Tuesday, December 16, 2014

Bond Market Bubble Has Ugly Ramifications

What Happens If The Bond Market Pops?
Many of us think the bond market is a bubble, if so when it pops it will leave a massive path of destruction in its wake. Many people have been caught off guard by the collapse of oil prices and the havoc they are causing in many markets. Even more of a concern should be a popping of the bond market bubble. This is a disaster waiting to happen with the general public totally unaware of the ramifications it will have even extending down to reduced pay outs on pensions.  Money has been rushing into government bonds in a flight to safety that has sent yields lower and lower. This may be part of a conundrum created by the reality that when you simply have too much freshly printed money floating around people need someplace to stash it. In the world today investors look for large markets to park their money because it implies a degree of liquidity that insures a quick exit if necessary.

The idea of money quickly leaving the bond market should be a big concern to all governments. Bonds are not just those issued by America but by countries all around the world. While some forecasters predict America will grow at the fastest pace in a decade during 2015 debt investors are signaling their skepticism as commodities plunge and slowdowns in Europe and Asia threaten the U.S. recovery. Last week, the bond market's outlook for inflation over the next three decades fell below 1.9 percent annually, the lowest in three years. Investors’ expectations for consumer-price increases are diminishing as the Federal Reserve debates how soon to raise its benchmark interest rate which has been held close to zero in an effort to support demand in the economy since 2008. It is hard to know if this is an indicator the marketplace feels comfortable that inflation is going to remain tepid or if concern for safety is driving this market. I contend it is the later and an influx of foreign capital has been driving this market.

Anyway you look at it I have a problem lending my hard earned money out for a long period of time based on predictions of future government deficits. These forecast are often formed and made on assumptions based on rosy scenarios or politically skewed to benefit those in power. Knowing what we know about the effect that interest rates have on the value of bonds in the secondary markets, one might deduce that the 30 year bull run on bonds will have to come to an end the moment rates are expected to go up.  To give you a sense of what this may mean to U.S. Treasury Bond investors a 10 year treasury bond issued at a 2.82% interest rate could see a 42% loss in value from a mere 3% rise in interest rates. This means if you’d held $100,000 in these bonds prior to the rise in rates, you would only be able to sell those bonds for $58,000 in the secondary market after the 3% rise. Please note the $58,000 you get back would be before factoring in the loss of purchasing value lost from inflation.

A theory I have put forth in the past is that it might soon become apparent that storing your wealth in any kind of  "paper promise" is a bad idea. The term "liquidity trap" that has been used by Allen Greenspan and others can be difficult to understand. The result of such a trap can be that all the additional money poured into the system, even when coupled with lower rates, can no longer drive the economy forward.   This would most likely happen when people realize the return on loaning money is simply not worth the risk!  Why do you want to loan money if most likely you will never be repaid or repaid with something that is totally worthless? When this happens the only safe place to store wealth will be in "tangible assets" and the only lenders will be those who print the money that nobody wants. When this happens we are at the end game.

Another concept that should be considered is the primary reason that inflation has not raised its ugly head to become a major economic issue is because we as  a society are pouring such a large  percentage of our wealth into intangible products or goods. This includes currencies. If faith drops in these intangible "promises" and money suddenly flows into tangible goods seeking a safe haven inflation will soar. Like many of those who study the economy I worry about the massive debt being accumulated by governments and the rate that central banks have expanded the money supply. The timetable on which economic events unfold is often quite uneven and this supports the possibility of an inflation scenario.  The current subsidizing of the auto, housing, and financial industry coupled with an ad hoc disregard for both the rule of law as well as basic economics produces a very flawed kind of growth. We need to start thinking beyond propping up failed corporations by running up our national debt because this course is unsustainable.

Markets are not always efficient and the idea that they are is a myth manufactured by so-called experts such as Paul Krugman in the ivory towers of academia. Disconnected from the real world those responsible with guiding our banking institutions often fail to see potential second and third order effects of debt monetization. In many ways they pose one of the greatest threats to the stability of our economic system. A policy of blindly trusting anyone who claims to be an expert has disaster written all over it. If the bond market is indeed a bubble ready to pop its collapse will be full of ugly ramifications that will not only effect bond holders but will test the economic foundations of both the country and the world. Not only will bond holders be stripped of wealth but soaring interest rates will magnify the nations debt service and rapidly impact our deficit in a negative way. It is important to remember that debts can go unpaid and promises be left unfilled. If this happens where does it  leave us?

Thursday, December 11, 2014

China Housing Market Customs A Tad Bizarre

Typical upscale housing development in China
As a contractor and being involved in real estate I was thinking about how "draw systems" work. This has to do with how a certain percentage of the cost of construction is shelled out as each stage of construction is completed. I remember hearing years ago how Home Depot was excited about entering and developing the massive market in China because apartments are sold by the developer at the "roughed in" stage with no interior. You might know Home Depot cut and ran after a few years adding to the list of American companies that failed in China. Home Depot has blamed their bad experience on not understanding the Chinese culture. After reading this article you may question both the quality of how well these housing units have been finished and how many may never get done.

In trying to understand the massive housing market that drives much of China's growth it is important to realize that people in China buy apartment units that are only roughed in. This means the buyer is essentially purchasing what we in America would call an "empty shell" or an unfinished apartment. In most cases, apartments are sold with internal walls and electrical outlets in place but everything else, including doors, flooring, and bathroom fixtures will need to be built-out by the owner after purchase. It is understandable this created a great deal of excitement for a company like Home Depot that sells the "rest of the package" in a way that can be a one-stop answer for any home buyer. It cannot be underestimated that most of the money spent on constructing a housing unit is spent in finishing, many people give this little thought.
The importance of the housing market in China's economy should not be underestimated, this is where almost 75% of the country's household wealth is stored and it is deeply interwoven with shadow banking. A close look at housing in China and the customs under which deals are completed will give Americans some real surprises. Getting information on this subject is not as easy as we might think in a world where in a blink of the eye we find dozens of articles on America's latest craze, after about an hour of research I found enough to confirm what I thought. The site I received a good deal of information from and found myself returning to was designed to help foreign teachers moving to China to better understand the internal workings of the country, it was last updated in November 2010 and does not appear to have any other agenda.

Unlike property and housing ownership in America and other Western countries, all property in China is simply being leased for a 70-year period. The lease is supposed to renew automatically upon expiration, this might unnerve many buyers that know the Chinese government's relatively new Ministry of Housing and Construction retains full "property prerogatives," meaning that leases can be nullified at any time if the government determines that it needs that property for any reason. In addition, the government is also entirely free to decide how much compensation should be offered for that property in the event the land your apartment happens to be located on is reclaimed by the state. Recent regulations now give residents the right to sue the government if they feel they receive unfair compensation, but they rarely win in court.

Then is the issue of cost, it could be said cheap housing is something you won't find in China. Its housing market is among the most expensive in the world when compared to per capita income. For example, the average price of housing in New York City is around $200 per square foot with an average family income of $72,000 per year. By comparison, the average cost of housing in Shanghai for the year 2007 was nearly $108 a sq. ft. against an average family income of $7,316. Generally speaking, the cost of housing outside of Beijing, Shanghai, and Guangzhou will run anywhere from 1,500 to 5,000 yuan (roughly $20 to $68) a foot depending on location. By American standards apartments are small, no more than 30 percent of all new apartments can be larger than 90 square meters (970 square feet).

There is a big question and much disagreement over the stability of China's housing market. Shortly following the end of the 2008 summer Olympic Games, the housing market in China fell into an unprecedented slump with housing prices dropping as much as 30 percent below pre-game prices (note this was around the time the world was in economic crisis). Aside from this being a very difficult market in which to predict prices, foreigners may only purchase apartments to live in for personal use and not to rent out. Virtually no secondary market exists to sell into if you decide to relocate. When the Chinese seek to buy an apartment, they will not give much consideration to anything but new construction. Most bizarre is the legal protections and real estate standards are not yet well-established. The various procedures and steps Americans take for granted when purchasing a property such as; due diligence, housing inspections, and secure escrow accounts simply do not exist. China is a land where rules affecting value can change with little notice, good luck with that.

  Footnote;  As always comments are welcome and encouraged. This article goes hand in hand with several others on China the link below will take you to one of the most popular.

AS A BONUS! Below is the "Unbelievable story of how they sell apartments or should I say houses in China." It is worth the read, a short lead-in is provided to soften the transition.

A week after these people got a number they went to "the lottery."  As soon as we got there, they slapped a VIP sticker on them.  Some were red; some, blue. The entrance was guarded by men in black swat team attire, complete with Nazi styled helmets and dark glasses.  You couldn't get in without the proper paperwork and ID card.  It was a challenge to get all of the people in.

There were 61 groups and 15 buyers in each group, for a total of 915 potential buyers chasing after 600 apartments.  They were in group 25 and were seated according to groups.  There were 3 big screens in front of them.  About every 5 minutes, 15 random numbers were displayed on the big screens.  Group 25 came up a disproportionate number of times, but not their number.  We were lucky 13.  Group 11 only showed up twice while........ (the link to continue can be found below)

Wednesday, December 10, 2014

Crosscurrents Cloud Future Economic Picture

Where Do We Go From Here?
The American and world economy is in uncharted water. Weird crosscurrents are clouding our economic future. Last quarter America's GDP came in at a strong 3.5% but the fact that a 10% jump in federal spending, mostly on Pentagon hardware bolstered growth and was very much behind the numbers. This "pre-election" spending was the biggest increase in federal spending since 2009 when the Obama administration put in place a huge economic stimulus package. Mix in an upbeat November number concerning job creation, falling oil prices and ever higher stock market prices and new record highs and many people have the impression we are on a roll.

The fact is we have created a "Government Centered Economy" and the newly elected  Republicans controlled Congress will have power over the purse stings and government spending. It appears they now sit in the drivers seat and they should by all logic slam the brakes on the destructive policies that have distorted the economy and driven stocks to record highs, but why would they want to take on the hard task of bringing about painful reform? What a tangled web we weave, it is hard to deny that the economy is a manipulated mess propped up by government spending and artificially low interest rates that hurt savers. Politicians never want to be the ones to take away the punch bowl and be blamed for ruining the party, this means expect little help from Washington..

We should understand that demand is the true driver of economic growth and investment, it is not confidence. Lack of real growth is about lack of real demand, and much of the demand we see today comes from artificially low interest rates and QE that distorts the markets. Not only do low interest rates punish savers, but when rates are held at an artificially low level for too long capital is misallocated and flows into speculative investments. All growth is not created equal, quality does matter, we must differentiate the kinds of economic growth and understand that if you spend money but afterwards have little to show for it you have wasted it. Sadly, much of the money America "invests in itself" each year through government spending and programs falls into this category.

Several other acts are playing out on the economic stage adding to the confusion. World growth is slowing while countries remain mired in debt, this is making the dollar stronger in relation to the other major currencies. This will not help American exporters as month after month we suffer huge and unsustainable trade deficits.  When coupled with huge government budget deficits the trade deficits move America in the direction of bankruptcy. It is a myth that we can "export" our way out of this mess, a myth spread by politicians preaching the "no pain" method of solving a problem. Another problem is that the good news to consumers of oil prices falling across the world are adding to destabilizing many countries and disrupting a major growth sector of the American economy. Energy production has been a big job creator for America but lower prices threaten to make drilling unprofitable and stop it dead in its tracks.

Adding to our woes job creation and wage growth has been weak compared to all other post recession periods. Recent Black Friday sales were dismal at best and unenthusiastic consumers suffering from years of poor wage growth and in a protracted state of weakness are unlikely to bail retailers out this season. We have seen a big shift in what consumers are buying, recently they have been spending more on autos and healthcare, but the Obamacare mandate may be guilty of creating stress in other sectors of the economy by redirecting spending away from them. Booming auto sales driven by low cost and sub-prime loans may do the same when payments come due. Many of these sales may be motivated because an automobile owner faced with a costly repair may be oping for this alternative verses putting money they do not have into their current ride. This allows someone in a weak financial position, such as those living on disability or student loans, to kick the can down the road while putting themselves into an ego boosting vehicle that they cannot really afford.

In many ways Bernanke and the Fed have put America on a path that mirrors the same unsuccessful path taken by Japan. A path that avoids real reform and bails out the very people that caused many of our problems. The Fed then upped the ante by setting the bailout and money printing machines on high and flooding America and the world with QE. By selling other central bankers on this solution the Fed now led by Janet Yellen has taken the lead in an experiment that is losing traction across the world. Real momentum seems to ebb shortly after each new wave of stimulus and another fix seems to constantly be needed. While they claim otherwise any thought that inflation is not higher has come from the false illusion brought from a very competitive retail environment and lower payments on auto loans and mortgages. This is a one off and will not continue.

Trouble lurks ahead because debt does matter and it will massively thwart growth going forward. If I'm correct, much of the idea of "so called pent up demand" in our economy is secondary and we are being pushed along by cheap money that is unsustainable. Interestingly, this is all occurring at a time the government continues to pour out billions of dollars each month in student loans, many of these loans will never be repaid. This is in a way its own "stimulus" package. It is hard to predict the future and often we are very surprised how events unfold, expect the unexpected. Remember that great forces are at work here and things are moving rapidly. The currency players and the carry trade is in constant flux. This is not a well rehearsed performance but rather a play it by the seat of your pants and this improvised effort to keep many balls in the air while the ground shifts under our feet. If these balls begin to drop things can go very badly in the blink of an eye.

 Footnote;  As always comments are welcome and encouraged. This article goes hand in hand with the article below that focuses on the destabilizing effects of falling oil prices.

Sunday, December 7, 2014

Police Violence Goes Beyond Black And White

A news story on my local news channel in November 2014 reported how a man faced charges stemming from Halloween party. It told how Fort Wayne, Indiana prosecutors have charged a white  20-year-old man after police say he threatened them when they broke up a party on IPFW’s campus on Halloween night. According to court documents, police responded to a call about a loud party at IPFW’s student housing. While speaking with party-goers, officers noticed a half-empty vodka bottle on the floor. Alcohol is banned at the student housing. Police said when they went into the apartment, Theodore Tamm was loud and refused to cooperate. After putting him in handcuffs and leading him out of the building via an elevator, Tamm reportedly threatened the officer by saying he would beat and kill him. A struggle ensued and the officer used a Taser to subdue Tamm who is now facing charges of resisting resisting law enforcement, criminal mischief, and disorderly conduct.

Mug shot of Tamm, provided by the Allen Co. Sheriff's Dept.
The issue concerning police using unnecessary force and their attitude towards the public they are paid to serve is not black and while. Following the shooting death of  Brown in Ferguson and a much more controversial use of force on a black man in New York where choking contributed to his death we should note abuses are being fostered upon people of every race and gender. Rather than an issue of racism I contend this has more to do with the way the role of the police in society has changed over the last decade. As the world has moved in the direction of becoming overly "politically correct" the police many times have moved in the direction of flexing their muscle in a tight "boys club" where the first code is to protect your brother and ignore his transgressions.

Abuse, violence, and unnecessary force is not used only on blacks and other minorities but is also employed on whites, or as I like to call them "people of non-color." In response to the incident above, I was not there and I do not know this young man, so I reserve the right to be wrong, but most likely more than one officer was in the elevator and escorting him from the building. Even if I were alone with this handcuffed young man I would like to think that I could of brought him to the floor and held him down until another officer could arrive to help me. To taser him I consider stepping over the line. It should be noted many of these problems occur away from witnesses and cameras. If police wearing body cameras will help to protect the rights of Americans I think we best get on with equipping them with such. While I'm not a religious man I say, "God bless the good old days when the police might have scolded this young man and told him to go to bed."

We should not be mislead by how media is trying to spin the protest sprouting up across America into just being about blacks being abused. The issue spills over into the general demeanor of police and how they interact with society. This is why so many young people and white faces are often seen in the protests voicing both anger and resentment. They understand at any time they might see their lives turned upside down by an officer with an attitude. The expansion of the NSA and the militarization of police forces across America reeks of a growing Orwellian police state that should concern us all. The feeling that many of these officers have they should be held to a different standard and are above the law has become an ugly reality across America. This is especially a problem in conservative or unenlightened areas where special economic incentives are often paid to police as a way to generate income for local government or the police department through fines, confiscation of money or property, and other fees. Enforcement of drunken driving laws and the war against drugs where even the most minor offense results in draconian and harsh penalties highlights just how skewed and warped enforcement has become.

The President can moan all he wants about police being too heavy handed towards blacks and minorities, but he shares a great deal of the responsibility for their misconduct.  Over the last six years while Obama has been in office the unrelentless trend to add a military component to police forces across the nation has continued to ramp up. Many people see this as the governments way to extend control and power over the masses in case of a civil uprising in the future. More and more we see those paid with our tax dollars driving aggressive macho vehicles and strutting around in black uniforms with a swagger of intimidation. Letting your eyes move around the world you will see similarities in today's images of armor covered police in America with shields lined up in front of military vehicles facing protesters. This is something we thought only happened in fascist or repressive countries. To make matters worse it seems this aggression is spilling over into the personal lives of the police. A September 19th article in the Atlantic reports that studies suggest that domestic abuse and family violence is about three times higher in the law-enforcement community than in the general population. So where's the public outrage?

A country shocked by actions of NFL's Ray Rice's actions ought to be even more horrified by studies that say at least 40 percent of police officer families experience domestic violence, in contrast to 10 percent of families in the general population. It found cops "typically handle cases of police family violence informally, often without an official report, and that this 'informal' method is often in direct contradiction to legislative mandates and departmental policies. A white paper in 2003 by the International Association of Chiefs of Police on the subject highlights the law enforcement community's failure to track these cases consistently or rigorously. Several studies dating back into the 1990s or even before confirm this and while all partner abuse is unacceptable, it is especially problematic when domestic abusers are literally the people that society is supposed to call for help. Being a police officer is a job that anyone involved in domestic abuse should be disqualify from because it gives them a lethal weapon, trains them to stalk people without their noticing, and relies on their judgment and discretion to protect the abused against domestic abusers.

A few weeks ago I received a phone call in the middle of the night from the alarm company that one of the buildings I own had been broken into. My encounter with the police as the building owner was not good and still haunts me so I can only imagine the amount of disrespect a non building owner might have to endure. Believe it or not I was not one time addressed as sir, or asked for any information as to what areas the alarm system covered, but twice one of the officers referred to me as slick, as in "Well, slick, I think they were after was the hard drive from the computer in the law office." This must have been an attempt to bond with me in some condescending way. What really scared me was he boasted about how he was slated for military training later in the day while lacking to comprehend the so called "crime scene" he was viewing was not the work of a sophisticated criminal, but created by kids who were so inept they had also broken into an office at the far end of the building that was totally empty. A young woman of non-color at another property I own who had a encounter about a week late with the police described them as "idiots with guns." 

The police mission in America seems to have morphed from "serve and protect" to "fighting a war on crime" to one mixing in elements of maintaining order and searching for a terrorist under every bed. Many child psychologists and about every mother will tell you if you want to make a child more aggressive give them some toy weapons. In the case of adults you will find if they have the toys they will want to use them. When the police allow this same attitude to become mentally entrenched in their mind we are all vulnerable to them overstepping the line while they play out some kind of power game. Most people understand police officers have a tough and difficult job, but while this may be distasteful to some police officers to hear this, "you are being paid by the citizens to do a job." Fear for your safety is not a defense for not doing that job in an irresponsible way, if you find you are afraid to do this job another endeavor would be in order. Bottom-line is that Americans should not have to be afraid of those we pay to protect us.

  Footnote; As always comments are welcome and I urge you to glance at the blog archives for other post you might find interesting. The following posts are concerning the question of whether we are creating an Orwellian society, the other delves into the NSA and current trends,

Monday, December 1, 2014

Does The Peter Principle Apply To Mankind?

To all the people who think the world's surging population will not become a problem because of new energy sources I say, wake up! Anyone with even the slightest mechanical knowledge will tell you that solar panels, windmills, and such take a lot of energy to build and often are maintenance intense. Both these complicated systems have a short lifespan and require a great deal of energy to be expended in just keeping them up and running. This was one of my arguments that optimism concerning ethanol and its potential was being overhyped.

By energy expended in the day-to-day operation of the new systems, I'm talking about BTUs being burned in producing parts, constantly inspecting and replacing parts with short lifespans. At some point, you are not creating enough "net gain" in energy from the total energy produced minus energy expended to claim a major victory in resolving your energy problem. This means the energy we produce in the future will come at a much higher cost. That cost will slow economic growth and remove much of the plentiful bounty we have come to expect and have enjoyed during what I call man's "golden age" or roughly the last 200 years.

Carry no illusions the days of cheap energy are behind us and not only has the low-hanging fruit been picked it has been eaten. Sadly, if we look back we will see much of this energy was allowed to go to waste. America has adopted the same attitude towards its buildings. In our fast-changing world, we have made everything disposable.  A remove and replace mentality tends not to maximize gains or resources and creates a huge amount of waste. Often there is no way to reclaim much of this and even recycling is inefficient. This acceptable lifestyle and way of doing business has extended down to the point where most consumer goods have become non-repairable. With fast growth, we often see a lack of quality. I contend this is about to catch up with modern society.

Mankind Has Failed To Plan For Sustainability
Why should we think that we are immune to the rules governing the universe?  When we look at fast growing cities where we see buildings erected and ripped down and replaced after only two or three decades we should ask if this is sustainable or our best use of resources. The reasoning behind remove and replace is often that it is far less expensive to just rip it down than to repair or upgrade a structure with labor being the determining factor. Ironically, this is in a world where the number of people choosing to work is declining and those being supported by government programs has risen dramatically.

As the noose of reality and finite resources begins to tighten around the neck of mankind do not expect to hear those in charge to scream out warnings from the rooftops. The few mutterings we hear will be from people tagged as "gloom and doomers" who only see the glass half empty and are incapable of seeing it is really half full. When we approach the tipping point promises of easier, cheaper, and ever better ways of postponing the inevitable will prove to be an illusion. Problems will begin to materialize on a daily basis and reality will be both abrupt and harsh.

As I ponder our fate is it possible the collective human race is also governed by the "Peter principle" and if so, how will humanity escape this trap? The Peter Principle is based on the notion that employees will get promoted as long as they are competent, but at some point will fail to get promoted beyond a certain job because it has become too challenging for them. Employees rise to their level of incompetence and stay there. I'm not saying that we can stop going forward or that we should erect barriers to our progress, but it would be wise to give issues more thought. We should ask at what point have we gone as far as we can go before we have sowed the seeds for a less than compelling future?

 Footnote;  As always comments are welcome and encouraged. This article goes hand in hand with another article that focuses on planning and sustainability. You can find that article below. http://brucewilds.blogspot.com/2014/04/planning-sustainable-future-for-mankind.html.

Saturday, November 29, 2014

Retail Sales Expectations Should Be Held In Check

Reports from the local mall and surrounding stores started coming in around 6:00AM from my "shopping team" on the morning of Black Friday. They shocked even me, not only were the parking lots empty but many of the stores had more employees working than customers. This was something I felt was worth seeing first hand. My office is across from the second largest mall in my state so as I went into work an unplanned visit seemed in order. Foot traffic inside the mall was far less than I imagined, most of the shoppers were younger women and older girls. These are considered the "core" and most diehard of shoppers. Many were carrying few if any bags, this indicates little in the way of buying. Animal spirits in reaction to Black Friday were far less enthusiastic than in the past. The stores did fill as the day wore on.

Picture Taken In Mall 7:00 AM Black Friday!
Almost two years ago in a television interview on Bloomberg, Harvard economist Steven Roach put a retail sales consultant in her place who was crowing about strong retail growth.  Roach pointed out that after discounting for inflation growth in retail sales compared to past years is mostly an illusion. His statement remains true today. 

I walked the entire mall to get a feel for what was happening and stopped at Sears to see if any good buys existed in tools. I picked up a spare "'basic" circular saw that was on sale for $29.95. I have about ten of these but they tend to get dropped and banged around until they lose the ability to give a perfect cut. The girl at check out was standing there looking a bit bored so I joked about her waiting for me. With a smile she responded, "yes sir, that is my whole reason for being here" then and after the sale gave me a free wrench. The wrench retailed for about three and a half dollars costing Sears around eighty cents. I doubt if I added greatly to Sear's bottom-line. 

As usual we see clips and stories on the news of robust shopping, this includes scuffles in stores in the UK. In reality what happens in one store matters not, it is what is taking place in a majority of  this country's retail locations that will determine whether this Christmas season is a boom or a bust. We are repeatedly told by the media of America's changing buying habits, about the massive shift to online buying from a lazy public seeking convenience. Add to this stories about how the malls are dying and failing to attract shoppers who need a compelling draw to wow them and not just run of the mill goods and services. Personally, I think the shift in how people buy is all a bit more complicated than that.

I have written several articles about Amazon and how it is difficult to see how they have any fans when you consider how they abuse and exploit the brick and mortar stores that line 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. These stores build or lease space, buy supplies from the other local businesses, and pay both sales and real-estate taxes. I was unhappy when Washington failed to force the collection of sales tax by online companies that was supported by real estate owners and most business owner because it gives online retailers an unfair advantage.

While Amazon sends out the signal that their customers are smart, forward thinking, and upscale they exploit America and have an evil side, this is a side we should and must recognize. What it saves consumers in money it may cost them many times over in damage to their local business community. Words like "evolving" are used to describe Amazon's business model, a better word might be undefined. A major key weakness is that new competition can now cheaply and easily replicate the most profitable parts of Amazon and cherry pick much of their future potential. The most profitable and best thing to sell online is lightweight expensive items. Soon it will be realized that its competition has hit Amazon head on in a game Amazon cannot win.

Could it be more is going on here? It is possible that a combination of many consumers simply being "tapped out" and with their closets full are finally learning to live with less and are unenthusiastic about buying more. As for online shopping we should remember some of the things that will effect their sales and bottom-line. Many of the poor lack a "good credit card" and as brick and mortar retailers cut prices to move merchandise companies like Amazon will be forced to do the same. This will squeeze margins and profits. Many of the big box stores have beefed up online sales and services with the advantage of allowing customer pick up and returns that companies dealing only with online cannot provide.  All in all expect this years retail sales to be ok at best to disappointing, and profits are likely to be the same or worse.

Friday, November 28, 2014

Dropping Oil Prices Increase Risk To Economy

The decision by OPEC members Thursday to keep their production ceiling unchanged has sent crude prices into a tailspin. The Organization of the Petroleum Exporting Countries decided not to cut oil production quota to help boost oil prices. Dropping oil prices add a surprising new dimension to the world financial system by directly injecting massive instability. While often heralded as a godsend to the economy and the end consumer we must remember lower prices hurt both producers and those in the business of oil exploration, drilling, and sales. The shale boom has been one of the bright spots in the economy in recent years and acted as a tailwind that accounted for much of America's growth. Expect this to come to an abrupt halt and with it thousands of jobs.

With the price of oil and oil futures trading hitting levels not seen in over four years, the issue of investing in new resource expansion is in flux.  In most areas of the world the price of producing oil and bringing it to market is $70 or more. This makes many plans to expand unprofitable. The oil and energy sector makes up a large and important part of the economy and many big players have made huge bets on higher prices in the coming years, often these bets are leveraged. This means we may see a collapse of some firms and investors as well as contagion which could spread like wildfire if things continue to deteriorate.

Oil prices have lost around 35% of their value since June and OPEC's decision to maintain its current production ceiling of 30 million barrels a day will not help to remove the glut that is keeping oil prices low. Nymex West Texas Intermediate crude has fallen below the $70 level and was trading at its lowest since May 2010, and Brent crude, the global oil benchmark, was at its lowest since August 24, 2010. On the New York Mercantile Exchange, light, sweet crude futures for delivery in January fell to $69.08 a barrel, down $4.61 in the Globex electronic session. How long it take to bring oil prices back up will depend on economic growth and is hard to predict.

The Drop In Oil Prices Will Impact Countries Differently
How these lower prices effect a particular nation will vary and will effect both their currency and how competitive they will be going forward. Low oil prices are a big positive for most of Asia in particular. With the U.S. becoming more self-sufficient in production and Europe’s oil demand falling, Asia is the largest remaining importer of oil in the world. With China the world’s second-largest consumer of oil seeing at least another year of low oil prices will give Beijing more leeway to loosen monetary policy.

Other major oil importers in Asia like India and Indonesia will also get a major boost because this should cause their current account deficit to narrow and the subsidy bills footed by local governments to shrink. For Japan oil prices are a positive, but much of the impact has been blunted by a weaker currency. Countries like Australia in which the government relies on rising energy exports and massive investments in oil-and-gas projects to cushion the blow of a sharp decline in minerals spending and prices will be hurt. Its booming liquefied natural gas sector sells vast quantities of the fuel at oil-linked prices.

While certain parts of the economy like transport services and airlines as well as some industries will benefit from lower oil prices dropping oil prices do cause some concern. When financial problems occur in the energy sector it is often accompanied by political instability and sometimes her ugly sister war. As a rule the economy loves stability, bottom-line dropping oil prices means more risk for an already shaky world economy. All this is being complicated by the recently strong dollar.  The dollars strength and the rising American stock market could also be taken as a sign of an unstable global economy. The money flowing in from other countries in search of a safe home screams of a bigger problem! When a strong shift in currencies occurs someone usually gets hurt and this can lead to bankruptcy, default, or contagion.  

A great deal of the shadow banking world overlaps and falls into the grey world of derivatives. A world that is both difficult to regulate and at times even harder to understand. To say derivatives are complicated is often an understatement, even the problem of defining what constitutes a derivative plays havoc with what and when reporting rules apply. The total derivatives market has grown to a massive size. It includes hundreds of trillions of dollars in over-the-counter non-reported agreements and private contracts and is estimated to be over 20 times larger than the global economy. Everyone paying attention knows that even a slight problem in a market this size could collapse the whole economic system.

 Footnote;  As always comments are welcome and encouraged. This article goes hand in hand with the article below that focuses on why currency trading may get crazy and what it means.

Saturday, November 22, 2014

National Debt Tops $18 Trillion

As the National Debt crossed over the 18 trillion dollars mark we continue to hear from the media how robust economic growth has helped push the U.S. budget deficit down to the lowest level since 2008. Claims of the sharpest turnaround in the government’s fiscal position in at least 46 years are targeted at reassuring American that Washington has got our back. As I write this the deficit, national debt, and spending is far from the minds of many Americans. Currently, we are consumed by such things as the economy, war, strange weather patterns, and deadly disease. The the last few years the Obama administration has touted how the deficit is dropping and the economy is on the mend. This has led some Americans into thinking the worst of our problems are in the rear view mirror. 

Charts are often very misleading
Charts can be very deceiving, little things like the scale or how they are colored often blur how we interpret their message. The chart on the right sends a clear signal that Bush was the problem even as it confirms the Obama deficits have been larger. Only upon looking back decades do we see just how large this problem has grown. To the American people the crossing of several red-lines in the sand without dire consequences has given us a false sense of security. One thing is crystal clear, running up debt is far easier than paying it off.

According to figures released by the U.S. Treasury, the federal government has officially run a deficit of 589 billion dollars for the first 11 months of fiscal year 2014.  We should remember this number is for public consumption and it relies on accounting tricks which massively understate how much debt is really being accumulated.  If you want to know what the real budget deficit is, all you have to do is go to a U.S. Treasury website which calculates the U.S. national debt. On November 1, 2013 the U.S. national debt was sitting at  $17,108,598955,343 just a year later on October 31, 2014 the number has risen to $17,937,160,394,872 . That means that the U.S. national debt has actually grown by 829 billion in less than 12 months.  

The powers that be promote the myth of a falling deficit and the general overall rosy scenario that we can outgrow many of the problems we face. This brings with it optimism and hope. I have ran into more than one person who touts the fact that the deficit is coming down as proof everything will be alright.  A trick or game being used to confuse the issue and muddy the waters is which administration or President to dump the massive 2009 deficit on. Bush left office with the economy in the sewer but the resulting deficit occurred on the watch of Obama. Only when we use the massive 2009 deficit as a baseline are we given the impression the budget is back under control. We must all concede that 2009 was an unplanned budget disaster and the 2009 deficit budget should never ever be used as a baseline

Total Debt Has Leaped Off Chart Hitting $18 Trillion
Negotiating the financial cliff and muddling through what was described as a draconian sequestration has emboldened many people and left them feeling immune to economic reality. Those who claim our current budget deficit is harmless live in peril and are creating the next disaster. Sadly, the reality is we continue to run up massive record deficits and are merely kicking the day of reckoning down the road. Projections made by the government or any group predicting budgets based on events that may or may not happen at some future date are simply that, projections or predictions and not fact. This means that such numbers are totally unreliable. A major concern for this writer is that in 2017 entitlements are poised to balloon and cause a massive hike in government spending. 

Data compiled by Bloomberg using Commerce Department figures would lead a person to think all is well or at least getting better. They tout a shortfall of only $483.4 billion in the 12 months ended Sept. 30th, 2013 noting it was only 2.8 percent of the nation’s gross domestic product of $17.2 trillion. The ratio peaked at 10.1 percent of GDP in December 2009. Data shows the fourth quarter of 2008 was the last time the deficit-to-GDP share reached 2.8 percent was in April 2005. “That’s what happens when the government is holding itself back on spending and the economy is improving,” said George Goncalves, head of  interest-rate strategy at Nomura Holdings Inc. in New York. “The question is, is that as good as it gets or will the deficit continue to shrink?”

Some people forget that the way the GDP is compiled was recently changed to add luster to this ratio. The narrowing budget deficit has bought time for lawmakers to solve some of the long-term threats to the economy such as the cost of retirement benefits, but even the "false fiscal relief" before us may be short lived as austerity-weary lawmakers may boost spending on defense and other programs. Some people are concerned that even as the Republicans take over congress we might see the beginnings of a pendulum shift away from fiscal restraint. The Congressional Budget Office in August predicted the deficit will shrink further this fiscal year, to 2.6 percent of GDP, before rising to 2.9 percent in the presidential election year of 2016. After that entitlements have the potential to wreck havoc with future numbers.

Unless entitlements are reformed, spending on Medicare, Medicaid, and Social Security will drive deficits to catastrophic levels. We have seen deficits reach unprecedented levels and future deficits will be dramatically worse. The ugly truth many people choose to ignore is that starting in 2017 entitlements will become the driving force and carry the deficit in to nosebleed territory. Any claim that the Obama administration has the budget deficit back under control is a total lie. We are mired in the mist of the greatest government debt bubble in the history of the world. With the artificially low interest rates many people seem to have little desire to do anything about this. We are literally gorging on debt, and most Americans seem to think that it is just fine and dandy as we continue to wildly run up debt as if there is no tomorrow. By our actions or lack of action we are destroying the future of this nation.

 Footnote; If you found this post about how the American government deficit and debt is growing interesting or informative please view my post about an article written by Mort Zuckerman, it is really shocking. Other related articles may be found in my blog archive, thanks for reading, your comments are encouraged,

Tuesday, November 18, 2014

Deflation? I think not!

A Look At Our Future!
Deflation? I think not! For a while I was one of the people concerned we would see the world tumble into a massive deflationary cycle as debts went unpaid and credit collapsed. It appears the central banks of the world have made the crux of their existence a balancing act between the forces of inflation and deflation. With the poor results they have had at creating economic growth through QE do not be surprised if any new round of easing to combat future slowdowns is even less successful at getting economies moving forward.

The magic of QE and ever lower interest rates is losing its luster as the money finds its way into the pockets of the bankers and the rich or quickly flows into distorted stock markets and other intangible asserts. The more and more I study derivatives it now appears 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.  In other words, the entire economic policy of the United States has been dedicated to saving four banks that are too big to fail. Yes, the main purpose of QE is to keep the up prices to support the debt on which big banks have loaned money.  The staggering size of the derivative market is beyond science fiction or anything that we can comprehend.

QE has up to now stopped an implosion of derivatives and the resulting contagion and shock that would have spread throughout the financial system. One of the main reasons the stock market has benefited so easily from all this money is that it is highly liquid and both easy to enter and exit. This is a big advantage in uncertain times when valuations can change rather quickly. Unlike real estate that has a high bar of entry with many fees and often taking months or even years to sell, stocks can be exited in a blink of an eye. The wild card in where our economy will take us is inflation. Currently velocity (the speed at which money flows through the economy) is very low but many people think if it rapidly increases "more money" will be chasing the same amount of  goods resulting in more inflation.

Other factors are also driving today's current short-term investment insanity. Many Americans with savings have taken on a much higher degree of risk in search of yield. People have grown complacent after years of being told it is safe to again invest in the markets. They have loaned their hard earned savings out to corporations by buying bonds and this in turn has allowed companies to lower borrowing cost and shift the savings to their bottom-line. This constitutes a onetime increase in profits that we are unlikely to see ever again. All the cheap money has also created a binge of stock buybacks by companies that choose to please shareholders by raising their share prices rather than investing in an economy where demand remains weak.  

The danger is that once inflation takes root it can take on a life of its own and feed on itself creating a hard to control "positive feedback cycle." How the central banks can get out of the corner they have painted themselves into and if it can be done in a safe manner is yet to be determined. One thing is clear, we cannot remain on this artificial growth path forever. We have seen much of the effect wear off from prior bouts of easing, in the past each wave acted as a tailwind pushing us towards recovery. Now as central banks begin to taper and resume more normal policies many economist fear that efforts to return to normal interest rates and policies will become a major drag on the economy going forward.

I ask you to consider the possibility that what we have been going through the last six years was the "deflationary period" that many of us were looking for and expecting. This would mean the "major deflationary period" is mostly behind us and it has not been disinflation as much as inflation being kept in check because of several factors, including where the money flowed, weak demand, dropping velocity of money, and the onetime benefit of lower interest rates. As we edge towards the edge and total economic collapse expect central bankers to print even more paper money. I think they will print enough to "literally  cushion our fall" and in doing so the reality of hyperinflation will be completely unleashed.

Before you discount the possibility that we will move directly from where we are into stagflation then hyperinflation please consider that hyperinflation paves the way for governments and those in power to make a transition to a replacement currency and a reset of the whole system. When a system becomes too difficult to repair people tend to look for the promise of an easy and fast fix. The one thing we can count on is that things seldom progress as expected. Sadly, knowing the quality of those guiding our economy and ship of state we must wonder if this was their intention all along or merely an  accident they failed to see coming from the incestuous ivory towers in which they live.

  Footnote; Please feel free to explore the blog archives and as always you comments are encouraged. This article ties together several post I have made over the last few months. The article below makes a case for inflation and predicts it will bring about economic chaos.

Sunday, November 16, 2014

Reserve Currency Status Both A Blessing And A Curse

Having the dollar as the world reserve currency is both a blessing and a curse. The world is currently engaged in a massive game of speculation and chance that contains a lot of risk. Political considerations and insider deals between both nations and Central Banks play a big roll in this game. A chart I saw recently touted how the percentage of funds held by foreign governments in dollars has fallen in recent years. Even after many countries have reduced their holdings in dollar reserves the dollar still carries a major wallop and place in the world economy and will effect everyone going forward.

The above chart highlights the size of this issue
Today four major currencies dominate the world stage, they are the pound, the euro, the yen, and of course the dollar. Two of these are in serious trouble, the yen and the euro, and the pound is very vulnerable to contagion. After that, all the remaining currencies of the world still remain small bit players in the over all scheme of things. The status of being deemed the "reserve currency" by which all others are weighed and in someway pegged does not make the dollar infallible or guarantee it will remain strong but the liquidity of such a large market does add a resilience to the American dollar.

For most concerned a stable world currency yields the most benefits. When the dollar is weak consumers pay more for imports but are able to sell and export more goods and services as they become more competitive. When the dollar gains strength the cost of foreign imports drop and the American consumer is the winner, but it has cost to both job creation and hurts the earnings of  large American companies playing on the world stage. All in all this is more or less a self balancing system that does best when fairly stable. Currently a great deal of effort by countries affected most negatively by the dollars wallop have banded together seeking more options and a work around to break the dollars hold.

The way things are structured the dollar is the linchpin of global fiance and has guaranteed itself a place at the table until dethroned. This means that countries like Japan and China which hold a lot of American bonds and thus dollars will be able to offset some of the pain of a weakening national currency. Unfortunately, many countries they are not in such a position, and to make matters worse countries that are mired in debt often have tied or pegged that debt to the dollar. This means a lot of economic pain if the dollar grows stronger for these countries will find themselves under a great deal of pressure just to survive.  

Unstable currency markets can be a precursor to massive shifts in value and a sudden drop in confidence. It is logical to think that in such a situation insiders would be the big winners. The main reason the world has chosen a "reserve currency" is to have some benchmark to peg currency values to and lessen the impulse of countries that have accumulated massive debts to attempt to address their problems by just printing more money, This results in devaluing their currencies but often fails to face the root cause of their problem. Just printing more money is not sustainable and little comfort should be garnered from assets or pensions being pegged to future inflation because promises can be broken and rules rewritten for what is called the greater good.

The collapse of any currency causes wealth to flee both from the country and that currency and temporary to any safe haven in reach. The bottom-line is that while many people go about their daily lives giving little thought to currency valuations they leave themselves open to the whims of those that control, manipulate and play in this important area of the global economy. Ten percentage points higher or lower against a foreign currency can have a great deal of impact on how your net worth stacks up against someone across the world. This rapidly becomes apparent to anyone doing a great deal of travel or buying foreign goods. It also highlights why all of us should be very concerned where we stand when the smoke clears from the currency wars before us. Do not underestimate the forces in play.

  Footnote; Your comments are welcome and encouraged. If you have time please check out the archives for other post that may be of interest. Below is another of several post I have written concerning currencies.

Sunday, November 9, 2014

Politicians To Hail Infrastructure Spending As Silver Bullet

Get ready for a barrage of talk from Washington about how new infrastructure spending is going to boost the economy and drive growth. As usual the politicians in search of easy answers often dust off an old idea polish it up and act as is they have a new magic formula. While most people and economist agree infrastructure is important I contend that the old 80-20 rule applies to this vital part of our lives more than they might want to admit. As a rule of thumb it that states that 80% of outcomes can be attributed to 20% of the causes for a given event. In this case I'm highlighting the fact that the first 20% of infrastructure spending goes to the root of our problems giving us the greatest return on our investment and after that more of each and every dollar tends to get squandered.

To the many who see government spending on infrastructure as a silver bullet for the economy and as a job creator I would like to raise a word of caution, It may be time for a "truth off'. More "bridges to nowhere" and wasted spending exist then the taxpayer could ever imagine. Both Democrats and Republicans will be on board this train, but the reality is often this kind of spending falls short of creating real wealth for our country. In my book Advancing Time I talk about a bridge that was recently replaced in Fort Wayne, Indiana that even the city's leading newspaper said we did not need. The newspaper had gone on to state the bridge did not "need" to be replaced, but only needed minor repairs. Here is a paragraph from the book:

Another pork-barrel project that drains federal coffers? 
If we think local media is helping guide government to do the right thing, we should be troubled. In the city where I live a recent Sunday newspaper editorial commented about the cost of a bridge project, that will be covered by a earmark from Senator Even Bayh. The article states "Does the four million dollars represent yet another pork-barrel project that drains federal coffers? Most likely. But once the money is designated, it would be foolish to give it back."

Bottom line, nothing has changed over the last several years that indicates the media, government, or planners have become better and far more responsible in how infrastructure money is spent. More telling is a look at the bridge recently completed. In the end the bridge final cost was closer to ten million dollars, and it now sports the name "The Martin Luther King Jr. Memorial Bridge". After the bridge was structurally complete the plans called for the builder to come back and top it off with a million dollar plus metal structure that gloriously lights up at night, this was all to present a show of changing colors.

This bridge now has a new role, to act as a gateway into downtown. A huge ugly sign over the bridge,  large monuments on each side of the approaching end, plus large plaques along the spacious sidewalks are few of its features. The so far unmentioned and most wasteful use of taxpayer money would be the benches that line both sides of the bridge, why do you need twelve foot wide sidewalks sporting benches on a bridge? Considering the bridge had to be widened to accommodate the benches it means they sit on some very expensive real estate. Taking this into consideration I estimate a shocking finished cost of a around one hundred thousand dollars for each bench.

When decisions are placed in the hands of politicians, most who have never run a business and have little understanding as to the value of a dollar cost soar through the roof. This means the taxpayer often pays a huge amount for a "pigs ear" when promised a silk purse. Politicians will hail infrastructure spending as a silver bullet, but when they do cover your pockets. Over the years I have published two similar articles to make this same point, the latest in February 2014, but as we get ramped up for a new wave of this "salvation spending" a repeat of this warning is in order. People love new and shiny things and this is especially true when they are reassured that someone else will pay the bill or they are free. Government mandates on both design and how federal funds are spent have added to much higher cost and poorer results for the money spent.

As an owner of buildings over the many years I have had as tenants more than one firm that lived off designing projects for both the government and those quasi government institutions such as schools and hospitals. As a contractor and tax payer I have found much of their work not only over engineered but designed in ways that future maintenance was destined to be very intense and costly. Much of their work was in issuing detailed specifications to meet some government mandate or as a way to justify their fees. The shear amount of paper work and studies they were paid to crank out was mind boggling. Sometimes these designs even failed to address and accomplish the most reasonable and basic goals of the initial project.

If you think this kind of mindless infrastructure spending will help America, it might be because the media, many politicians, and the businesses that benefit from it are constantly telling you of its virtues. A "Truth Off" would show that infrastructure is not even close to being a silver bullet, and America is not a uncompetitive third world country. Sure this kind of spending creates jobs, but at a horrible cost that must be paid at a future date or eventually bankrupt the country. The grandiose planners and politicians love free money, unfortunately there is no such thing. And truth be told, the jobs created are often short lived. This is not a fix for the structural and employment problems plaguing America.

Footnote;  As always comments are welcome and encouraged. This article goes hand in hand with another article that focuses on government debt and just how big the problem has become you can find that article below.


Quasi Government Ventures Used To Expand Government

Nearly two years ago I wrote about how the role of the government in America is changing on federal, state and local levels. I see this when I sit and have coffee near the front window of the building where my office is located. This window looks out on what might be called the crossroads of America.  Across the street is a Target store that was recently expanded in to a super-target, behind it a toxic waste site cleaned up to where it may be used in a limited way.  A bank on the corner, built ten years ago after demolishing the preexisting buildings, has changed its name five times through acquisitions. Miscellaneous stores and offices line the street, coming and going, many with "for lease signs" that have become far too common in recent years. 

It only takes a minute or two to see how government mandates that are often unfunded and fostered upon both businesses and private citizens have changed America. If unchecked it is the nature of bureaucracy to expand, the use of sun-set legislation is often underused or the bar set too low when it comes to extending and renewing government bodies. Politicians and bureaucrats deterred from expanding or funding programs by a few vigilant citizens, wait and find creative ways to reach their objective at a later date.  They do this by creating special bonds, attaching fees to needed services or narrow taxes that go on to fund new authorities, commissions, and districts. Often these groups are allowed to regulate or set rules that affect us all.

Government need not be efficient, we see this in issues small and large. One example is our currency, not only is the penny still being used, four new versions of it were released in 2009.  The penny is totally antiquated and  illogical if an employee is paid only $12.00 per hour it cost twenty cents per minute.  How can you afford to pay that employee to count and handle pennies, the labor exceeds its value.  According to the “citizens to retire the penny” it cost the Country more than $15 Billion Dollars annually, but to the government that matters naught. To make things worse incestuous government relationships have trickled  down to local governments. In my area the Airport Authority that taps into local tax dollars supports and gives money to PBS television and the Downtown Improvement District as a way to spread around our wealth. 

The Government hurls money at inefficient programs to assist the poor.  Government has spent a fortune in housing for low income people offering low prices to the applicants. Government housing competes with private enterprise but government supported housing is able to “cherry pick” those that will be good residents because the subsidizes substantially lower their rents. This rejects to the streets the more troubled people needing housing thus ignoring their mission of helping the most needy. Public transportation systems often run empty. Food stamps do not limit the user to economical healthy basic foods, but even allows a recipient to pick up steak and lobster that they can give to friends and family at Christmas, a blind eye is turned towards these glaring flaws.

Amazing is the high percentage of  vehicles on our roads that are government owned or busy going about government related business. These include the empty city buses, police cars, fire trucks, post office, housing authority, city parks, and code enforcement department, all day long these vehicles drive back and forth. To this we must add the quasi government units like utilities, which are regulated monopolies, this would extend to and cover the groups trimming trees and running new lines and all those vehicles providing services to help meet the many government mandated and required regulations that are paid for with taxes and fees. Yes, government has wormed its was into every nook and cranny of the economy this is clear in our hospitals and universities.

Unneeded quasi government organizations by nature reach out to expand the influence and power of their directors. Instead of focusing on the business of government and simplicity, this new proactive movement, one of "cuteness", disguised in the shawl of flexible and diversity is being expanded, and we are paying the tab.  Government is proud of pet projects and under terms like "Public Private Partnership" they continue to grow. This allows bureaucrats to experiment and try new things without the personal financial risk of a businessman. Bureaucrats and politicians are creative on our dime and this is a problem for concern. The best time to kill a monster is while its still small, that time has passed, now we can only hope to slow its growth through starvation, and that is unlikely.

Footnote; this dovetails with a post on February 6th, 2012 titled "The Assault of Growing Government," it can be accessed at

Thursday, November 6, 2014

Why American Equities Are Rising

In addition to manipulation by the government-financial complex other forces are converging to further distort and disconnect Wall Street from the American economy. Why American equities continue to rise is very important, more is at force here than the usual causes which might include a pre-election and post-election rally. The market has been all a twitter as we continue in a "greed and stupidity loop" that can best be explained as follows, stocks are rising so why get out, not getting out is causing the stocks to rise. We are experiencing a double down and let it ride mentality that has been ratcheted higher by media hype, but more is behind the stock market move.

Greed is running rampant at a time when low interest rates continue to force savers to move to more risky investments or see their wealth erode through inflation. Just as important it must be noted that as the dollar gains strength cross border money flows have become a massive factor. U.S. assets have already become  the biggest benefactor of the Japanese Government Investment Pension Fund’s (GPIF) decision to more than double its target allocation of foreign stocks to 25%. According to analysts the changes to the $1.1 trillion pension fund coinciding with the Bank of Japan’s shocking decision to ramp up stimulus on Friday is a big reason for why global equity markets are soaring.

“The shift for international equities going to 25% of pension fund holdings is fairly big news,” said Tobias Levkovich, chief equities strategist at Citigroup. “It establishes a new incremental buyer of shares and the U.S. should be a significant beneficiary,” he said. The overall contribution to non-Japanese stocks could approach $60 billion of new purchases, half of which could go to the U.S. by the end of 2015, Levkovich said as he noted that foreign investors typically buy large cap stocks which have greater index impact. While these cross border flows have been good for the market I caution it does not fundamentally change the economy.

Most analysts agree that money from countries with weakening currencies is flowing out of the troubled areas and the U.S. is receiving most of the benefit. The Japanese as well as many Chinese and Europeans know with so much money floating around and few safe harbors America is becoming the most comfortable option for temporary investing their money. Currently, the world is watching Japan closely because it’s such a large economy and its currency appears to be in a free-fall. If the global markets start leaning on Japan, something that may happen any moment now because of its behemoth debt levels, the entire country could start going up in smoke.

Japan's leader Abe took office promising he had a fix for the economy, but as signs appear that the situation is only getting worse. Abe has given signs of seeking to take the blame for his failures out on China and while some nationalist in the population may follow him it doesn’t look like there’s enough trust left for him to move forward. It is hard to predict who will follow as the next leader, but it’s still a highly volatile situation that Japan finds itself in with huge potential downside effects for the whole world. The system is signaling that it is unstable and this means contagion could quickly take root bringing about an abrupt fall in stocks.

    Footnote; Your comments are welcome and encouraged. If you have time please check out the archives for other post that may be of interest. Below are two post I recently wrote, one deals with how the Fed has voiced concern over the impact of a stronger dollar, and the other about not underestimating the importance of preserving your capital because it could get ugly very fast.


Sunday, November 2, 2014

Putin Scores More Points In Ukraine Conflict

As time goes by Putin continues to rack up more points in the Ukraine as the conflict drags on. Things appear to have quieted down to many as the eyes of the world have moved to more pressing issues, but the war continues and Putin is playing the long game by grinding away at the resolve of both bankrupt Kiev and the EU. Putin has sat back as violence festers and currently holds the trophy of a bloodless Russian annexation of Crimea. Obama would give his eye teeth for such a victory. All the self-righteous huffing and puffing in Washington over Ukraine jars on European and especially Russian ears after the multiple U.S. led invasions and interventions into several countries in recent years. The grim reminder of American decisions are still being felt in a crumbling Iraq, the horrific growth and success of ISIS, and by the ever growing numbers of Afghan civilians dying as America wraps up its withdrawal.
The Game Continues As More Innocent People Die

As winter gets ever closer a cold reality is settling in as the Euro-zone furiously scrambles to find alternative sources of energy should Gazprom pull the plug on natural gas exports to Germany and Europe. The surge in Ukraine gas prices is probably the best indication of what Europe faces. A cutoff by Russia would severely disrupt supplies. The EU, Turkey, Norway, Switzerland, and the Balkan Countries received 30% of the natural gas they burned last year from Russia according to the U.S. Energy Department "We have to be very careful not to hurt ourselves more than we hurt the other side," the Polish Foreign Minister has said. This comes after Russia announced what many have called the "Holy Grail" energy deal with China that has geopolitical implications for the whole world as it binds the two nations in a commodity-backed axis.

A recently signed deal for gas supplies to Ukraine only highlights the fact the devil of any agreement is in the details. It was quickly pointed out the EU didn’t give any guarantees to Russia for Ukrainian gas payments by a spokeswoman for the European Commission in Brussels. The Russian Energy Minister Alexander Novak said any resumed supplies could be halted again on Jan. 1 if Ukraine doesn’t pay $3.1 billion in debt prepay for future deliveries. It appears this deal is tenuous and the guarantees of it being fulfilled are weak. In the end the money will come from an IMF loan to Ukraine which means that many of the same countries that are claiming to oppose Putin and not giving any guarantees for payment will be filling Putin's coffers with cash.

The Russian President has kept tensions high and some people think he may be telegraphing his intentions with his fighter jets. This forced the North Atlantic Treaty Organization to scramble its own warplanes several times this week. Russian military planes were tracked over the Baltics,North Sea, and Atlantic yesterday. “The airspace interceptions around Europe in the past few days show that Russia is willing to challenge NATO and has no interest in de-escalation,” Stefan Meister, an analyst at the German Council of Foreign Relations in Berlin, said by phone. “I don’t see this gas deal as a step forward.”

On the ground in Eastern Ukraine the daily clashes have intensified between rebels and government forces. The Russians have been sending more supplies to the region, according to the Ukrainian army while the Kremlin has denied any "military involvement" in its neighbor’s crisis. The EU on October 30th rebuked Russian Foreign Minister Segei Lavrov, who said that his country would recognize the separatist elections. Reports are Russia continues to supply the militants and conduct surveillance from its side of the border. Russia’s Emergency Ministry said it’s organizing another convoy that will include meat, sugar, construction materials, fuel and medicine.

As parts of an EU-Ukraine Association Agreement will go into effect today, covering such areas as the rule of law as well as the fight against crime and corruption. Nothing has really changed within Ukraine and the next flashpoint may be in the self-proclaimed republics of Donetsk and Luhansk. The separatists are pushing ahead even as daily fighting and violent clashes test a truce signed September 5th.  “The separatist elections planned on November 2nd matter a lot more in terms of the big picture than the gas deal,” Arkady Moshes, the head of the EU’s Eastern Neighborhood and Russia research program at the Finnish Institute of International Affairs, recently said by phone. “The overall conflict is in a state where too many parties simply don’t want to have any solution.”

As this unfolds a self-righteousness President Obama continues to scold Russia for intervening in the affairs of Ukraine and Secretary of State, John Kerry is on record declaring it unacceptable to invade another country on a "completely trumped-up pretext," or just because you don't like its current leadership. The glaring hypocrisy exhibited by the White House and what appears to be a total lack of self-awareness by U.S. officials has shocked the world. While Obama  continues to charge his Russian counterpart, Vladimir Putin, with violating Ukraine's sovereignty and territorial integrity in breach of international law, it is difficult to forget the infamous "Fuck the EU" comment by Assistant Secretary of State, Victoria Nuland in the run-up to Ukraine's revolution. The comment revealed the extent to which Washington was recklessly maneuvering to undermine Ukraine's elected pro-Russian president by backing the Kiev street protesters' demands.

Reality on the ground remains that America has few military options in Russia's backyard unless it has the backing of a full and enthusiastic NATO and that is very unlikely. The political reality is that few Americans support such action and the number is dropping each day. Europe has reason to be unexcited about a possible long and expensive conflict. While still trying to recover from a recession, Europe would face fuel shortages and a massive spike in the price of natural gas. Currently, Russia supplies much of the gas used in Europe, this gives Putin a great deal of leverage. If an actual ground attack were to occur few see the Russians as likely to rollover as other armies have when America approaches.

Many in the West point to a weakening ruble as proof they are winning this "cold war." Russia’s currency has been plunging as Russians pull capital out of the country amid the standoff with the U.S. and its allies over Ukraine. Sanctions imposed by the U.S. and the EU have shut Russian companies out of foreign capital markets and threaten to push Russia into recession. It must be noted the euro is also falling as Euro-zone economies falter and this is pushing Russia into forging stronger bonds with China. This will haunt the Euro-zone in the long-run.  Don't hold your breath for Putin to back-off or back-down, he has put down his marker and is now playing both Obama and Kerry for fools in a contest that may cost Russia little. If Putin doesn't get his way next week he will next month or next year at the latest. This conflict won't be over until Putin says its over.

   Footnote; Your comments are welcome and encouraged. If you have time please check out the archives for other post that may be of interest. Below is another of several post I have written concerning Ukraine.