:00pm

America should reevaluate the direction of ots foreign policies. It is antagonizing a few important countries and the remaking are sitting on the fences or are looking from the sidelines.
Can US afford the vives of militaristic arrogant and unreasonable messages it is sending to the Asian ,African,and Latin American?

Its foreignolicy has been hijacked by the warmongers who have never seen a war from frontline and have never wavered on supporting a war from close distance.

Blenheim, 21 May 2014 7:02pm

"Russia's new pipeline to China will increase competition for natural gas from 2018 and will most likely increase the cost we pay for natural gas here in the European Union. It will certainly increase the pressure on European countries to find alternative gas supplies," he said.

Yup, you just have to love the way the west handled the Ukraine situation. Brilliant!

KingRolo, 21 May 2014 7:02pm

Interesting article on ZH

http://www.zerohedge.com/news/2014-05-21/russia-dumps-record-amount-us-treasurys-here-what-it-buying

evolution2now, 21 May 2014 7:04pm

Reducing China's massive dependence on coal based energy is a great win for the world. This deal does more for the environment than any western climate regulations could possibly do.

Let's not forget India, which also relies heavily on coal. I would guess they are next to make a deal with Russia.

Babeouf, 21 May 2014 7:05pm

Yes this is the first mega deal which breaks the ice it won't be the last though will it. The US regime will still continue attacking both Russian and China. It will still bore the world rigid with its ' Pivot to Asia' and its 'Isolation of Russia' . The really really funny part is the sudden suggestion that the EU's Russia policy is actually going to raise gas prices for European customers. Must be part of the EU's new competition strategy built on raising production costs for the various European based industries that consume large amounts of energy. Still you must admit that the EU's Russian policy has worked a treat for the Chinese government. So among the nations of Europe there is at least one ' Manchurian Candidate'. The servile spirit of Europe's political leaders is only matched by the bone headed stupidity of their imperial US masters.


Peabody94

Nice deal, take a loss for a few years, smacks of desperation by Russia. It's nowhere near being a deal big enough to bother European supplies, Europe takes about 170 bn cubic meters a year, this is only for 38bn and from an undeveloped field. Desperate dealing at a low price.

So as Europe weans itself off Russian gas Gazprom takes a mighty big hit over time. That's what happens when you have a one trick pony economy and you need western technology to extract the minerals, one trick pony technology as well, decades behind the west.

AlexRussia Peabody94

Generally less and in Europe are important only a few countries - everything else is not so important

http://www.gazpromquestions.ru/en/foreign-markets/


Shiku101

Great job that EU is doing with antagonising Putin with the Ukrahinian saga. Now we have to bail out a broke country and pay more for the gas. Great news.

vr13vr Shiku101, 21 May 2014 7:28pm

This deal will definitely make it more difficult for Ukraine to claim any discount. Ukraine will have to eat at least this price and guess who will have to pay it? That's right, the "Western partners," a.k.a EU.

ID5677229, 21 May 2014 7:15pm

The contract [is for Russia ]to provide 38bn cubic metres of gas each year [to China at] .... about $350 (£207) per thousand cubic metres.

This deal has some symbolic value I suppose but otherwise it is a rather desperate and only partially successful move on Russia's part to shore up its export market for gas.

Reacting to Russia's aggression in Ukraine, a month ago the EU announced plans to effect a 25% cut in its gas imports from Russia by 2020. Since the EU has been importing 180bn cubic metres of gas a year Russia's deal with China barely makes up the shortfall. In fact, from Russia's viewpoint the situation is even worse: China will pay $30 per thousand cubic metres less than the EU has been paying; moreover, Ukraine's imports of Russian gas are going to be greatly reduced too.

vr13vr ID5677229

This deal is bigger than the current European deal, and it is muuuuuuch bigger than whatever reduction EU will be able to make in the future. China got some 9% of volume discount compared to EU prices, but that's reasonable given the volume. At the end of the day both countries will end up with newly developed infrustructure. And both will be better diversified to deal with "pressure" from the West. Not a bad deal at all.

mustspeak, 21 May 2014 7:17pm

@article:
"But one British energy expert warned last night that the move could drive up prices for European gas consumers who are becoming increasingly dependent on Russia and now face a competition for supplies"

Serves Britain and EU right, only pity and concern is that I happen to be British, so also EU citizen. The West's gerrymandering around the world is going to spectacularly bite their asses harder and harder as time goes by.

daylight101 mustspeak, 21 May 2014 7:22pm

It's unlikely. Russia already sells gas to Europe at premium price and setting it higher now might be self defeating in longer terms. I am sure that Russia will attempt to undermine the US gas proposal to EU by offering more competitive bargains.

SteveK9, 21 May 2014 7:21pm

The comment about 'finding financing' betrays the faulty economic thinking that pervades the West right now. If Russia does not import anything to build the pipeline, then 'financing' is irrelevant. The Russian state cannot run out of Rubles. The only question is whether this is a worthwhile investment of workers and materials. Since this is becoming a strategic question for Russia ... you can bet your ... they will 'find the financing'.

I don't know how much help China will be providing to this project but if there is one thing that China seems to be very capable of these days it is large construction projects.

natalifoley, 21 May 2014 7:25pm

Putin checkmates Obama in "gas war"
http://voiceofrussia.com/news/2014_05_21/Putin-checkmates-Obama-in-gas-war-0503/

MyDown, 21 May 2014 7:56pm

Just incredible: infrastructure investment from both sides will be more than $70
billion and will be the world's largest construction project, with Russia providing $55 billion up front and China $22 billion. Fuck my boots...

efreelittlehelps

http://www.zerohedge.com/news/2014-05-20/birth-eurasia-russia-china-do-pipelineistan

burnageblue11, 21 May 2014 8:04pm

All this is fallout over the Crimea because off US hegemonic foreign policy. It was a Russian base to start with, its not like they were invading. We had to make a big song and dance over it, because the United States really wanted it as a warm water base for the US 6th fleet in Sevastopol.

It was never going to happen, we knew it, they knew it.

Sanctions, provocative rhetoric, more sanctions.

End result. New Cold war. Redirected gas supplies to China that Europe badly needed. The irony is, the United States will be totally unaffected. Europe will become dependent on US gas imports. How could European leaders allow this to happen. How could they pursue a US foreign policy that will have a detrimental affect on Europe European industry, and consumers.

Our leaders are nothing more than traitors.

It wont be the citizens off the United States freezing this winter. They wont be paying though the nose for gas, it will be us in the EU,UK.

Not sure how traitorous EU leaders who have screwed their own people, economies over will survive long term. Germany will be the biggest loser. Merkel pursuing US hegemonic foreign policy despite the fact German industry is very dependent on Russian imported supplies. German Business leaders were totally against Merkel position to start with.

Russia has said it will turn off supplies to Ukraine on June 3rd if their debt is not paid in full. And unless they pay in advance.

European supplies come through the Ukraine. This could get much worse.

I hope this winter is not a cold one.

mikebraksa Fednad

Europe will fall apart into three parts soon - that's all

Already has. Eastern EU states. Western EU states. And France.

Slo27, 21 May 2014 8:04pm

So, they are getting $350 from China and $380 from Europe and what will they do? Sell more to Russia and less to Europe .... Eeeh, not exactly.

BrissieSteve Slo27, 21 May 2014 9:19pm

The gas comes from totally different gas fields thousands of km apart and with different extraction costs. Geography wasn't one of your school subjects was it?

GAHenty, 21 May 2014 8:06pm

The significance is in the continued rise of China. Putin may believe himself clever but in any Chinese-Russia alliance Russia will quickly become the junior member. The provider of raw materials for the Chinese machine.

venerablejohn, 21 May 2014 8:12pm

Far be it from me to say "I saw this coming" but

http://www.theguardian.com/world/2014/apr/15/ukraine-armed-conflict-east#comment-34409619

I saw this coming.

Taku2, 21 May 2014 8:16pm

Russia and China have to guard against America's sanctions-happy foreign policy, so the more business they can do together, it will be the more 'sanction-proof' their economies become.

We already see America gunning for China, in her attempt to delay China's ascendancy to top-dog status.

Eaglesson, 21 May 2014 8:27pm

What the article forget to mention is both countries with this deal are bypassing the (petro)dollar, so it will be in their domestic currencies.

Another bold move from both sides..After a similar bold move between Russians and Iranians short time ago

Russia and China took a small step toward undercutting the domination of the U.S. dollar as the international reserve currency on Tuesday when Russia’s second biggest financial institution, VTB, signed a deal with the Bank of China to bypass the dollar and pay each other in domestic currencies.

Japan got the news and is running fast to get a piece of the deal, quoting that is paying a hefty price for US LNG...why should't they? And Russians have thought about that, the plan of a gas pipeline through North Korea are targeted for markets of South Korea and Japan.
In a period of one year neocons have done so much damage to US and Europe that it cannot be revoked any more. The biggest loosers are EU in this deal and right away after the deal Barroso send a pledge letter to Putin, pleading him to keep his gas running for Europe and (they were prepared to pay the price dictated by russians for Ukraine's gas supply)

wimberlin AlexRussia

In spite of all the space that the 'Prince's' stupid comments are receiving from the Guardian - in fact the US today is much more similar to Nazi Germany than any other country. Ask Edward Snowden, he has all the dirty details that the US does not want you do know. He is presently in Russia, so therefore all the anti-Russia hysteria.

Oh but not by Luke Harding - he is really good and never lies about Russia - no I certainly do not include him!

Ciarán Here

When you compare this deal to the "DEAL" Russia had with Ukraine since 1991- Russia lost - subsidised Ukraine to the tune of up to 300 billion it now seems that Russia has Ukraine and EU over a barrel. Russia won't be subsidising Ukraine a saving of 300 billion over the next 30 years and a gain of over 400 billion from China . I guess Russia with not be to concerned about others taking on the burden of Ukraine.....

daylight101 Ciarán Here

There will be some attempts to rebuild Ukraine but it will be not subsidising, I am sure.

finnja, 21 May 2014 8:42pm

Notably, also

the plans for South Stream, which does not go through Ukraine, are on track
, at least when it comes to the directly involved EU countries (like Bulgaria, Hungary, Austria) and Russia.

The question now is: will the EU force its Southeastern member states (the ones that depend on Russian gas) to fall on their swords in order to make a point and to prop up fracking and TTIP?

GAHenty natalifoley, 21 May 2014 9:26pm

Oh look. Articles from a Russian news corporation. No bias there then.

windies GAHenty, 21 May 2014 9:56pm

ABC, NBC or CNN, they do objectivity, they do equal points of view, don't they!!

American news is as bias as Russian news..

What is your point.

Mark Chaloner, 21 May 2014 8:47pm

Sounds like a good deal but it won't make the Russian economy grow. Russia needed this just to stand still. In the long term Russia can't do without the EU. Russia needs the EU as much as the EU needs Russia.

daylight101 Mark Chaloner

My understanding is that Russia can actually substitute many of its high-tech EU imports by chinese ones.

ploughmanlunch Mark Chaloner, 21 May 2014 9:04pm

Standing still might be more desirable than back tracking, as this still fragile Euro economy may yet do.
It's true that the EU and Russia would mutually benefit from unimpeded trade and commerce, but the EU, following the lead of the US appears to be willing to sacrifice it's own prosperity at the behest of US geo-political interests.

daylight101 Mark Chaloner, 21 May 2014 9:19pm

Russians will not quit EU market, I am sure. They will keep selling gas to EU and, probably, will even offer bargain to undermine the US gas proposal. They will compete, not leave.

bulldoggy, 21 May 2014 9:11pm

Reporter needs to get the story straight. One paragraph describes a deal, "ten years in the making". Another paragraph quotes a Russian spokesman who attributes the deal to western hostility. What it really looks like is Russia and China not letting a PR opportunity slip by without exploitation.

A deal ten years in the making wasn't spawned on western hostility. It was spawned by economic reality. An eastern Siberian gas field is conveniently close to China and half a planet away from Europe. I'd guess the low price China wrung out of Russia had a lot to do with Chinese perception that Russia has no other buyers for this gas.

knuckles66, 21 May 2014 9:18pm

Businessweek and Bloomberg both think the deal is more fumes....that the Chinese and Russians agreed on the volume to be shipped, but still have not agreed on the price. The Chinese will kick in 25 billion in pre-payment to fund the cost of building the pipeline, but the final pice will still be in negotiations.

Since the pipeline will take several years to build, they have plenty of time to fight over the price.

windies knuckles66, 21 May 2014 9:31pm

They will make it work, the "west" pisses them off..

American financial reporting are so boned faced one-sided, objective reporting is beyond them. Course they want it to fail.

The US/EU point of view is now redundant in their eyes.

richiep40 windies

The 'markets' and the western press have been predicting the collapse of the Chinese economy for more than a decade. It will not happen.

MyDown, 21 May 2014 9:22pm

Almost 700 comments, yet there is none about the agreement is somehow affecting gay rights. Strange, but it shows that Guardian readers are confused. )))

zchabj5, 21 May 2014 9:27pm

Much more important than the deal itself is the agreement to open up Russia to Chinese investment for infrastructure.

The UK has agreed to become a clearing house for the renminbi. Osborne is not stupid, we can see which way the wind is blowing, and it is blowing east. Israel has also made significant moves to encourage trade with China, to mitigate the fallout of US decline.

For last 20 centuries, China has had the largest GDP for 15 to 18 of them. The two centuries right after the industrial revolution saw European hegemony, brief lived, but the world will return to it's Asia dominated status quo.

MyDown, 21 May 2014 9:46pm

Economical and infrastructural aspects are significant, but political one is just huge. Talking to my Chinese friends - they are as excited on green light the deal brought as Russians are. The whole story is kind of step up in friendly relations between Russia and China and money is not the main issue.

followthemonkey PoiticalWatchDog, 21 May 2014 9:59pm

Saddam Hussein paid a high price but Russia and China are not defenceless like Iraq or Afghanistan. They're completely capable of defending their countries interest.

geoprobe, 21 May 2014 9:49pm

I think we need to thank the neo-cons in the Obama administration to apply the pressure to make this deal happen. Without them, the Russians might have held firm on their price and the Chinese might have held out for a lower price.

Due to the Americans' imperial might it brought these players to the table. It might be a bad move for American might, but it just might save the planet, as it will provide the Chinese a more climate friendly fuel than their current coal.

My hats off!

tiye60

About the pipeline "Sila Sibiri", from Gazprom website.
http://www.gazprom.com/about/production/projects/pipelines/ykv/

Wagram, 21 May 2014 9:52pm

"We have powerful enemies but we don't have powerful friends, that's why we need the support of such a giant as China," said Ruslan Pukhov, director of the Centre for the Analysis of Strategies and Technologies in Moscow.

Telling statement.

Robert Sandlin Wagram, 21 May 2014 10:53pm

And it works both ways.Only a fool couldn't see that if Russia was destroyed,China would face the West alone.A strong Russia in support is China's greatest aid.So in many ways the Russo-Chinese relationship is a marriage made in Heaven.And they can both thank the US for being the Matchmaker.The US trying to humble Russia,and threatening China,did the trick

The Guardian

Bismarx , 21 May 2014 5:38pm

Our dependence on their gas is their dependence on our money. Both sides are well advised to diversify. However, i would be careful if i had to decide for Russia: China and Russia have animosities and while the Europeans are a bunch of hysteric merchants, the Chinese will know how to get what they want once Russia is dependent on THEIR money.

followthemonkey -> Bismarx, 21 May 2014 8:59pm

the Chinese will know how to get what they want

I'd rather be a Chinese than an American.

"Americans more afraid of being tortured by their government than Chinese are of theirs"

Amnesty International conducted a global survey

MyDown -> tfernando, 21 May 2014 5:48pm

Putin said that gas price of the agreement is linked to petrol price, so it will not effect USD.

FrankPoster -> MyDown, 21 May 2014 7:44pm

FFS you know nothing. The price might have a formula that involved the USD somewhere, but the transactions will be in Rubles and Yuan, thereby fully bypassing the petrodollar. There are huge implication to the US for this, and therefore you will see them ramp up efforts in Ukraine and elsewhere to engage Russia in a proxy war with a view to eventually destabilize Russia in 5-10 years time to grab their oil and gas and process it in dollars to support their massively bankrupt financial system...but this time they will fails since china will side with the Russians and will drop their US treasury bills if necessary.

HongKongBlue

preemptive move to invade Ukraine?

Gudwin -> HongKongBlue

Nobody gives a rat's ass about Ukraine anymore.

whyohwhy1 Gudwin

Nobody gives a rat's ass about Ukraine anymore.

At the moment Ukrainian soldiers are killing civilians in the eastern part of that country, that is why the Western media seem to have lost all interest after 24/7 coverage for a couple of months.

AndyOC, 21 May 2014 5:39pm

You can't blame them for forging ever closer ties, uncertain as both countries must be with regards both recent Ukraine and industrial espionage problems.

Is it worth being worried about? Probably.

PaulThtanley AndyOC, 21 May 2014 7:49pm

No it isn't.

Russia and China don't trust each other at all, despite this grandstanding. Both countries look to the West and define themselves relative to it. Their oligarchs send their kids to school here and maintain holiday homes. Many retire (or flee) here. Let the Chinese bubble accumulate more investment debt and let the Russians have a go at extracting gas that is harder to reach than the gas they currently extract and sell it for less than they are currently selling their gas that has existing infrastructure. Who knows? It may even work out.

griffinalabama, 21 May 2014 5:39pm

Nice to see Russia outsmarting the nefarious yanks especially after all the bullshit the US has instigated in Ukraine. A good article in Counterpunch goes into the media coverup of the Odessa massacre and US involvement. The truth is coming out. Link here: http://www.counterpunch.org/2014/05/08/false-flag-in-odessa/

ahbowledhim

Geo-political realignment is evident. A Sino-Russian alliance is huge and puts Washington on the back foot.

Can Washington play off the back foot like the incomparable Viv Richards could is the question?

IgAIgEIgG ahbowledhim, 21 May 2014 5:45pm

Geo-political realignment is evident. A Sino-Russian alliance is huge and puts Washington on the back foot.

Dude! What are the contingencies?!

Carl Jones IgAIgEIgG

Only one...world war 3. The fact is, Amerika and Britain are bankrupt. So they need some very big wars.

iamnotwise vr13vr, 21 May 2014 7:49pm

But this will become a new Cold War only if the US decides to stir trouble.

Continue to stir trouble, I think you mean. This whole Ukrainian situation is another US instigated clusterfuck. Once again the failing empire (with the UK clinging to it like a tumour) tries to drag everyone else down with it.

steavey, 21 May 2014 5:42pm

Russia maybe unpopular with the west, but their assets are always popular everywhere. It's nice to come home in winter time heated by gas central heating, and does not matter where the gas comes from, Alex Salmond's Scotland or Putin's Russia.

OneWorldGovernment, 21 May 2014 5:50pm

Love the 15 minute context. The negotiations for this deal was a decade in the making and the Chinese strong armed the Russians into taking a lower price. It shows how desperate the Russians have become and their weak bargaining power.

Carl Jones

I like that US dollar sign in front of the 400 billion?lol This deal is a massive nail in the coffin of the US dollar!!lol Funny, but true, Western sanctions are actually hastening the end of US dollar hegemony. You should watch a Dr Paul Craig Roberts youtube vid called "Fed launders treasury bonds in Belgium"...then you`ll know just how precarious the US economy is.lol

PaperEater Carl Jones

Lol. The level of discourse is amazing. Lol

Pazuzu Carl Jones, 21 May 2014 9:07pm

Nothing like a bunch of LOLs and references to to the Youtube School of Economics to lend that much needed dose of credibility to an argument. Well played!

Let me put things in perspective for you, if you'll allow me to interrupt your scholarly lulz for a moment: $400 billion is about the amount Uncle Sam uses to wipe his bum every day.

Still, I admire the resolve of the Putinbots, like obedient toy poodles still firmly clamping their little jaws on the heels of a giant, convinced they're winning the fight.

Mr1Cynical, 21 May 2014 5:56pm

This is only a terrible deal for the US and it's prostitute EU Milov i wouldn't take to seriously, as usual the Guardian always go for the lowest denomination when it comes to experts they mean someone who has an axe to grind.

This comes as CNN are calling Russia a pariah nation, they really mean o shi# this is great as the Bog roll called the petro dollar struggles along getting closer to the cliff O-Bama helping it along the way

What next Sanctions on everybody outside of Utah, still cheer up you Barry o supporters, you've still got your killer drones to play with

whyohwhy1

Russia didn't "fall out with the West": it was threatened with sanctions by the US and their puppets in Europe after they supported a coup against the elected government of Ukraine.

Maybe Kerry's hot air can provide enough energy for Poland and Germany next winter.

semyorka, 21 May 2014 5:59pm

The Kovykta field is considered to supply natural gas to China and Korea. According to these agreements signed by Rusia Petroleum with China National Petroleum Corporation and Kogas on 2 November 2000, the annual export of gas to China and Korea will be 20 billion cubic meters (bcm) and 10 bcm, respectively.[7] The Kovykta field will contribute also to the gasification of Irkutsk Oblast, implemented by the OAO East Siberia Gas Company, a joint venture of Gazprom (originally TNK-BP) and the Irkutsk Oblast Administration.
http://en.wikipedia.org/wiki/Kovykta_field

You tell people Putin had stomach cramps and CiF would be crawling with people announcing this latest move had the west in knots by the master strategist.

TransAtlanticist, 21 May 2014 6:00pm

Iraq, Afghanistan .. now Russia. I will say the Chinese are remarkably good at knowing when to capitalize on others' bad situations.

vr13vr TransAtlanticist, 21 May 2014 6:30pm

It says the US is remarkably good at creating bad situations that only hurt the US.

AlexRussia, 21 May 2014 6:01pm

Putin: gas contract with China signed today has become the largest in the history of the USSR and Russia

Signed today contract to supply China natural gas from Russia is the biggest gas deal in the history of the USSR and Russia , said Russian President Vladimir Putin According to him, laying a gas pipeline " Power of Siberia " will come be the largest construction project in the world for the next 4 years. Meanwhile, Russia will invest in the construction of the pipeline and development Kovyktinsky and Chayandin deposits and about $ 55 billion while China is going to to create the necessary infrastructure for at least $ 20 billion. "This is the largest contract for Gazprom" - said SEO Gazprom Miller.

Ludwitt, 21 May 2014 6:04pm

The reporter writes

"Gazprom and CNPC (China National Petroleum Corporation) have signed a 30-year, $400bn (£237bn) deal to deliver Russian gas to China"

a factual statement and adds an editorial comment

"a deal that underscores Russia's shift towards Asia amid strained relations with the west."

It's fine for the reporter and/or editor to have an opinion: it's just that the above statement does not follow at all from the previous statement about the signing of the deal. Indeed further down the article that this deal was 10 years in the making. Indeed it is prudent to diversify one's portfolio for a variety of reasons and especially have China, a voracious consumer and a key if not THE engine of global growth as one of your primary customers.

In fact the US and the West do roaring business with China itself. So why not Russia? And why not some analysis as to whether this deal would eventually be good or bad for the Russian economy and its growth? Or the development of the Russian Far East which has long been declared as a National Priority within Russia's domestic policy?

In a Western government centric world, any major deals that don't have the West in the picture are seen to be a threat, to be amplified as such by the Western corporate media.

An interesting gas story thread to chew on meanwhile is Hunter Biden - the US VP's son - being appointed to the board of Ukraine's largest gas company.

And so it goes.

FighTheBrainwashing

To be honest, right now I can't but feel quite a bit of shadenfreude picturing the "ecstatic" faces of the newsmakers from the Financial Times, Bloomberg, Washington Post, Wall Street Journal, etc., etc. that spent the last 24 hours leading to the announcement of this ground-breaking deal gloating over Putin's "failure to reach a landmark agreement with China".

As they say, he laughs best who laughs last, so, suckers, deal with it! It's our turn to laugh now!
:)

PS: And I'm absolutely positive it's only the beginning of good news for those who dare defy the criminally hypocritical, cynical, double faced, devious, mendacous and war-mongering United States of Lies, Propaganda and Double Standards around the world!

Bloomberg April this year on the danger of junk bonds

The U.S. drive for energy independence is backed by a surge in junk-rated borrowing that’s been as vital as the technological breakthroughs that enabled the drilling spree. While the high-yield debt market has doubled in size since the end of 2004, the amount issued by exploration and production companies has grown nine-fold, according to Barclays Plc. That’s what keeps the shale revolution going even as companies spend money faster than they make it.

“There’s a lot of Kool-Aid that’s being drunk now by investors,” Tim Gramatovich, who helps manage more than $800 million as chief investment officer of Santa Barbara, California-based Peritus Asset Management LLC. “People lose their discipline. They stop doing the math. They stop doing the accounting. They’re just dreaming the dream, and that’s what’s happening with the shale boom.”

... ... ...

Spending Treadmill

“Who can, or will want to, fund the drilling of millions of acres and hundreds of thousands of wells at an ongoing loss?” Ivan Sandrea, a research associate at the Oxford Institute for Energy Studies in England, wrote in a report last month. “The benevolence of the U.S. capital markets cannot last forever.”

The spending never stops, said Virendra Chauhan, an oil analyst with Energy Aspects in London. Since output from shale wells drops sharply in the first year, producers have to keep drilling more and more wells to maintain production. That means selling off assets and borrowing more money.

“The whole boom in shale is really a treadmill of capital spending and debt,” Chauhan said.

Access to the high-yield bond market has enabled shale drillers to spend more money than they bring in. Junk-rated exploration and production companies spent $2.11 for every $1 earned last year, according to a Barclays analysis of 37 firms.

...

“It’s a perfect set-up for investors to lose a lot of money,” Gramatovich said. “The model is unsustainable.”

[May 07, 2014] SP 500 and NDX Futures Daily Charts - Yellen Says Alakazam, Wall St Says Alibaba

Jesse's Café Américain
“The decadent international but individualistic capitalism in the hands of which we found ourselves after the war is not a success. It is not intelligent. It is not beautiful. It is not just. It is not virtuous. And it doesn't deliver the goods.”

John Maynard Keynes


“After the collapse of socialism, capitalism remained without a rival. This unusual situation unleashed its greedy and - above all - its suicidal power. The belief is now that everything, and everyone, is fair game.”

Günter Grass


Speaking of the culture of death, the good news of the day is that Scientists Discover that the Black Death 'Had a Silver Lining'

It also had a positive economic effect, since fewer people were able to enjoy the same amount of goods.

Perhaps we can have another plague, bio-engineered to take out the 47 percent.

What a sick world.<

'Is the Stock Market Getting Bubbly?'

Dean Baker:
Is the Stock Market Getting Bubbly?: Washington Post columnist Steve Pearlstein argues it is, taking issue with fellow columnist Barry Ritholtz who says it isn't. I'm going to come down in the middle here.
The market is somewhat above its historic levels relative to trend earnings. Pearlstein cites Shiller who puts the price to earnings ratio at 25 to 1, compared to a historic average of 16. ... I would agree that stock prices are somewhat above trend, but not by quite as large a margin as Shiller.

... ... ...

However, there are some points worth noting. The social media craze has allowed many companies with no profits and few prospects for making profits to market valuations in the hundreds of millions or even billions of dollars. That sure looks like the Internet bubble. Some of these companies may end up being profitable and worth something like their current share price. The vast majority probably will not.
The other point is that the higher than trend price to earnings ratio means that we should expect to see lower than trend real returns going forward. This is an important qualification to Ritholtz's analysis. While there is no reason that people should fear that stocks in general will take a tumble, as they did in 2000-2002, they also would be nuts to expect the same real returns going forward as they saw in the past.
With a price to earnings ratio that is roughly one-third about the long-term trend, they should expect real returns that are roughly one-third lower than the historic average. This means that instead of expecting real returns on stock of 7.0 percent, they should expect something closer to 5.0 percent. That might still make stocks a good investment, especially in the low interest rate environment we see today, but probably not as good as many people are banking on.
In short, there is not much basis for Pearlstein's bubble story, but we should also expect that because of higher than trend PE ratios stocks will not provide the same returns in the future as they did in the past. Anyone who thinks we can better have their calculator checked.

5 Ways to Run Out of Money in Retirement

The only way is to model your future using Excel spreadsheet and using you expected longevity data. Most of those financial planners advice is counterproductive. This article is more realistic then other but still take it with a grain of salt...

Retirement is a balancing act. You want to spend enough to enjoy today, while preserving enough to take care of your needs tomorrow. If you keep things in balance, there is no reason you should run out of money. So what throws people off balance in retirement? Here are five things people do that puts them at risk of running out of money.

1. No measuring device. Imagine driving across the country with no fuel tank gauge. How often do you stop for gas? I suppose you'll have to guess. If you approach retirement income this way, you can get yourself in trouble. You must have a monitoring system in place.

This type of system measures how much you have left, your income needs, uses a conservative rate of return based on your investing style, and takes into account remaining life expectancy. Your retirement income gas gauge isn't only there to tell you when to slow down -- it can also tell you when there is room to step on the gas.

2. No spending plan. The No.1 reason people run out of money in retirement is they spend too much relative to the amount of financial assets they have. Most often excess spending occurs as parents help adult children, or because an upcoming retiree forgot to calculate expected taxes and health care expenses in their retirement budget.

When you retire, make a spending plan that lays out your monthly and annual expenditures, including money for fun. Now, add up your guaranteed sources of income, like Social Security. The amount of living expenses in excess of your guaranteed income must come from your savings and investments.

Make a projection assuming you take the desired withdrawals, and see how long the money lasts. Now, make the same projection, but assume you spend $5,000 more or less a year. This type of scenario modeling can show you how small changes in your spending can make the difference between having enough or running out.

... ... ...

4. No plan B. Life throws curveballs, and it will continue to do so in retirement. If your plan requires you to use every asset you have, you're at risk of running out of money. You need to allocate some of your assets to reserves -- this means the asset is not included in your plan as available to meet living expenses in retirement.

Reserves can be an emergency fund account, home equity, cash in the safe, a piece of land you own, or even a valued collectible. Hopefully you'll never need to tap into your reserves, but it may be you'll need it for health care expenses later in life, or to help an adult child who gets in trouble. There's no telling what might come up that throws your original plan off track. That's why you need assets set aside as plan B.

5. Fall for the scam. There will never be a shortage of people trying to part you from your money. In our own family, my great aunt had caregivers that embezzled hundreds of thousands of dollars from her in her last year of life.

... ... ...

Dana Anspach , certified retirement planner, retirement management analyst, Kolbe Certified Consultant, is the founder of Sensible Money, LLC , a registered investment advisor with a focus on retirement income planning based in Arizona. She is the author of "Control Your Retirement Destiny" (Apress), writes for About.com as its Expert on MoneyOver55 and contributes to MarketWatch as a RetireMentor.

16 Signs That Most Americans Are NOT PREPARED For The Coming Economic Collapse

May be not collapse but it's already 6 years from 2008 crash and it is time to start thinking about "What's next?". And before 2008 there was a crash of 2000. Do we have two more years, four more, six more years ?
Washington's Blog

And another one of the big problems that we are facing is something called “normalcy bias”. The following is how Wikipedia defines it…

The normalcy bias, or normality bias, refers to a mental state people enter when facing a disaster. It causes people to underestimate both the possibility of a disaster occurring and its possible effects. This often results in situations where people fail to adequately prepare for a disaster, and on a larger scale, the failure of governments to include the populace in its disaster preparations. The assumption that is made in the case of the normalcy bias is that since a disaster never has occurred then it never will occur. It also results in the inability of people to cope with a disaster once it occurs. People with a normalcy bias have difficulties reacting to something they have not experienced before. People also tend to interpret warnings in the most optimistic way possible, seizing on any ambiguities to infer a less serious situation.

Over the past several years, the U.S. economy has been relatively stable. And that is a good thing. But it has also lulled millions upon millions of people into a false sense of security and complacency. At this point, most Americans consider 2008 to be a temporary bump in the road, and most assume that the U.S. economy will always be strong.

Unfortunately, that is not the truth. As I have written about previously, the long-term trends that are destroying our economy have continued to get worse since 2008, and none of the problems that caused the last financial crisis have been fixed.

We are steamrolling toward the edge of an economic cliff, and most people in our entertainment-addicted society are totally oblivious to what is going on. So they are not doing anything to get ready for the immense economic pain that is coming. The following are 16 signs that most Americans are completely unprepared for the coming economic collapse…

#1 Could you come up with $2000 right now? According to a shocking study that was just released, 40 percent of Americans could not

Forty percent of individuals in the U.S. said they could not or probably could not come up with $2,000 if an unexpected need arose, according to research by Atif Mian of Princeton University and Amir Sufi of the University of Chicago Booth School of Business.

#2 In that same study, Americans were asked the following question…

“Do you have 3 months emergency funds to cover expenses in case of sickness, job loss, economic downturn?”

An astounding 60 percent of people that responded said that they do not.

#3 Another study found that less than one out of every four Americans has enough money stored away to cover six months of expenses.

#4 Some people are actually trying really hard to get ahead, but admittedly that is really tough to do when we are all being taxed into oblivion. In fact, it was reported this week that Americans now spend more on taxes than they spend on food, clothing and housing combined.

#5 Right now, more Americans are dependent on the government than ever before. In fact, according to the U.S. Census Bureau, 49 percent of all Americans live in a home that currently gets direct monetary benefits from the federal government.

#6 It is estimated that less than 10 percent of the entire U.S. population owns any gold or silver for investment purposes. That is a stunning number.

#7 It has been estimated that there are approximately 3 million “preppers” in the United States. But that means that almost everyone else is not prepping.

#8-16 The following are nine more statistics that come from a survey conducted by the Adelphi Center for Health Innovation. As you can see, a significant portion of the population is not even prepared for a basic emergency that would last for just a few days…

[Apr 11, 2014] 'Pseudo-Mathematics and Financial Charlatanism'

Economist's View

"Past performance is not an indicator of future results":

Pseudo-mathematics and financial charlatanism, EurekAlert: Your financial advisor calls you up to suggest a new investment scheme. Drawing on 20 years of data, he has set his computer to work on this question: If you had invested according to this scheme in the past, which portfolio would have been the best? His computer assembled thousands of such simulated portfolios and calculated for each one an industry-standard measure of return on risk. Out of this gargantuan calculation, your advisor has chosen the optimal portfolio. After briefly reminding you of the oft-repeated slogan that "past performance is not an indicator of future results", the advisor enthusiastically recommends the portfolio, noting that it is based on sound mathematical methods. Should you invest?
The somewhat surprising answer is, probably not. Examining a huge number of sample past portfolios---known as "backtesting"---might seem like a good way to zero in on the best future portfolio. But if the number of portfolios in the backtest is so large as to be out of balance with the number of years of data in the backtest, the portfolios that look best are actually just those that target extremes in the dataset. When an investment strategy "overfits" a backtest in this way, the strategy is not capitalizing on any general financial structure but is simply highlighting vagaries in the data. ...
Unfortunately, the overfitting of backtests is commonplace not only in the offerings of financial advisors but also in research papers in mathematical finance. One way to lessen the problems of backtest overfitting is to test how well the investment strategy performs on data outside of the original dataset on which the strategy is based; this is called "out-of-sample" testing. However, few investment companies and researchers do out-of-sample testing. ...

Lafayette said in reply to bakho ...

{If a stock is currently way overvalued, it is more likely to get picked.}

Yes, that is called the "herd instinct". And when the lemmings all go over the cliff, we all go with them ...

A balanced portfolio is best. Old fashioned but replete with good sense: One-third high-risk (such as stocks), one-third medium risk (such as bonds), one-third very low risk (such as the home you own and live in).

Or some such balanced variety of investments. Seeking interminably high-risk, high-return investments is for suckers.

And why hedge-funds that pay hundreds of millions of dollars to have the fastest telecom-link to an exchange (for high-frequency trading) is allowed, thus giving them a great advantage over the rest of us peons dealing via the Internet, I will never ever understand.

The disparity in the ability to trade between them (a select few) and us is patently obvious.

It's an example of the world gone berserk, as happens all too often in America with its unfettered "free enterprise" ...

See here: http://www.theguardian.com/business/2014/apr/06/michael-lewis-flash-boys-high-frequency-traders

Reply Friday, April 11, 2014 at 02:23 AM

Tony:

I'd agree with pth above: the industry at the research side is extremely sophisticated (as is anyone whose business is to do modeling right (i.e. they make money when their model is good)). This article blurb is conflating the research world with the sales world, and in the sales world they make money by convincing people to hand over money. This is completely orthogonal to modeling rectitude.

Reply Friday, April 11, 2014 at 12:40 AM

Lafayette:

HAVE I GOT A DEAL FOR YOU!

{... the portfolios that look best are actually just those that target extremes in the dataset.}

Just one more ruse in a profession replete with them.

Huckstering is not new to selling equities, and will probably never ever go away entirely. Not until there are laws that allow an investor to sue a bank or investment adviser for portfolio-mismanagement, with sufficient precision describing "mismanagement".

That works in France, btw. But one must be careful to work through an adviser that, in turn, is working for a entity that can afford to lose the case.

Reply Friday, April 11, 2014 at 02:03 AM

Darryl FKA Ron:

I wonder what percent of the US population even has a financial advisor? I'd think that would be a luxury good if it were not a luxury bad:<)

My wife and I each have some index funds laying under our 401K pillows and she also is sleeping on her firms EMPP. I have known some people that traded and made a few bucks and I have known some people that traded and lost more than a few bucks.

... ... ...

Active portfolio investing is a rich man's game and a working man's obsessive compulsive disorder. Stashing money in a low fee index fund or a managed fund that has a good manager, for as long as they stay, is saving and saving for retirement makes good sense. Chasing a higher risk for a shot at a higher yield ain't exactly saving, but it ain't really investing either. Even in Vegas, there are a few players that beat the house, but they all cannot. Only a few winners can take a bigger haul that everyone else.

Reply Friday, April 11, 2014 at 04:26 AM

Bill Jefferys said in reply to Darryl FKA Ron...

I've been teaching a course on decision theory to freshman/sophomore honors college students for a number of years; Because financial decisions are so important, I urge them to think about all of this early on. They are ~20 years old and have ~45-50 years ahead before they retire. Early acquisition of good habits is a must if they are to educate their kids and retire in some degree of comfort.

This is the handout I give them (talking about this on Monday):

http://bayesrules.net/Investing.html

Reply Friday, April 11, 2014 at 09:54 AM

Narwhal:

Figures don't lie; but liars figure.

Reply Friday, April 11, 2014 at 04:58 AM

DrDick said in reply to Narwhal...

Lies, damned lies, and Statistics! Also, what P.T. Barnum said.

Reply Friday, April 11, 2014 at 08:26 AM

NotMarkT:

No doubt that finance does not want for charlatans, but Bailey et al, the authors of the paper (http://www.ams.org/notices/201405/rnoti-p458.pdf) obviously didn't even bother to perform a cursory google search:

“While the literature on regression overfitting is extensive, we believe that this is the first study to discuss the issue of overfitting on the subject of investment simulations (backtests) and its negative effect on OOS [out of sample] performance.”

Had they done so, they would have discovered any number of papers showing that mean-variance optimization and its progeny are notoriously unstable and perform poorly out-of-sample (e.g., Frankfurter et al 1971; Bloomfield et al 1977; Jobson and Korkie 1980). DeMiguel, Garlappi et al. (2009) reported the results of an extensive out of sample horse race showing that none of the portfolio optimization models consistently performed better out of sample than a naïve equal weighting strategy. (DeMiguel was highlighted in Andrew Haldane's much publicized Dog and Frisbee paper.)

So Bailey et al. provide a double service. They remind us of the importance of out of sample testing and the conceit of the mathematical.

Rumor: Was The Price Of Ukraine's "Liberation" The Handover Of Its Gold To The Fed?

Tyler Durden on 03/10/2014

A curious story, and one which should be taken with a mine of salt, has surfaced out of the pro-Russian newspaper Iskra, which reports - so far on an entirely unsubstantiated basis - that last Friday, in a mysterious operation under the cover of night, Ukraine's gold reserves were promptly loaded onboard an unmarked plane, which subsequently took the gold to the US.

From the source:

Tonight, around at 2:00 am, an unregistered transport plane took off took off from Boryspil airport.

According to Boryspil staff, prior to the plane's appearance, four trucks and two cargo minibuses arrived at the airport all with their license plates missing. Fifteen people in black uniforms, masks and body armor stepped out, some armed with machine guns. These people loaded the plane with more than forty heavy boxes.

After this, several mysterious men arrived and also entered the plane. The loading was carried out in a hurry. After unloading, the plateless cars immediately left the runway, and the plane took off on an emergency basis.

Airport officials who saw this mysterious "special operation" immediately notified the administration of the airport, which however strongly advised them "not to meddle in other people's business."

Later, the editors were called by one of the senior officials of the former Ministry of Income and Fees, who reported that, according to him, tonight on the orders of one of the "new leaders" of Ukraine, all the gold reserves of the Ukraine were taken to the United States.

Indicatively, according to the latest IMF figures, Ukraine's official gold holdings are just over 40 tons, having doubled in the past decade:

[Mar 08, 2014] Starved & evicted Britain’s poor now treated worse than animals

...Britain he wants to see is a sadistic place where, as US writer Gore Vidal mockingly commented: “It is not enough to succeed, others must fail.”
RT Op-Edge

Even Lord Rothschild, who invests over 2 billion pounds of his own dynasty’s and other depositors’ cash through RIT Capital Partners, is ringing alarm bells this week: “With the world recovery still fragile and reliant to a large extent on policy support [QE/money printing]", he warns, "it is not hard to envisage markets having to deal with shocks in the coming year.” Yes, “shocks.”

... ... ...

Abandoning a domesticated animal or withdrawing its supply of food can end in criminal convictions here in the UK, yet the duty of care and animal cruelty legislation does not, it seems, apply to human beings. This government has taken Britain over the line into barbarism, around 5 million Britons, if they get their way, are headed for the Tory party knacker’s yard.

Cameron seems fixated on trying to stop the unemployed or other victims of his money laundering fraudster City funders from eating and sleeping. The Britain he wants to see is a sadistic place where, as US writer Gore Vidal mockingly commented: “It is not enough to succeed, others must fail.” Only the selfish, the ignorant and the rich count as human in Cameron’s financial determinism.

Jesse's Café Américain

The Recovery™ - Bubble Back To the Bar For the Hair of the Dog That Bit You

"Double, double toil and trouble,
Fire burn and cauldron bubble.

Cool it with a baboon’s blood,
Then the charm is firm and good...

By the pricking of my thumbs,
Something wicked this way comes."

William Shakespeare, Macbeth, Act 4 Sc. 1

And why would we expect anything different, given the lack of serious reform and the careful targeting of the monetary expansion into the hands of the same old TBTF financial firms that have been distorting markets and misallocating capital for their own advantage since the repeal of Glass-Steagall?

The best way to cure the damage from a widespread, real economic collapse in the aftermath of a financial asset bubble is surely a continuation of the failed policies of the past, and yet another asset bubble targeting the most wealthy in the hope that something will trickle down to the rest.

Why emerging markets are unlikely to sway the Fed by Robin Harding

February 2, 2014 | blogs.ft.com/

After the Reserve Bank of India’s Raghuram Rajan took the Fed and other developed country central banks to task this week for ignoring turmoil in emerging markets, Richard Fisher, president of the Dallas Fed, gave the standard retort on Friday. He said the US central bank must make policy according to what is best for America.

Doing so means the only reason the Fed would change its monetary policy is if trouble in emerging markets had a direct effect on the US. There are two main channels – exports and financial markets – but neither looks likely to hurt the US unless the EM turmoil gets a lot more severe. Thus while the Fed may make a greater show of consultation, and soak up some flak at the G20, its actions this year are unlikely to change.

Exports

If interest rate rises drove big emerging markets into recession, then that would hit US exports, but any plausible effect is very small. A proper estimate needs a big equilibrium model, because you have to consider currency and feedback effects, but you can get a pretty good idea just by looking at where most US exports go.

Rank Country Exports Percent of Total Exports
Total, All Countries 1,448.2 100.0%
Total, Top 15 Countries 1,033.6 71.4%
1 Canada 277.0 19.1%
2 Mexico 208.2 14.4%
3 China 108.9 7.5%
4 Japan 59.9 4.1%
5 United Kingdom 44.0 3.0%
6 Germany 43.8 3.0%
7 Brazil 40.4 2.8%
8 Netherlands 39.3 2.7%
9 Hong Kong 38.8 2.7%
10 Korea, South 37.6 2.6%
11 France 29.2 2.0%
12 Belgium 29.1 2.0%
13 Singapore 28.3 2.0%
14 Switzerland 25.5 1.8%
15 Australia 23.7 1.6%

The only member of the ‘Fragile Five’ to make the Top 15 is Brazil. Brazil buys 2.8 per cent of US exports. Meanwhile, exports equal only 13 per cent of US output. Thus exports to Brazil amount to less than 0.4 per cent of the US economy.

It quickly becomes clear that only a very broad emerging market slowdown – one that included China or Mexico, for example – would have much effect on US exports. It remains the case that a US recession can plunge the rest of the world into an export crisis; there are not many countries that can have the same effect on the US.

Financial Markets

A more plausible way for an emerging market shock to hit the US is via financial markets. Corporate America earns a good share of its profits from emerging markets. The Asian financial crisis in 1997 and the collapse of Long-Term Capital Management in 1998 show how financial shocks from emerging markets can quickly hit Wall Street.

But as Capital Economics point out, both the Asian crisis and LTCM had short-lived effects on US stocks, and the S&P 500 ended up rising by around 25 per cent in both of 1997 and 1998.

The effects have been similarly modest so far in 2013 and 2014. The S&P 500 is less than 4 per cent below its all time high. A deeper EM crisis could mean greater losses for US banks and investors but so far there is hardly an effect on financial conditions that would justify a change of Fed policy.

Flight to Safety?

So far the troubles in emerging markets, far from being a drag on the US economy, have if anything been a net stimulus. That is because ten-year bond yields have fallen. It is hard to know whether that reflects capital flight to US Treasuries or merely a little less optimism about the US growth outlook. Either way, it loosens financial conditions in the US.

An emerging market crisis could end up influencing the Fed sometime this year. But it would have to become much more of a crisis – rather than just the wobbles we have seen so far – to activate these channels and thus endanger the US economy.

FC leung Ki | February 3 4:29pm | Permalink

The author quotes Mr. Rchard Fisher, President of the Dallas Fed as haqving said that 'the US Central Bank must make policy according to what is best for America.' This policy sounds like unilateralism in economics, closely similar to unilateralism in using arm forces that led to disaster.

Paul A. Myers | February 3 4:40pm | Permalink

Excellent table. A very diversified list. Undoubtedly a lot of good research will come out of the QE experience.

An interesting hypothetical model would show a US increase in monetary supply and its ripple effects out across the world economy. If a lot of US-fueled monetary expansion hits a country, one presumes the domestic monetary authorities can counter it with some form of sterilization (?) or macro prudential policy. Possibly, the domestic country could sop up incoming liquidity with public debt and finance public investment. The opposite would be to allow a housing bubble to take off.

I think US authorities are going to have to pay attention to the impacts of both expansion and contraction in the wider world. I would say overall stability is a paramount goal of US policy.

An axiom is that countries have no permanent friends, just permanent interests. I think the US permanent interest is international stability. How to achieve and sustain this goal has to be reinvented every generation or so. One might say that today Fed Reserve policy is a bigger policy tool than NATO.

VermillionBord | February 3 6:15pm | Permalink

"One might say that today Fed Reserve policy is a bigger policy tool than NATO." Or more likely to be said is that Fed policy is like a financial thermonuclear ticking time bomb.

MmmHmm | February 4 3:29am | Permalink

In regards to this line, from up above: "The S&P 500 ended up rising by around 25 per cent in both of 1997 and 1998." Statistically speaking two samples makes no rule. Also, there are a lot of variables at play in both cases, and also in the current one that make any analysis on such lines flawed to begin with. You might argue though that there is no proof such events have any long term effects.

[Feb 19, 2014] Marc Faber It's Too Late To Buy US Stocks

"Unstable stability" is very dangerous for investors. It stimulates making reckless moves in order to get above average return. While Mark Faber is perma bear watching video might be educational as a immunization from making stupid moves now. Among other things this bull market is supported by executives attempts to secure bonuses and related abilities to cut work force. But cutting work force at some point needs to stop. Then what?
Zero Hedge

By early March "the US will be in the 2nd longest bull market of the last 80 years," and as Marc Faber warns, "usually, these long bull markets end badly." Simply put, The Gloom, Boom, & Doom Report publisher notes "it's too late to buy US stocks," warning of previous major declines like 1987, 2000, and 2007.

"It's not an opportune time" to buy US stocks but while it might be too early to buy some of the beaten-down emerging markets at these levels, Faber believes investors can make money in the longer-term - "I think I can make the case that over the next five to 10 years, I will make more money by buying now in the emerging economies then in the U.S."

Ham-bone

According to St. Louis Fed, the Monetary Base has halted it’s $100 B/mo growth and as of Jan, added just over $10 B/mo…bout to go negative??? Big change in trajectory since November…prior to taper $10B (now $20B/mo taper)??? Somebody draining the pool??? http://research.stlouisfed.org/fred2/series/AMBNS click on 1yr or 5yr chart to see big change http://research.stlouisfed.org/fred2/graph/?chart_type=line&s1id=AMBNS&s... http://research.stlouisfed.org/fred2/graph/?chart_type=line&s1id=AMBNS&s... During periods since ’09 when the monetary base was flat, equities have been down / flat and then lifted by anticipation of QE / QE execution. If this pattern holds (particularly w/ record leverage) stocks bout to get clobbered. Also notable is that golds big upside runs happened during the flat periods or QE runoff periods…

here are the last five months…after growing consistently by about $100B/mo all ’13..Novembers growth was $31B, Dec $13B…and likely going negative in next month???

This slowdown is way in excess of tapering and looks more like reverse repo’s kicking in??? Correlation to market downturns since '09 has been 100% when this happens.

mayhem_korner

have you ever heard N.N. Taleb's saying "that's like picking up nickels in front of a steamroller"...? Or his other gem "it's not the frequency with which you are right that counts, but rather the aggregate of your losses."

Dr. Engali

I like Marc Faber, but I'm still waiting on that 20% correction call from levels 40% lower than where we are now.

The market is a policy tool and until that changes the only response is to BTFD. When policy does change there will be no getting out.

kaiserhoff

Well said, Doc.

Faber has a sense of humor and a sense of style. He plays the game on a global scale, but which "emerging markets" is he talking about? Argentina, Venezuela, Greece, Colombia, Eastern Europe? What is the last time one of these suckers emerged and stayed up long enough for someone to get their money back, much less a profit?

mayhem_korner

I saw this clip live (in a moment of weakness, forgive me)...Faber was in part responding to the shill commentator who in his comatose state declared that whatever the returns might be in emerging markets relative to the U.S., there would certainly be "less risk" in the U.S. So Faber's comments were very, very crafty in dressing down that assertion.

Diablo

May 2012: Marc Faber Sees A 1987-Like Crash Approaching

Aug 2013: Marc Faber On Today's 1987 Redux "Market May Drop 20% Or More"

And the biggest LOL of them all...

May 2012: Marc Faber Sees 100% Probability Of Global Recession In 2013

I feel bad for anyone who actually takes this clowns advice.

mayhem_korner

Good thing there wasn't a global recession in 2013. Oh, wait...

NoDebt

What does the economy have to do with stock prices the last 5 years (or arguably longer)?
mayhem_korner

Everything. The more the sheeple have been sold on the Keynesian myth that monetary stimulus is needed to jump-start the economy, the more stawks have been inflated. Prolly a 90+ R-squared on that.

Spitzer

The longer the realists like Marc are wrong, just means the worse it will be when it happens.

zebrasquid

Funny, if you call him out on being wrong on his ongoing bearishness he bristles and says "show me where I ever said to short stocks!"

really, Marc?

Your predictions of 30% crashes would not lead one to believe that a short position would be your advice?...

he likes to hedge alright..his words.

deflator

The difference between this long running bull market and the previous ones is there was some actual substance besides hopium behind them.

For example, the runup to the dot.com bubble crash in 2000 had tremendous investment in internet technology and, I think more importantly the paradigm shift of U.S. manufacturing to China. (and the profits U.S. companies were enjoying via the labor arbitrage, lack of regulation, new customers, etc.)

This bull market is backed purely by confidence in central bank intervention without any underlying premise other than recovery to the good ole days.

[Feb 07, 2014] January Employment Report 113,000 Jobs, 6.6% Unemployment Rate

From comments: "That comes from the seasonally-adjusted household data, which did some weird things and doesn't agree at all with the establishment data, so I'd take this with a grain of salt. Remember that January data are driven entirely by seasonal adjustments, which can be highly inaccurate when attempted in real time--in the unadjusted data, employment actually fell by millions in January, like it does every year after Christmas."
Economist's View

comma1

Yes, but unemployment is at 6.6%! Happy times are here again! *snark.

comma1 -> comma1...

Headline from Boston Globe website:

Jobless rate falls to 5-year low of 6.6%

pgl -> comma1...

Yep - it fell and this time because the employment to population ratio increased a wee bit. But much of that 5 year decline was alas from a fall in the labor force participation rate.

Fred C. Dobbs -> comma1...

US employers add 113K jobs; rate dips to 6.6% - via @bostondotcom http://bo.st/1kkkkaW

See also: Stocks Move Higher After Unemployment Rate Falls http://nyti.ms/1f1Ilwb

NEW YORK (AP) — The U.S. stock market is moving higher in early trading after the government reported a decline in the unemployment rate last month.

Earnings gains from several U.S. companies including Expedia also drove the market higher early Friday. The market had its best day of the year the day before.

The Dow Jones industrial average rose 75 points, or 0.5%, to 15,700 shortly after trading began. ...

im1dc

Did anyone notice that local, State, and Federal jobs lost 33,000 in this report?

If government hiring were increasing to norms in all likely hood this jobs report would have been a mildly good one.

The takeaway is that Republican/Tea Party forced austerity hurts America and increases unemployment.

Will someone please tell that story so the media will pick it up and run with it and maybe start asking Republican/Tea Party candidates about what austerity is doing to America?

[Feb 07, 2014] SP 500 and NDX Futures Daily Charts - Crushing the Bears On NFP Day

Jesse's Café Américain
I know some might object to referring to today's trading as 'technical' but I think that is exactly what it was.

By technical I mean that those in the know saw the market structure of positions, to which they have an advantageous view, looked at the buying and selling pressures, saw a short term opportunity to profit, and then jammed the futures up hard after the Non-Farm Payrolls number came out. They ran the stops, and handed out some serious pain to traders who were positioned bearishly.

They can do this in the absence of a consensus of more organic selling volume, as opposed to computer gamesmanship. In a light volume market, dominated by the hot money traders, they can almost write their names in the snow with the tape. I showed a picture of it at the time, but a while ago when AG Eliot Spitzer was taking on Wall Street, they made a nice picture of a hand 'giving him the finger' using the 5 minute SP futures. You can't make this stuff up. If you want to be a short term trader, you need to understand and respect that. In the intraday trade, fundamentals don't mean squat, unless they are driving the herd to do something in force.

That is not how it always is, at least not to this degree. But with computers dominating the course of the intraday trade and regulators held at bay, its taken on a larger footprint than what might ordinarily might be expected.

The bad news is that in the face of some exogenous bad news, I would think this market is set up to melt down. That is because it is a snarky, in your face 'professional market,' not based on value but on bullshit, on short term money muscle and market gamesmanship.

Does this strike you as improbable? Talk to me after the next crash, when the economic sages are running around waving their hands saying, 'what happened, what happened?'

And by the way, this is not sour grapes from a bear. I have 'no' short position and no stock positions for that matter. I just think this is one hell of a way to allocate capital and revive the real economy. It is a disgrace, and a shame.

[Jan 25, 2014] Why are US corporate profits so high Because wages are so low

MacroScope

U.S. businesses have never had it so good.

Corporate cash piles have never been bigger, either in dollar terms or as a share of the economy.

The labor market, meanwhile, is still millions of jobs short of where it was before the global financial crisis first erupted over six years ago.

Coincidence?

Not in the slightest, according to Jan Hatzius, chief U.S. economist at Goldman Sachs:

“The strength (in profits) is directly related to the weakness in hourly wages, which are still growing at just a 2% nominal pace. The weakness of wages and the resulting strength of profits are telling signs that the US labor market is still far from full employment.

Companies have been unable to raise prices much because of the economic recovery has been fragile. But they’ve still managed to boost profits beyond anything ever seen before because they’ve got away with employing as few workers as possible at as low a rate as possible.

[Jan 23, 2014] Citi Warns Everything Is Expensive - Pretty Much

Jan 22, 2014 | Zero Hedge

Citi's credit group is bullish; but, as they admit, for all the wrong reasons. Bullish, because they still believe that the extraordinary liquidity environment which has dominated the last four years will remain in place this year (despite tapering) and for the wrong reasons because aside from their doubts about the foundations of much of the economic recovery itself, nearly all the factors that they would normally base their view on the markets on seem to be pulling in the opposite direction. In their own words, "everything is expensive; and the market is driven purely by a variant of the Greater Fool's Theory."

Via Citi's Credit group:

...We are bullish...

For the wrong reasons, because aside from our doubts about the foundations of much of the economic recovery itself, nearly all the factors that we would normally base our view on credit on seem to be pulling in the opposite direction:

Credit fundamentals are deteriorating. Although the fragile European and global recovery should support earnings, we expect leverage to rise further as companies push shareholder value.

Valuations are increasingly unattractive. Scored against 20 different fundamental metrics, credit spreads come in as 'Tight' or 'Very tight' on every single one of them at the moment. The yield offered by € IG corporate credit is in the 4th percentile looking at the last ten years – hardly a compelling case for investing if you look at credit from a total-return perspective.

The marginal money is going elsewhere. Judging by our survey, inflows into corporate credit have been on a falling trend for 18 months and are now close to neutral at a five-year low. This weakens the technical that has so often left the credit market almost impervious to negative headlines in recent years.

Market composition is deteriorating. We think the European credit market should see a record volume (~€90bn) of subordinated debt issuance next year. While some of that (the AT1 issuance) will remain outside the indices for now, the market will still have to absorb a lot of additional risk.

And to top it off, positioning in the credit market is very different. The rush into beta may have further to go, but already the rally we have seen since September has created a vulnerability through higher-beta exposure in the market. We reckon that it is at least comparable to the one that was exposed by the Fed's change in tone on tapering in May.

We'd argue that markets may be driven by a variant of the Greater Fool's Theory, where the underlying rationale for many would in essence be:

"I don't like credit here, but I don't like other assets very much either (other than, perhaps, equities). I don't see what turns the market any time soon and I can't afford to sit and wait for a better entry point, especially while central banks are backstopping everything. I'll have to take more risk and then sell to someone else when I see a trigger ahead. Worst case, I'll be in the same boat as everybody else."

We are not arguing that this is irrational – on the contrary, for individual investors whose performance is tracked on a monthly, weekly or daily basis, this argument seems entirely rational – especially against the perception that central banks can no more afford to let the prevailing equilibrium slip today than they could in 2009.

But the sum of that individual rationality is a market with a very obvious vulnerability.

When no one sees an immediate risk of losing, when positions get ever longer and when valuations are stretched further and further as a result, less and less is needed to eventually topple the consensus. Longer-term, it is a recipe for breeding black swans.

So the inherent challenge is to predict how long the Greater Fool's game goes on.

However, the more tension that builds up between market valuations and fundamentals and the more stretched positions get, the more likely a subsequent selloff becomes.

Where's the value? Spreads look tight to fundamentals on every single one of the 20 metrics

CarrierWave

The Market is expensive? - Come back in a month after the SP500 breaks above 1850 and closes in on 1900, and then read this same article again.

Point is that this sort of articles is useless in determining when the market will really top before the next Bear market.

And.. No one ever knows beforehand when Markets Top.

Conclusion? - Stay with the trend. Thanks to the FED, I am grateful to having seen my 401K going 50-80% higher since Nov-2011.

No matter how many articles of this sort ZH will keep posting, it's the FED who drives this market higher still.

[Jan 22, 2014] Top Tax Rate- Socialism

May 20, 2010

Since when has labeling anything you disagree with “Socialism” a substitute for poltiical discourse? We embarrass ourselves as a nation to the rest of the world when we do this.

See also:
Bill Gates’s Dad Says the Rich ‘Aren’t Paying Enough’ in Taxes
http://www.bloomberg.com/apps/news?pid=20601109&sid=a4YNFBDAXnKI&

[Jan 16, 2014] GMO Market Commentary Ignore The Common Sense

Yes S&P500 can go to 2000. But it can go to 1000 too... The key question is this a new normal or Fake Normal. Is this "normality" natural or tenable in the long term or it reflects temporary and potentially reversible factors.
01/16/2014 | Zero Hedge

GMO Market Commentary: Ignore The "Common Sense"

From GMO via Wells Fargo

"I've got plenty of common sense ... I just choose to ignore it."

- Calvin, from Calvin and Hobbes

By the time the Times Square ball landed, U.S. equity markets had closed the books on one of the best years in recent history. Oecember's further rise of 2.5% put the capstone on an amazing year for the S&P 500 Index, which finished 2013 up 32.4%. New historic highs on this index were reached routinely throughout the month. Small-cap stocks, as represented by the Russell 2000® Index, added 2% in December to finish the calendar year up a remarkable 38.8%. Yes, you read that correctly: Small-cap stocks rose almost 40% in a single year.

The "common sense" justifications for these dramatic moves are now well documented. The Federal Reserve (Fed) model, which compares earnings yields on the S&P 500 Index (the inverse of price/earnings) with the Treasury yield, clearly signals to load up on stocks. Common sense also tells us that profit margins are at an all-time high, so clearly it's a good time to be buying stocks. Yellen's dovish background, common sense tells us, is yet further reason to expect continued loose monetary policy and accommodation. And, finally, common sense dictates that recent upward gross domestic product (GOP) revisions, lower unemployment numbers, and a successful holiday retail season, means that of course it's time to load up on stocks.

Here's the problem: We don't buy the common sense. And so, like the philosopher boy above, we choose to ignore it. We suggest you do the same, but for good reason.

First, the Fed model, while intuitively appealing, is a relative measure. Yes, bond yields are ridiculously and artificially low, so of course earnings yields are going to look attractive on a relative basis. But we're trying to make money in an absolute sense, not a relative one. What if bonds and stocks are BOTH overpriced? Then what? Oh, and one more inconvenient truth-the Fed Model's track record of forecasting future returns is actually quite abysmal.

Second, yes, we'll concede that profit margins are at all-time highs-an undeniable fact. Here's the problem: Profit margins are reliably mean-reverting, which means that hitting an all-time high is not a cause for celebration but just the opposite-a reason to be afraid.

Third, yes, quantitative easing can continue for some time, maybe even decades. But that isn't a reason to get excited about stocks. In fact, we believe quite the opposite. What it means is that if that is true (and we don't believe that it will be), then we've got much bigger problems on our hands because stock returns going forward are going to be dismally below what they've delivered for the past 150 years of our modern industrial society.

And finally, ah, yes, GDP growth! Too bad GDP growth has historically had zero to mildly negative correlation with stock market returns. In other words, even if GDP growth is resuscitated, even if 2014 turns out better than we thought, so what! Economic growth-across developed countries, across emerging countries, across time-has told us absolutely nothing about future stock market returns. Sorry to deliver the bad news.

So, we ignore common sense and instead rely upon the unconventional wisdom of, you guessed it, valuation. Rather than load up on stocks, we remain cautious and nervous because, from a valuation perspective, U.S. stocks look downright frothy. And, if the global markets continue to rally into 2014 and beyond, it is more likely that we'll trim. By the end of November, our official seven-year forecast for the S&P 500 Index was -1.3 (real) and our forecast for small-cap stocks, at 4.5%, is worse than it was during most of 2007. Quality, a large position in the fund, has also seen its forecast come down as it, too, has had quite a nice run. Forecasts for quality are still quite positive, so we're happy to continue owning these stocks but becoming less happy by day. Outside of the U.S., the only groups that we are somewhat optimistic about are value stocks, particularly in Europe, and emerging equities, which we think are priced to deliver 3.4% annually over the next seven years.

[Jan 12, 2014] Chris Hedges: The False Left-Right Paradigm and the Fatal Intransigence of Oligarchies

It's possible like Chris Hedges suggest to view creation of a National security state as a reaction of elite to the fact that the current generation in Western countries will be unable to achieve similar level of prosperity as their parents. That's why the elite feels an urgent need to create military and total surveillance-based mechanisms of suppressing latent protest which materialized in Occupy Movement. Putting them on the same page as Soviet rulers who also responded to the inability to fitful promises of "scientific socialism" (and the major one was to exceed productivity and well-being of capitalist nations) with the creation of brutal totalitarian state and KGB.
January 11, 2014
"In the same way, those who possess wealth and power in poor nations must accept their own responsibilities. They must lead the fight for those basic reforms which alone can preserve the fabric of their societies. Those who make peaceful revolution impossible will make violent revolution inevitable."

John F. Kennedy, First Anniversary of the Alliance For Progress



[Jan 11, 2014] SP 500 and NDX Futures Daily Charts - Jobs Shock, the Walking Dead

The Jobs number sucked out loud this morning, as the economy added a meager 74,000 jobs, compared to an expected number of 197,000. That's a swing and a miss. Both hourly earnings and average workweek missed as well. Today's box scores are included below.

The good news was that the unemployment percentage dropped hard from 7.0% to 6.7%. Huzzah! Stocks rally back, and the VIX plummets.

The fly in that holiday toddy is that they did it by whacking the denominator in the unemployment ratio, declaring about a half million or so able bodied workers to be the new walking dead. (Hey, I was just kidding about liquidating people as the next move the other day.)

Capping that bit of cheer off, US retailers reported their worst holiday season since 2009.

Let's talk.

Stimulating the economy is not a bad idea when it is in shock from a financial crisis brought on as the result of massive systemic fraud and financial asset bubbles perpetrated by the financial system. And yes, austerity has been proven wrong, again and again, and is the stuff of puritans and pigmen.

But stimulating the economy by giving more money directly to the same self-serving jokers that caused the problem in the first place, AND failing to correct the massive distortions in the economy that have been growing through horrible policy decisions over a period of years, is not exactly what Lord Keynes might have had in mind, ya think?

The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustainable recovery.

The Roots of the Next Crisis, and the Dark Hallway Beyond

“Those who fail to exhibit positive attitudes, no matter the external reality, are seen as maladjusted and in need of assistance. Their attitudes need correction...

Suddenly, abused and battered wives or children, the unemployed, the depressed and mentally ill, the illiterate, the lonely, those grieving for lost loved ones, those crushed by poverty, the terminally ill, those fighting with addictions, those suffering from trauma, those trapped in menial and poorly paid jobs, those whose homes are in foreclosure or who are filing for bankruptcy because they cannot pay their medical bills, are to blame for their negativity.

The ideology justifies the cruelty of unfettered capitalism, shifting the blame from the power elite to those they oppress."

Chris Hedges


Here is a recent conversation I had with a friend about the current state of the US recovery. As an accountant with a wide range of exposures, I enjoy hearing his perspective since I no longer have that sort of current insight into the corporate culture in America. I have years of background running large businesses in corporations, and some forays into large scale M&A work, so I have seen quite a bit of it. The methods rarely change, merely the guises and degrees.

Here are excerpts from his side of the conversation with only one parenthetical comment of my own.

"I don’t think we’re seeing profits in a traditional sense. Instead, it appears to me that we’re watching a long, drawn out LBO’ing of America. It appears that companies are liquidating capital and returning it as opposed to earnings spreads on revenue.

It seems like we’re seeing the final blow-off phase that started with the stock option becoming the primary form of compensation for corporate talent. By drawing out the LBO, they re-stock their options each year with a guaranteed return thanks to the Fed and their own Treasury Departments.

The problem is that you can’t have systematic corporate buybacks with employment/economic growth as they create diametrically opposite outcomes. The more work I do, the more I conclude that the US economy has not expanded since 2006.

I was looking at mutual fund data the other day and it showed that people moved their fixed income money into domestic equity - $185 billion in liquidated bond funds to buy $175 billion in equity funds. This happened after the Fed announced tapering was on the table. Just like the gold market, I suspect that “someone” forced the liquidation of bond funds and herded the money into equity funds to keep the rally going. (I think it is perfectly reasonable to flee bond funds at any time that interest rates are turning higher. Bond funds often take it on the chin in such a deleveraging of a long term interest rate trend. However, I think the whole taper thing was hyped and used by the wiseguys, as are most things these days by our financial masters of the universe. - Jesse)

Coincidentally, corporations used half a trillion in cash flow on buybacks. It’s a liquidity game but with limitations. What’s the next asset that can be liquidated or levered? They’re still working on gold but sometime soon, the price of gold will be set in the East, where the gold resides. Agricultural commodities are being liquidated but that ensures a drop in planting next year. Oil is too valuable on the geopolitical front to liquidate.

There are certainly winners in this economy but far more losers. At some point, the weight of the losers acts against the winners, many of whom are levered up with confidence. Corporations can liquidate equity capital but we all know how the LBO’d companies operated in the 1990’s. In many ways, they’ve gotten corporations to behave like consumers did in the 2000’s, only this time they’re trained to buy back their own stock. Every cycle has natural limits.

We know that corporate cash flow is no longer growing and we know that it’s more expensive to sell debt today than a year ago. We also know that the Fed sees the stock market as their proof of success. So how does this shakeout? If corporations are a lemon, how much juice can you squeeze out of the lemon?"


Although I do not wish to be an alarmist, I have to say that this trend of attempting to sustain the unsustainable has gone on longer than I had previously thought possible.

I am fairly sure that the next crisis will bring these things to a head and some sort of resolution. But therein also lies great danger. Philosophies that have grown time can have deep roots, and when faced with what to them is an intolerable change, can react somewhat excessively. They may even welcome the opportunity to act excessively and decisively, at least in their own minds, as the path to winning.

When a ruling subculture that has become accustomed to crushing and liquidating things for its own power and pleasure, whether it is natural resources, the environment, crops, animals, land, or social organizations, eventually runs out of things, it can become frustrated and angry in its seeming impotence to continue on, to keep expanding.

Indirectly and somewhat benignly at first, but with a growing efficiency and determination over time, it will begin with the weak and the defenseless, attacking and objectifying them, even in the most petty of ways and impositions. It will turn to its critics, and then everyone who is defined by them as 'the other.'

That is when a predatory social and economic philosophy can turn into pure fascism, and start liquidating people. And finally it liquidates and consumes itself.

But really, no one wakes up one morning and suddenly decides, 'Today I will become a monster, and wantonly kill innocent women and children.'

Otherwise ordinary people get to that point slowly, one convenient rationalization for their 'necessary and expedient' behavior at a time. After all, they are the good people, they are the strong, they are the most successful and the favored.

They are the entitled, and not these others who would seek to drain them, drag them back down. They are the champions of progress and achievement and civilisation, the hardest working, and the epitome of mankind.

What could possibly go wrong?

"He prompts you what to say, and then listens to you, and praises you, and encourages you. He bids you mount aloft. He shows you how to become as gods. Then he laughs and jokes with you, and gets intimate with you; he takes your hand, and gets his fingers between yours, and grasps them, and then you are his."

J. H. Newman, The AntiChrist

If you are one who thinks that the above 'could not possibly happen here,' and I am sure that there are many, you may wish to read the following vignette from modern US history. Alan Nasser, FDR's Response to the Plot to Overthrow Him

[Jan 03, 2014] Reason for Optimism?

Dec 24, 2013 | econbrowser.com

Bruce:

Speaking of optimism, stock market bullishness is at an extreme, with one bearish sentiment indicator at the lowest level in its history going back 25 years, and at the lowest level since before the 1987 Crash.

http://3.bp.blogspot.com/-T1i9qwajt3U/UpwvpV5mxSI/AAAAAAAASb0/dnUwMhROJn4/s1600/II+Bears.png

http://www.aaii.com/sentimentsurvey

http://blogs.marketwatch.com/thetell/2013/12/12/investor-bullishness-looks-horrifying-according-to-this-chart/

http://greedometer.tumblr.com/post/69625602145/advisors-hit-new-all-time-record-for-bullishness

www.investorschronicle.co.uk/r/.../IC/Assets/.../Sentiment%20Tactics.pdf‎

http://stockcharts.com/h-sc/ui?s=$CPC&p=D&yr=3&mn=0&dy=0&id=p83181309503

http://stockcharts.com/h-sc/ui?s=$CPCE&p=D&yr=3&mn=0&dy=0&id=p33456923405

Reported earnings and revenues have been flat for over two years, whereas the S&P 500 is up 60-65%, and the P/E has expanded 50%. The only two times in the 142-year history of the S&P 500 when a similar situation occurred with real reported earnings having contracted yoy along the way was in 1986-87 and 1928-29.

Shiller's 10-year average P/E is above the levels historically when secular BULL MARKETS PEAKED (1881, 1929, and 1966-68) and thereafter experienced secular bear markets lasting 15-16 to 20 years. Even a best case scenario implies a ~0% real total 10-year return (before fees and taxes) and cyclical drawdowns of 35-50%+ in the meantime.

The speculative leveraged meltup we have seen since summer-fall 2012 (Fed's "all in") is one for the history books, if not one for which the history books must be rewritten.

http://stockcharts.com/h-sc/ui?s=$NYHILO&p=W&yr=3&mn=0&dy=0&id=p40612045936

http://stockcharts.com/h-sc/ui?s=$NYSI&p=W&yr=3&mn=0&dy=0&id=p80316387638

Fewer stocks are participating in the meltup.

Despite Wall St. (that depends upon inflating bubbles), Fed officials (who work for the TBTE banks and Wall St.), and establishment economists (who serve the TBTE banks, the Fed, and Wall St.) claiming that there are no bubbles anywhere (or they are incapable of seeing, or are not permitted to see, bubbles), there are bubbles ABSOLUTELY EVERYWHERE (because the Fed/TBTE banks intended there to be bubbles):

Stocks
Non-financial corporate debt to GDP
Real estate, including in China, Asian city-states, Canada, Australia, parts of Europe, and the oil emirates
Wealth and income concentration to the top 0.01-0.1% to 1-10%
Equity market cap to GDP
Q ratio
Trophy properties
Farmland
Teslas
IPOs
NYSE margin debt
Stock buybacks
Derivatives to GDP
Total debt to GDP
Art
Vintage cars
Student loans and college tuition
Subprime auto loans
Bank reserves
Bank assets to GDP
Fed balance sheet to GDP
Professional athlete and CEO compensation
Professional sports franchise prices
Tight oil extraction and exports

There is also a bubble in the number of people claiming that there are no bubbles anywhere.

The bubbles are global and cumulatively far larger than anything experienced in history, even larger in scale globally than in 1999-2000 and 2006-07.

The bubbles, Fed printing, bank cash hoarding, and the resulting EXTREME wealth and income concentration to the top 0.1-1% to 10% is contributing to money velocity plunging and the pricing of Millennials out of the housing market, causing household formation to collapse.

Bears have been in hibernation for so long (as in 1999-2001 and 2007-08) that no one remembers where their caves are or if they are any still alive. The bulls have only themselves left to trample in the next stampede out the exits (when, not if, it occurs) when the TBTE bankers finally decide to pull the plug on (or deflate) the bubble, as they always do.

Reason for optimism or unreasonable optimism by the top 0.01-0.1% to 1%?

Ricardo

A friend sent me the following email.

The inability to see that the current monetary policy does not work in any mechanically rational way is embedded in the culture of the professional and academic community. There is an orthodoxy of thought in all the elite institutions of learning and then in all the government and private applications of that learning. This group think will not change, as Schumpeter explained, until all the old heads of academic economic departments die and a new generation can impose a new orthodoxy. Professors and Central Bankers, who have spent their whole lives writing papers and books from an Aggregate Demand, Quantity Theory of Money point of view, are not capable of mentally confronting the possibility that everything they learned and taught for their whole lives might be wrong.

All the cherished beliefs of a generation that low interest rates stimulate economic activity, that increasing the quantity of money will increase bank loans and inflation, or that the economy’s growth can be judged by the level of government spending and consumption, are exposed as intellectually bankrupt myths, are not effective in structuring policy, but the current orthodoxy makes it culturally and professionally impossible to admit that.

Bruce:

Ricardo, brilliant. Thank you and thank your friend for his/her clarity in succinctly stating the obvious that obviously cannot be admitted by establishment economists.

The focus on public debt by many academics creates a political debate that obscures the structural drag effects of demographics, "globalization"/"trade" (neo-imperial "trade" regime), PRIVATE debt to wages and GDP, and the resulting end of the reflationary effects on the growth of economic activity when the cumulative imputed compounding interest claims of private debt on wages and GDP are so large as to no longer permit growth of private economic activity.

Neither supply-side nor Keynesian policies can resolve the secular Long Wave debt cycle we currently face after 32 years of falling nominal interest rates and the reflationary effects from increasing debt to wages and GDP. More private debt (debt-money lending/deposits) to wages and GDP to increase supply does not work when there is too much private debt to service.

(Total rentier income [interest, dividends, and capital gains)] received disproportionately by the top 0.1-1%, and total gov't receipts combine for an equivalent of 51% of GDP, 120% of public and private wages, and 145% of private wages. The hyper-financialized economy and local, state, and federal gov't spending at 35% of GDP is resulting in a private sector so burdened by debt service, i.e., "rentier taxes", and gov't taxation that it cannot grow.)

Nor is more public debt to wages and GDP successful in increasing gov't spending to encourage private sector growth when the private sector is burdened with unprecedented debt.

By definition, secular highs in debt to GDP coincide with bubbly asset values to GDP, which in turn is reflected by extreme wealth and income concentration, as the top 1-10% receive 20-50% of income and hold 40-85% of all financial wealth.

The secular debt constraint to real GDP per capita precludes further supply-side expansion of debt, whereas extreme wealth and income concentration and runaway central bank reserve expansion causes asset bubbles, further hoarding at no velocity by the top 1-10%, and plunging money multiplier and velocity.

Historically, high debt/GDP, asset bubbles, and extreme wealth and income concentration are unambiguous indications of sub-optimal incentives, gross price distortions, misallocation of flows, and precursor conditions to decelerating real GDP per capita, financial panics, currency crises, structurally high labor underutilization, social instability, political reaction, and war.

Then add the structural ("permanent"?) drag effects from peak Boomer demographics AND Peak Oil (and net energy per capita), and the effects of debt and inequality are exacerbated (reinforced).

The median household income per capita for the bottom 80-90% of US households is equivalent today to the country GDP per capita in eastern Europe and the wealthier areas of Central and South America. The bottom 50-60% now have household income per capita of Mexico, poorer South and Central Americans, and South Africa.

The typical American male under age 35 receives an income of 60% of that of his generational predecessor in 1970-73 after taxes, inflation, and the effects of higher costs to income for energy, housing, education, and medical services.

The typical college grad today (the 50% who are employed or not underemployed or unemployable) receives a salary similarly adjusted at the equivalent purchasing power of the minimum wage in 1970.

We should thus not be surprised why Millennials are staying home, or moving back in, with Mom and Dad (or Mom or Dad); why household formation is collapsing; why Millennials' headship rate is at a record low; why Millennials are not marrying; and why the birth rate for Caucasian females is converging with that of Europeans, Japanese, Singaporeans, and Taiwanese.

In spite of all of this, or because of it, the stock market is melting up and the top 0.1-1% have virtually disengaged from what remains of the productive sectors of the economy on which the rest of us depend for paid employment and purchasing power.

Now the owners of most of the financial wealth and the means of production of goods and services and the managerial caste that facilitates economic activity intend to accelerate automation of paid employment, expand "trade" via an Asian NAFTA, increase immigration to the US, further increase surveillance-state capabilities, and impose "austerity" on the 50% "takers".

In the context of such conditions, it's no wonder economists spend most of their time focused on attempting to determine how many angels can dance on the head of the proverbial pin. No one gets paid nor receives tenure, a department endowment fund, and a pension by looking out of the window of the ivy-covered tower at the real world and telling his peers to do the same and write about it.

[Jan 01, 2014] JPMorgan Presents "The Era Of Central Bank-Driven Equity Rallies"

Jan 01, 2014 | ZeroHedge

We have gotten to a point when even the most tenured economists have finally admitted the truth, and in the process none other than JPMorgan itself has just issued a chart titled "The era of central bank-driven equity rallies."

[Jan 01, 2014] How Will The Economy Improve In 2014 If Almost Everyone Has Less Money To Spend?

Compare with Finally, the U.S. economy may be starting to hum Economy McClatchy DC

Is the U.S. consumer tapped out? If so, how in the world will the U.S. economy possibly improve in 2014? Most Americans know that the U.S. economy is heavily dependent on consumer spending. If average Americans are not out there spending money, the economy tends not to do very well. Unfortunately, retail sales during the holiday season appear to be quite disappointing and the middle class continues to deeply struggle.

And for a whole bunch of reasons things are likely going to be even tougher in 2014. Families are going to have less money in their pockets to spend thanks to much higher health insurance premiums under Obamacare, a wide variety of tax increases, higher interest rates on debt, and cuts in government welfare programs. The short-lived bubble of false prosperity that we have been enjoying for the last couple of years is rapidly coming to an end, and 2014 certainly promises to be a very "interesting year".

Continued

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