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 letting years go by where they did not insist Amazon collect sales tax 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 has been 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 constituting 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.

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 Kasich from Ohio 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 Kasich'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. It must also be noted that while Ohio Governor axed and rejected the so-called "Amazon tax", he approved a sales tax rate increase on brick and mortar retailers in his state that went into effect on September 1, 2013. When government chooses winners and chooses to subsidize 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. Amazon 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 for 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 at some point investors will begin to reflect in the company's stock price that it make no profit. This may happen just about the time new competitors begin to cheaply and easily replicate the most profitable parts of Amazon, by doing this they can 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 for similar reasons have become staunch Amazon customers.  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 an 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 valuations 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 to improve 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, the 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 effect 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 that you 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.

A Reassuring Lie Has Many Fans
It is often hard to quantify just how intelligent the masses are but, it is safe to say many people could not qualify as a 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. It is often not very reassuring to question what we are told and far easier to go with the flow or accept the general consensus that the person you are following actually knows where they are going.

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 claiming to be 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 the 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 drivel 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.

Japan And Its Shrinking Number Of Options

Japan's Economic Options Are Shrinking
A recent article outlined how Japan is painting itself into a corner and how its economy and future was still troubled at best. Reuters has gone on to reinforce this opinion when it pointed out there is no spending cap in the latest fiscal strategy draft being issued by Premier Shinzo Abe. Not only is the mandatory spending cap missing, but the draft is based on some rather optimistic economic estimates of future events. This will put the Bank of Japan under even more pressure making it difficult to expand monetary stimulus if needed. Japan's options are shrinking and "any" shift in monetary policy could cause bond yields to soar and create a panic.

Concern over the slow progress Japan is making to get its huge national debt and government deficit under control has been rising for some time. The reality is these delays could morph into a reinforcing negative loop if the markets or Japanese people begin to lose confidence. The liquidity of the government bond market has been recently questioned and if yields were to start rising it would trap the Bank of Japan into buying more bonds and holding them longer to halt an explosion in the government debt which is bigger even Greece's relative to its economy. The BOJ had been promised a stronger effort would be made by the government in confronting its fiscal deficit.

This is in many ways about "confidence", the moment it is lost the consequences will be huge. With the government financing almost 40 percent of its annual budget through debt it becomes easy to draw comparisons between Greece and Japan. The obvious difference being Japan is not at the mercy of others and is able to print currency at will. A big chunk of the budget already goes to servicing the national debt and any rise in interest rates would put Japan in a world of hurt. "Once markets become suspicious about Japan's fiscal discipline, it will be tough even for the BOJ to control long-term interest rates," said BOJ policy board member Takehiro Sato. 

A clearer picture of how the economy is fairing will begin to develop later this year after the distortion from falling oil prices has worked its way through the system.  If inflation does start to take hold it is not unreasonable to think it will pull bond yields higher as it moves up.  Another problem is that the number of banks and investors buying Japanese Government bonds has slowed to a trickle as they moved into the stock market and riskier ventures in search of higher yield. Even Japan Post Holdings, a state controlled company and the world’s biggest holder of  JGBs after the Bank of Japan recently announced with little fan fair its intention to significantly alter its investment strategy and revamp its 300 trillion yen portfolio away from these bonds.

The bottom-line is the BOJ is in the hot seat and any effort to taper its purchases could cause chaos. Unless the government restores fiscal discipline bond prices will plunge and yields soar on any attempt by the BOJ to cut its bond buying. If it doesn't, fears that the country will monetize its debt will drive funds out of Japan and send the yen into free-fall. Hideo Hayakawa, a former top BOJ economist said "The moment markets stops believing that Japan's finances are sustainable, huge market turbulence is unavoidable." We should remember Japan is still a large global player and problems there will spread across the world. 

Footnote; As always your comments are appreciated. Please take the time it check the archives located at the right to see if any other articles tickle your interest. The article below delves further into just how vulnerable the yen is going forward.

Footnote #2;  When looking at recent numbers from Japan we must remember the depreciation of the yen mechanically inflates the revenue collected abroad when converted into Japanese currency. Exports, conversely, increased at an unprecedented pace since January (+ 9.5%), to 6.5057 trillion yen (52.5 billion dollars), driven by the semiconductor and automotive sector in particular. Thus while the yen total has grown is larger in terms of volume, there was a stagnation.

Friday, July 3, 2015

Hard-landing Scenario Is Not Out Of The Question

Will You Be Able To Walk Away?
The game of life is both confusing and complex, this is especially true when it comes to the financial part of our lives. Those who watch closely will notice that even small changes in the laws and rules can have a big impact. A lot of strange almost bizarre theories are floating around. If we step back, take a deep breath, then try to sort out what is really happening in the economy we find great uncertainty. Many of the investments people make are predicated on the idea that if the economy fails we will have a soft-landing, or if it does crash the result will not be fatal.

The idea the economy will simply be able to adjust and grow its way out of our current funk and muddle along is based on a view of history that often overlooks the many who have "lost it all" in prior periods of economic chaos. As we focus on the fact the system always moves forward we tend to forget how it has a way of sacrificing many investors for the "better good", this is fine if you are not one of those being sacrificed. This means we should not be blind as to other less optimistic scenarios concerning our economic future. A key assumption of the current "escape velocity" mantra is that we have all the time in the world to deal with our problems, it discounts the notion that forward progress may at any time be fouled by events often beyond our control. This feeling all is well is strengthened by the government's optimistic projections and numbers that fail to recognize how another recession could skew future tax revenue and cause spending to soar.

Computer Screen Of Inaccessible Sites!
To the left is an image posted on a web site on the morning of Monday June29th, this was at a time concern over a default by Greece ran high. It shows dozens of servers as being "inaccessible" and is an indication of how fast things can lock-down when things turn ugly. Take this as a warning and solid reminder that we must not allow ourselves to become complacent and think we have plenty of time to take action. In our modern world of instant communication  it is becoming increasingly common that options can vanish in a blink of an eye. If we wait too long we may find all doors close and there is no place to hide.

A person watching closely as the deadline approached for Greece renegotiating its dept with the Euro-zone noted that many people reading about money coming out of the Greek banks were wondering why any money was still even left in these accounts. He went on to say "It is simply another Greek tragedy that so many of the local depositors were merely waiting until just after the last minute to withdraw their funds before joining those already busy hoarding fuel and food." The financial default of Greece could be the thing that fuels the fire that finally brings down the house. If it does not, the light from the flames will surely illuminate and expose the fact that similar flaws and massive debts exist in many other countries across the world.

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. QE has up to now stopped an implosion of derivatives and the resulting contagion and shock that would have spread throughout the financial system. The irony is how little of this money has reached Main Street in a constructive way while the damage to savers has been massive. While the Fed has essentially abolished the most basic rules of macro-economics do not be surprised if the natural laws of economics show their dominance over Yellen and others who dare to toy, tinker, and write a new script.

It appears complex and strong crosscurrents may be about to converge and knock the implicit assumption of the escape velocity off its axis. The theory that we have plenty of time and that another recession does not loom anytime in the future is rooted and based on the momentum model of economic growth.  It rests on the idea we will experience a trend of ever growing year over year increased production. The problem we face today is much of this recovery has been constructed on the unstable base of false demand. The easy money policies and artificially low interest rates of the last seven years has simply moved demand forward and created a slew of economic activity that is unsustainable in what would be considered a normal economic environment. This tends to distort prices and lead to overbuilding that often abruptly comes to a painful end.

Just how far off course we have moved becomes clear when we look at the service trades which cater to the top 10% of consumers which account for 40% of total consumption spending and 85% of financial assets. Please note jobs reports should be viewed as a lagging indicator, but in the present US business world that is dominated by stock market obsession it has been elevated much as it was in the run-up to 2008. Many people are "over-inventorying" labor by believing that the stock averages are forecasting higher sales and demand around the corner. We are currently at the highest ratio of business inventories to final sales since October 2008 in part because low interest rates make it easy to stock more goods with little carrying cost. When the markets finally break, we may again witness a hard landing driven by the dual liquidation of excess labor and stockpiled goods.

Wednesday, July 1, 2015

Building A False Economy On Infrastructure Or War

Building New Bridges Creates Jobs But Is Not Free
One way a country can kick their gross domestic product forward is to build a false economy based on infrastructure or war. When a country gorges at the trough of deficit spending it can easily manipulate a big temporary boost in its GDP. One of the best examples of building an economy on a foundation of military might or a massive move to militarization was demonstrated by how Germany was turned into a war machine during the 1930s. Unfortunately, such spending quickly creates a wall of debt.

China Boost Its Economy By Building Machines For War
While history clouds much of past events, Hitler is often seen as force guiding Germany's economy, how much he contributed is a matter of debate. Hitler's views on the economy were mixed and of secondary importance to his more overriding goals. In a speech he proclaimed "we are socialists", but he made it clear that his meaning "has nothing to do with Marxian Socialism". It is reported that in private he also said "I  absolutely insist on protecting private property... we must encourage private initiative". Of course history shows that he had no problem with the government regulating the use of that "private property" for the good of the state.

Remember Hitler rose to power following the hardships of World War I and Germany's historic bout of hyperinflation in the mid-1920s. The crash in 1929 and the Great Depression that spread across the world created an environment where Hitler was able to become Chancellor of Germany in 1933. Under his leadership the Minister of Economics introduced the Mefo bills (Government IOUs) that existed alongside the Reichmark, industries were allowed to trade these bills among themselves. This was a scheme that allowed Germany to rearm by creating a huge off the book deficit and massive national debt.  As a result employment soared and wages rose. The part of this story many people forget is the prosperity was false and temporary. The fast growth only masked real problems within the economy and resulted in rationing and shortages in things like poultry, fruit, and even clothing for many of the people.

A major problem of a war based economy is the issue of sustainability. It is expensive to maintain an army and war is a destructive force. Long gone are the days of conquering your enemy then raping and plundering your way to glory and riches. At least so in seems and we can only pray that part of mankind's history is fading into the rear-view mirror. In many ways this lessens the appeal and lowers the risk reward ratio of war. When after winning a war if you have to pay and invest money to rebuild the enemy you defeated, war becomes rapidly unappealing. The only real winners are those manufacturing the weapons and signing massive contracts to rebuild what has been damaged. Another problem is if society takes the position the lives of their soldiers have value, the cost of lives lost and the money spent  to care for the wounded and other programs for those who have served quickly adds up.

Infrastructure also has the potential to become a boondoggle with huge cost overruns and is just a waste of money if allowed to be driven by political motivations rather than necessity. The real test comes when questions are asked about the need for a certain project and the quality of the vision on which it is based. We must also take a deep look into how we set priorities and the payback or savings that will take place over time as a result of our investment. When looked at closely this is where large public or government building projects often fall short of our goals. It is not uncommon to find poor decision making and corruption has created a project that is overbuilt, expensive to maintain, or has a lifespan far too short to afford a reasonable payback on the funds spent.

The reason infrastructure spending can sometimes be considered part of a false economy is the number of jobs we claim are created from such spending are often only temporary and can be easy to overstate. While infrastructure spending brings the illusion of solid growth it is generally a long-term investment financed by creating debt, this debt often last for decades and long after the project is completed. Often the jobs such projects create quickly fade away. This makes it important the money is well spent or the bill will come back to haunt society and the economy over time. Sadly, many people and politicians who devise such projects are more interested in a quick fix today or spurring growth rather than focused on building a better future.