“But what if all the tranquility, all the comfort, all the contentment were now to come to a horrifying end?”
Tin can at my feet.
Think I’ll kick it down the street,
That’s the way to treat a friend.”
“And the open road rolled out in front of us.”
“You’ve changed me forever. And I’ll never forget you.”
Dollar Surge Endangers Global Debt Edifice, Warns BIS .........................................25
Mexico Planning Intervention As Peso Weakens to Two-Year Low ..............................26
The Mother of All Bank Runs!........................................................................27
Why Beijing’s Troubles Could Get a Lot Worse ....................................................29
Abe’s Last Chance .....................................................................................31
Polish Intellectuals Sound the Alarm on Russia ...................................................33
Retail Traditions Hit a Wall at Wal-Mart China ....................................................34
Bloomberg’s House Bonehead Clarifies All .........................................................36
The Golden Age ........................................................................................37
Fed Bubble Bursts in $550 Billion of Energy Debt ................................................39
for readers of Things That Make You Go Hmmm...
This is the final edition of Things That Make You Go Hmmm... to be published and distributed by Mauldin Economics.
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now back to our regularly-scheduled programming — one last time...
On Christmas Eve 1979, 27 days before I became a teenager, in a surburban street in Moseley in Britain’s West Midlands, a group of musicians put the finishing touches on their debut album.
The musicians — Brian Travers, Astro, James Brown (no, not that one), Earl Falconer, Norman Hassan, Mickey Virtue, and twins Ali and Robin Campbell — had a unique approach to the music business.
Eighteen months prior to completing their first album, Ali Campbell and Travers had plastered the streets of Birmingham with leaflets promoting the band, which had taken its name from the document issued to people claiming unemployment benefits from the UK government’s Department of Health and Social Security (DHSS). The name of the form — and thus the band — was UB40.
Having advertised themselves and with dreams of making a big splash on Britain’s reinvigorated music scene running wild in their heads, the band had just one remaining item on their to-do list — learn to play their instruments.
The members of UB40 made an agreement to spend the next year doing nothing other than learning their instruments and practising their songs until they felt they were good enough.
(I know, I know! This IS analagous to many modern-day Central Bank policy efforts, but that’s not where I’m going with this, so stop jumping ahead.)
Anyway, after about a year, the band felt competent enough to play in public; and they made their debut on the 9th of February, 1979, in an upstairs room at the Hare & Hounds, a small pub in King’s Heath. They had been “booked” by a friend to celebrate his birthday.
Following on the success of their first gig (apparently, the birthday boy was delighted), the band secured a series of similar shows, all in local pubs, at which they planned to unleash their blend of reggae and dub onto an unsuspecting public who, though they didn’t realise it, had been waiting for UB40 for years.
Remarkably, at one of these pub gigs, Chrissie Hynde just happened to be in attendance, no doubt supping a couple of pints of Throgmorton’s Dubious Explanation (a real ale so thick it’s served by the slice); and she liked what she saw so much, she offered the band a supporting slot on The Pretenders’ upcoming tour of the UK.
Fast-forward to Christmas 1979, and the story of the recording of the band’s debut album burnishes the legend yet further:
(Wikipedia): The band approached local musician Bob Lamb as he was the only person they knew with any recording experience. Lamb had been the drummer with the Steve Gibbons Band for much of the 1970s and was a well-known figure within the Birmingham music scene.... However, as the band were unable to afford a proper recording studio, the album was recorded in Lamb’s own home at the time, a ground-floor flat in a house on Cambridge Road in Birmingham’s Moseley district....
Brian Travers recalled just how basic the recording facilities of the original Cambridge Road “studio” really were:
Because we couldn’t afford a studio and he was the only guy we knew who knew how to record music, we did the album in his bedsit. I remember he had his bed on stilts. So underneath the bed was a sofa and mixing desk. And so we recorded the album there on an eight-track machine, with the same 50p coin going through the electric meter continually because we’d booted the lock off it. And, with it being a bedsit and us being eight in the band, we’d record the saxophone in the kitchen — because there was a bit of resonance off the walls, a bit of reverb — before putting the machine effects on it. While the percussion — the tambourines, the congas, the drums — we’d do in the back yard. Which is why you can hear birds singing on some of the tracks! You know, because it was in the daytime we’d be shouting across the fences “Keep it DOWN! We’re RECORDING!”
Lamb remembered the process fondly:
Nothing was hard work about that album, it was a bit of a dream that sort of fell out of the sky... It was almost effortless to make in that they were so good at the time, and so happy at the time with the success that they got, there was no effort in it.
The title of the album, “Signing Off,” was inspired by the process of the band members ending their claim on UK unemployment benefits — and becoming pop stars.
The LP (Google it, Gen Y-ers), released on August 29, 1980, spent 71 weeks on the UK albums chart, peaking at number 2 and turning platinum (when doing such a thing used to mean something). It was greeted with rapture by Britain’s music press:
(Sounds): Five stars out of five. It is an (almost) perfect album.... It’s rare to find a debut album so detailed, so excellently played and so packed with bite — I sometimes think it hasn’t really happened since The Clash.
The album would go on to make Q Magazine’s “100 Greatest British Albums Ever” (#83, if you’re interested) and is featured in a book somewhat somberly titled 1001 Albums to Hear Before You Die.
I think it’s fair to say I played my part in the success of the band by spending the pocket money I had saved up on a copy of “Signing Off” (though the band have so far not publicly acknowledged my involvement).
Anyway, as I am now signing off from Mauldin Economics, I felt it would be appropriate to take stock of a few of the issues I have covered ad nauseum repeatedly during my two-plus years working with John and his team; and I thought I’d also take those of you unfamiliar with UB40’s debut album through a few of the tracks (and remind those of you who know the band just how spectacular that album was).
The “King” referred to in the second track on “Signing Off” was, of course, Martin Luther King, Jr. The song was short on lyrics but big on impact; however, the undoubted “King” in markets today is once again King Dollar, and the world’s reserve currency is making some serious waves right now, which threaten to cause chaos in world markets.
At this point I’ll throw things over to my friend and partner in Real Vision Television and author of The Global Macro Investor, Raoul Pal, who has been warning of the likelihood of a major move in the dollar for longer than just about anybody. In his most recent report, he explained the ramifications of a dollar bull market in the clearest, most concise way possible:
(Raoul Pal): Debt dynamics, deflation, positioning and technicals all suggest that a dollar bull market of some considerable velocity and length is underway.
When dollar bull markets occur, emerging markets get hit.
When dollar bull markets occur, carry trades get unwound.
When dollar bull markets occur, they tend to usher in disinflationary forces as commodities and goods get re-priced.
The preceding three factors lead to a self-reinforcing of the dollar bull market, creating more of the same in a cycle of liquidation and bad debts, creating more demand for US dollars.
As I said, clear and concise.
I watched Raoul present at the iCIO Summit this past week, and his presentation was compelling, to say the least. As he pointed out in a panel discussion with Mark Yusko, Dennis Gartman, David Rosenberg, and myself, “When currencies begin to trend, they can do so for decades.”
A sobering thought.
A look at the long-term charts of the DXY Index shows just how massive the potential reversal of this trend is; and based on Raoul’s roadmap, the sheer size of the reversal gives us a strong hint of the degree of carnage that will be wrought upon a world in which the dollar carry trade has reached somewhere between $5 trillion and $9 trillion.
Incidentally, one of those estimates is Raoul’s, and one belongs to the BIS, and I bet your first guess as to which is which would have been wrong.
A closer look at a shorter-term chart demonstrates the recent break clearly:
The BIS report to which I refer was published last week, and it was astounding in terms of the sheer size of the dollar carry trade it depicted.
According to the BIS, US dollar loans to China’s banks and companies have jumped to $1.1 trillion — that’s TRILLION — from virtually zero just five short years ago. The annual rate of increase of those loans is a mind-boggling 47%.
However, the fun doesn’t stop there.
Consider Brazil, for example, where cross-border dollar credit now stands at $461 billion, or roughly 20% of GDP. For Mexico those numbers are even more eye-watering. A country with a GDP of just $1.1 trillion has outstanding cross-border dollar credit of $381 billion — or roughly 30% of GDP. Frightening.
Meanwhile, in Russia the same metric has reached $751 billion. Why does this matter? Well, the charts below, which show the appreciation of the US dollar against those three currencies in the last five years, highlight the danger to countries that have been able to borrow seemingly endless amounts of (relatively) stable dollars to finance business operations and expansion.
Lastly — and perhaps most importantly — witness the change in direction of the Chinese renminbi which, after trending higher against the dollar for many years (and, in the process, moving virtually everybody to the same side of the boat in the belief that a stronger Chinese currency was a given), has suddenly started to look as if it may also succumb to the renewed strength of the dollar. The only difference here being that the Chinese may actively be looking now to devalue their currency in light of the ongoing attempt by the Japanese to devalue their way back to competitiveness. Few thought this a likely scenario until very recently; consequently, few are positioned accordingly; and when things like that happen in the macro world, you can get some REALLY funky moves.
When currency wars break out, they can get very nasty very quickly.
Under no circumstances should you take your eyes off the US dollar, folks. The sheer number of places where you will witness the knock-on effects of a soaring dollar — chief amongst them emerging markets and the commodity space — will be breathtaking.
I will write at greater length on the likely effects of the dollar’s move on gold in a few weeks, as it warrants a piece all its own; so stay tuned for that one.
In a series of conversations I’ve been fortunate to have had with some of the best macro traders in the world in recent months through Real Vision Television, there has been one overarching takeaway from every one of them: macro is back, and 2015 is shaping up to be an epic year for the guys who trade these fundamental shifts. To a man, after several years of little action in the macro world, they are positively licking their lips at the potential opportunities that are headed their way next year.
One person’s opportunity is another person’s crisis. You have been warned.
Track 3 was an instrumental number called “12 Bar,” a reggae reimagining of the 12-bar blues that highlighted Brian Travers’ remarkably good saxophony skills (given his lack of attention to learning to play the instrument before forming the band).
Obviously, during my time with Mauldin Economics, the “bars” which have preoccupied me have been those of the gold variety — and for the most part, their constant movement in an easterly direction.
I have written article after article and given presentation after presentation about the dichotomy between paper and physical gold and have regularly highlighted the magnitude of the flow of gold out of the West and into strong Eastern hands. In the previous edition of this publication (“How Could It Happen?”), I imagined a future in which this stunning relocation of physical gold had finally mattered; and between publishing that piece and penning this one, a couple of interesting things have happened. Firstly, my friend Barry Ritholtz took a big, fat shot at me in a Bloomberg column entitled “.” Barry’s article (which was entirely consistent with his very public and oft-stated thinking and was, as is always the case with Barry, very well-written) took apart what he sees as the various failed narratives in the gold markets. He began with gold’s link to QE:
(Barry Ritholtz): [T]he most popular gold narrative was that the Federal Reserve’s program of quantitative easing would lead to the collapse of the dollar and hyperinflation. “The problem with all of this was that even as the narrative was failing, the storytellers never changed their tale. The dollar hit three-year highs, despite QE. Inflation was nowhere to be found,” I wrote at the time...
... moved on to the recent SGI:
Switzerland was going to save gold based on a ballot proposal stipulating that the Swiss National Bank hold at least 20 percent of its 520-billion-franc ($538 billion) balance sheet in gold, repatriate overseas gold holdings and never sell bullion in the future. This was going to be the driver of the next leg up in gold. Except for the small fact that the “Save Our Swiss Gold” proposal was voted down, 77 percent to 23 percent, by the electorate....
... then hit upon the recent Indian import restrictions and reports of gold shortages, which Barry clearly feels are spurious, before eventually finding his way to yours truly:
Perhaps the most egregious narrative failure came from Grant Williams of Mauldin Economics. He imagined a conversation 30 years from now about China’s secret three-decade-long gold-buying spree, dating to November 2014. Well, we only need to wait 30 years to see if this prediction is correct.
Now, in response to the lighting up of my Twitter feed after Barry’s article was posted (and my thanks to all those who kindly pointed it out to me), I would say this: Barry is right on all counts.
I am delighted to be able to call Barry a friend and have absolutely no problem with his calling me out on what I said. Those of us who possess sufficient hubris to deem our thoughts worthy of distribution wider than the inside of our own heads are absolutely there to be taken to task should others disagree with us. We make ourselves fair game the second we hit the wires.
Sadly, none of us actually KNOW anything. How could we? We all take whatever inputs we find and then use them to reach our own conclusions based mostly on probability, and more often than not those conclusions are wrong.
HOWEVER... if your logic is sound and your thought processes rigorous, being wrong is often a temporary state — something that can also be said about being right, of course. In my humble opinion, the issue with gold today is not one of narrative, as Barry suggests, but rather that the extent of the current interference in markets by our friends at the various central banks around the world has meant that being wrong (no matter which part of the financial jigsaw puzzle you may be concerned with) has never been easier — even though being right has never, in my own mind at least, been more assured in the long term, certainly as far as gold is concerned.
As I slumped against the literary ropes, Barry threw one more punch when he suggested that the reader would “only need to wait 30 years to see if this prediction is correct,” but this is where I stop covering up and finally flick a jab or two of my own.
I think the chances of having to wait 30 years to see the gold conundrum resolve itself (in materially higher prices, I might add) lie close to those of Barry’s being invited to give the opening address at the next GATA conference. The evidence is crystal clear that significant quantities of physical gold have been pouring into Eastern vaults (due to both private- and public-sector activity); and gold is, after all, a finite resource. Not only that, but the “weakness” in gold (which remains roughly 500% above its turn-of-the-century low, despite the recent 30% correction) is confined to the paper market.
Whilst this distinction between paper and real gold hasn’t mattered up until now, there will come a day when it absolutely does — to everybody — and at that point, anyone not positioned correctly will be in a world of hurt.
(Charts above and below courtesy of Nick Laird at Sharelynx and Koos Jansen)
Tightness in the physical market has increased consistently as the likes of Russia continue to stockpile ever-increasing amounts of gold and as Chinese imports as well as withdrawals from the Shanghai Gold Exchange maintain a torrid pace. The only missing piece of the puzzle is the lack of any official acknowledgement that the Chinese have been doing the same thing to a far greater degree; and, as I wrote in “”, there is a curious demand for absolute proof from those who dispute official figures, whilst the principle of reasonable doubt continues to hold sway on the other side of the argument.
I suspect that imbalance will right itself — possibly very soon — and when it does there will be absolutely no putting the genie back into the bottle.
In the meantime, as Barry so confidently predicted, the Swiss Gold Initiative failed, but that was overshadowed (in my mind at least) by a couple of very interesting developments that were covered beautifully by two of my buddies, Willem Middelkoop (author of — a phenomenal read) and Koos Jansen.
Firstly, Koos reported on the increasing drive to allocate the gold held within the Eurosystem:
(Koos Jansen): [M]ost of the Eurosystem official gold reserves are allocated, and since January 2014 (which is as far as the more detailed data goes back) the unallocated gold reserves are declining, as we can see in the next chart.
Unfortunately we do not know what happened prior to 2014.
Note, allocated does not mean the gold is located on own soil, but it does mean the gold is assigned to specific gold holdings, including bar numbers, whether stored on own soil or stored abroad. Unallocated gold relates to gold held without a claim on specified bar numbers; often these unallocated accounts are used for easy trading... The fact the Eurosystem discloses the ratio between its allocated and unallocated gold and, more important, the fact that the portion of allocated gold is far greater and increasing, tells me the Eurosystem is allocating as much gold as they can.
Secondly, another repatriation request was unearthed — this time made by perhaps the least likely source imaginable:
(Koos Jansen): In Europe, so far, Germany has been repatriating gold since 2012 from the US and France, The Netherlands has repatriated 122.5 tonnes a few weeks ago from the US, soon after Marine Le Pen, leader of the Front National party of France, penned an open letter to Christian Noyer, governor of the Bank of France, requesting that the country’s gold holdings be repatriated back to France; and now Belgium is making a move. Who’s next? And why are all these countries seemingly so nervous to get their gold ASAP on own soil?
Funnily enough, the answer to Koos’ rhetorical question about who’s next was answered just a few days later:
(Bloomberg): The Austrian state audit court says central bank should address concentration risk of storing 80% of its gold reserves with the Bank of England, Standard reports, citing draft audit report. Court advises central bank to diversify storage locations, contract partners.
Austrian central bank reviewing gold storage concept, doesn’t rule out relocating some of its gold from London to Austria: Standard cites unidentified central bank officials. Austria has 280 tons gold reserves, according to 2013 annual report. Austrian Audit Court Will Review Nation’s Gold Reserves in U.K.
Say what you want about the gold price languishing below $1200 (or not, as the case may be, after this week), and say what you want about the technical picture or the “6,000-year bubble,” as Citi’s Willem Buiter recently termed it; but know this: gold is an insurance policy — not a trading vehicle — and the time to assess gold is when people have a sudden need for insurance. When that day comes — and believe me, it’s coming — the price will be the very last thing that matters. It will be purely and simply a matter of securing possession — bubble or not — and at any price.
That price will NOT be $1200.
A “run” on the gold “bank” (something I predicted would happen when I wrote about Hugo Chavez’s original repatriation request back in 2011) would undoubtedly lead to one of those Warren Buffett moments when a bunch of people are left standing naked on the shore.
It is also a phenomenon which will begin quietly before suddenly exploding into life.
If you listen very carefully, you can hear something happening...
The lyrics to “I Think It’s Going to Rain Today” include a line with a phrase that has become all too familiar in recent years. The quote graces the front page of this edition of Things That Make You Go Hmmm... and it bears repeating:
Tin can at my feet
Think I’ll kick it down the street...
Since the Lehman collapse, every central banker and every politician in the world has embraced the idea of kicking the can harder and farther down the road than their predecessors did (and that is something I have indeed written about ad nauseum). Nowhere has the art of can kicking been more egregiously consistently practised than in Japan.
When I moved to Tokyo all the way back in 1989, people were talking about the impending demographic timebomb that would explode in Japan as its ageing society began to die. But, of course, that was 25 years away, and so nobody paid any attention to it.
Suddenly ... 25 years later ... the fact that Japan’s population is now declining by roughly 20,000 people every month has seemingly crept up on the world and taken everybody by surprise.
The only answer to Japan’s demographic problem is mass immigration. Simple.
The odds on Japan allowing that to occur are longer than those for a Ritoltz/GATA lovefest.
In the meantime they have Abenomics — the solution to virtually none all of their problems.
Abenomics has been a favourite topic of mine since it was announced, as it was clear from the outset (to anybody who had spent any time in Japan) that the policy was doomed to failure for one very simple reason: it required structural reform — something the Japanese just don’t do, I’m afraid. (Real Vision subscribers can watch my presentation from the Strategic Investment Conference earlier this year, in which I outlined the extent to which perception and reality have diverged with regards to Japan).
Kuroda-san’s actions have just compounded the eventual problems for the Japanese, and yet the madness perpetrated by the governor of the Bank of Japan has been cheered to the echo, right around the globe.
This will end very, very badly.
This past week, as the world geared up for yet another Japanese election (called by Abe in an attempt to give him the old “well-you-guys-voted-for-it” excuse clarify public support for his policies), the desperation was almost palpable.
Firstly, Japanese GDP numbers were revised, and guess what...
(WSJ): Japan’s economy shrank more than previously estimated in the third quarter, contracting 1.9% as capital spending declined and private consumption remained weak, the government said Monday.
The economy has now contracted for two consecutive quarters, a common definition for recession, the data confirmed, less than a week before general elections that Prime Minister Shinzo Abe has framed as a referendum on his economic policies.
Last month, the government estimated that gross domestic product contracted 1.6% during the July-September period. Soon after, Mr. Abe cited the weak economy in saying he would delay a second increase in the nation’s sales tax, and called a snap election in search of a mandate.
In recent days, though, many economists had predicted that the third-quarter contraction would actually turn out to be smaller than initially estimated — or perhaps be revised to flat or a slight expansion — after the Ministry of Finance reported late last month that capital spending by businesses rose 3.1% during the quarter, compared with a previous estimate of a 0.2% decline. Business investment accounts for around 14% of GDP.
I know, right? Who could have seen THAT coming?
Oh... but it got worse:
(WSJ): Private consumption, the most important pillar of the economy, remains anemic, rising just 0.4% in the third quarter from the second, as consumers continue to stagger following a sales tax increase in April and a decline in the yen of more than 30%, which has raised the cost of imports.
The downbeat consumer mood was most evident in weak sales of big-ticket items such as houses and automobiles. Residential investment and consumption of durable goods both fell sharply for two consecutive quarters.
The government also revised its growth figures for the second quarter, saying the economy contracted 6.7% instead of the initially reported 7.2%. It also lowered first-quarter growth to 5.8% from 6.7%.
Another unexpected figure Monday was the nation’s current-account surplus, which was a strong ¥833.4 billion ($6.9 billion) in October. However, a weak yen and overseas investment income masked a large trade deficit due to weak exports.
All this followed hot on the heels of another “surprise” — a downgrade of Japanese sovereign debt (and subsequently the banking sector, for obvious reasons) by Moody’s.
A surprise. A surprise like Christmas Day’s falling on December 25th this year.
Clearly, a strong sense of irony and the ability to deadpan are important character traits when working in Moody’s press department:
(Moody’s): Moody’s Investors Service today downgraded the Government of Japan’s debt rating by one notch to A1 from Aa3. The outlook is stable.
The key drivers for the downgrade are the following:
1. Heightened uncertainty over the achievability of fiscal deficit reduction goals;
2. Uncertainty over the timing and effectiveness of growth enhancing policy measures, against a background of deflationary pressures; and
3. In consequence, increased risk of rising JGB yields and reduced debt affordability over the medium term.
A few days later, Fitch (rather belatedly) jumped on the dogpile and warned that next year there could be another “surprise” (spoiler alert: in 2015 Fitch will downgrade Japan):
(CNBC): Japan’s “A-plus” credit rating is under threat, after Fitch Ratings placed the country’s debt on negative watch on Tuesday.
The ratings agency said it could cut Japan’s rating in the first half of next year, following the government’s decision to delay a consumption tax hike to April 2017 from October 2015.
“The delay implies it will be almost impossible to achieve the government’s previously-stated objective of reducing the primary budget deficit to 3.3 percent of GDP by the fiscal year April 2015–March 2016,” said Fitch in a report on Tuesday.
Fitch estimates the proportion of Japan’s debt to the size of its gross domestic product would reach 241 percent by the end of this year, up from 184 percent at end-2008. The 57 percentage point rise in the ratio would be the second-highest over the period in the A or double-A category after Ireland, the agency noted.
Sorry folks, but Japan is toast.
Exports are still “weak” despite a near-30% weakening in the yen; the bond market is utterly broken; corporate bankruptcies have hit new highs; and the country is now in a quadruple-dip recession (yeah).
And so we go into this weekend’s election with Abe’s approval ratings at a two-year low and the possibility that a backlash of sorts may ensue.
The results will be in by the time you read this, and the polls suggest Abe will maintain a “super-majority,” which will give him and his central bank an extended license to continue Japan’s journey to oblivion; but the graphic below will give you a handy guide as to the outcome should the result be any kind of surprise:
No matter which way the Japanese turn, the future of their country relies on a ridiculous concept: that “investors” will keep funding the government’s borrowing requirements or, if not, look the other way whilst the Bank of Japan prints money and buys the entire issuance of JGBs.
Meanwhile, Japan’s leaders need their ageing population to remain docile while their savings are eviscerated through a “promised” 2% per year inflation rate and a 30% (and counting) theft of their purchasing power through the outright debasement of the yen.
They also need to rely on the Chinese, the Koreans, the Taiwanese, and even the Germans not retaliating when the yen’s destruction makes their own manufacturing industries and exporters uncompetitive.
Luckily, the oil price has fallen, and the second phase of the consumption tax hike has been cancelled postponed so... that’s... well... great, right?
Lower oil is undoubtedly a positive for Japan, but there are a couple of problems that linger.
Firstly, it happens just as the country has begun restarting its nuclear power plants after Fukushima, and so the amount of oil being imported will continue declining as those plants come back on line. Secondly, the crumbling yen is negating a large portion of the benefits of lower crude in dollars.
Also, you can file this under “damned-if-you-do...damned-if-you-dont”:
(Reuters): The yen edged higher on Tuesday as a fall in oil prices dented risk appetite and prompted investors to trim short positions in the Japanese currency.
The Japanese are not about to abandon their nuclear program just because oil has temporarily dipped into the $60s. Sixty-dollar oil would have been REALLY useful for the last few years; and while it is certainly something of an unexpected tailwind for Abenomics, they need something a lot more powerful at their backs when sailing into the teeth of a hurricane.
Bon Voyage, Abe-san
This song — another of the instrumental tracks on the album — was illustrative of the inflationary pressures of the 1970s. The song took its title from the wage increases demanded by the UK’s trades unions in the late 1970s to give them what became known as a “living wage.” This concept meant that a person working 40 hours a week, with no additional income, should be able to afford the basics for quality of life: food, housing, utilities, transport, health care, minimal recreation, childcare, and one course a year to upgrade their education.
In Greece today, there are three 25% figures to be concerned with: the 25.9% fall in Greek GDP, the 25.7% support the incumbent New Democracy Party clings to (versus Syriza’s 31%), and the 25.9% unemployment rate that still haunts the country.
Some time ago, I wrote about Alex Tsipras and the potential that he could be the first of a new breed of politicians at the fringes of the political spectrum (I will deliberately avoid the use of the word extreme in this case as, when applied to politics, it is more straitjacket than adjective) who could threaten the very existence of the EU.
After a series of political happenings in Greece in recent weeks (), the upshot is the distinct possibility of a snap election being called in January — an election that, given the current polling, Tsipras’s Syriza party would likely win with ease.
The problem with such a win is Tsipras’s oft-stated position on the bailout funds advanced to the country by the Troika (remember that band?):
(UK Daily Telegraph): As matters stand, it is more likely than not that a defiant Alexis Tsipras will be the elected prime minister of Greece by late January. His Syriza alliance has vowed publicly and persistently that it will overthrow the EU-IMF Troika regime, refusing to implement the key demands...
Mr Tsipras is a polished performer on the EU circuit. He can no longer be caricatured as motorbike Maoist. But the fact remains that he told Greek voters as recently as last week that his government would cease to enforce the bail-out demands “from its first day in office”.
The logical implication is that Greece will be forced out of the euro in short order, unless the EU institutions capitulate. Syriza’s deputy, Panagiotis Lafazanis, is plainly willing to take this risk, warning in October that the movement must “be ready to implement its progressive programme outside the eurozone” if need be. His Aristeri Platforma holds 30pc of the votes on Syriza’s central committee.
Next July and August, whoever holds the purse strings in Athens is bound to repay €6.7 billion to the ECB, and whilst that sort of money ceased to be anything to be concerned about on September 16, 2008, it remains an amount of money that Greece doesn’t have.
Adding to the fear over a possible Syriza victory was a recent Greek “road show” in London, during which several high-ranking members of Syriza sought to allay fears as to the upheaval that might ensue should they actually do the unthinkable and win any election.
I think it’s safe to say — based on this account from the UK Daily Telegraph — that things didn’t exactly go to plan. In fact, as regards a successful outcome to an overseas trip, this mob made Neville Chamberlain look like a political genius:
(UK Daily Telegraph): The Syriza road show in the City last month went horribly wrong. “Everybody coming out of the meeting wants to sell everything Greek,” said a leaked memo by Capital Group’s Joerg Sponer.
The reported shopping list was: a haircut for creditors; free electricity, food, shelter, and health care for all who need it; tax cuts for all but the rich; a rise in the minimum wage and pensions to €750 a month; a moritorium on private debt payments to banks above 20pc of disposable income; €5bn more in EU subsidies; and demands for 62pc debt forgiveness on the grounds that this is what Germany received in 1952. “The programme is worse than communism (at least they had a plan). This will be total chaos,” said Mr Sponer.
“It was a disaster,” said Professor Yanis Varoufakis from Athens University, a man tipped to play a key economic role in any Syriza-led government.
Greece is back, front and centre — just as it was at the beginning of the euro crisis in 2010 and at the depths of the euro crisis in 2011. The only difference is that now, after several more years of depressionary policies have been foisted upon the people of that proud nation, the likelihood of an establishment victory (and thereby a continuance of the status quo) is far less than at either of those previous junctures.
The Athens stock index fell 13% in a single session last Tuesday — its biggest fall since 1987, eclipsing anything seen at even the shakiest points in the euro crisis — which should tell you that the stakes are far higher now than they were previously.
Along with the US dollar, keep a very close eye on Greece in the next few weeks. It has the potential to spring another nasty surprise on the market which will have multiple knock-on effects — none of them good.
Since the day John approached me to write Bull’s Eye Investor for him and offered to take Things That Make You Go Hmmm... under the Mauldin Economics umbrella, I have had the opportunity to work with a wonderful group of people; and though there isn’t enough time to thank everybody personally, there are a few special people I can’t sign off without mentioning.
To Dody and Brent, thank you for all your hard work and support and for putting up with my crazy schedule. To Charley and Lisa, my tireless copy editors, your patience is boundless and your command of the English language puts me to shame. To Clara, thank you for doing such a wonderful job being the “List Runner.” To Johnny Grand — keep rolling, my man. I’ll see you North of the Border soon. And an extra special thank you to Shannon for getting a million things done flawlessly and within seemingly impossible timeframes whilst somehow continuing to be such a wonderful person — a truly remarkable achievement. I salute you all.
Special thanks also go to Robert Ross, an exceptional young analyst with a great future ahead of him; to Marin Katusa — a more brilliant mind and better company you couldn’t hope to find; and to Ed and Olivier for working so hard to make me a part of the Mauldin/Casey family.
Lastly, there are three more important acknowledgements which I can’t sign off without making.
Firstly, to Worth Wray: I offer a huge thank you for your warmth, friendship, and incredible insight. Those with whom you share your wisdom are lucky indeed, and I am genuinely thrilled at the prospect of watching your career unfold. Onwards and upwards, my young friend.
And then, of course, there is John himself.
Like so many thousands of folks all around the world, I started reading your thoughts over a decade ago; and throughout that time you have been a constant source of wisdom, insight, and level-headed analysis in an ever-more hyperbolic world. You have introduced me to so many brilliant people (both through your writing and in person) and have been so gracious with your time and your advice. I cannot thank you enough and am humbled to be counted amongst your many friends.
Lastly — if you’ve indulged me and made it this far — I want to thank you, my wonderful readers.
For five years you have welcomed me into your homes and your minds, humbled me by taking the time to read my words, and enlightened me with the benefit of your collective wisdom.
So many of you have taken the time and the trouble to write to me, either to offer feedback on Things That Make You Go Hmmm..., to provide further information on a subject I covered, to suggest new areas where I might go hunting for ideas, or to call me out on mistakes I have made. I have, to the best of my knowledge, answered each and every one of the many hundreds of emails I have received; but in case I somehow missed one here or there — I’m sorry! Send it again, and I’ll get back to you — hopefully with the benefit of hindsight, by which to try and make myself look smarter!
To those of you who will step off the train at this point, thank you for coming this far — truly. I’ve loved having you along for the ride, and I will miss you.
To those of you staying aboard, rest assured, there are plenty of plans in the works to make the all-new Things That Make You Go Hmmm... bigger, better, and bolder than ever before, and I am genuinely excited about having you on board.
Until next time...
My final collection of articles covers everything from the BIS report on the dollar carry trade, to the thoughts of a group of Polish intellectuals on Russia, to Wal-Mart’s travails in China. Throw in a little helicopter money, some Abenomics, a potentially disastrous bank run, and a Mexican stand-off, and you have all the ingredients for a world-class soufflé.
Top it all off with some gold, a bursting energy bubble, and a rather alarming view of China, and toss in a chart here and there (I’d suggest disconnects, stock connects, and long-term equity performance), and you should be all set.
The icing on the cake is provided by Bill Gross, a team of Bloomberg anchors, and 30 minutes of typical brilliance from the great Jim Grant.
I think that just about covers everything.
Off-shore lending in US dollars has soared to $9 trillion and poses a growing risk to both emerging markets and the world’s financial stability, the Bank for International Settlements has warned.
The Swiss-based global watchdog said dollar loans to Chinese banks and companies are rising at annual rate of 47pc. They have jumped to $1.1 trillion from almost nothing five years ago. Cross-border dollar credit has ballooned to $456bn in Brazil, and $381bn in Mexico. External debt has reached $715bn in Russia, mostly in dollars.
A chunk of China’s borrowing is disguised as intra-firm financing. This replicates practices by German industrial companies in the 1920s, which hid their real level of exposure as the 1929 debt trauma was building up. “To the extent that these flows are driven by financial operations rather than real activities, they could give rise to financial stability concerns,” said the BIS in its quarterly report.
“More than a quantum of fragility underlies the current elevated mood in financial markets,” it warned. Officials are disturbed by the “risk-on, risk-off, flip-flopping” by investors. Some of the violent moves lately go beyond stress seen in earlier crises, a sign that markets may be dangerously stretched and that many fund managers do not really believe their own Goldilocks narrative.
“Mid-October’s extreme intraday price movements underscore how sensitive markets have become to even small surprises. On 15 October, the yield on 10-year US Treasury bonds fell almost 37 basis points, more than the drop on 15 September 2008 when Lehman Brothers filed for bankruptcy.”
“These fluctuations were large relative to actual economic and policy surprises, as the only notable negative piece of news that day was the release of somewhat weaker than expected retail sales data for the US one hour before the event,” it said.
The BIS said 55pc of collateralised debt obligations (CDOs) now being issued are based on leveraged loans, an “unprecedented level”. This raises eyebrows because CDOs were pivotal in the 2008 crash.
“Activity in the leveraged loan markets even surpassed the levels recorded before the crisis: average quarterly announcements during the year to end-September 2014 were $250bn,” it said.
BIS officials are worried that tightening by the US Federal Reserve will transmit a credit shock through East Asia and the emerging world, both by raising the cost of borrowing and by pushing up the dollar.
“The appreciation of the dollar against the backdrop of divergent monetary policies may, if persistent, have a profound impact on the global economy. A continued depreciation of the domestic currency against the dollar could reduce the creditworthiness of many firms, potentially inducing a tightening of financial conditions,” it said.
The dollar index (DXY) has surged 12pc since late June to 89.36, smashing through its 30-year downtrend line. The currency has risen 55pc against the Russian rouble and 18pc against Brazil’s real over the same period.
Hyun Song Shin, the BIS’s head of research, said the world’s central banks still hold over 60pc of their reserves in dollars. This ratio has changed remarkably little in forty years, but the overall level has soared — from $1 trillion to $12 trillion just since 2000....
Mexico’s central bank revived an intervention program designed to curb foreign-exchange volatility after the peso fell to a two-year low.
Policy makers will auction $200 million on days when the peso weakens at least 1.5 percent from the previous close, the central bank said today in a statement. A similar measure to support the local currency was put in place in November 2011 and deployed just three times before ending in April last year.
The peso, which pared losses after the announcement, is still down 10 percent over the past six months on concern that a drop in oil prices will damp investment in the country’s energy industry. The new program to support the peso surprised investors including Juan Carlos Alderete, a currency strategist at Grupo Financiero Banorte SAB in Mexico City, after Finance Minister Luis Videgaray said last week that he didn’t see a need for intervention.
“I don’t think it will be necessary to actually use the measure,” Alderete said in a telephone interview. “It’s more of a preventative one based on high market volatility.”
In a statement on Dec. 5, the central bank had signaled concern that the slump in the currency might spur inflation.
The peso weakened 0.2 percent to 14.3820 per dollar at 4 p.m. in New York after earlier dropping as much as 0.7 percent to the lowest intraday price in two years. Speculators as of Dec. 2 had taken out a record number of short futures contracts, or those designed to profit from a weakening of the currency, according to data from the Commodity Futures Trading Commission and Bloomberg.
“This instrument has been successfully used before during other episodes of transitory volatility,” the bank said today in its statement. “Its main goal is to provide liquidity in foreign exchange markets if necessary.”
Salvador Orozco, deputy director for fixed income at Grupo Financiero Santander Mexico, said the bank should have made this announcement last week to calm the markets.
“I was expecting them to announce it last Friday,” he said. “Since it has worked in the past, to help contain volatility, this should give the markets more confidence.”
Do you remember seeing old pictures of the Great Depression which depicted “lines?” There were two types, bread lines and also lines to the front doors of banks. While we don’t see any bread lines today, trust me, there are bread lines in every single state and long ones at that. Nearly 50 million people in the U.S. survive on SNAP, EBT cards or whatever they are called in your state. Can you imagine the “confidence” it would instill if each day on your way to work you saw massive lines of people waiting for breakfast? Or, when you came home from work you turn on your television only to see long lines again, this time for supper? I can see it now, some reporter out on the street giving us the “good” unemployment, inflation or GDP news with a line of people in the background waiting for food. My point? False economic news would be harder to “sell” and even harder to “stomach” (pun intended).
Back during the Great Depression there were also the other type of lines, these formed in front of banks. Many banks either “ran out of money” or had poor investments which led to their demise. We also had this type of activity in the U.S. in 2008-09 … but again, we just didn’t see them. There were “electronic runs” of all sorts which we either didn’t hear about or never saw … but they did happen. This is why so many banks, brokers and mortgage companies were rolled up together and merged. The failures had to be hidden as best they could from the public’s eye because fear would have bred more fear. This cannot be allowed in a system built and standing alone on “confidence”.
I mention the above because another situation is now arising, another “line” is beginning to form. The current line formation is unfortunately the scariest imaginable, we are facing the Mother of all Bank Runs! This past week Willem Middlekoop uncovered another central bank asking for their gold back, Belgium. We already know Germany had publicly requested their gold back beginning in early 2013 and gotten very little so far. Just a couple of weeks back, The Netherlands announced the repatriation of 122.5 tons of gold …after the fact. When the announcement came, it said the transfer and transaction had already been done. Several days afterwards, a leading candidate for France’s next election also brought up the possibility of French gold being repatriated …and now it’s Belgium!!!
Notice I used three exclamation points, I did so because of all the central banks to request their gold back; Belgium in my opinion would be the very last to do so with one “caveat.” The caveat being “unless something REALLY big has changed,” let me explain. First, Belgium is the “seat” of the European Union, this is where all European decisions are made and announced (with Germany’s approval of course). The decision to repatriate gold from the “safe haven” of New York and to do it publicly raises eyebrows on its own, but this is Belgium, not “just some country” in Europe. Brussels is where the EU itself is headquartered. We are talking about a dealing between the #1 and #2 Western central banks in the world, did the EU or ECB in Frankfurt give the OK to ask for repatriation? Yes I understand, Belgium’s central bank is not the ECB but would they or any other central bank request repatriation without ECB approval? The same could be asked of both Germany and The Netherlands, they must have had prior approval before asking for their gold back?
Looking at this a little further, I remind you of earlier in the year when it was discovered “Belgium” was holding some $400 billion worth of Treasury securities. This was termed the “Belgian bulge” and not really explainable because Belgium as a country did not have the wherewithal to have purchased this amount. Either this was done via proxies or with ECB help or some other manner, it has never been explained to my knowledge. I mention this because of the important “tie” apparently between the U.S. and Belgium. If “Belgium” trusted us so much to have purchased $400 billion worth of Treasuries, then why repatriate their gold? Belgium has 227 tons of gold, we found out in 2011 that 86 tons of this amount were on lease, leaving approximately 141 tons at the FRBNY. This is only worth in current dollars somewhere close to $5 billion. The “ratio” if you will is better than 80 to one, Treasuries to actual gold “held” but not leased (hopefully?)....
Few foreigners know China as intimately as Anne Stevenson-Yang does. She has spent the bulk of her professional life there since first arriving in 1985, working as a journalist, magazine publisher, and software executive, with stints in between heading up the U.S. Information Technology office and the China operations of the U.S.-China Business Council. She’s now research director of J Capital, an outfit that works for foreign investors in China doing fundamental research on local companies and tracking macroeconomic developments.
Among other things, J Capital conducts trips for hedge fund managers, U.S. corporate executives, and bankers all over the Middle Kingdom, relying on Stevenson-Yang’s roster of government officials, Communist Party leaders, financiers, small- business operators, and ordinary citizens to take the pulse of economic and political developments.
“Every spasm of new stimulus seems less and less effective in boosting the economy.” —Anne Stevenson-Yang Photo: James Wasserman for Barron’s
An American, Stevenson-Yang, 56, is fluent in Mandarin, although her husband, a former People’s Liberation Army intelligence officer, and their two adult children sometimes mock her accent. For Stevenson-Yang, who toted Chairman Mao Zedong’s Little Red Book in high school, her years in China have given her a skeptical view of the nation’s miraculous growth. Her disenchantment arises from the stark inequality of wealth and opportunity, the thuggishness of the Communist elite, and the amount of chicanery and accounting fraud engaged in by Chinese companies and government organs. Read on to find out why she thinks that China has entered the early stages of slowing expansion, severe credit problems, and potential instability.
Barron’s: Investors seem far more concerned about Europe’s sinking into economic despond than slowing growth in China. Are they whistling past the graveyard?
Stevenson-Yang: I think so. China, for all its talk about economic reform, is in big trouble. The old model of relying on export growth and heavy investment to power the economy isn’t working anymore.
Sure, the nation has been hugely successful over recent decades in providing its people with literacy, a decent life, basic health care, shelter, and safe cities. But starting in 2008, China sought to counter global recession with huge amounts of ill-advised investment in redundant industrial capacity and vanity infrastructure projects—you know, airports with no commercial flights, highways to nowhere, and stadiums with no teams. The country is now submerged by the tsunami of bad debt that begets further unhealthy credit growth to service this debt. The recent lowering of benchmark deposit rates by the People’s Bank of China won’t accomplish much because it won’t offer more income to households. It also gave China’s biggest banks the discretion to raise their deposit rates back up to old levels, which would give them a competitive advantage
How bad can the situation be when the Chinese economy grew by 7.3% in the latest quarter?
People are crazy if they believe any government statistics, which, of course, are largely fabricated. In China, the Heisenberg uncertainty principle of physics holds sway, whereby the mere observation of economic numbers changes their behavior. For a time we started to look at numbers like electric-power production and freight traffic to get a line on actual economic growth because no one believed the gross- domestic-product figures. It didn’t take long for Beijing to figure this out and start doctoring those numbers, too.
I put much stock in estimates by various economists, including some at the Conference Board, that actual Chinese GDP is probably a third lower than is officially reported. And as for the recent International Monetary Fund report calling China the world’s biggest economy on a purchasing-power-parity basis, how silly was that? China is a cheap place to live if one is willing to eat rice, cabbage, and pork, but it’s expensive as all get out once you factor in the cost of decent housing, a car, and health care.
I’d be shocked if China is currently growing at a rate above, say, 4%, and any growth at all is coming from financial services, which ultimately depend on sustained growth in the rest of the economy. Think about it: Property sales are in decline, steel production is falling, commercial long-and short-haul vehicle sales are continuing to implode, and much of the growth in GDP is coming from huge rises in inventories across the economy. We track the 400 Chinese consumer companies listed on the Shanghai and Shenzhen stock markets, and in the third quarter, their gross revenues fell 4% from a year ago. This is hardly a vibrant economy.
How bad do you see things getting?
I hate to wear sackcloth, since in late 2011 I became quite bearish and yet a sharp dose of government stimulus managed to steady the economy. By our calculations, since June the central government directly and indirectly has added more than $400 billion of stimulus and relaxed lending terms for housing purchases. Yet, every spasm of new stimulus seems less and less effective in boosting the economy.
So most likely, China is sinking into a deflationary recession that’s increasing in speed and may take some time to run its course. Investors have lost faith in the property market, which alone comprises about 20% of GDP, when taking into account the entire supply chain, from iron-ore production to construction to related financial services and appliance sales. Employment and wage compensation will suffer. Consumption will continue to suffer. There’s even an outside possibility that China’s economic miracle could end up in a fiery crash landing, if a surge in banking-system loan defaults outruns government regulators’ attempt to contain such a credit crisis and restore financial confidence.
What are some of the other signs of economic malaise?
A big one is increasing capital flight from China on the part of wealthy Chinese, and corporations using phony trade invoicing and other ploys to get around the country’s capital controls. This trend so far has been masked by the influx of hot money into China to take advantage of its higher money-market rates, strong foreign direct investment, and, of course, China’s positive trade balance.
But something curious is happening. In the third quarter, China’s vaunted foreign-currency reserve balance actually declined by $100 billion, to $3.89 trillion. Sales of luxury foreign brands are faltering. Clearly, a lot of wealthy Chinese are rushing to cut back on in-country assets and get money offshore. If one has the ability to own a house in Sydney over an apartment in suburban Shenzhen, the choice is obvious.
Rampant capital flight could turn into a rout given the ridiculous concentration of wealth in China, cutting the seemingly impregnable foreign reserves dramatically.
Any other worries?...
TWO years ago Shinzo Abe ran for office vowing to end Japan’s long economic malaise by banishing deflation and smashing the old habits that impeded growth. He promised to make a country suffering a collapse in confidence once again stand tall. Mr Abe won the election in a landslide, yet barely two years later he has called another.
One reason for this is painfully obvious: Mr Abe has failed to deliver on those promises. Japan is once more flirting with recession and deflation. Households feel no better off. Promised structural reforms have not happened. “Abenomics”, the prime minister’s slickly marketed programme, is looking to many Japanese like a prescription that is benefiting only the rich and big business. Mr Abe’s decision to hold a fresh election on December 14th is in part a cynical move to consolidate his power before his popularity falls further.
In political terms that gamble seems likely to pay off. Given a weak opposition, it would be a shock if his Liberal Democratic Party and its junior partner, Komeito, did not win again. But does Mr Abe actually deserve a second term? Our answer is yes—but only if he does what, in an interview with this newspaper (see article), he says he will by finally embarking on the structural reforms that his country badly needs.
Mr Abe’s record is mixed. In foreign policy, he has had to cope with a resurgent China, which has been asserting territorial claims (see Banyan). But his own revisionist jingoism has often looked dangerous: his visit to the Yasukuni shrine was a needless insult to all those Asian countries whose people were slaughtered by the war criminals that are honoured there. In Mr Abe’s Japan, newspapers are once again using the term “comfort women” for the wartime sex slaves its soldiers degraded (see article), hardly tactful with the rest of Asia due to celebrate the end of the second world war next year.
But economics has been at the core of Mr Abe’s premiership. The start of Abenomics was impressive. Early last year the Bank of Japan launched a radical programme of quantitative easing—the first of Mr Abe’s promised “three arrows”. Along with the second arrow, a big dollop of public spending, this was meant to boost consumer confidence, lift financial markets and so overcome the drag caused by a long-planned rise in the consumption tax from 5% to 8% in April this year. This strategy did not work, largely because the tax rise did far more damage than anyone expected, with GDP falling at an annual rate of 7.1% in the second quarter, and a further 1.6% in the third. Core inflation in the year to October fell to 0.9%.
The Bank of Japan and Mr Abe have rightly responded to the threat of deflation by expanding quantitative easing and postponing the next rise in the consumption tax. But, given that public debt is already over 240% of GDP, Mr Abe needs to find other ways to spur the economy. Hence the emphasis on his largely unused third arrow: structural reforms to boost productivity and thus the economy’s capacity for growth.
In his first term Mr Abe forced Japan’s conservative business establishment to accept some useful changes in corporate governance and dared to say that women could be useful in the workplace. But he failed to confront the farmers, energy producers and other vested interests that gum up Japan’s economy. Now he promises vigorous action after the election. He says he will open up agriculture, overhaul the electricity market and liberalise the overly rigid labour market. He insists that a long-delayed trade deal with America over the Trans-Pacific Partnership (TPP) is imminent. That means taking on the farmers who have blocked the deal.
Fulfilling these promises would tell the world that Japan was again open for business. But will Mr Abe do it? Cynics point out that he has expressed his enthusiasm for the TPP rather less enthusiastically to domestic audiences than to foreign ones. But he did begin this term in office with considerable flair—far more than the cynics expected. Whatever his inconsistencies, Mr Abe does seem determined to make Japan great, which he cannot do without reviving the economy. Above all, he is running out of time. Unless he pushes ahead with reforms, both Japanese consumers and foreign investors will lose faith in his country’s ability to recover, and disaster will follow. In The Economist’s view he is still Japan’s best bet.
*** economist / link
Jacek Dehnel’s apartment smells like mandarin oranges and gas heating. Two dozen walking sticks protrude from one corner of the room, the accessories of a young man with the airs of a wise old dandy. Books are stacked everywhere, right up to the ceiling, and they line the walls of the poet’s three-room apartment, located in the heart of Warsaw, on the banks of the Vistula River.
The apartment offers a view of a tall, spiked high-rise — the Palace of Culture and Science, a landmark of the Polish capital and a symbol of erstwhile Soviet imperialism. The people of Warsaw have given the building many colorful nicknames, including “Stalin’s syringe.”
Today, it is surrounded by prestigious buildings designed by Western architects. The spike and the skyscrapers around it, ghostly guests looming in the twilight between East and West, are vaguely reminiscent of one of Dehnel’s poems: “Specters rise outside in the shadows, darkness comes to visit at my windows.”
In front of the syringe stands a statue of the national Polish poet Adam Mickiewicz. On the street in front of Mickiewicz, brand names from the West shine in the night — as if the iconic poet has a prickle of fear running down his neck while hope flashes before his eyes.
Warsaw reflects Poland’s history like no other place. It is the city where Soviet architecture stands next to Western skyscrapers. Where psychology is taught in the building that once housed the SS. Where rubble from Nazi Propaganda Minister Joseph Goebbels’ birth house was displayed for a few days in front of the Zacheta National Gallery of Art. Warsaw is where heavily made-up women and hipsters cross paths between McDonald’s and milk bars. It is a city where pensioners on the street give away cardboard pictures of Pope John Paul II and the wind whirls brothel business cards across the cobblestones.
Warsaw is the capital of a country located in the heart of Europe, yet on the periphery, with a culture characterized by “western easternness or eastern westernness,” as Polish intellectual Maria Janion once wrote — a country that disappeared from the map for 123 years, was cut into pieces by its neighbors, and for decades was covered by the sheet of a ghost called communism. This journey leads us to important writers in Poland — a country caught between East and West — to talk about one thing: fear.
This fear is tangible everywhere. It stares out from the front pages of newspapers and magazines, crawls across TV screens and slips into barroom conversations. It nestles in people’s minds. It is the fear of Vladimir Putin’s Russia. It is the fear thatEurope is not reacting forcefully enough to the crisis in Ukraine, the fear that Putin will advance not only to the Donets River, but soon also to the banks of the Vistula. And it is the fear of Putin himself, who just a few days ago made reference to the “centuries old common history” that connects Poles and Russians, words that sparked anxiety among the Polish media, because they match the rhetoric of the cold embrace that the Russian president has reserved for Ukraine.
This fear is expressed in an open letter, “From Danzig to Donetsk,” an appeal to Europe signed by 20 Polish intellectuals and published on Sept. 1 in the Gazeta Wyborcza, The Economist, Le Monde, La Libre Belgique, Die Welt and in the Ukrainian media. It says: “Anyone who will not say ‘no pasarán’ to Putin today (...) consents to the destruction of international order.” Furthermore: “Whoever follows today the policy of ‘business as usual’ with respect to the Russian/Ukrainian conflict is turning a blind eye (...) on attacks by Putin’s imperialist forces on successive countries. Yesterday it was Danzig, today it is Donetsk: We cannot allow a situation where Europe will be living again for many decades with an open and bleeding wound.”...
Zhong Shidan started climbing the Wal-Mart career ladder 18 years ago after she joined the U.S. retail giant’s Shenzhen outlet as a shop assistant.
Today, Zhong holds a high-level operations department position and oversees the company’s more than 80,000 employees in China. She goes by the English name Grace and works hard to reflect well on Wal-Mart as an executive who is persistent, smart and focused.
But there’s another aspect of Zhong’s professional image — and Wal-Mart’s image as a big, U.S. retailer in China — that could be working against her. Like her employer, Zhong prides herself as a little old-fashioned, which means she favors traditional retailing with bricks-and-mortar stores.
As e-commerce spreads in China, Zhong and Wal-Mart face mounting pressure to adjust their business approach as well as update their attitudes. So far, though, the company appears more committed to the physical store business than cyber shopping in China.
Big stores and payrolls are pillars of the old-fashioned retail business model that some experts say are starting to teeter for companies such as Wal-Mart, which has over 400 outlets in China.
Basic retail real estate costs in China are rising fast. A recent report by PricewaterhouseCoopers and the China Chain Store & Franchise Association, for example, said that rental costs for commercial space in China rose an average 3 to 5 percent every year between last few years. Rents have been climbing more than 10 percent annually in some premium business locations.
Meanwhile, the report said, retail industry labor costs have been rising an average 10 percent annually in recent years.
And these costs have been rising even while retail industry growth has been slowing for the past seven years in a row. The sector grew 9.9 percent 2013, according to a report by the consultant Deloitte, which marked the first time this growth fell to single digits in seven years.
The report cited China’s current economic slowdown and e-commerce competition as reasons for the cooling growth among traditional retail companies.
Wang Xiao, an executive partner at PricewaterhouseCoopers’ China retail and consumer goods division, said the country’s consumer goods market is changing as e-commerce and social media empower consumers.
“Consumers can have more shopping conduits at their disposal,” Wang said. “All of these changes are having a far-reaching impact on China’s retail industry.”
Traditionally oriented Wal-Mart, which has enjoyed impressive performance for decades, has been among the retailers affected by the switch to online shopping.
To adapt, Zhong said Wal-Mart is directing more resources toward after-sale deliveries, particularly door-to-door free delivery services for customers within two kilometers of a store. It also plans to team up with product suppliers to sponsor promotions and price items according to what e-commerce retailers offer.
Zhong refused, however, to admit that these strategies were tailored to offset the impact of the Internet. Rather, she said, the plans emerged “out of Wal-Mart’s own needs.”
Wal-Mart joined the e-commerce revolution in 2007 when it started letting shoppers order goods online and pick them up at stores. Three years later, it began taking e-commerce more seriously.
Wal-Mart China CEO Sean Clarke, who considers himself traditional and an old-fashioned retailer, says real-store shopping is still an important experience for families. Speaking to Caixin, he said e-commerce hasn’t seemed to have changed that experience.
Clarke said online shopping accounts for about 10 percent of retail sales in China, which means traditional stores still control the largest piece of the pie.
Wal-Mart sales in China rose 3.6 percent in 2012 and 24.5 percent last year. E-commerce provider JD, meanwhile, saw revenues jump 67.6 percent in 2013 to 69.3 billion yuan.
The PricewaterhouseCoopers report said consumers are rapidly migrating from outlet stores to the Internet. This is particularly true in China, where one-seventh of the population shops online every day and 60 percent every week, compared to the global average of 21 percent weekly.
During the first half of 2014, retail chains in China excluding those selling furniture and electrical appliances had altogether closed 158 outlets across the country, five times the number of closures reported in 2013.
Wal-Mart closed at least 15 stores in China in 2013, which was its first downsizing in China. Raymond Bracy, a senior vice president at Wal-Mart China’s Public Affairs Department, said a major reason for the closures was that targeted outlets had failed to meet financial targets.
At a late 2013 meeting, Wal-Mart’s top executives particularly acknowledged declining consumer loyalty in China, and that this loyalty had been eroded by e-retailers....
Bloomberg’s House Bonehead Clarifies All — Central Banks Should Literally Drop Money From Helicopters
The reason there is a terrible financial cataclysm ahead is that mainstream thinking has degenerated into outright quackery. Just read the drivel coming from financial journalists and pundits these days; and recall that the latter are little more than repeaters and amplifiers, passing along to their readers what politicians and policymakers are thinking and saying.
Take the case of Clive Crook, formerly the FT’s man in Washington and now an editorial scribbler at Bloomberg View. After lamenting the Draghi has dawdled too long getting to an aggressive QE initiative, he called out the authority of no less than Milton Friedman to justify a new absurdity in Keynesian delusion. Namely, that in dispensing trillions of new euros made out of thin air, the ECB should not simply purchase the rotten debt of Italy and the rest of the latin league; instead, it should literally mail out checks to 275 million Eurozone households and send them frolicking into the continent’s shops, stores and retail websites:
On the face of it, though, this approach would be legal. It would make Milton Friedman proud. Best of all, it’s a good idea. Fire up the helicopters!
Would that Crook were writing a parody for The Onion. But, unfortunately, the man is dead serious.
So you can either dismiss Clive Crook and his august perch at Bloomberg View as just more mainstream claptrap or ask why in the world would a purportedly literate and long-experienced financial journalist advocate such nonsense. Really. The ECB is just supposed to send, say $500 freshly minted Euros, to every household on the continent? A central bank can actually create output and wealth by hitting the send button on its digital printing press?
Yes, indeed. Crook and perhaps many others at the great Bloomberg whirligig want the ECB to hit the printing press because by their lights Europe is tumbling into the dread disease of deflation.
European Central Bank President Mario Draghi and his colleagues are ready to do whatever it takes to rescue Europe’s economy from deflation. This must be true because they keep on saying it. They’ve been ready now for as long as anybody can remember — yet inflation in Europe stays dangerously low and very little ever seems to happen.
The above quote underscores why the current financial environment is so dangerous. There is not one shred of historical evidence to prove that near price stability (i.e. 0.4% y/y increase in the CPI) is dangerous or that it causes economic growth and job creation to be lower than at the ECB’s 2% inflation target. This is just ritual incantation.
Moreover, how did we get to the point where a short term blip in the price indexes—owing to obvious trends in global oil and commodity prices and the prior appreciation of the euro FX rate—is cause for resorting to absolute monetary quackery? Perhaps Crook should be reminded once again that other than the last few months, Europe has had no lack of inflation, and that for 14 years running it has hit or exceeded the ECB’s 2% inflation target.
Yet there has been no aggregate gain in Eurozone output since 2006. How can it possibly be argued, therefore, that getting the CPI back to 2% will suddenly and magically reignite economic growth?
Indeed, the Eurozone’s problem is that incomes are buried in public and private debt at nearly 400% of GDP, while the supply side of its member economies have been battered and bruised by decades of statist dirigisme and welfare state disincentives to production. QE through the secondary market for government bonds or directly by helicopter delivery to the public can not possibly alleviate these statist barriers to prosperity.
YOU would have thought by now — 43 years after President Richard M. Nixon scrapped the gold standard — that gold’s role as an economic instrument was over. After all, the mighty metal that once held sway over the global monetary system was supposed to have, by this point, finally been reduced to just another asset peddled on the Internet.
But in fact in recent weeks, gold has experienced a renaissance of sorts, quietly re-emerging as the centerpiece of a handful of initiatives in Europe, Asia and the Middle East. On Dec. 1, voters in Switzerland considered — and eventually rejected — a populist plan to force its central bank to buy gold in a controversial bid to stabilize its currency. Russia and China both made headlines by snapping up enormous stores of gold. In late November, Marine Le Pen of France, a nationalist politician, called on her government to start amassing gold, and the Netherlands followed suit, revealing that same week that it had repatriated $5 billion of its own gold from a vault in New York City owned by the Federal Reserve.
Even the Islamic State, it appears, has become intrigued by gold. Declaring last month that it wanted to avoid “the tyrant’s financial system,” the group released a statement announcing that it was planning to produce a line of custom-made gold coins.
What’s going on here? Like almost everything concerning gold, the experts don’t agree. Some have interpreted the metal’s mini-comeback as an indication that financial Armageddon, in the guise of runaway inflation, is approaching. Others have read the recent moves as a symbolic way for central banks and governments to make a show of strength in nervously uncertain economic times.
“Holding gold, for people and for governments, reflects our anxieties about the future,” said Michael Bordo, a professor of economics at Rutgers University who specializes in monetary history and policy. “Even though it might seem somewhat retrograde, to many investors, having it on hand is something safe.”
At a time when central banks around the globe have tried to foster growth by aggressively printing money — which can in theory devalue sovereign currencies — moves by countries to recall their stores of gold can help create a “culture of stability,” Professor Bordo said. But then again, to simply stockpile gold doesn’t guarantee the health of an economy, and some analysts have said that such notions of stability are often more psychological than actual.
The Swiss proposal, for example, called for the central bank to hold at least 20 percent of its national reserves in gold. While the referendum was designed in part to reassure Swiss citizens concerned about the solvency of their money, some historians have argued that, even had it passed, it would have had no palpable effect on the value of the franc.
“It was mostly a symbolic move,” said Richard Sylla, a professor of the history of financial markets and institutions at New York University. “Which isn’t to say that it was crazy or unfounded. What the Swiss were really saying by considering the plan was that some of them were going to feel a whole lot better if they had tons of gold inside the bank.’”
There remains the question of why gold has traditionally served as the economy’s equivalent of comfort food. According to Professor Bordo, it is, for one thing, a highly liquid asset that is easily exchanged for other currencies.
Furthermore, he added, when it was used as part of the gold standard, its controlled supply served to limit central banks from printing money and put a lid on profligate government spending.
Needless to say, in an era when the balance sheets of many central banks have expanded to unprecedented scope, there has been plenty of discussion of those last two trends, causing a pessimistic sect of economic experts to augur pending doom in the repatriation schemes and the shopping sprees by Moscow and Beijing.
“By purchasing gold, China and Russia have indicated that they understand how fragile things are and that they’re getting ready for the demise of the dollar,” said James G. Rickards, author of “The Death of Money: The Coming Collapse of the International Monetary System.” “At the same time, other countries have been watching what they’re doing and are saying to themselves, ‘If things are really that bad, then we better get our gold back,’ possession being nine-tenths of the law.”
Of course, not all economists have interpreted gold’s resurgence as heralding a geopolitical disaster.
To Joshua Aizenman, a professor of economics and international relations at the University of Southern California, dabbling in gold is mainly an attempt by bankers and officials to send a message to the world — one that signals an appetite for power or that broadcasts a desire to challenge a rival. “I doubt that the Chinese or the Russians actually believe that gold is such a great investment in terms of pure returns,” Professor Aizenman said. “But if they’re trying to suggest that they’re unhappy with the dollar or that they want to become a global player, then gold is very powerful.
“The investment is a symbol,” he explained. “It’s made for political, not financial, gain.”
The danger of stimulus-induced bubbles is starting to play out in the market for energy-company debt.
Since early 2010, energy producers have raised $550 billion of new bonds and loans as the Federal Reserve held borrowing costs near zero, according to Deutsche Bank AG. With oil prices plunging, investors are questioning the ability of some issuers to meet their debt obligations. Research firm CreditSights Inc. predicts the default rate for energy junk bonds will double to eight percent next year.
“Anything that becomes a mania — it ends badly,” said Tim Gramatovich, who helps manage more than $800 million as chief investment officer of Santa Barbara, California-based Peritus Asset Management. “And this is a mania.”
The Fed’s decision to keep benchmark interest rates at record lows for six years has encouraged investors to funnel cash into speculative-grade securities to generate returns, raising concern that risks were being overlooked. A report from Moody’s Investors Service this week found that investor protections in corporate debt are at an all-time low, while average yields on junk bonds were recently lower than what investment-grade companies were paying before the credit crisis.
Borrowing costs for energy companies have skyrocketed in the past six months as West Texas Intermediate crude, the U.S. benchmark, has dropped 44 percent to $60.46 a barrel since reaching this year’s peak of $107.26 in June.
Yields on junk-rated energy bonds climbed to a more-than-five-year high of 9.5 percent this week from 5.7 percent in June, according to Bank of America Merrill Lynch index data. At least three energy-related borrowers, including C&J Energy Services Inc. (CJES), postponed financings this month as sentiment soured.
“It’s been super cheap” for energy companies to obtain financing over the past five years, said Brian Gibbons, a senior analyst for oil and gas at CreditSights in New York. Now, companies with ratings of B or below are “virtually shut out of the market” and will have to “rely on a combination of asset sales” and their credit lines, he said.
Companies rated Ba1 and lower by Moody’s and BB+ and below by Standard & Poor’s are considered speculative grade.
The Fed’s three rounds of bond buying were a gift to small companies in the capital-intensive energy industry that needed cheap borrowing costs to thrive, according to Chris Lafakis, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.
Quantitative easing “has been one of the keys to the fast, breakneck pace of the growth in U.S. oil production which requires abundant capital,” Lafakis said.
One of those to take advantage was Energy XXI Ltd. (EXXI), an oil and gas explorer, which has raised more than $2 billion in the bond market in the past four years.
The Houston-based company’s $750 million of 9.25 percent notes, issued in December 2010, have tumbled to 64 cents on the dollar from 106.3 cents in September, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. They yield 27.7 percent.
Energy XXI got its lenders in August to waive a potential violation of its credit agreement because its debt had risen relative to its earnings, according to a regulatory filing. In September, lenders agreed to increase the amount of leverage allowed.
“We think the sell-off has been a little over done,” said Greg Smith, a vice president in Energy XXI’s investor relations department. “People are trading us as though we’re distressed.”
The company has “plenty of liquidity,” Smith said. “Come January we’ll be free cash flow positive,” which is “a rarity in this business,” he said.
The debt rout is one of the latest examples of a boom and bust in U.S. markets as unprecedented Fed stimulus fuels a hunt for yield. The fallout has been limited so far, yet the longer the Fed holds its benchmark lending rate near zero, the greater the risk of more consequential bubbles, according to former Fed governor Jeremy Stein.
“To the extent that highly accommodative monetary policy courts risks to the economy further down the road, there is more of a live trade-off than there was at 8 percent unemployment” said Stein, now a Harvard University professor.
Joblessness of 5.8 percent in November was about half a percentage point away from the Fed’s estimate of full employment, or the lowest level of labor market slack the economy can sustain before companies bid up wages.
Employment in support services for oil and gas operations has surged 70 percent since the U.S. expansion began in June 2009, while oil and gas extraction payrolls have climbed 34 percent.
“There are distortions in multiple markets,” said Lawrence Goodman, president of the Center for Financial Stability, a monetary research group in New York. “It is like a Whac-A-Mole game: You don’t know where it is going to pop up next.”
Fed Chair Janet Yellen said in a July 2 speech in Washington that she saw “pockets of increased risk-taking,” including in the corporate debt markets.
Midstates Petroleum Co. (MPO) is spending about $1.15 drilling for every dollar earned selling oil and gas. Outspending cash flow is the norm for many companies in the U.S. shale boom....
Sometimes charts don’t need much in the way of annotation.
These, courtesy of Zero Hedge, are two such...
There’s a major change taking place in the Chinese stock market — one that could affect markets worldwide.
The Stock Connect link between the Shanghai Stock Exchange and the Hong Kong Stock Exchange expands the connection between the mainland Chinese stock market and the rest of the world.
The result could be a flood of new opportunities for investors and companies inside or outside of China.
Visual Capitalist put the possibilities into easy-to-understand graphic form.
Mark Yusko presented this chart at the recent iCIO Summit in New York, and I thought it was well worth reproducing here.
The chart shows the performance of major world stock indices since 2000, and as you can clearly see, there is one market that has outperformed all the others by a considerable margin — and it’s a market where not many Western investors have been focusing: India.
The BSE Sensex Index has outperformed the S&P 500 and the Hang Seng by a factor of TEN since the turn of the century.
Also noteworthy is the poor overall performance of Japan’s Nikkei, despite its recent “strength,” and France’s CAC 40, which seems to be doing a far better job of representing the state of the republic than its ECB-supported bond market.
Food for thought...
Source: Doug Short
Bill Gross talks to Bloomberg’s Tom Keene about what he sees as the new normal — zero or negative interest rates — and explains why the Fed is about to turn dovish thanks to the drop in crude oil prices in recent weeks.
More on oil — this time we hear from a surprised Bloomberg anchor how “central bankers are losing control of their bond markets,” why Russia’s is not a “normal currency crisis,” why the Norwegians are warning of oil-price-drop contagion, and how a Chinese power station is burning (fiat) currency to produce power.
Jim Grant is one of my personal financial heroes, and this week we get the chance to watch him give the opening keynote address at the Cato Institute’s 32nd Annual Monetary Conference.
Half an hour of brilliance on gold, constitutional money, free banking, and even Bitcoin.
Last Christmas I offered TTMYGH readers a couple of seasonal discounts from small companies I had used during the year and with whose products I had been delighted.
One of those offers was from a small, luxury ladies sandal company based right here in Singapore, and many of you took advantage of the kind offer they made of a 30% discount on their entire product line.
That offer was extremely popular, and I got a ton of emails from satisfied readers who had taken advantage of the offer and were really happy with their gifts.
I’m delighted to say that George Blue has very kindly agreed to repeat the offer for my readers this year; so, if you are looking for a gift for someone special, look no further!
Happy shopping, folks!
Grant Williams is the portfolio and strategy advisor to Vulpes Investment Management in Singapore — a hedge fund running over $280 million of largely partners’ capital across multiple strategies.
The high level of capital committed by the Vulpes partners ensures the strongest possible alignment between the firm and its investors.
Grant has 28 years of experience in finance on the Asian, Australian, European, and US markets and has held senior positions at several international investment houses.
Grant has been writing Things That Make You Go Hmmm... since 2009.
As a result of my role at Vulpes Investment Management, it falls upon me to disclose that, from time to time, the views I express and/or the commentary I write in the pages of Things That Make You Go Hmmm... may reflect the positioning of one or all of the Vulpes funds—though I will not be making any specific recommendations in this publication.
A walk around the fringes of finance
THINGS THAT MAKE YOU GO
By Grant Williams
17 December 2014
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