Saturday, August 1, 2015

We Must Deal With Iran

One way or another we must deal with Iran. Six world powers have  reached an agreement with Iran on its disputed nuclear program after years of talks. The Iran nuclear negotiations that have finely ended will now will be spun to constitute a major victory with John Kerry saying things like "What the critics of this plan never offer... is a realistic alternative."  Many Americans are currently trying to get their heads around whether or not the deal John Kerry and team has negotiated and promoting is good, bad, or just so-so. In the progress we must be careful not to let partisan divides or disdain for the current President poison our judgement. A gigantic problem is the perception that we have created over the years as Iran being a larger than life boogeyman that threatens our very way of life and existence.

Remember Iran was elevated to this level when President George W. Bush used the term "Axis Of Evil" in his State of the Union Address in 2002, not only did he include Iran as being a member, but he often repeated it throughout his presidency. A big issue with me is that Washington and the politicians who reside there have lied and mislead us so often it is difficult to believe them when it comes to such an important matter as this. The icing on the cake is my total lack of confidence in the President who I feel has not only lied to us, but failed in so many ways to keep the promises he made to the people who have put him in office. This is exacerbated by the fact I'm dubious of anything coming out of the White House, or congress because government is very attuned and highly geared to serve the agendas of special interest that place lining their pockets above the common good.

The current agreement on the table supposedly squares off against the unsavory option of taking military action to halt Iran from developing a bomb.  History shows war to be a pathetic option to bring about positive change, it may change things, but to what degree and for how long. In truth few Americans know much about Iran or its 78 million inhabitants or have ever visited the country. Many people would have difficulty pinpointing its location on an unmarked map and the chief source of what knowledge they do have is usually from the evening news. The official name of the country is the Islamic Republic of Iran and it is an area that history called Persia with Persian being the official language and the rial is it's currency. Iran's unique political system based on its 1979 constitution combines elements of a parliamentary democracy with a theocracy governed by the country's clergy. The country is made up of several ethnic and linguistic groups but most inhabitants are officially Shia.

A little research shows that in regard to Iran's attitude towards America anyone saying that Iran has good reason not to trust the American government is making an understatement. America through its foreign policy has reeked havoc upon many countries, but few societies have been affected or suffered from our meddling as much as Iran. A neutral source without an agenda in this case would be Wikipedia, and a quick read of the history of Iran post World War II shows America has constantly interfered in their internal politics. In 1953 the British M16 and the American CIA organized a military coup 'étadt to oust the nationalist and democratically elected Prime Minister and form a government that allowed the country to be firmly ruled by Mohammad-Reza Shah Pahlavi, the man we all know as the Shah of Iran, in Persian Shah means king.

The Shah maintained a close relationship with America and shared our views towards the Soviet Union its northern neighbor. Iran was a strong ally in efforts to keep the Russians contained during the cold war. While the Shah Westernized and modernized Iran he also ruled with a heavy hand. Arbitrary arrests and torture by the Shah's secret police, was used to crush all forms of political opposition. Ayatollah Ruhollah Khomeini an active critic of the Shah publicly denounced the government and was arrested and imprisoned for 18 months. After his release when Khomeini publicly criticized the United States government he was sent into exile. When oil prices spiked in 1973 due to an oil embargo declared by OPEC and several other countries a flood of foreign currency into Iran caused double digit inflation, waste, and corruption that was followed by a recession and social unrest. Protest and strikes spread until they reached a point where the Shah fled the country and  Ayatollah Khomeini returned in 1979.

In the spring of 1979 a new government was formed and over the next several years uprisings were subdued in a violent manner as the new government went about purging itself of the non-Islamist political opposition that had joined with them to overthrow the Shah, tens of thousands were eventually executed by the Islamic regime. A part of history that lingers strongly in the minds of many Americans is that in November 1979 a group of Iranian students seized the U.S. embassy taking  52 U.S. citizens and embassy personnel hostage after the U.S. refused to return the former Shah to Iran to face trial and execution. The hostages were finally set free on Jimmy Carter's final day in office, but many Americans continue to view this as a slap in the face.

A serious bone of contention among Iranians might be what happened next. On September 22, 1980 the Iraqi army invaded Iranian Khuzestan this signaled the start of the Iran–Iraq War. Although Saddam Hussein's forces made several early advances, by mid 1982 the Iranian forces successfully managed to drive the Iraqi army back into Iraq and Iran made the decision to invade Iraq in a bid to conquer Iraqi territory. The war continued until 1988, when the Iraqi army defeated the Iranian forces inside Iraq and pushed the remaining Iranian troops back across the border. It is clear the United States, alongside regional and international powers, supported Iraq and Saddam Hussein with loans, military equipment and satellite imagery during Iraqi attacks against Iranian targets. Subsequently, Khomeini accepted a truce mediated by the UN, but the war cost Iran many lives and huge economic damage, half a million Iraqi and Iranian soldiers, with an equivalent number of civilians, are believed to have died, with many more injured. It must be noted that during the conflict America and the international community remained silent as Iraq used chemical weapons of mass destruction against Iran as well as the Kurds in northern Iraq.

Following the war Iran concentrated on a pragmatic pro-business policy of rebuilding and strengthening the economy without making any dramatic break with the ideology of the revolution. Tensions with the United States dramatically increased after the 2005 presidential election brought the conservative populist candidate, Mahmoud Ahmadinejad, to power. His over the top rhetoric galvanized the feeling Iran had no intention to take a peaceful place in the world community. In 2009 protest erupted in Iran after President Mahmoud Ahmadinejad was reported to have won nearly 60 percent of the vote despite voting irregularities. Despite the relative peaceful nature of the protests, the police and the Basij (a paramilitary group) crushed the people by using batons, pepper spray, sticks and, in some cases, firearms. Images of Neda Agha-Soltan, who was shot and died were uploaded to mass media and broadcast around the world.

It was reported that thousands were arrested and tortured in prisons around the country, with former inmates alleging mass rape of men, women, and children by the Iranian Revolutionary Guards. Relatives of those killed are forced to sign documents claiming they had died of heart attack or meningitis. The world watched and did nothing. On June 15, 2013 the electoral victory of new Iranian President Hassan Rouhani took place and since then Iran has improved relations with other countries. This recall of history is necessary to understand the real nature of the American Iranian relationship and how we arrived at today. It should be noted that many Iranians have no malice towards America and are far more moderate than the political apparatus with its strong links to the country's clergy. A few years ago Rick Steves produced a documentary that explored Iran in a one-hour, ground-breaking travel special. This is a good place to meet the people of this nation whose government so exasperates our own.

Kerry stressed that if Iran fails to meet the requirements of the current deal, all options remain on the table. I am not a warmonger and feel that armed conflict tends to be a Pandora's box rather than an easy answer to our woes. We must defend ourselves, but the fact is mothers value their children just as the peasant in a rice patty field values his ox, neither want to see them killed in war.  If we look at every war ever fought we will find that most of the people effected by the violence only wanted to be left alone. It seems the first casualty of war is truth and governments often go to enormous lengths to persuade people to go to war using the tools of patriotic seduction, propaganda, and coercion. Governments convince and mobilize the people by painting a picture of an evil enemy that must be stopped. This means a lack of knowledge does not bode well for society when it comes to our ability to foster intelligent government. The term "need to know" should be revisited and changed to "we all need to know as much as possible".

With this in mind please do not give Obama too much credit for bringing us a great or even good agreement, sadly what is put before us with flowery phrases about his legacy should be questioned. Remember that in six years he has been in office, foreign policy has been in shambles and he has flip flopped ignoring the red lines he boldly drew in the sand. When Kerry talks about offsetting the boatload of money Iran will receive when sanctions are lifted by "upping our game in the area" questions arise as to the cost and how Washington intends to pay for this next gambit. Even a part of the one hundred and fifty billion dollars Iran is slated to get will go a long way to fund the many proxy wars being fought in the area. While officials say this international agreement will halt much of Iran’s nuclear program and ratchet back other elements of it several U.S. senators, both Democrat and Republican, have voiced displeasure with the parameters of the agreement, arguing that the U.S. and its partners are offering too much for something short of a full freeze on uranium enrichment.

Those who are skeptical and view this as a weak agreement say Obama has again backed down again. The President has noted the qualms of Israel, Saudi Arabia and other Persian Gulf allies of the United States and that they are skeptical of Iran’s intentions. An interesting thought to consider is Iran holds more cards than you might think because of ISIS. In many ways Iran holds the fate of Baghdad in their hands. If the Shia militias from Iran that are currently defending Baghdad waver both the Iraqi capital and the American Green Zone could come under fire from ISIS, this would be very embarrassing for Obama and our government. For the world the bottom-line remains that if  Iran does not halt and reverse its course any agreement means nothing. Iran can always ramp up its plans to develop a nuclear bomb at off site locations. The fact is if current trends continue in the future Iran looks to face a defanged and economically weakened America with less power in the region. Regardless it appears one way or the other we must deal with Iran and war is not a great option.

Friday, July 24, 2015

Amazon Is A Job Killer

Amazon may become world wide lightning-rod for discontent
Amazon is a major job killer and should be recognized as such. While politicians tout how they helped Amazon create a few hundred or thousand jobs in a certain area or state they often fail to comprehend the number of jobs they destroyed or the damage they do to the communities devastated by the unfair competition they have endorsed. This includes things like not insisting Amazon collects sales tax in all states or offering the company special and costly incentives to locate operations in their state. Amazon abuses and exploits the brick and mortar stores in the malls and lining the streets throughout America. These are the stores that employ our family members, support little league teams in the community, and add value to our lives.

In many cases our local stores have become showrooms for consumers who then look for cheaper deals online. Amazon’s "no sales tax" advantage can often make a difference with penny-pinching shoppers. When looking for big-ticket items, such as consumer electronics, the absence of sales tax can be more appealing than instant gratification.  Remember these stores build or lease space, buy supplies from the other local businesses, and pay both sales and real-estate taxes. With internet shopping posing a mounting threat to bricks-and-mortar stores and U.S. shopping-center owners smarting from high vacancies an effort to level the playing field is being made. Many supporters of local business are now throwing their weight behind federal bills aimed at requiring online retailers to collect sales tax, but until now nothing has been done.

This is not to say the sale of goods over the internet does not have a great deal of merit, but it is how this is used that determines its effect on society. Republican Governor John Kasack from Ohio who is running for President is one of the many politicians including Obama himself that I have heard bragging about their association with Amazon as a good thing. They talk about how jobs were created, in Kasack's case full discloser would have him talking about how The Ohio Tax Credit Authority approved tax incentives for Vadata, a subsidiary of Amazon Web Services, worth an estimated $81 million in August. Amazon’s $1.1 billion investment will be made over three years and is expected to create only 120 jobs that would pay an average of $80,000 a year. Please note that when government chooses winners and subsidizes groups like Amazon the cost is shifted onto other businesses.

Amazon spins focus away from the limited amount of financial data it releases and when promoting its cloud fails to talk about the data it collects and government connections to spying on the American people. The recent 20th anniversary of Amazon celebrated by a their "Amazon Prime" sales event is the catalyst for this posting. A lack of supply on hot items and a hard push on unexciting merchandise adds to original suspicions that Prime Day was less about celebrating Amazon's 20th birthday and more about moving unsold inventory at discount prices. It appears many consumers were left feeling it was a frustrating endeavor and found that the best deals ran out by the middle of the afternoon. This sale was more reminiscent of a giant internet garage sale than the kind of quality of items people were expecting and hoping for from Amazon.

What I want to make clear is that Amazon is a self promoting hype machine that is far from transparent and while politicians fall over themselves to be in its shadow it is not our friend. It looks to a future where workers are replaced by robots as it goes about putting small companies out of business. Companies selling over the internet do serve a clear purpose by making hard to get items or products that have a small market available to people everywhere and this is a good thing. Small business working through companies like eBay in many ways help grease the wheels of commerce by linking buyers and sellers in what are often very illiquid markets. Many of the items sold on eBay fall into the category of "used" and when they get put back into service this even has a positive environmental impact that could be put in the "recycle and reuse" category. This is a far different business model than the one we see from Amazon where often UPS trucks often drive many miles to deliver a small item packaged in a fresh new box.

At some point in time Amazon may become a lightning-rod of discontent because of its anti-social behavior . With each announcement that it intends to expand into even more areas and sectors of the economy just as Wal-Mart angered Americans, Amazon may begin to share the same fate. In Germany anger has risen about how they treat their workers and in Britain for sidestepping taxes. A May 2014 article by Graham Ruddick delves into how the US online retailer had previously reported in its US accounts that sales in Britain grew to 6.7 billion dollars in 2013. However, new accounts filed at Companies House show sales of just 620 million dollars for Limited Pre-tax profits for rose 56 percent to 26 million, with tax payments rising from 5 million to 6.5 million dollars. The company claims all is on the up and up and it has to do with the point of origin and from where the goods are shipped.

Margaret Hodge, chair of the public accounts committee, said that UK shoppers should boycott Amazon over the level of tax it is paying. Amazon’s tax bill will infuriate its UK rivals, such as John Lewis, Home Retail Group, and Dixons, who are shelling out hundreds of millions of pounds on business rates for their property as well as corporation tax. The bottom-line is that sooner or later more and more people will realize the damage exploiters like Amazon unleash upon their communities. Also, I expect that investors will begin to reflect in the company's stock price that it make no profit just about the time new competitors begin to cheaply and easily replicate the most profitable parts of Amazon and cherry pick much of its future potential. Amazon will not be the first big company to get its comeuppance.

With its history of little or no profit the disruption Amazon is causing has drawn the ire of people across the world. This is not about trying to tamp down efficiency or set back the process of economic creative destruction that replaces uncompetitive institutions. It is a call that we recognize balance, sustainability. and a warning of the danger government subsidies coupled with unfair tax policies is bringing about. It is ironic and borders on hypocrisy that so many of those who have criticized and boycotted Wal-Mart over the years have become staunch Amazon customers. While I concede the company may offer good prices and service I for one refuse to feed a beast that will in the end do me harm.

Saturday, July 18, 2015

Is This A Bear Market Rally?

Netflix CEO Reed Hastings shocked by 16% stock jump!
Some of the rather bizarre market action recently has me wondering if we are in the middle of a bear market rally, and if so how violently it might end. Several stocks on an uptrend appear fundamentally unstable and lack a certain and important "je ne se qua" such as earnings and profit. The french phrase je ne sais quoi as you know denotes a elusive quality or attribute that is difficult to describe or express. It literally means "I do not know what". It is often used when referring to that special intangible quality that makes something or someone distinctive or attractive, in the case of stocks I find profitability as "something" rather important.

Lately in an effort to justify high stock evaluations we have seen profitability being discounted and taking a backseat to things like market momentum. I consider this a dangerous situation. When stocks like Amazon that are trading at an astronomical P/E then miss earnings, or actually lose money, it is hard to explain why stocks prices reverse after a sharp drop then close the next day posting huge gains. Recently, we have witnessed massive moves in several speculative stocks like Tesla and Netflix that are hard to defend by any other reasoning than shorts being squeezed out of the market. May I suggest the market has become so distorted it no longer reflects reality and that those with short positions rushing to the exits are responsible for most of the price action now taking place. 

An unholy alliance made up of the Federal Reserve, the government, and the too big to fail has placed the markets in a rather precarious place. For the big boys, it's insider information and computer trading, this includes using computer programs that exploit where stops are placed that improves their ability to wash the weak out of their positions. With many investors skeptical of the ever upward moving market we are increasingly seeing bears putting a toe into the water and establishing short-positions with tight stops. It seems many of these bears are very timid and these stops rapidly come back to haunt them, it is as if they have painted a target on their back. When they exit and buy back their positions we find they have done the heavy lifting for those wishing to manipulate the market ever higher.

All this action has elevated the "buy the dip" and "don't fight the Fed" mantras to new levels. Following the 2008 collapse the market started showing some odd patterns and many of us saw these as the result of what we called the "plunge protection team" this team appears to have  morphed into a full fledged market manipulation vehicle over the years. Time and time again we has seen the type of reversal Goldman Sachs and JP Morgan backed by the Federal Reserve can generate with a concerted effort to buy S&P 500 index futures at crucial support points late in the day. They have proven it is more than enough to turn the markets from red to green in the blink of an eye. In many cases light volume makes these moves even more suspicious.

While those holding long positions have been busy patting themselves on the back and taken to bragging about their cunning ability to pick stocks the market has moved to where it does not reflect reality. We must and should on occasion look at the underlining assets supporting these valuations. The bottom-line is that the higher the market goes the more vulnerable it becomes to a major collapse and sudden downward move. A lack of short positions will bode poorly for the market if it falls rapidly because in such a situation as shorts take profit and buy back their positions they act as a floor under the market giving it support. In this distorted market we may find the floor is very weak or only an illusion.

Linking this all together and the main justification for such market manipulation is the idea that higher equity prices will reflect a strengthening economy and create a wealth affect that will drive more consumer spending. Like many investors I feel the growing gap between what is happening on Main Street and stock evaluations is a harbinger of problems ahead. A bit of deja vu is in the air, we have seen this all before. Way back in 2007 we saw all stocks moving in unison, always upward, often ignoring both the news and reality, it is happening again. This is a reason for caution! If it looks like a Ponzi scheme, sounds like a Ponzi scheme, and feels like a Ponzi scheme, then it is probably a Ponzi scheme, and as history has shown these schemes do not end well.

Sunday, July 12, 2015

Grexit Coming - How They Will Save Face

Where do we go from here? It is likely Greece will soon exit the Euro-zone, but do not be surprised if it is done under some new or politically correct moniker that puts the action under the most positive light possible. One way to re-frame this is not to view it as a bailout but as “humanitarian aid”. Two things are apparent, first this soap opera is far from over, and the other that Greece remains a money pit or "black-hole." This has generated suggestions that Greece take on a new "quasi membership" status of half in half out. This might give the country many of the benefits of being in the EU while giving it far more room and flexibility to put its house in order. Anyway you look at this it almost impossible for Greece to repay these euro-denominated debts, this not only applies to the government, but also to the private sector.  However, what is uncertain is the timetable over which all this will play out and what will bring down the final curtain.

Keep in mind the fact Greece is totally broke and that just because Greece defaults does not mean the debt suddenly vanishes. All dept is not created equally and lawsuits and disputes will rage on for years maybe even decades. The fact you cannot squeeze blood out of a turnip will not mean that those who are owed money will not pursue Greece into hell and back in an effort to recover at least a part of their money. Yes, write offs will be made and the balance sheets of those holding the debt will feel the blow, but the carnage will play out over time rather than be immediate. While people point out Greece is a small country and a small part of the Euro-zone GDP it has a massive amount of dept, and debt does matter! Greece cannot make this debt obligation vanish or go away by simply declaring it odious, as a parliamentary commission in Greece has recently done. The ECB, the IMF and every country in the EU that has contingent liabilities due to guaranteeing EFSF loans to Greece or has bilateral loans to Greece outstanding, would sue for repayment.

 Most of us forget the fact that 100 billion in Greek debt has already been forgiven in the “voluntary” private sector initiative in 2012. It is human nature to forget the details of things that are not in our face but if anything distant and a bit abstract. Below are a few key lines as to what Wikipedia says about this recent time in history;

In April 2010, adding to news of the adverse deficit and debt data for 2008 and 2009, the national account data revealed that the Greek economy had also been hit by three distinct recessions (Q3-Q4 2007, Q2-2008 until Q1-2009, and a third starting in Q3-2009),[76] which equaled an outlook for a further rise in the debt-to-GDP ratio from 109% in 2008 to 146% in 2010. Credit rating agencies responded by downgrading the Greek government debt to junk bond status (below investment grade), 
On 2 May 2010, the European Commission, European Central Bank (ECB) and International Monetary Fund (IMF), later nicknamed the Troika, responded by launching a €110 billion bailout loan to rescue Greece from sovereign default and cover its financial needs throughout May 2010 until June 2013, conditional on implementation of austerity measures, structural reforms, and privatization of government assets.
A year later, a worsened recession along with a delayed implementation by the Greek government of the agreed conditions in the bailout programme revealed the need for Greece to receive a second bailout worth €130 billion (including a bank recapitalization package worth €48bn), while all private creditors holding Greek government bonds were required at the same time to sign a deal accepting extended maturities, lower interest rates, and a 53.5% face value loss.[78]
The second bailout programme was finally ratified by all parties in February 2012, and by effect extending the first programme, meaning a total of €240 billion was to be transferred at regular tranches throughout the period of May 2010 to December 2014.

Fallout from the overwhelming 61% “No” vote taken by Greece has angered several members of the Euro-zone and reduced sympathy for them going forward. The latest ultimatums from both sides are leaving less wiggle room. Even before Greece’s referendum on a bailout plan in early July, EU decision makers, including Eurogroup Chairman Jeroen Dijsselbloem, warned a “no” vote might lead to Greece’s exit from the Euro. Greece is already in default to the IMF, on June 30, 2015 it failed to make an IMF loan repayment making it the first developed country in history to default on an IMF loan, at that time Greece's government had debts of 323 billion euro. Currently the the Greek banking system is dependent on the ECB. A scheme called Emergency Liquidity Assistance (ELA) that allows the Greek Central Bank to issue loans to banks with liquidity problems and in effect prop up insolvent banks. A two thirds majority is  needed within the ECB Governing Council to block the Greek Central Bank from creating euros to lend to Greek banks, this hasn’t been reached yet, but it appears the ECB is reaching its limit. 

If Greece would back down on its calls for debt restructuring it could enter a new European Stability Mechanism (ESM) program, but things do not seem to be moving in this direction, it is more likely that the EU Summit this Sunday will move towards excluding Greece from the Euro-zone and provide funds to make the transition to Drachma through the so-called “Balance of Payments” facility for non-euro states that has been used for Romania, Hungary and Latvia. The fact that EU Commission President Juncker declared that “We have a Grexit scenario, prepared in detail” indicates for the first time that adopting the euro as your currency is not irreversible. Now that the Greek people have sent a powerful signal by voting "No" they have given Euro-zone politicians the political cover they wanted and it will be much harder to blame them for refusing continued transfers and support.

Still we can expect the Euro-zone countries will most likely fly in occasional shipments of euro bank notes until the end of summer, in order to avoid a risk of social breakdown. This special “transition bailout” – possibly financed by future cuts to EU subsidies for Greece could be implemented as a way to raise hopes for an orderly transition to the Drachma. There is also an alternative scenario in which Greece after defaulting and restructuring its banks would continuing using the euro but it would no-longer enjoy the cheap money from the ECB. The Euro-zone could grant Greece a special status as an incentive to stay in both the EU and NATO. By shifting them into a status similar to that of Bulgaria, Sweden and Poland that will be seeking full membership down the road. German Finance Minister Schäuble alluded ahead of the referendum that a Greek “no” could lead to a “temporary” Grexit and opened a path to this potential scenario.

As to debt restructuring even Ms. Merkel has acknowledged that a restructuring will be required. However, she continues to dismiss an outright haircut as not viable and on her side is a history of Greece continually failing to honor agreements and their unsavory habit of returning to the table always asking for more. Make no doubt about the fact this makes no practical difference because a series of back-hand deals has already transferred the debt to all the people of Europe. A further stretching out of debt maturities will allow the real value of this debt to be eaten into by inflation, and if there is one thing we can be certain about, it is that the ECB will provide plenty of inflation. True money supply growth in the euro area has shot well above 13%. If Greece tries  to simply refuse paying any of this debt it will become shunned in the capital markets for years to come adding to its woes. Obviously, this makes it even more likely that Greece might eventually have to link up with Russia, which it is incidentally about to strike a deal with over a gas pipeline. The issue now before politicians and bankers is how to create the illusion this doesn't matter and minimize the fallout.

Footnote, July 15th-11pm; The problems with Greece are not resolved until the man on the street is on board with the agreement. This evening Greece voted to accept the harsh offer the Euro-zone has offered up over the cries of many of the Greek people. This is a bit of a surprise to some of us, but in many ways just another move in a long game that has yet to play out. The situation in the Euro-zone and its relationship with Greece just got more complicated and interesting. Do not be surprised if this all blows up in the faces of the politicians and ratchets up into massive civil unrest. It is apparent the Greek people feel the same kind of anger towards their lenders as the German people had following World War I and we would be wise to remember the  misery that fostered.

Saturday, July 11, 2015

Ignorance is bliss!

Ignorance is bliss! This is a tribute to all those cute little sayings and witticisms that lace their way through our culture and vocabulary. While I will only mention a few it should be noted that many exist and they and often the result of generations of tried and true lessons pounded into the collective heads of mankind. Now back to the title of this article, "Ignorance is bliss!"  The lyrics from a song that was popular years ago indicated that "things get a little easier once you understand." However, I find this is often not true.

This Chart Is Scientific Proof Of Our Path! 

Like many people I often think about just giving up and chucking it all. Oh how sweet it is not to know the truth and be so oblivious as to the dangers lurking around every corner. this allows you to awake each day to a world of calm serenity.  The chart to the left proves and shows without any doubt the scientific correlation between ignorance and happiness, this explains a lot about life and leaves little doubt as to the benefits of a lazy mind.

It is often hard to quantify just how intelligent the masses are but, it is safe to say many people could not qualify as rocket scientist. I strongly suggest it is not by accident the phrase "an inconvenient truth" came about or that "da Nile" is not only a river in Egypt.  Denial is a place or state where many people live out much of their life.

Reality Can Lurk Just Below The Surface

Some of the drawbacks related to pursuing knowledge alluded to above may be only the tip of the iceberg in explaining why so many people choose the well traveled path of  being happy with  what is, rather than thinking about what could be. I salute those who pick to live their life in a place where the color of the sky is of their choosing. The only problem with choosing the path of ignorance is the possibility that the illusion might collapse at any time if reality chooses to raise its ugly head.

In a world where Goldman Sachs is busy doing God's work and a large swatch of mainstream media might claim to also stand upon the moral high ground it is hard to find a good anchor. Nowhere to be seen on CNBC, Bloomberg, the WSJ, or any other status quo propaganda media outlet is much that resembles honest or thoughtful information. Their job is not to analyze or seek truth. Their job is to keep their government patrons and Wall Street advertisers happy, while keeping the masses sedated, misinformed, and pliable.

After years of economic propaganda, artificially inflated stock prices, dishonest accounting, laced with pandering and outright lies we find Washington and the media have hollowed out our culture lulling most unsuspecting Americans to sleep. The rest of the world has not fared any better. Few among us no matter how dumb or how dense think the world would not be better off if they were in charge and calling the shots as ruler supreme. One thing is very clear, the issues a person would make their priorities if they held such a station of power speaks volumes as to what they value and what they hold dear.

I must say this article has been in the works for longer than you might imagine. It takes a great deal of effort to put together such a profound piece of dribble and I hope I got the balance right. I find both solace and comfort in the idea that I'm not nearly as stupid as many of the people who occupy this world. Thank goodness the bar has been set so low because it creates a situation where it becomes much easier to compete. Sadly, this double edge sword leaves us living among people that are not too bright and unburdened by the worry of reality. I must admit it is rather ironic we who claim to see the bigger picture often envy their happiness?

As a final thought to ponder below is a link to; Always Look on the Bright Side of Life - Monty Python's Life of Brian  

Wednesday, July 8, 2015

China Merits Our Attention! Greece Is On Hold

China Stocks Crash
Even as China's stock markets are in a free-fall the eyes of the world are fixed on Greece. On the Shanghai exchange, 365 companies suspended trading, equivalent to 33 percent of all listings. A further 992 were halted in Shenzhen, or 56 percent of the total. This sell-off has overwhelmed all government efforts so far to restore confidence. Chinese stocks plunged rapidly out of the gate on yesterdays open, with the Shanghai Composite Index falling another 7% then extending the loss to 8.2%, before recovering slightly to 4.8%. The sell-off came despite a rare pledge by the People's Bank of China near opening that it would closely watch stock movements and continue to use multiple ways to support the state-backed margin-finance entity in order to safeguard the stability of the markets and "hold the line against systemic and regional financial risks."

Bloomberg reported the situation to be even more troubling, one guest claimed that investors trying to sell Chinese shares have found themselves locked out of 72 percent of the market. This is because currently at least 1,331 companies have halted trading on mainland exchanges, freezing $2.6 trillion of shares, or about 40 percent of the country’s market capitalization. Another 747 fell by the 10 percent daily limit on Wednesday, making it impossible to find buyers at the prevailing price. Investors stuck in their positions are being forced to turn elsewhere to raise cash and this only fueled the panic and resulted in the biggest drop in a month in Chinese government bonds. It has also sent Hong Kong’s Hang Seng Index to a 5.8 percent tumble. “They’re going all out in trying to stop stocks from falling but it’s not working.” said Tsutomu Yamada, a market analyst at Securities Co. in Tokyo.

Over the last several weeks both the Shanghai Composite and Shenzhen Composite have plunged about 30% from their highs due to concerns that Chinese stocks are in a bubble. Investors and traders who leaped into Chinese shares over the past year, causing Shanghai to rise 150% and other markets to catapult even higher now face margin calls on their highly leveraged positions and are faced with selling head over heals. This comes despite government efforts to halt the fall. Both investors and analysts debate whether and how the government should intervene. Those supporting a bailout argue that China is nearing a financial crisis if it lets the rout continue and that the government must avoid the problems created in America when the U.S. government did not act fast enough to prevent the bankruptcy of Lehman Brothers.

Still we find the crux of world focus locked on a Euro-zone that continues a several year talkaton and is still busy wrangling over the issue of Greek default. Considering the collapse of its stock market it would seem the world should be much more worried about the economic chaos going on in China, remember the country has about 1.4 billion people and the world's second largest GDP. A rapidly sinking stock market is often a sign of an economy in turmoil as we saw during the dot-com bust in 2000 and again in 2008. Many people point to the fact recent exuberance for Chinese stocks isn't backed up by fundamentals and that the rise over the last year appears driven by continued government borrowings and manipulations. In this scenario, investing becomes gambling on the government’s actions.

It is important to note that while some risk of contagion exist from what is happening in China the real impact may not be felt for some time. A few of the factors that play into this are things like foreigners own just about 1.5% of Chinese shares, this may insulate outsiders from a direct hit, but increases the potential that stock market losses will ripple through the Chinese economy. It has been noted that a lot of new traders have flooded into the stock market in China over the last several months and many are investing borrowed money that has been leveraged on margin, this means the pain will be great and could impact the economy in a big way going forward. We know it is not the poorest workers involved, but those higher up the consumer chain. this could translate into a much slower economy going forward.

In a healthy market, investors make independent decisions about whether or not to buy or sell a stock. But in the China A-share market, government intervention has disturbed the price-discovery process because it unifies investor expectations and encourages them to make the same choice. This means investors are less concerned on mark to market value and driven by when they think the government will step in and how much extra liquidity will be available. The loud voices of those wanting more support for the market from the government of China have been so loud that it is difficult for regulators to ignore them. A series of measures have been implemented to shore up investor confidence, but as of now they have been unable to stem the tide. This adds credence to the idea that only in the case of systemic risk that threatens financial stability should any government step in and that bailouts be considered only as a last resort during the most dire of times.

 Footnote;  As always comments are welcome and encouraged. This article goes hand in hand with another article that focuses on the giant credit crunch and overbuilding that threatens the economy of china. You can find that article below.

Sunday, July 5, 2015

Contagion Potential Reaching New Heights

Contagion Is A Reason To Scream
The reach of contagion has grown to the point where it can easily upset the fragile balance of our economic system. In economics as well as fashion, what is old is often new again, and as look back through history and different economic cycles it is clear we have seen this before. This article explores how potentially devastating this force can be and delves into several issues that may converge. It joins together the idea the system isn't ready, with the danger of derivatives, a growing lack of faith in currency markets, and how this could all be molded to increase calls for a new world currency by those seeking to escape our current conundrum.

When you study the derivatives market it become clear the main goal of QE may have been to hold up the underlying value of assets that feed into and support the massive derivative market more than help the economy. QE has up to now stopped an implosion of derivatives and the resulting contagion and shock that would have spread throughout the financial system. Everyone paying attention knows that the size of the derivatives market is about 20 times larger than the global economy.  About 95% of the $230 trillion in US derivative exposure is held by four US financial institutions. It is hard not to see this as a reason for concern.

 If you look close you will see the currency markets are beginning to reflect diminished confidence in the system central banks have created. As the currency games continue to ratchet ever higher it is becoming more apparent that we are standing on shifting sand. This was emphasized when the Swiss National Bank surprised markets and eliminated its exchange-rate cap a key source of support for the euro. The schemes bankers have used for years to hide and transfer debt are coming under attack, if they crumble under the assault it will culminate in a reset of the economic system across the globe.

Even as the Euro-zone contemplates its self destruction the death of the Yen that makes up only 3.2% of worldwide reserve holdings compared to the Euros nearly 26% sits near a new multi-year low. This is a  harbinger of what is to come, the myth that advanced Democratic countries are immune to hyperinflation might soon be destroyed as the value of the Yen spirals downward. Soon after that people will realize that the Euro, Pound, and even the Dollar are not safe from what happens when a currency falls from grace. These four currencies make up about 95% of the Central Bank reserves backing other currencies. Faith in paper money in general stands ready to be shattered and the question is whether the euro or yen will be the first domino to fall.

Ben Bernanke made a statement recently that I thought should have received a lot of attention. The former Fed Chairman said Presidents should have the power to declare economic emergencies along the lines to declare war. The reason I think this should have received far more attention is that it screams massive risk still exist. After seven years the "System Is Not Ready!" and cannot adjust to what lies ahead. It is incredibly naive and pure folly to think that during a crisis a band-aid applied from Washington by any President is the solution or even a makeshift stopgap to economic carnage.

Contagion is a problem in a world where we  are all interconnected. Some people have been calling for a "world currency" for years. the saying "one should never let a good crisis go to waste" means a meltdown with high levels of fear would present a perfect opportunity and catalyst to advance this agenda down the field. Remember many people with agendas have a lot to gain when a major shift in the currency markets takes place. Even with some countries not participating in such a currency it could dislodge the American dollar as the world reserve currency and this would represent a major shift. Expect calls for a new world currency may grow over the coming years, if the world stumbles into an economic hell the noise could become deafening because people and their leaders tend to look for easy answers.

While those in charge work frantically to limit the impact of a default by Greece we should remember this is only one of many financial problems that plague us, but it might be enough to cause or start the dominoes to fall. I for one have little faith when I see the massive growth in crony capitalism and corruption in Washington that allows those in control to "change the rules" and positioning themselves to benefit at every turn. Neither Martial Law, bank holidays, or instituting a price freeze can quell or halt a panic and the damage resulting from a major collapse of the economic system. If we get put in a corner the option of a new world currency would represent to many a new lease on life and a way to avoid and lessen the consequences of past actions.The blessing of this political smoke screen has "inflation" written all over it in the kind of ink only visible with a special light.