Chart Of The Day: The Fed's "Renormalization" Shock (All 600 bps Of It) Submitted by Tyler Durden on 09/21/2013 15:21 -0400 Barclays Ben Bernanke Fed Funds Target Gross Domestic Product Monetary Policy recovery in Share 5 As we noted earlier, Bernanke's actions this week make it very clear that between "financial conditions" and the fragility of growth, the US is incapable of surviving without ZIRP and QE (for now). As Barclays notes, ultimately, normalisation should proceed according to a timeline that does not threaten recovery , yet will result in a neutral monetary policy by the time the economy reaches full capacity and the desired inflation rate. However, there are many uncertainties along this path. Chairman Bernanke has said it might take "two or three years after 2016" to reach a 4% fed funds rate (the FOMC’s ‘longer-run’ expectation), but, as the disturbing chart below highlights, even an adjustment to 2.0% (the median FOMC expectation for December 2016) entails formidable adjustment of monetary policy once allowance is made for the tapering of QE. Given we now know that 'tapering is tightening' , the implicit rate hike from a reduction in QE will mean a 600bps tightening in financial conditions. Do you believe in miracles? There is a wide variation of econometric estimates of the impact of LSAP, but one rule of thumb is that net purchases of $800bn have, very approximately, a similar impact on US GDP to a 100bp reduction in the fed funds rate . This implies that the Fed’s cumulative LSAP (set to approach $3.0trn by Q1 2014) might be considered equivalent to lowering the fed funds target rate by 370bp. We have tried to represent this in terms of a negative equivalent fed funds rate in the chart above, which illustrates that a return to ‘normality’ in terms of the Fed’s balance sheet and reaching even a 2-2.5% fed funds rate would represent a formidable tightening of US monetary conditions. Simply put - how do you think our easy-money , share-buying-back , leverage at all-time highs corporations will cope with a 600bps rise in the cost of capital over the next three years? Source: Barclays Average: 5 Your rating: None Average: 5 ( 5 votes) !-- - advertisements - .AR_2 .ob_empty {display: none;} .AR_2 .rec-link {color: #565656;text-decoration: none;font-size: 12px;} .AR_2 .rec-link:hover {color: #565656;text-decoration: underline;font-size: 12px;} .AR_2 {float: left;width:50%} .AR_2 li {list-style: none outside none !important;font-size: 10px;padding-bottom: 10px;line-height: 13px;margin:0;} .AR_2 .ob_org_header {color: #000000;text-decoration:bold; margin-left: 0px; font-size:14px;line-height:35px;} .AR_3 .rec-link {color: #565656;text-decoration: none;font-size: 12px;} .AR_3 .rec-link:hover {color: #565656;text-decoration: underline;font-size: 12px;} .AR_3 .rec-src-link {font-size: 12px;} .AR_3 li {padding-bottom: 10px;list-style: none outside none !important;font-size: 10px;line-height: 13px;margin:0;} .AR_3 .ob_dual_left, .AR_3 .ob_dual_right {float: left;padding-bottom: 0;padding-left: 2%;padding-top: 0;} .AR_3 .ob_org_header {color: #000000; text-decoration:bold; margin-left: 0px; font-size:14px;line-height:35px;} .AR_3 .ob_ads_header {color: #000000; text-decoration:bold; margin-left: 0px; font-size:14px;line-height:35px;} -- - advertisements - Login or register to post comments 6438 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Exclusive: The Fed's $600 Billion Stealth Bailout Of Foreign Banks Continues At The Expense Of The Domestic Economy, Or Explaining Where All The QE2 Money Went Chart Of The Day: With All Of QE3 Priced In, The Only Way Is Down Should Bernanke Disappoint Chart Of The Day: The Fed's Taper In Perspective Chart Of The Day: The Minimum-Wage (Non) Recovery Comment Of The Day: On The Self-Destructiveness Of Fed Policy
A Stunning 60% Of All Home Purchases Are "Cash Only" - A 200% Jump In Five Years Submitted by Tyler Durden on 08/15/2013 17:29 -0400 10 Year Bond Bond Housing Bubble Housing Market Real estate recovery Remember when housing was the primary aspirational asset for a still existent US middle class, to be purchased with some equity down by your average 30 year-old hoping to start a family in his or her brand new home, and, as the name implies, aspire to reach the American dream? Those days are long gone. Back in those days the interest rate on the 10 Year bond mattered as it determined the prevailing marginal affordability of leveraged real estate. That is no longer the case, at least not for about 90% of Americans, because as Goldman shows, while before the great crisis only 20% of home purchases were "all cash", since then the number has soared threefold, and currently the estimated percentage of cash transactions (by count and amount) has hit a record 60%. In other words, less than half of all home purchases are debt-funded, and thus less than half of all home purchases are actually representative of what middle-class America is doing. Goldman's take: Exhibit 4 shows the estimated cash transactions as percent of total home sales both by transaction count and by transaction dollar amount. Relative to the pre-crisis years, percent cash transactions has risen by about 30 percentage points. This change is broadly in line with the increases suggested by DataQuick data. The 30 percentage point increase in percent cash transactions explains almost the entire decline in the “mortgage per dollar transaction” series (with the remainder explained by small changes in average LTV ratios per mortgage). We do not have data to assess who these all-cash homebuyers are, but presumably investors who have been purchasing distressed properties and turning them into rental units have played an important role. The WSJ has a few thoughts to add: The surprisingly large cash-share of purchases helps to explain why home sales have jumped over the past two years despite more muted increases in broad measures of new mortgage activity, such as the MBA’s mortgage application index. There’s no exact way to know who is responsible for all of these cash purchases, though they are likely to include some combination of investors, foreign buyers, and wealthy homeowners that don’t want to go through the hassle of getting a mortgage before closing on a sale. Mortgage lending standards have sharply tightened up since the housing bubble, with banks scrutinizing borrowers’ tax returns and bank statements to verify their incomes and the source of their down payment. Our personal thoughts: just like the stock market has been levitating on zero volume and virtually no broad distribution, so the entire housing market appears to have morphed into a "flip that house" investment vehicle used by the usual suspects (wealthy foreign oligarchs abusing the NAR's anti-money laundering exemption to park their stolen funds in the US, government sponsored firms such as BlackStone using near zero cost REO-to-Rent subsidies, and other 0.01%-ers) who piggyback on cash flows deriving from alternative cheap credit-funded investments and translate their profits into real-estate investments. It also means that if nobody used leverage (i.e., mortgages) to buy houses before, they certainly won't do it now, all the more so with interest rates soaring and purchase affordability imploding in front of everybody's eyes. Finally, due to the very thin marginal source of bidside interest (flipper flipping to flipper and so on), it means that most of America has not participated in this mirage "recovery", and all it will take to send the buoyant housing market crashing is for the one marginal buyer to become a seller. What they will next find, is that when dealing with a bidside orderbook that has zero depth, one indeed takes the escalator down from where the lofty heights achieved courtesy of Fed-funded stairs. Average: 4.882355 Your rating: None Average: 4.9 ( 17 votes)
US Consumer Bankruptcies Jump By Most In Three Years; Third-Party Collections At All Time High Submitted by Tyler Durden on 08/14/2013 16:36 -0400 Consumer Bankruptcies recovery Something funny happened on the road to the epic consumer balance sheet cleansing and subsequent releveraging (without which there can be no actual non-Fed sugar high fueled recovery): the second quarter. And specifically, as the Fed just disclosed in its quarterly Household Debt and Credit Report , the number of consumer bankruptcies during the second quarter, just jumped by 71K, to 380K from 309K in Q1, the biggest quarterly jump in precisely three years - on both an absolute and relative basis - and the most since the 158K jump recorded in Q2 2010. It appears that when the "releveraging" US consumer isn't busy buying stuff on credit, they are just as busy filing for bankruptcy. Healthy consumer-led recovery and all that. But wait, there's more. Because as this other data set also from the NY Fed shows, the proportion of US Consumer that have a third-party collection process commenced against them is pretty much at all time highs, where it has been for the past two quarters. Must be the recovery too. Source: NY Fed Average: 5 Your rating: None Average: 5 ( 5 votes) !-- -- Tweet !-- - advertisements - .AR_2 .ob_empty {display: none;} .AR_2 .rec-link {color: #565656;text-decoration: none;font-size: 12px;} .AR_2 .rec-link:hover {color: #565656;text-decoration: underline;font-size: 12px;} .AR_2 {float: left;width:50%} .AR_2 li {list-style: none outside none !important;font-size: 10px;padding-bottom: 10px;line-height: 13px;margin:0;} .AR_2 .ob_org_header {color: #000000;text-decoration:bold; margin-left: 0px; font-size:14px;line-height:35px;} .AR_3 .rec-link {color: #565656;text-decoration: none;font-size: 12px;} .AR_3 .rec-link:hover {color: #565656;text-decoration: underline;font-size: 12px;} .AR_3 .rec-src-link {font-size: 12px;} .AR_3 li {padding-bottom: 10px;list-style: none outside none !important;font-size: 10px;line-height: 13px;margin:0;} .AR_3 .ob_dual_left, .AR_3 .ob_dual_right {float: left;padding-bottom: 0;padding-left: 2%;padding-top: 0;} .AR_3 .ob_org_header {color: #000000; text-decoration:bold; margin-left: 0px; font-size:14px;line-height:35px;} .AR_3 .ob_ads_header {color: #000000; text-decoration:bold; margin-left: 0px; font-size:14px;line-height:35px;} -- - advertisements - Login or register to post comments 8507 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Italian Scandal Widens As Italy's Third Largest Bank Set To Get Third Bailout In 3 Years; Draghi, Monti Implicated Levered Beta Uber Alles: NYSE Borse Margin Debt Jumps To Three Year Highs, Investor Net Worth Remains At Record Lows All Eyes On The Gold Rout, Most Oversold In 14 Years JPY Surges Most In 3 Years; "Buy-The-Dip-Mentality" Gone Chicago PMI Plummets By Most In Over 4 Years; Weather Blamed
Chart Of The Day: Monthly Home Payment Soars 40% To 2008 Levels Submitted by Tyler Durden on 07/29/2013 09:08 -0400 Credit Suisse recovery The following chart from Credit Suisse fully explains why the US housing "recovery" has just ground to a halt: in a few short weeks, US housing affordability (a topic we first covered a month ago ) has collapsed as a result of the monthly payment on the median home sold soaring by nearly 40% from under $800 to just shy of $1100, a level not seen since 2008. Now if only US personal incomes would keep pace, instead of doing this ... Average: 4.72222 Your rating: None Average: 4.7 ( 18 votes) !-- -- Tweet !-- - advertisements - .AR_2 .ob_empty {display: none;} .AR_2 .rec-link {color: #565656;text-decoration: none;font-size: 12px;} .AR_2 .rec-link:hover {color: #565656;text-decoration: underline;font-size: 12px;} .AR_2 {float: left;width:50%} .AR_2 li {list-style: none outside none !important;font-size: 10px;padding-bottom: 10px;line-height: 13px;margin:0;} .AR_2 .ob_org_header {color: #000000;text-decoration:bold; margin-left: 0px; font-size:14px;line-height:35px;} .AR_3 .rec-link {color: #565656;text-decoration: none;font-size: 12px;} .AR_3 .rec-link:hover {color: #565656;text-decoration: underline;font-size: 12px;} .AR_3 .rec-src-link {font-size: 12px;} .AR_3 li {padding-bottom: 10px;list-style: none outside none !important;font-size: 10px;line-height: 13px;margin:0;} .AR_3 .ob_dual_left, .AR_3 .ob_dual_right {float: left;padding-bottom: 0;padding-left: 2%;padding-top: 0;} .AR_3 .ob_org_header {color: #000000; text-decoration:bold; margin-left: 0px; font-size:14px;line-height:35px;} .AR_3 .ob_ads_header {color: #000000; text-decoration:bold; margin-left: 0px; font-size:14px;line-height:35px;} -- - advertisemen Login or register to post comments 22157 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Chart Of The Day: Plunging Gasoline Demand vs The "Soaring" Recovery And Record Dow Jones Chart Of The Day: Build America Bond Yields Hit 11 Month High Chart Of The Day: Fed Interventions Since 2008 Chart Of The Day: Americans At Or Below 125% Of The Poverty Level Chart Of The Day: Savings Rate Drops To December 2007 Levels
The Jobs Number Is BS Says Former Head Of BLS Submitted by Tyler Durden on 07/18/2013 15:57 -0400 Ben Bernanke Ben Bernanke BLS Bureau of Labor Statistics Great Depression HFT Monetary Policy Obama Administration Quantitative Easing Real estate Real Unemployment Rate Reality Recession recovery Unemployment After every non-farm payroll report we provide our own breakdown of what the real unemployment rate is in a country in which the labor force participation rate has not been adjusted to normalize for the Second Great Depression. In the most recent such endeavor we found the "Real Unemployment Rate" to be 11.3%. To wit : As of May, assuming realistic LFP assumptions, the real U-3 unemployment rate should have been not 7.6% but 11.3%. Today, courtesy of the Post's John Crudele we find that our estimate was spot on not just from anyone, but the former head of the BLS himself: Keith Hall . Keith Hall believes the US economy is a lot sicker than the 7.6 percent unemployment rate would lead you to believe. And he should know. Hall was, from 2008 until last year, the guy in charge of Washington’s Bureau of Labor Statistics, the agency that compiles that rate. “Right now misleadingly low,” says Hall, who believes a truer reading of those now wanting a job but without one to be more than 10 percent. The fly in the ointment is the BLS employment-to-population ratio, which is currently at 58.7 percent. “It’s lower than it was when the recession ended. I think that’s a remarkable statistic,” says Hall, a senior research fellow at the Mercatus Center at George Mason University in Fairfax, Va. That level tells Hall the real unemployment rate is actually about 3 percentage points higher than the BLS number. If the jobless rate is unacceptable at 7.6 percent, it’d be shockingly bad if he is right and the true rate is 10.6 percent. ... Hall reckons there are millions of U-6 people on top of the 4.5 million long-term unemployed. "This has been a very slow, very bad recovery,” he says. “And I think the numbers have really struggled as a result. In fact, I’ve been very disappointed in the coverage of the numbers." It is not just the artificial manipulation in the labor force participation rate, which we first brought up in 2010 and only became a mainstream theme this past year. There is also the monthly seasonal adjustment factor which provides the much needed smoothing function whose only job is to provide a "credible" number to be used by the HFT algos to ramp stock momentum almost exclusively to the upside: after all the only thing the Fed has left is to promote confidence in the economy using the only transmission mechanism subject to the Fed's central-planning: the manipulated monetary policy vehicle known as the SP500. There are other problems with numbers coming out of BLS, according to Hall. And they will just add to the confusion. All parts of Washington’s data-collecting machine adjust to smooth out the bumps caused by the seasons of the year. But the recession that started five years ago was so severe and the recovery so anemic that the seasonal adjustments have been thrown off. Crudele, a long-time skeptic of manipulated data, points out some other obvious divergences between the Fed's propaganda and reality: The Fed, and particularly Chairman Ben Bernanke, are acting rather strange these days. One minute Bernanke is suggesting that his highly controversial and very dangerous money-printing operation, called quantitative easing, will be tapered off in the near future because the economy is doing better. The next minute Bernanke is talking about how QE will continue if the economy isn’t strong enough to stand on its own. The Fed chief often points to the housing and the stock markets as evidence of economic improvement, although those are nonsense indicators. The stock market is only rising because Bernanke is printing so much money. And housing is improving, with prices rising sharply in spots, because big-time investors who can’t find anywhere else to park their assets profitably are scooping up big-city real estate by the bundle. Finally, while Hall isn't a whistleblower in the pure sense of the word, and hasn't disclosed any specific illegal data manipulation by the BLS, the fact that such systematic data "massaging" has been acknowledged by the former head of the statistical agency should be enough for the BLS and the Obama administration to hang their heads in shame. Of course, they won't - to a big part because nobody in the mainstream media will actually call them out on it - and will instead point to the SP hitting all time manipulated high after all time manipulated high as proof the economy is doing great. Alas, to their chagrin, nobody believes that particular lie anymore. 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How America's Housing Non-Recovery Led To Record Income Inequality Submitted by Tyler Durden on 07/05/2013 14:04 -0400 Bond Census Bureau Creditors fixed France Great Depression Housing Starts Monetary Policy Mortgage Backed Securities recovery With bond yields soaring over fears of a Fed tapering, and 30 Year fixed mortgages on the verge of crossing 5.00%, it is inevitable that any "speculative" investment property components, driven by cheap and abundant credit, to what continues to be incorrectly labeled a housing recovery, will crash and burn in the days and weeks ahead. This was already confirmed when looking at mortgage applications, which tumbled at the fastest pace in three years . However, as the following note from CLSA's Chris Wood explains, there is another angle when a housing recovery is not a housing recovery : a surging Gini coefficient. In fact as Wood observes that " the Gini coefficient had apparently reached in 2006 the previous high seen in 1929, prior to the Great Depression ." In other words, the US now has greater income inequality than even during its worst economic episode in history. This means, unfortunately, not that the problem has been avoided but that the ‘great reckoning’ has been deferred to another day as the speculative classes have continued to game the system by resort to carry trades actively encouraged by the Fed and other central bankers , which is why fixed income markets freak out when they see signs of an exit. Precisely. It also means, even simpler, that the rich are getting richer, while the poor not only can't afford to buy homes, but are getting poorer by the day. For some colorful stories of what previous episodes of such unprecedented social divergence may ultimately leads to, just speak to France circa 1788. From CLSA's Greed and Fear If housing has staged an impressive pickup in activity, GREED fear’s view remains that the recovery in American housing is different from a conventional recovery from a housing bust in that it has been jump started to a huge extent by massive investor demand in the context of the unusual circumstances provided by unconventional monetary policy , including the Fed’s buying of mortgage backed securities (MBS). The Fed’s holding of MBS totalled US$1.2tn at the end of June. The degree to which yield-seeking investors, including specialised investment funds, have driven the housing recovery is best illustrated by the extent to which the new mortgage applications index has not recovered as much as say housing starts. Thus, the US new purchase mortgage application index has so far risen by 29% from its low reached in October 2011, while US housing starts are up 91% from their April 2009 low (see Figure 5). It is, therefore, necessary to continue to watch the new mortgage applications index closely for evidence that the baton in the housing recovery will be passed from investors to end buyers. In this respect, the obvious constraints on end buyers are a lack of income to service the mortgage and, more importantly, a lack of sufficient equity in terms of what is required by banks post-crisis to have a mortgage. Indeed there is a risk that investors, on account of still attractive rental yields compared to what is available in fixed income markets, keep pushing up prices so that houses become unaffordable again. Certainly, in GREED fear’s view investors will be much less concerned by rising mortgage rates, courtesy of the recent Treasury bond sell-off, than would-be home owners. The above thesis of an investment property boom, as opposed to a conventional housing recovery, raises another consequence of unconventional orthodoxy. This is that the practical way these policies work is to lead to ever more extreme wealth distribution, as reflected in America’s Gini coefficient which measures the degree of income inequality . The Gini coefficient has risen from 0.386 in 1968 to 0.47 in 2006 and was 0.477 in 2011, according to the US Census Bureau (see Figure 6). This is because the wealthy are geared into rising asset prices, particularly prices of financial assets, whereas ordinary people are geared into average hourly earnings growth . In this respect the Gini coefficient had apparently reached in 2006 the previous high seen in 1929, prior to the Great Depression . This is a reminder that capitalism’s natural way of dealing with excesses is via business failure and liquidation; which is why wealth distribution would have become much less extreme as a consequence of the 2008 crisis if losses had been imposed on creditors to bust financial institutions, for example owners of bank bonds, in line with capitalist principles; as opposed to the favoured ‘bailout’ approach pursued for the most part by Washington. This means, unfortunately, not that the problem has been avoided but that the ‘great reckoning’ has been deferred to another day as the speculative classes have continued to game the system by resort to carry trades actively encouraged by the Fed and other central bankers, which is why fixed income markets freak out when they see signs of an exit. But the point to remember is that the leverage taken on in such trades is highly risky because of the underlying deflationary trend. * * * Which is precisely why the Fed's pseudo-exit via hints of tapering is why the entire house of "housing recovery" cards is set to tumble any minute: because quite simply it was never a recovery to begin with, but merely the latest cheap credit-funded, hot potato flipping ploy conceived by the Fed to benefit its private bank backers. And, as always, it will be everyone else left to fund their bailout once this latest credit bubble pops and the TBTF card is used one more time... 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1994 Redux? But Not In Bonds Submitted by Tyler Durden on 06/15/2013 19:17 -0400 Bond Borrowing Costs Capital Formation Central Banks China Copper CPI ETC Exchange Traded Fund fixed Germany Gross Domestic Product High Yield Housing Market Hyman Minsky India Mexico Monetary Policy Recession recovery Switzerland Trade Balance United Kingdom Yield Curve In UBS' view, 1994 is critical for guiding investing today. The key point about 1994 was not that US bond yields rose during a global recovery. But that the leverage and positioning built up in previous years, on the assumption that yields would remain low, then got stressed. The central issue, they note, is that a long period of lacklustre growth, low rates and easy money induces individual investors, funds, non-financial corporates and banks to reach for yield. In many cases, they gear up to do it. And as Hyman Minsky warned; in this way, stability breeds leverage, and leverage breeds instability . Via UBS: 1994 Redux? ... Sebastian Mallaby has written an excellent account of the 1994 bond market blowout in ‘Hurricane Greenspan’, chapter eight of his book ‘More money than God’ (Bloomsbury press, 2010). In his depiction of the legendary hedge fund trader Michael Steinhardt – he describes how hedge funds, and a range of other financial institutions, chased convergence trades from 1990-1993 . They played term carry (borrowing short term to buy long dated bonds within the US) . They ran cross regional carry trades (borrowing in Germany or the US to buy Italian Spanish bonds as these countries prepared for EU membership) . And they rushed to buy assets that were priced off convergence trades ; emerging market property, peripheral banks. They even bought defensive growth stocks (with the idea that the PE on a defensive growth stock should converge to the inverse of the 10 year yield). We argue below that the set-up today is very similar to that in early 1994 . The danger in these trades is that a cyclical recovery, especially a global cyclical recovery, will cause yields to rise and compel policy makers to withraw accommodation. And that this can induce an outsized reaction in all the convergence trades ultimately priced off treasuries, as leverage is removed. This is why the central lesson from 1994 is that , after a long period of easy money, when a cyclical recovery kicks in and policymakers are setting to remove accommodation, at all costs avoid convergence trades and avoid assets that are priced off convergence trades . And the popular convergence trades of the past months have been; Emerging market credit Emerging market property Southern European sovereign debt Peripheral European sovereign debt US mortgage backed securities US and global high yield debt Global defensive growth stocks. So what brings us to think that we can use 1994 as a guide to investing for the rest of 2013? In the section below we highlight several key developments from 1990-1995 and the comparison with the current situation ; 1990-Feb 1994 The Fed ran a very easy monetary policy from 1990-early ’94 in an attempt to reflate the US economy in aftermath of the SL crisis. We have seen lower rates even easier monetary policy since 2009. US growth remained lacklustre throughout 1990-1993, going through a series of moderate ‘mini-cycles’. We have seen even more lacklustre growth over the past four years. US 10-year treasury yields fell from 9% to 5% from 1990-early 1994, as a recession and then disinflationary pressure pushed down inflation expectations. Treasury yields fell from 4.3% in 2007 to 1.4% in the summer of 2012. US banks hoarded treasuries. Lending remained lacklustre. Corporates hoarded cash paid back debt. From 1990-1994 Capital flowed into emerging markets . Asia boomed. The former USSR saw large inflows also. Capital flowed heavily into emerging markets from 2009-11, although it then slowed in 2H11 2012 as the Fed ended QE2. Credit spreads tightened from 90-94, and from 09-13. Commodities remained in the doldrums from 1990-1994. This was unusual, given the strong capital flows into emerging markets. But the implosion of the military/industrial complex in Russia from 1989 saw domestic demand for commodities collapse. Russia then exported nickel, aluminium, palladium, platinum, copper and oil to get hold of hard currency. Commodity prices came under intense pressure. This contrast is with the 2009-13 period – where capital flows restocking drove commodity prices higher from 2009-11, but where capital outflows, destocking and new supply drove prices lower in 2011/12. Headline CPI trended down , persuading many that there was no cause for rate hikes. We have seen a similar trend from mid-2001. The dollar trade weighted index range traded between 80 95 from 1990-1995 . An interesting development was that the dollar weakened while the US economy recovered through 1994, and while the Fed raised rates 225bps. The DXY has been range trading in a similar manner, broadly between 75 and 90 since 2009. The extended period of low rates and strong capital flows into emerging markets induced a huge build-up of leverage across financial non-financial institutions on a global basis . The strong flows of capital into emerging markets set off the procyclical growth dynamic we have described regularly. Capital inflows induce central banks to print their own currency to buy the dollars coming in. Bank deposits rise, and banks lend to construction and engineering companies. Growth inflation pick up. And with nominal rates sticky, real rates fall. That in turn incentivises procyclical gearing up to buy build houses, inventory and general fixed capital formation. The Asian tigers grew aggressively , and their stock markets boomed going into 1993. Emerging markets recovered in 2009/10, struggled into 2011/12 and then saw a patchy recovery until recently. The problem with the reflationary process in emerging markets is that it sows the seeds for its own destruction. Because the low real rates in EM induce excessive gearing fixed capital formation – compared to a more balanced allocation of capital, had real rates stayed steady above zero. This leaves misallocated capital, and the latent potential for bad loans to emerge when credit becomes scarce. It also causes a deterioration in the trade balance . Both make emerging markets increasingly dependent on capital flows to stay afloat. In many cases, emerging market governments will react to rising inflation by attempting to restrict credit growth (rather than raising rates). The problem with this is that it incentivises US dollar borrowing. Emerging market business finds it attractive to borrow in dollars when domestic inflation is rising , the domestic currency is appreciating, and domestic borrowing costs are higher than dollar funding. And it is even more attractive when the activity the loans are funding – from inventory building to FCF – sees price/cost rises. But when the trends reverse – the domestic currency depreciates, the dollar funding becomes more dear, the inventory values fall – then emerging market corporates can find themselves squeezed. Very rapidly. But it is not just EM . In the long history of financial crises, the ‘reach for yield’ during a slow growth and low yield environment has on multiple occasions set up the conditions for financial stress when yields eventually rose. The book ‘More money than God’ by Sebastian Mallaby (Bloomsbury, 2010), gives an excellent description of the leverage and yield enhancing structures that built up in the 1990-1993 period , and the carnage inflicted upon that leverage in 1994. Some examples include: Bank hedge fund carry trades – borrowing at the short end to purchase long dated bonds. Borrowing in USD and German marks to buy Italian and Greek long term debt Borrowing to buy high yield corporate debt. he use of interest rate swaps to generate yield enhancement. Leverage purchases of buy-to-let properties We have also seen a significant build up in leverage over the past four years . Buy-to-let investment has risen strongly in the US/UK/Switzerland/Scandinavia. Retail investors have become heavily exposed to credit through mutual funds and credit ETFs. Investors became very overweight long duration defensive growth and dividend yielding equities , at the expense of cyclical exposure. Investors have left themselves highly exposed to any kind of cyclical rally outside the US, as well as within it . Valuations (as we noted here ) are extremely varied. 1994 As macro activity in the US accelerated, corporates stopped hoarding cash and started to seek to borrow to expand their businesses. US banks, which had been hoarding treasuries, sold them to make way for increased corporate loans. Treasuries started to sell off . The Fed then responded to the steepening curve and the improving macro conditions by raising rates by 25bps in February 1994. This came as a surprise to the market, which was not aware of the Fed’s internal deliberations. The transcript of the February meeting indicates that Fed members were wary of a 1988/89 style spike in inflation if they did not start the process of tightening. Greenspan believed that the curve would flatten, as markets anticipated tighter policy moderated inflation expectations in the future. But that’s not what happened. The rise in rates instead dented the derivative trades predicated on no rise in yields, and it squeezed carry traders . That induced a more aggressive unwinding of treasury holdings, as leveraged carry trades unwound. And the Banks accelerated the sell off as they sold treasuries to make space for increased corporate lending. So the yield curve steepened over the year, with 10-year yields rising 306bps vs the 225bp rise in Fed funds. An array of casualties ensued , from Orange county, California, that went bankrupt due to its exposure to a series of exotic interest rate swaps. To a number of prominent hedge funds – which saw extreme losses in February 1994. Then there was the international fallout. The sharp increase in domestic demand for credit, combined with the increase in real rates induced powerful capital flows back to the US. This sucked liquidity out of several emerging markets, whose central banks had to retire domestic currency to repay the dollars exiting their countries. Soon, countries that had seen the most aggressive investment booms, which had done the most aggressive US dollar borrowing, and which suffered the largest current account deficits, came under intense duress. The Mexican peso crisis erupted, and the seeds were sown for a sustained deterioration in Asia, before the full collapse of the Asian crisis in 1997. One of the conundrums of 1994 was the US dollar. It would be logical to think that, with a sharp rise in US growth, in rates yields that the US dollar would have rallied. But it didn’t. It fell. An important reason was that the US recovery, while stronger than expected, was not a big surprise. But what was a surprise was the European recovery – after the sustained post-unification funk in Germany, and the Scandinavian banking crisis in 1992. In our view in commodity strategy – it was the relative surprises – which made Europe’s recovery much more unexpected, that triggered the currency move. This is particularly interesting today – with the broad consensus that the US dollar is going to rally, due to the more robust recovery in the US and the potential for tapering. But it is always worth keeping an eye on relative macro surprises. We see the potential for a counter trend fall in the US dollar . Now there are clearly some stark differences between today and 1994 . Back then interest rates were much higher. So 300bps on treasuries increased rates by three fifths. The same rise from the July low would treble rates. And certainly, the authorities are first talking about an extended period of QE tapering. We are still a distance away from actual rate hikes. The Fed is also much more transparent than it was under Greenspan in the early 1990s. Where conditions are similar is that a very large structure of leverage has built up on the back of low rates , from leveraged property credit buying, large retail exposure to yield enhancement products (high yield ETFs etc), earlier dollar leverage driven investment booms in emerging markets. So where are we now. It looks to us very similar to February 1994. The Fed’s continued insistence on talking tapering despite the recent rollover in US macro surprises has started to unsettle leveraged yield enhanced positioning . The US high yield ETF has come under severe pressure. The US mortgage spread has blown out relative to the US 30-year treasury yield. South African and Indian currencies are under pressure. India has responded by raising taxes on gold imports. In 1994, Mexico was the first to feel the brunt. Followed by South Korea in 1997. In 2013, South Africa is feeling the pressure. Although other emerging markets, notably China, continue to benefit. The next big question is; can the US withstand a higher cost of capital, like it did from 1994-98. In short, no! In the mid-late ‘90s, the US coped with a higher cost of capital in several ways. It enhanced productivity through a rapid adoption of tech. Corporates geared up, which ensured strong liquidity growth and ‘efficient’ balance sheets. Corporates went through a second round of ‘just in time’ inventory management and outsourcing. Consumers benefited from the strong dollar and falling commodity prices – seeing their disposable incomes improve. And the disinflation in EM translated to a downtrend in yields from 1994, which allowed for an acceleration in the housing market and an expansion of household debt. But we have a number of concerns that hint at vulnerability. The first is that the potential for sustained disinflation over multiple years is less, because yields are already low . Consequently, there is less scope for a sustained recovery in housing – beyond the initial flurry of demand from rising household formation. The sharp rise in mortgage spreads is one hint that this transition may be more difficult. The spread on mortgages may be particularly important for the leveraged buy-to-let investors , who have been heavily involved in the recent surge in housing sales. Because we understand that a large part of the buying is from investors then seeking to rent out the properties, we suspect that the follow-through consumer demand may not be as aggressive as previously imagined . If a household buys a house, taking on debt, it opens the floodgates to increasing debt fuelled buying of cars, household furnishings and white goods. A very different psychology comes from paying a month up-front on a rental. You are much more likely to cut back, to be more frugal. Government debt levels are clearly extended , and the deficit needs to be cut to prevent further deterioration A more subtle point is that the extended expansion of government spending as a share of GDP in response to the financial crisis is crowding out the private sector, and reducing the productive potential of the US economy. This stands in stark contrast with the tight control of government debt in the early 1990s under the Clinton administration . These suggest that it is much less likely that we see the US enter a ‘high plateau’ of growth as we saw from 1995-98 , where the US saw a powerful productivity credit fuelled boom while the emerging markets deflated. And it makes it more likely that the US stays on a lower trajectory, interspersed with periodic recessionary slowdowns in the years ahead. The point at which the market realises this would likely herald a significant risk-off event. Average: 4.4 Similar Articles You Might Enjoy: Scott Minerd's Detailed Pre-Mortem On What Europe's Bank Run Will Look Like, And Other Observations Must Read: Jim Grant Crucifies The Fed; Explains Why A Gold Standard Is The Best Option Gold And Silver Correction Possible But Store Of Value Demand - Especially From Asia To Support Central Bankers Are Not Omnipotent Bill Gross On Minsky's Take Of The Liquidity Trap: From "Hedge" To "Securitised" To "Ponzi" Your rating: None Average: 4.4 ( 5
Mortgage Applications Have Biggest May Collapse Since Financial Crisis Submitted by Tyler Durden on 05/22/2013 12:58 -0400 Ben Bernanke Exchange Traded Fund recovery It seems that the recent rise in interest rates, instead of the typical (pre-depression) behavioral tendency to make people nervous and rush to lock in low rates , has once again stalled any hope of an organic housing recovery occurring. While the reams of hard data show that the housing recovery remains a fast-money investment-driven enigma ( here , here , and here ) - as opposed to real confidence-driven house-buying; we are still told day after day that housing is the backbone of the economy (despite construction jobs languishing and affordability plunging again). The fact of the matter is that the last 2 weeks have seen mortgage applications plunge at their fastest rate for this time of year (a typically busy time) since the financial crisis began . But that doesn't matter because housing must be recovering because the homebuilder ETF is up 2% today... January and February we saw the rate rises (blue line dropping) spark a renewed (more behaviorally normal) interest in locking in low rates and buying... but since then the relationshio has invferted once again as the Bernanke put on bonds has now found its way into the real world. The last 2 weeks have seen rates rise and mortgage apps plunge... at the fastest rate for this time of year since the crisis began... What could possibly go wrong? Charts: Bloomberg Average: 4 Your rating: None Average: 4 ( 7 votes) Tweet - advertisements - VectorVest Stock Analysis. Find out Whether a Stock is a Buy, Sell or Hold. Get your Free Stock Analysis simply by clicking here! Login or register to post comments 10635 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: 2012 Year In Review - Free Markets, Rule of Law, And Other Urban Legends David Stockman On The Fed's Path Of Destruction Why The UK Trail Of The MF Global Collapse May Have "Apocalyptic" Consequences For The Eurozone, Canadian Banks, Jefferies And Everyone Else No Hints Of QE In Latest Bernanke Word Cloud "The Lunatics Have Taken Over The Madhouse…..Yet Again!"
Are We On The Verge Of Witnessing The Death Of The Paper Gold Scam? Submitted by Tyler Durden on 05/09/2013 17:25 -0400 Central Banks China default Eric Sprott Fail Germany Hong Kong John Paulson KIM Physical Settlement Precious Metals Reality recovery Switzerland Too Big To Fail Turkey Volatility Submitted by Michael Snyder of The Economic Collapse blog , The legal claims on physical gold far exceed the amount of physical gold that the banks actually have by a very, very wide margin. And right now the bankers are scared out of their wits because their warehouses are being drained of physical gold at a frightening rate. So what happens when their physical gold is gone but they still have lots and lots of people with legal claims to gold? When that moment arrives, it will represent the end of the paper gold scam. Many believe that the recent takedown of the price of paper gold was a desperate attempt by the bankers to put off that day of reckoning, but it appears to have greatly backfired on them. Instead of cooling off demand for precious metals, it has unleashed a massive " gold rush " all over the globe . Meanwhile, word has been spreading among wealthy families in both North America and Europe that they had better grab their physical gold out of the banks while they still can. This is creating havoc in the financial community , and at least one major international bank has already declared that it will only be settling those accounts in cash from now on. The paper gold scam is starting to unravel, and by the time this is all over it is going to be a complete and total nightmare for global financial markets. For years it has been widely known that the promises that banks have made regarding their gold far exceed their actual ability to deliver , but we have never reached a moment of such crisis before. Posted below are quotes from people that know precious metals far better than I do. What these experts are saying is more than a little bit disturbing... - CME President Terry Duffy : What’s interesting about gold, when we had that big break two weeks ago we saw all the gold stocks trade down significantly, we saw all the gold products trade down significantly, but one thing that did not trade down, was gold coins, tangible real gold. That’s going to show you, people don’t want certificates, they don’t want anything else. They want the real product. - Billionaire Eric Sprott : So we see all of these paper (trading) volumes going through that bear absolutely no relationship to what’s going on in the physical markets. As you know I have always been a proponent of the fact that supply in the gold market was way less than demand, and by a very large factor. I think demand exceeds supply by at least 60%. The central banks are surreptitiously supplying that gold, and ultimately they will be running on fumes. When we hear about the LBMA not willing to deliver gold, and JP Morgan’s inventories at the COMEX have gone from 2.4 million (ounces) down to 160,000 ounces, it just makes you realize that all of this paper trading means nothing. It’s the real physical market that you have to rely on. - JS Kim : FACT #1 : COMEX gold vaults were recently drained of 2 million ounces of physical gold in one quarter, the largest withdrawal of physical gold bullion from COMEX vaults in one quarter during this entire 12-year gold and silver bull. There has been speculation about the reasons that spurred these massive withdrawals of gold from COMEX vaults, but the most reasonable speculation is that no one trusts the bankers to hold on to their physical gold anymore, especially in light of Fact #2 . Note below, that both registered AND eligible stocks of gold had heavily declined in recent months. Such an event signals a general distrust of the banking system from everyone holding gold in registered COMEX vaults. FACT #2 : One of the largest European banks, ABN Amro, defaulted on their gold contracts and informed their clients that they would only settle their gold bullion contracts in cash and not in physical. So much for the supposed legality of financial contracts as a "binding" contract. So whether Fact #1 caused Fact #2 or vice versa is irrelevant. What IS apparent is that the level of trust in bankers to safekeep physical gold and physical silver is disappearing, as it should be, and as it should have already been for years now. But truth always takes some time to catch up to banker spread lies and that is what is happening now. I have been warning people never to trust bankers in deals involving gold and silver for years now, as in this article I wrote nearly four years ago informing the public that the SLV and GLD are likely a banker invented scam as well. FACT #3 : Silver fraud whistleblower and London trader Andrew Maguire stated that the LBMA was having trouble settling gold contracts in bullion as well and stated that institutions that asked for physical settlement “were told they would be cash settled instead by a bullion bank.” In plain English, this is a default. So Andrew Maguire reported that the LBMA had already gone into default. In light of Fact #1 and Fact #2 , the dominoes were starting to tumble and the house of cards that the bankers had built in gold and silver paper derivatives to deceive and hide the true fundamentals of the physical gold and physical markets from the entire world was rapidly starting to crumble. A financial earthquake of magnitude 2.5 was quickly threatening to evolve into one of the biggest financial earthquakes of all time in which the world’s confidence in all global fiat currencies would effectively have a well-deserved funeral. - Jim Sinclair : I think the reality is the supply situation is extremely volatile at this point, and even discussing it is like rubbing a raw nerve to the people who are in charge. The amount of discussion on the subject of warehouse supply, supply that is represented by the gold leases, indicated to the central planners that the demand for physical was going to continue to effect the exchanges. Although they did not expect any grandstand delivery, the mere continued draining of physical inventories was threatening the very functioning of the paper exchange. That threatening of the paper exchange and its ability to continue functioning is really taking off the blinders and revealing the truth behind the critical question, ‘Where is the gold?’ The question now is, ‘Where has the gold gone?’ Who has all of this gold? Because of the nature of gold leasing, all of this gold has been purchased and it has gone somewhere. The reality of the empty vaults reveal that the gold has gone missing. - Ronald Stoeferle : We’re seeing this rush to physical gold not only in the retail market, but also for the institutional players... just overwhelming…I a 130-to-1 …and I think in the last week we were really close to a default of the paper market. - Gerhard Schubert, head of Precious Metals at Emirates NBD : I have not seen in my 35 years in precious metals such a determined and strong global physical demand for gold. The UAE physical markets have been cleared out by buyers from all walks of life. The premiums, which have been asked for and which have been paid have been the cornerstone of the gold price recovery. It is very rare that physical markets can have a serious impact on market prices, which are normally driven solely by derivatives and futures contracts… I did speak during the week with several refineries in the world, of course including the UAE refineries, and the waiting period for 995 kilo bars is easily 2-3 weeks and goes into June in some cases. A large portion of the 995 kilo bars in the UAE goes normally into the Indian market, but a lot of the available 995 kilo bars are destined for Turkey, at this time. We heard that premiums paid in Turkey have reached anything between US $ 20 and US $ 35 per ounce. - James Turk : Another indication of the demand for large bars is the huge drawdown in the gold stock in COMEX warehouses. It is noteworthy that COMEX reports show the drawdown is largely the result of dealers removing their inventory, their working stock. When that happens, you know the availability of supply is constrained. What all of this means, Eric, is one thing. If the central planners want to keep the precious metals at these low prices, to meet the demand for physical metal they will need to empty more metal from central bank vaults, or borrow metal from the ETFs as some have suggested is happening. Otherwise, the central planners will have to step back and stop their intervention, thereby letting the price of gold and silver rise so that demand tapers off, bringing demand and supply of physical metal back toward some kind of balance. We've seen this same situation several times over the last twelve years. It is what I have been calling a “managed retreat.” Despite the current weakness, I firmly believe we have again entered a critical period where the central planners will need to retreat once again in order to let the gold and silver prices climb higher. - The Golden Truth : And then I get a call from a close friend in NYC last Friday. His career has been in private wealth management in the private bank department of the Too Big To Fail banks. He's been looking for work and chats with old colleagues all the time. He called my Friday and told me he just got off the phone with a very high level private banker from a big Euro-based TBTF bullion bank, but who was at JP Morgan until about six months ago. This guy told my friend that there is a scramble by many very wealthy European families/entities to get their 400 oz bars out of the big bank vaults. He knows this personally, for a fact. He said the private banker community is small over there and the big wealthy families all talk to each other and act on the same rumors/sentiment. The Bundesbank/Fed and the ABN/Amro situations triggered this move. He knows for a fact JPM tried to calm fears about 3 months ago by sending a letter to it's very wealthy clients assuring them their bars were safe, in allocated accounts. He said right now those same families are walking into the big banks like JPM and demanding delivery of their bars or threatening to take their $100's of millions in investment portfolios to competitors. His wording was "these people are putting a gun to the heads of private banks and demanding their gold." I know this information is good because I know my friend's background and when he tells me his source is plugged in, the guy is plugged in. Not only that, my friend's source said that there's no doubt that someone like a John Paulson, not necessarily specifically him, but entities like him or it may include him, have held a gun to GLD and demanded delivery of physical in exchange for their shares. Regarding the Bundesbank/Fed situation, recall that the Bundesbank asked to have some portion of its gold sitting - supposedly - in the NY Fed vault in NYC sent back Germany. The total amount is 1800 tonnes. After behind the scenes negotiations, the Fed agreed to ship 300 tonnes back over seven years. To this day, the time required for that shipment has never been explained. Venezuela demanded the return of its 200 tonnes held in London, NYC and Switzerland and received it all within about four months. And regarding the ABN/Amro situation. ABN/Amro offered a gold investment account product that offered physical delivery of the gold in the investment account when the investor cashes out. About a week before the gold price smash, ABN sent a letter to its clients informing that the physical delivery of the bullion was no longer available and that all accounts would be settled with cash at redemption. I believe it was these two events that triggered the big scramble for physical gold by wealthy families/entities who were suspicious of the integrity of their bank vault custodial arrangement anyway. ***** So what does all of this mean? It means that we are entering a period when there will be unprecedented volatility for precious metals. There will be tremendous ups and downs as this crisis plays out and the bankers try to keep the paper gold scam from completely unraveling. Meanwhile, nations such as China continue to stockpile gold as if the end of the world was coming. According to Zero Hedge , Chinese gold imports set a brand new all-time record high in March... Quite the contrary: as export data released by the Hong Kong Census and Statistics Department overnight showed, Chinese gold imports in March exploded to an all time record high of 223.5 tons. And the number for April is expected to be even higher. Does China know something that the rest of us do not? We are also seeing a rapid decoupling between spot prices and physical prices. In fact, it is quickly getting to the point where the spot price of gold and the spot price of silver are becoming irrelevant. For example, demand for silver coins has become so intense that some dealers are charging premiums of up to 30 percent over spot price for silver eagles. That would have been regarded as insane a few years ago, but people are now willing to pay these kinds of premiums. People are recognizing the importance of actually having physical gold and silver in their possession and they are willing to pay a significant premium in order to get it. We are moving into uncharted territory. The paper gold scam is rapidly coming to an end. In the long-term, this will greatly benefit those that are holding significant amounts of physical gold and silver. Average: 4.77049 Your rating: None Average: 4.8 ( 61 votes) Tweet - advertisements - Change is about to catch Republicans by surprise. A financial journalist says a scandal brewing in DC will catch most Republicans by surprise, and will alter the political system. 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The Widening Chasm Submitted by Tyler Durden on 05/08/2013 12:58 -0400 Corruption ETC Gross Domestic Product Guest Post recovery Unemployment Submitted by Charles Hugh-Smith of OfTwoMinds blog , An independent, critical account of the American economy would soon raise questions about the structural causes of inequality. That some sectors of the economy will be doing better than others is natural. If you're a landlord or mobile-apps coding genius in San Francisco, the economy is excellent. Those working in the vast North American oil-patch are experiencing a boom economy. Realtors in resurgent markets such as Miami are having their best year since the top of the bubble in 2007. This can be viewed through any number of lens, one of which is the inherent inequality of capitalism: capital and labor flow to what is most profitable at this point in time, and capital and labor left stranded in low-yield, declining sectors suffer poor returns and lower wages. This inequality can be seen as the systemic cost of a dynamic economy in which capital and labor are free to move to better opportunities. It can even be argued that the more dynamic and fast-changing the system, the greater the inequality, as those who move fast enough to take advantage of new opportunities reap most of the gain (The Pareto Distribution of 80/20 is often visible in these sorts of distributions). Economic systems that can be gamed by bribery or purchased political influence are also inherently unequal, as those with power are more equal than those without power. This is the classic feudal society or crony-capitalist kleptocracy. Those benefitting within the crony-capitalist kleptocracy will of course claim that the society is a meritocracy and their advantages are the result of their own hard work and brilliance (and perhaps luck if they are honest enough to admit to being lucky). As a result, it is difficult to tease apart the capitalist functions of the U.S. economy from the cartel-state, crony-capitalist kleptocracy that I call neofeudalism. What we do know is that the top 1/10th of 1% is reaping most of the income gains. We also know that household debt has far outstripped the growth rate of the economy as measured by GDP, evidence that much of the prosperity is based not on wealth creation or savings but on expanding credit: And we know that real income (adjusted for inflation) has declined. Since this is the median household income, we can project that the bottom 90% are actually doing much less well than shown here, as income gains mostly flow to the top 10%. Individuals are not powerless to change their circumstance. This is the basis of the American Dream (and also the Chinese Dream, Mexican Dream, Iraqi Dream, etc.) The question then becomes: how is the system "wired," i.e. what are the obstacles, incentives and disincentives presented to individuals who are trying to better their circumstance? It's important to ask this question, and to be honest in our assessment of victimhood, oppression and individual responsibility. The widening chasm refers to both the income chasm between the financier class (1/10th of 1%) and the 99.9%, and the chasm between the real economy and the official narrative of the economy. The essence of propaganda is to substitute an officially conjured narrative for independent critical thinking. In the American propaganda narrative, the central state and bank are admirably supporting a "recovery" that though uneven in places is soundly on the path to widespread prosperity. The primary support of this narrative is ginned-up statistics (bogus unemployment rate, etc.) and asset bubbles inflated by easy credit to the masses and unprecedented low-cost credit to the financier class. These are the basic tools of propaganda: choose a metric that you can control or game, and make that the measure of success. In the Vietnam War, the body-count of enemy combatants was the metric chosen by the propaganda machine to measure success. Unsurprisingly, stacks of dead civilians were duly counted to boost morale and to mask the failure of the war's managers. Nowadays the unemployment rate is the new body-count: a metric that can be gamed to reflect an illusory success. Just erase tens of millions of people from the workforce, count every 4-hour a week job and dead-reckon a few million jobs were created outside the statistical universe (the Birth-Death Model of small business creation) and voila, the unemployment rate magically declines even as the economy and the job market stagnate. The other metric of choice is the stock market, which has been inflated by central bank policies and identified as the gauge of recovery by a political class anxious to deflect inquiries into its systemic corruption and monumental policy failures. The official narrative carefully leaves the kleptocracy, crony-capitalism and cartel rentier arrangements firmly in place. As noted above, those benefitting from the cartel-state neofeudalism defend their perquisites as "natural," i.e. the result of meritocracy. This adds another layer of propaganda persuasion to the official narrative. An independent, critical account of the American economy would soon raise questions about the structural causes of inequality by asking cui bono , to whose benefit is the system arranged? If we can honestly say that the system's primary source of inequality is a dynamic economy that rewards the top 10% who are best able to deploy skills and capital, then that suggests one set of potential remediations. If however we find the system is unequal largely as a result of its cartel-state structure, then that suggests a political and financial reset is needed to clear the deadwood of corruption, malinvestment and state/central bank manipulation of statistics, finance and credit. We had to destroy the economy to save it. Indeed. New video with CHS and Gordon Long: Peak Consumption Average: 2.9 Your rating: None Average: 2.9 ( 10 votes) Tweet - advertisements - Republicans: be careful what you wish for. A brewing White House scandal could ruin Obama AND the Republican Party. 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Guest Post: It's A Bit Early To Declare A Winner In The Economic Debate Submitted by Tyler Durden on 04/25/2013 22:27 -0400 Bond Capital Formation Deficit Spending Government Stimulus Greece Gross Domestic Product Guest Post Henry Blodget Japan Keynesian economics Krugman Monetary Policy Paul Krugman Paul Volker Reality Recession recovery Savings Rate Tax Revenue Unemployment Submitted by Lance Roberts of Street Talk Live , Recently, Henry Blodget wrote that "The Economic Argument Is Over - And Paul Krugman Won." The premise of the article is that the ongoing debate between economic schools of thought, since the financial crisis began, over what policies were necessary to get the domestic and international economies growing again has been resolved. "On one side were economists and politicians who wanted to increase government spending to offset weakness in the private sector. This 'stimulus' spending, economists like Paul Krugman argued, would help reduce unemployment and prop up economic growth until the private sector healed itself and began to spend again. On the other side were economists and politicians who wanted to cut spending to reduce deficits and 'restore confidence.' Government stimulus, these folks argued, would only increase debt loads, which were already alarmingly high. If governments did not cut spending, countries would soon cross a deadly debt-to-GDP threshold, after which growth would be permanently impaired. The countries would also be beset by hyper-inflation, as bond investors suddenly freaked out and demanded higher interest rates. Once government spending was cut, this theory went, deficits would shrink and 'confidence' would return. This debate has not just been academic." He further states that: "Those in favor of economic stimulus won a brief victory in the depths of the financial crisis, with countries like the U.S. implementing stimulus packages. But the so-called "Austerians" fought back. And in the past several years, government policies in Europe and the U.S. have been shaped by the belief that governments had to cut spending or risk collapsing under the weight of staggering debts. Over the course of this debate, evidence has gradually piled up that the "Austerians" were wrong. Japan, for example, has continued to increase its debt-to-GDP ratio well beyond the supposed collapse threshold, and its interest rates have remained stubbornly low. More notably, in Europe, countries that embraced (or were forced to adopt) austerity, like the U.K. and Greece, have endured multiple recessions (and, in the case of Greece, a depression). Moreover, because smaller economies produced less tax revenue, the countries' deficits also remained strikingly high. So the empirical evidence increasingly favored the Nobel-prize winning Paul Krugman and the other economists and politicians arguing that governments could continue to spend aggressively until economic health was restored." The article really revolves around the "calculation error" in the Reinhart/Rogoff study which showed that when debt-to-GDP ratios rose above 90% economic growth slowed. Blodget believes that since the study contained an error this is clear evidence that the premise is false and that governments can continue to spend with reckless abandon until, by some miracle, economic growth is restored. The problem, however, is that it is still way to soon to declare a winner in this debate for several reasons: 1) Reinhart/Rogoff May Not Necessarily Be Wrong. While there was a calculation error in their study which changes the dynamic of the 90% threshold of debt to GDP - there is clear and ample evidence that rising debt-to-GDP ratios slow economic growth. The chart below is the debt-to-GDP ratio of the United States on an annualized basis as compared to the annual growth rate of GDP. You don't have to hold a doctorate in economics to clearly see the problem. Rising debt to GDP ratios, even from low levels, retards economic growth. Conversely, falling debt--to-GDP ratios have been a boost to economic growth. This really isn't a hard concept to understand. Rising debt levels deter savings from productive investments into debt service. The larger the debt - the larger the amount of debt service that must be paid. This leaves less to reinvest back into the economy. This is the same for both the government and the private sector. The chart below shows the annual growth rate in GDP as compared to the personal savings rate and consumer debt levels. The problem with Henry's argument is that "more stimulus" has yet to translate into higher economic growth rates as expanding debt service is impeding the ability, and confidence, of the private sector from participating in the very activities needed to create growth. The reality is that it really doesn't matter whether it is specifically 90%, 120%, or more, of debt-to-GDP before an economy "implodes" but the inability to create economic growth that should be of real concern. 2) Deficits Do Impede Growth. A second problem with Henry's declaration of a winner in the economic debate is the belief that "deficits don't matter." Keynesian economics believes that during periods of economic weakness that government spending should be increased until private spending returns. In theory this correct. However, over the past 30 years Keynesian economics has been bastardized into "the more deficit spending the better." Since Reagan entered office and vowed, with Paul Volker, to break the back of inflation - the rise of the debt/credit driven economy was able to mask over the effects of rising deficits. Falling interest rates and inflation combined with easy access to credit allowed consumers to span the gap between incomes and living standards as economic growth was retarded. However, the "end game" of rising debt and deficit levels have now arrived where additional increases spending have a diminished rate of return on the economy. While deficit spending in the short term may stabilize an economy - running deficits over an extended period of time diverts money from productive investments into debt service. Deficit spending is HIGHLY destructive to economic growth as it directly impacts gross receipts and saved capital equally. Like a cancer – running deficits, along with continued deficit spending, continues to destroy saved capital and damages capital formation. The chart below shows the annualized rate of economic growth versus the deficit balance. See the problem here? 3) Unprecedented Monetary Experiment. The current combinations of stimulative programs from bailouts, financial supports and direct liquidity injections, both domestic and globally, are of a magnitude never before witnessed in economic history. The problem with declaring a victor in the "economic debate" is the same as claiming that "Professor Plum did it in the library with the lead pipe" halfway through the game. The evidence of success is not yet available to leap to such a conclusion. The current supporters of Keynesian economics cannot point to the tepid recovery in housing, employment or even economic growth as signs of success. The support from the massive monetary programs implemented to date have, like a life support system for a near comatose patient, kept growth from slipping into a recession or worse. For success, and ultimately a victor, to be proclaimed will only be possilbe once the global liquidity programs have ceased, central bank balance sheets have successfully delevered and the economy begins to grow organically. There has yet to be any sign that we are anywhere near that point. The Argument Isn't Over While Henry declared the argument is over between the Keynesian and Austrian economic theories - we are a long way from really knowing that answer. The discovery of the calculation error in the Reinhart/Rogoff study does little to change the overall premise the excessive debt levels impede economic growth and have, historically, led to the fall of economic empires. All one really has to do is pick up a history book and read of the Greeks, Romans, British, French, Russians and many others. Does fiscal responsibility lead to short term economic pain? Absolutely. Why would anyone ever imagine that cutting spending and reducing budgets would be pain free? However, what we do know is that the path of fiscal irresponsibility has long term negative consequences for the economy. It is absolutely true that the current dysfunction in government is economically harmful as it weighs on both consumer and business confidence. However, businesses are not sitting around just waiting for more stimulus to increase employment, expand production and increase wages. What they need is demand from consumers, clarity on taxation and reduction in government regulation. How do we know this? It is because these are the top three concerns as reported by businesses owners in the monthly surveys . The reality is that it will likely be many years before we are able to conclusively settle this argument. As far I am concerned the argument is irrelevant. What we need is an Austri-Keynesian policy mix that combines short-term deficit spending to help offset the drag of budgetary reform. There is little argument that entitlement programs must be reformed along with a balancing of the federal budget and reduction of the deficit. The problem, to date, has been how to do it with no one willing to make the sacrifices necessary to achieve the end result. An Austri-Keynesian policy mix would still result in short term economic pain as there is no "pain-free" solution to the global economic environment that we face today. It is the unwillingness, and shortsightedness, of those in power that keep hoping that Cental Banks can find the "magic bullet" that will solve all economic ills and keep them in office. Alas, even the Fed has admitted that monetary policy alone is not a panacea and that evenutally fiscal policy must eventually take the lead. Ultimately, there will be a conclusion. However, without real long term budgetary reforms, that conclusion is likely not to be a pleasant one - history alone tells us this will be the case. In the meantime we can continue to ignore the long term conseqences in exchange for short term bliss. However, as long as we do, we will continue to be plagued by lower levels of economic growth as continued monetary interventions strive to offset the inevitable drag of expanding debt. Average: 3 Your rating: None Average: 3 ( 5
Worth Over $500,000? Then QE Has Worked For You; Everyone Else Better Luck Next Time Submitted by Tyler Durden on 04/23/2013 19:33 -0400 recovery Not supremely confident despite the stock market being at all-time highs? Unsure of the future and feeling poorer than in the past? You are not alone. In fact, you are among the 93% majority. As the Pew Research Center finds , during the first two years of the US economic 'recovery', the mean net worth of households in the upper 7% of the wealth distribution rose by an estimated 28%, while the mean net worth of households in the lower 93% dropped by 4% . As they explain, affluent households typically have their assets concentrated in stocks and other financial holdings, while less affluent households typically have their wealth more heavily concentrated in the value of their home. Due to these differences, wealth inequality increased during the first two years of the recovery. The upper 7% of households saw their aggregate share of the nation’s overall household wealth pie rise to 63% in 2011, up from 56% in 2009, with the mean wealth of affluent households now 24x the less affluent group (up from 18x in 2009) . So the next time you see some talking-head on TV devoutly proclaiming his faith in the Fed's QE policies, perhaps it's worth considering in which cohort he and his clients sit. Source: Pew Research Center Average:
March Durable Goods Implode, Plunge -5.7%; CapEx Recovery Put On Indefinite Hiatus Submitted by Tyler Durden on 04/24/2013 08:47 -0400 Gross Domestic Product Reality recovery So much for the great American CapEx recovery. Moments ago the Census department released the March Durable Goods report, thanks to which one can lay to rest any hope of a recovery in the US economy, with the headline number printing an absolutely abysmal -5.7%, an epic swing from the +5.7% (revised lower of course to 4.3%) in February, and confirming the recovery is dead and buried. This was the biggest miss in headline data and the biggest drop since August, and the second worst since January 2009. Although we are confident the propaganda spin is just waiting to be unleashed: after all it is possible that March weather was both too hot and too cold, thereby making the number completely irrelevant - after all it is always the inclement weather's fault when the economy does not act as predicted by some economist's DSGE model of reality and stuff. This headline number was obviously a huge miss to expectations of -3%, with the misses spreading to all sub headline categories too: Durables ex-transportation was down -1.4%, on expectations of a 0.5% rise, (previous revised from -0.5% to -1.7%). And so much for CapEx with Cap Goods nondefense ex aircraft up just 0.2% (0.3% exp) with the previous revised from -2.7% to -4.8%, while the nondefense orders shipped ex air missed expectations of a 0.8% rise, printing at 0.3%, and the February data revised from 1.9% to 1.2%. In brief, horrifying economic data however one looks at it, and proof that the great CapEx recovery never existed to begin with. So much for 3% Q1 GDP, which is about to be revised by everyone lower across the board. Finally, if this economic collapse validation doesn't send the SP limit up, nothing will. The only two charts needed to show what is really going on in terms of capex and generally spending on core capex: Orders: Shipments:
The "Undisputed Housing Recovery" Is Unmissable On This New Home Sales Chart Submitted by Tyler Durden on 01/25/2013 10:23 -0500 Census Bureau New Home Sales Reality recovery St Louis Fed We could bore readers with the just announced New Homes Sales data from the Census Bureau , which put a somewhat largish dent in the "undisputed" housing recovery fairytale taking place in America (perhaps in the Hamptons, and triplexes in Manhattan where the NAR continues to launder Chinese and Russian oligarch money) such as: December new homes sales, seasonally adjusted annualized, dropped from an upward revised 398K (was 377K) to 369K on expectations of a 385K print; That this was the biggest M/M drop since February 2011; That months supply rose from 4.5 to 4.9, the highest since January 2012; That on an unadjusted, actual basis, a tiny 26K houses were actually sold in December, compared to 24K last December, of which just 2K in the Northeast; That a whopping 1,000 houses were sold in the $750,000 and over category That houses for sale rose to 150K, the highest since December of 2011 That the punditry already spun this as being due to lack of clarity over the Fiscal Cliff and tax hikes, when in reality with expectations of higher taxes, consumers would have spent more money on hard assets in December, but why not regurgitate generic stupidity... Or we could just show this chart of the non-seasonally adjusted, unannualized New Home Sales in the past decade, and ask: just where is this recovery everyone keeps on talking about ? Source: St Louis Fed Average: 4.8 Your rating: None Average: 4.8 ( 20 votes) Tweet Login or register to post comments 15731 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Guest Post: Will John Paulson Be Wrong This Time? Pimco Vs Shilling: The Housing Bull Vs Bear Debate No Housing Recovery On This Chart Either The Chart That Proves The Fed's Policies Have Been A Failure 18.8 Million Vacant Homes In Q3, Seasonally Adjusted Homeownership Rate At Decade Low
Personal Income And Spending Weigh On Economic Recovery Hopes Submitted by Tyler Durden on 12/02/2012 11:28 -0500 Core CPI CPI Debt Ceiling Global Warming Gross Domestic Product Guest Post Personal Consumption Personal Income Rate of Change Recession recovery Savings Rate Via Lance Roberts of Street Talk Live , The personal income and spending report Friday morning left a lot to be desired for those expecting a stronger economic environment soon. However, the report fell well in line with what I have been expecting over the past several months (see here , here and here ) as the drag on real wages and incomes have weighed on the consumer. As we discussed in yesterday's report on GDP - personal consumption makes up more the 70% of the economy therefore changes to employment, incomes or credit has an immediate and significant impact to growth. First, let me argue the claim that the impact to personal incomes was due to Hurricane Sandy. While the storm is going to be the excuse for everything from economic reports to global warming the impact from Sandy on personal incomes was most likely very limited. The storm did not occur until the last two days of the month. Even if we assume that everyone in the Northeast was hourly pay, all quit their job five days before the hurricane, and then left town, the overall impact to the entire month of personal incomes for the entire country would still be fairly limited. Secondly, the Hurricane excuse doesn't account for the negative revisions to the personal income data going back to April of this year. The chart below shows the level of personal incomes both pre- and post revisions in October. These revisions also resolve some the imbalances that we have noted between reported personal income data and other economic reports pre-election. We have suggested that many of these anomalies would be revised away in the months ahead which we are now seeing come to fruition. However, for the sake of argument let's assume that the BEA is correct in their statement that 24 states were affected by Sandy for a total of about $18 billion at an annual rate . This still doesn't explain the complete lack of income growth nationwide. The chart below shows the contributions to personal incomes over the last months. More curious was the very large jump in interest income for the month of October after two previous months of decline. Absent that bump in interest income overall personal incomes would have been negative for the month. However, in the next month or two we should see the estimates used to account for the impact of the storm revised with actual data. This could show a minor increase to the October data. Moving on to personal spending it is not surprising that the previous estimates to spending were likewise revised down in October to reflect weaker income growth . The chart below shows the revision to the major categories of spending for the months of July, August and September. These negative revisions show that spending in the previous months was far less robust than previously estimated which is likely to lead to a downward revision of Q3 GDP next month. The continuing problem that faces the economy remains the impact of rising cost of living which is offsetting increases in compensation. We stated in our last report that: "...it is important to note that wage and salary disbursements have risen since the beginning of the year which has contributed to the increase in personal incomes. However, the recent rise in wages has been very nascent and has come very late in the current economic expansion. Secondly, the rise in wages has been more than offset by a large surge in food and energy costs in recent months as shown in the chart below. While the annualized rate of change in wage and salary disbursements rose again September continuing a steady trend since the beginning of this year, food and energy as a percentage of wages and salaries surged substantially more . The problem with this is that it grossly impacts the consumer. In the most recent report - personal incomes rose by 0.4% while consumer spending surged by 0.8%. Unfortunately, when spending outstrips income the difference has to come either from savings or credit. The chart below shows food and energy as a percentage of disposable personal incomes (DPI) versus the personal savings rate as a percentage of DPI. See the problem here? While core CPI remains very mild - rising food and energy costs at the headline have an immediate impact on the consumer's ability to make ends meet ." This is still the case this month. In October that annualized rate of change in wages showed an increase of 3.04% which was enough of an increase to keep food and energy at 22% of wages. Are We There Yet? When it comes to the economy, and particularly the ongoing recession watch that has nearly become a sporting event, it is real (inflation adjusted) incomes that matter. In the most recent report we see that real personal incomes declined for the month from $11,546 to $11,532 billion for the month reflecting a -.12 change. Doug Short always does an excellent job of tracking the four primary indicators used in distinguishing periods of economic expansion from contraction: "At this point, with all indicators for October on the books, the average of the Big Four (the gray line in the chart above) shows us that economic expansion since the last recession has been hovering around a flat line for the past seven months . Are we tipping into a recession? ECRI has reinforced its claim that we are in a recession and puts the cycle peak in July (more here ). On the other hand, a post-Sandy rebound, good holiday sales and favorably received outcome to Fiscal Cliff negotiations could easily put the economy into indisputable expansion mode. As for the recent data, of course they are subject to revision, so we must view these numbers accordingly." He is correct in his assessment that we are not currently in a recession. However, I am not optimistic the post-Sandy rebound will be enough to stem the tide of contracting wage growth. I am also less than convinced that Washington will come to a resolution for the fiscal cliff and the debt ceiling before it impacts the economy further. The next couple of months will be very telling about the strength of the underlying economy. The manufacturing data continues to point to further economic weakness, hiring plans have deteriorated and the main drivers of economic growth have all stagnated. With the recession in Europe continuing to erode exports, and impact corporate profitability, this leaves investors exposed to a sharp valuation adjustment in the months ahead. While we can hope to get lucky that things will work out for the best - "hope" rarely works out as an investment strategy. Average: 4 Your rating: None Average: 4 ( 2 votes) Tweet Login or register to post comments 2960 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Guest Post: CFNAI: Not Seeing The Growth Economists' Predict Overnight Sentiment: Cloudy, If Not Quite Frankenstormy Guest Post: GDP And Durable Goods - Heading To Recession? Europe's Recessionary Collapse Beating Even Most Optimistic Expectations Guest Post: New Home Sales - Not As Strong As Headlines Suggest
Russell Napier's "Most Important Chart In The World" Submitted by Tyler Durden on 11/22/2012 11:28 -0500 China Global Economy Recession recovery Yield Curve Hopes for an early recovery in the global economy may be overoptimistic, according to CLSA's Russel Napier, as he notes the expansion of China's reserves, which has been an engine of global economic growth, is about to come to a shuddering halt. As eFinancial News notes , Chinese reserves have decelerated dramatically over the last five years and are now close to zero. Napier said of the graph: "It is the most important chart in the world. The growth in Chinese reserves has determined all the key developments in financial markets in the last two decades. It printed lots of currency and artificially depressed the US yield curve. It has been the cornerstone of global growth, and now it's over ." Via eFinancial News : ... The last time the Chinese reserve growth rate was below 10% was at the end of the 1990s, just before the bursting of the technology stock market bubble and a recession. The recovery in the growth rate from 2001 onwards was followed by the economic boom of the last decade. The growth rate turned down decisively in 2007, just before the onset of the financial crisis. China's reserves have come from a trading surplus, and the Chinese authorities have used the money to buy US Treasury bonds. The finance that China supplied to the US helped fuel economic growth in that country and the rest of the world. Once again, we are reminded that it is the flow not the stock that counts for 'growth' is credit expansion and credit is growth... Average: 5 Your rating: None Average: 5 ( 7 votes) Tweet Login or register to post comments 13588 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Are 401(k) Loan Defaults Set To Resurge? Frontrunning: August 25 Guest Post: The Lie That Is Social Security Desperate Acts Of Government Continued - Europe Edition Broken Promises: Pensions All Over America
Why Energy May Be Abundant But Not Cheap Submitted by Tyler Durden on 10/29/2012 17:41 -0400 Afghanistan China Copper CRAP ETC Guest Post Natural Gas Recession recovery Saudi Arabia Submitted by Charles Hugh-Smith of OfTwoMinds blog , It doesn’t matter how abundant liquid fossil fuels might be; it’s their cost that impacts the economy. Many people think “peak oil” is about the world is “running out of oil." Actually, “peak oil” is about the world running out of cheap, easy-to-get oil. That means fossil fuels might be abundant (supply exceeds demand) for a time but still remain expensive. The abundance or scarcity of energy is only one factor in its price. As the cost of extraction, transport, refining, and taxes rise, so does the “cost basis” or the total cost of production from the field to the pump. Anyone selling oil below its cost basis will lose money and go out of business. We are trained to expect that anything that is abundant will be cheap, but energy is a special case: it can be abundant but costly, because it’s become costly to produce. EROEI (energy returned on energy invested) helps illuminate this point. In the good old days, one barrel of oil invested might yield 100 barrels of oil extracted and refined for delivery. Now it takes one barrel of oil to extract and refine 5 barrels of oil, or perhaps as little as 3 barrels of unconventional or deep sea oil. In the old days, oil would shoot out of the ground once a hole was drilled down to the deposit. All the easy-to-find, easy-to-get oil has been consumed; now even Saudi Arabia must pump millions of gallons of water into its wells to push the oil up out of the ground. Recent discoveries of oil are in costly locales deep offshore or in extreme conditions. It takes billions of dollars to erect the platforms and wells to reach the oil, so the cost basis of this new oil is high. It doesn’t matter how abundant liquid fossil fuels might be; it’s their cost that impacts the economy. High energy costs mean households must spend more of their income on energy, leaving less for savings and consumption. High energy costs act as a hidden “tax” on the economy, raising the price of everything that uses energy. As household incomes drop and vehicles become more efficient, demand for gasoline declines. Normally, we would expect lower demand to lead to lower prices. But since the production costs of oil have risen, there is a “floor” for the price of gasoline. As EROEI drops, the price floor rises, regardless of demand. This decrease in real incomes and ratcheting-higher energy costs could lead to a situation where energy is abundant but few can afford to buy much of it. The relative abundance of fracked natural gas and low-energy density fossil fuels like tar sands and shale has led to a media frenzy that confuses abundance with low cost. This article (via correspondent Steve K.) illustrates the tone and breezy selection of data to back up the "no worries, Mate" forecast of abundant cheap liquid fuels: An economy awash in oil . (MacLeans) Not so fast, reports Rex Weyler of the Deep Green Blog . Here is Rex's response to the above article. Fair point about the volume of unconventional – deepwater, shale gas oil, tar sands, etc. – hydrocarbons. These reserves may even produce peakies and/or sustain the plateau longer than some observers believe. However, biophysical restraints remain real; peak oil remains real; peak net energy appears imminent, and the impact on economies is already being felt globally. Points to consider: The dregs: In spite of huge shale tar reserve discoveries, peak discoveries remain well behind us, in the 1960s. My father, a petroleum geologist his entire life (and still, in Houston, Kazakstan...), knew about shale and tar deposits when I was a teenager in the 1960s. He called them "the dregs." These deposits are not really news within the oil industry. And they are the dregs because of high cost, low EROI and rapid depletion. EROI: The volume of these low-net-energy reserves could extend peak oil production for decades, but at fast-declining net energy returned to society. We high-graded Earth’s hydrocarbons, just as we high-graded the forests, fish, copper, tin, water, and so forth. We’ve taken the best, highest EROI hydrocarbons, the 100:1 free-flowing wells of the 1930s and 40s. We’re now into the 3:1 and 2:1 tar sands. For example: damming rivers in Northern BC, to send electricity to the fracking fields, to send shale gas to Alberta, to cook the boreal substrate, and mix the black sludge with gas condensate shipped in from California and by pipeline from Kitimat to Fort McMurray, to mix with the bitumen, to pipe to Vancouver Harbour, to ship to China, to burn in a power plant, to supply electricity to their manufacturing empire. By the time any of this energy gets used to actually make something useful to someone in society, and by the time that user puts that usefulness to work to feed, clothe, house, or heal anyone, there is no net-energy left. Our food in North America is already negative net energy by1:10 at best, up to 1:17 or worse for much of the crap we eat. This matters. EROI at well-head, EROI at the consumer pump, and EROI at the point of society’s actual service all matter. Well-head EROI, counting all public subsidies, is now in the 5:1 to 1:1 range for all these “non-conventional” (meaning the dregs) hydrocarbon deposits. Money can be made. Some energy can be delivered to Society, but this is already way below the well-head EROI that could likely run the current complexity of the human society, much less “grow” economies. The degrading reserves take us down along the EROI curve, in which Net Energy returned to society falls off a cliff around 6:1, and is in freefall by 3:1. Net-energy alone kills the idea of much economic growth from a booming hydrocarbon bonanza (other than some great stock plays along the way). Furthermore, depletion renders the idea ever more unlikely: Depletion: Depletion rates on these gas fields have arrived quickly and appear drastic by historic industry standards. The fracking fields peak early and decline swiftly. In the Bakken shale field – one of the great North American saviour fields – the average well has produced ~ 85k barrels in its first year and then declined at about 40% per year. The newer average wells peak earlier and decline faster, so the overall trend is down. The depletion moves the production process along a function that approaches zero net energy... Down we go along the EROI curve... 5:1 .. 4:1 .. 3 .. 2 ... and then really complex society breaks down. An Amish farmer gets 10:1. The Bakken break-even oil price is $85, so there is no profit in any of this right now, but of course there will be if global depletion exceeds demand from crashing economies. Depletion – both in volume and quality – and depletion for all industrial materials and energy stores, EROI, and economic stagnation all work as feedback loops. No one knows the bifurcation points in this complex system. We try to predict those, but miss by a longshot sometimes. Complex societies crash in this manner, declining returns on investments in complexity, from Babylon to London and Washington. See J. Tainter, H. Odum, N. Georgescu-Roegen, Hall, Cleveland, et al. Here are some depletion data on The Oil Drum: Is Shale Oil Production from Bakken Headed for a Run with “The Red Queen”? . See A Review of the Past and Current State of EROI Data (PDF) by Hall, Cleveland, et al. (source: www.mdpi.com ) There is a lot of EROI data here: Obstacles Facing US Wind Energy . (The Oil Drum) Below is the EROI curve, only the “We are here” point at 10:1 is the modern average, and from a few years ago. The new conventional stuff is coming in lower and and the enhanced recovery, shale and tar fields are already over the falls at 6 or 5:1 for the better stuff (best dregs), and 3:1 to 1:1 for the dregs of the dregs, the deeper shale and tar sands. So yes, our friends are correct about the great volume of tar, shale, deep, heavy hydrocarbons, but increasing production of world liquid hydrocarbons much beyond the current 85mb/d is not likely, and increasing net production is even less likely. As you may know, net production per capita peaked in 1979. Actual net production is peaking now. This is the figure that counts: Actual current Net Production Delivered to Society. Growing this figure is technically possible, and may happen with some massive production bonanzas, i.e. we may see actual production push above 90mb/day, or higher, and may even see net production increase, but a major glut of hydrocarbons? No. Not remotely. When settlers first came to North America, they found copper nuggets the size of horses exposed in river beds. China just bought the best known, last, huge, moderate-to-low-grade, strip-minable, high-cost copper field in the world, in Afghanistan, for $billions over the western bids. There will be others, but rest assured: They will be lower grade, higher cost, and the competition will be more intense. When was the last time you bought a “copper” fitting at the hardware store. They’re crap. The alloys are crap. Because the ore quality is in decline and the costs of extraction are rising. Same with oil, trees, tin, coal.... Make no mistake: The war for the dwindling materials and energy flow is well underway. Thank you, Rex, for this commentary on EROI and the quality and cost of hydrocarbon resources. Complex systems like economies are nonlinear, and so history does not necessarily track linear extrapolations of present trends. With that caveat in mind, the preponderance of evidence supports the notion that fossil fuel energy may remain abundant in the sense that supply meets or exceeds demand in a global recession, but the price of liquid fuels may remain high enough to create a drag on growth, employment, tax revenues and all the other economic metrics impacted by high energy costs. Average: 3.8 Your rating: None Average: 3.8 ( 10 votes) Tweet Login or register to post comments 4924 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Guest Post: What Peak Oil? Who Wants The Highest Crude Oil Price? Presenting The OPEC Cost Curve Guest Post: The Scientific Challenges To Replacing Oil With Renewables The 'Green' Premium: 620% The Race For BTU Has Begun
This Is The Housing Bubble Beneath The "Recovery" Submitted by Tyler Durden on 10/19/2012 13:43 -0400 Housing Bubble recovery We want to 'believe', we really do; but anyone with any sense (and no skin in the game) can see through the data; the eon-like periods of foreclosure and the drastically reduced supply. No matter how 'bullish' homebuilders are, or how much they dream of a future pickup, calling the recovery (as Bob Shiller recently noted ) is just a fool's errand. The truth is, for the average citizen, housing is not recovering - and the wealth effect is not creating animal spirits - and we do indeed have more to fear than fear itself. The following 79 second clip from Bloomberg TV should perhaps clarify the 'difference' in demand for housing . Primary residence 'buyers' are down remarkably, while 'investors' are up dramatically - now at pre-crisis bubble levels! Perhaps, as we noted here , Och-Ziff's stepping away from the 'flip-that-house' or 'REO-to-Rental' game is as good an indicator of exuberance as any. Once again it seems the Fed's ZIRP (and QE) has done nothing but enable the elites to gather assets and front-run them, bidding prices up - as opposed to 'enable' an economic recovery Average: 5 Your rating: None Average: 5 ( 7 votes) Tweet Login or register to post comments 13080 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Och-Ziff Calls Top Of "REO-To-Rental", And Distressed Housing Demand, With Exit Of Landlord Business A Glimpse Inside The Industry That Owns Everything When big money chases rentals So Much For "Housing Has Bottomed" - Shadow Housing Inventory Resumes Upward Climb The twin lost decades in housing and stocks
The $3,200,000,000,000 Question: Why Housing Has Much More To Drop Before It Bottoms Submitted by Tyler Durden on 08/31/2012 09:44 -0400 Credit Conditions Great Depression Home Equity LTRO recovery It is no secret that having failed repeatedly at the trickle down aspect of QE1, QE2, Op Twist 1, Op Twist 2 (and implicitly LTRO 1 and LTRO 2) as it pertains to the man in the street (if not the man in Wall Street, who was subject to 1-2 years of subpar bonuses which have since regained their upward trendline), the last effort the central planners of the world, and the administration, have is to furiously do everything in their power to reflate housing one more time, following what is already a triple dip in home prices ever since the December 2007 start of the Second Great Depression. Which is why month after month we get seasonally fudged, conflicted and outright manipulated data from various sources how housing has bottomed, for real this time, and things are finally looking up. Remember: with any con game, the key word is confidence, and the US consumers need to regain their confidence. Sadly, as the following very simple chart and accompanying explanation, the answer to the housing question is only one: there will be no housing recovery until much more debt is eliminated. $3.2 trillion to be precise. Everything else is merely fits and spurts of upward action predicated by easy money hitting the market either directly, or via the "REO-to-Rental" stimulus program du jour, which lasts for a few months then promptly evaporates. The chart in question: And what it means: The standard wealth effect does not account for the role of credit availability, which can amplify the effect. When home prices are increasing and credit conditions are easy, households can more easily realize the appreciation in wealth. We saw this phenomenon during the boom when easy credit conditions allowed homeowners to use their homes as “ATMs.” The reverse is true as well; if credit conditions are tight while home prices are falling, households are stuck in their home and are forced to accept the decline in wealth. In addition, once home prices start to turn higher in an environment of tight credit, the ability to realize that appreciation is limited. This is the case today. Home equity lines of credit and cash-out refinancing has been minimal, even for those borrowers who are already in positive equity. This reflects the slow deleveraging process. Housing assets plunged 29% from the peak in mid-2006, but mortgage debt only edged down 8% from its peak in mid-2008. This has left the aggregate loan-to-value ratio at 60%. Prior to the crisis, the loan-to-value ratio averaged 40% (Chart 2). To restore a normal loan-to-value at the current level of housing wealth, households would need to pay down their mortgage debt by US$3.2tn. That's $3,200,000,000,000 in excess debt before true price clearing can commence. That's also more in debt than QE1 and QE2 combined have monetized so far. Good luck. Average: 4.70588 Your rating: None Average: 4.7 ( 17 votes) Tweet Login or register to post comments 8172 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: The twin lost decades in housing and stocks What Housing Recovery? Existing Home Sales Miss By Most In 2 Years LTRO Stigma Becomes Acute Days Ahead Of Second Operation The resurgence of the low down payment market Three Reasons Why The Housing Recovery Dream Is Overdone
Guest Post: When Quantitative Easing Finally Fails Submitted by Tyler Durden on 08/01/2012 16:49 -0400 Bond Census Bureau Central Banks Double Dip European Central Bank Great Depression Gross Domestic Product Guest Post Las Vegas New York Times Purchasing Power Quantitative Easing Real estate Recession recovery Sovereign Debt State Tax Revenues Unemployment United Kingdom Submitted by Gregor MacDonald of Peak Prosperity , While markets await details on the next round of quantitative easing (QE) -- whether refreshed bond buying from the Fed or sovereign debt buying from the European Central Bank (ECB) -- it's important to ask, What can we expect from further heroic attempts to reflate the OECD economies? The 2009 and 2010 QE programs from the Fed, and the 2011 operations from the ECB, were intended as shock treatment to hopefully set economies on a more typical, post-recession, recovery pathway. Here in 2012, QE was supposed to be well behind us. Instead, parts of Southern Europe are in outright depression, the United Kingdom is in double-dip recession, and the US is sweltering through its weakest “recovery” since the Great Depression. It wasn’t supposed to be this way. Recently-released data from all these regions now confirm that previous QE, at best, merely bought time against even more grueling outcomes. Spain's unemployment, for example, has just hit a new post-Franco high of 24.6% , and the forecast for this crucially important EU economy remains negative. Recently revised US figures on GDP show that the post-2009 recovery was even weaker than previously estimated, with the first year post-crisis crisis clocking in at 2.5% vs. the expected 3.3%. Plodding, slow growth in the aftermath of a global financial crisis is a recipe for stagnation. The inability of the US economy to work off its surplus of labor appears to have finally stirred OECD policymakers into action. This is, of course, a great and humbling disappointment to the recoverists , who keep mistaking various economic oscillations around a bottom for the start of a typical post-war, V-shaped recovery. Housing, autos, jobs, Internet IPOs, state tax revenues, and train traffic have all been called upon by optimists to sound the clarion call for a broad economic recovery. Yet the US economy still is only able to produce sector-specific or selected regional strength that never adds up to quite enough to restore national growth. When we look at national GDP, at 1.5% in the most recent quarter, it is not clear the US economy has enough forward speed to statistically distinguish between slow growth and no growth. Large states like California, for example, are already seeing the return of declining state revenues. Meanwhile, national poverty -- one of the best measures of aggregate economic health -- continues to soar. There is no doubt that any new round of QE -- especially a double shot from both the Fed and the ECB -- will have psychological impact. For Europe, QE would once again allay systemic risk. And for the US, QE will surely find its way to the stock market; which is not an insignificant outcome as America increasingly relies on the stock market to produce retirement income. However, the question arises, What series of radical measures policy makers will turn to after the next round of QE wears off? Before we answer that question, let’s review the poor economic conditions leading to the next (and final) round of QE. Housing House prices in the US have done an excellent job of adjusting downward over the past 5 years to reflect the stagnation in US wages, the overhang of private debt, structural unemployment, and the rising cost of energy. But there has been a recent media celebration of sorts over this story, as it now appears that housing is bottoming. To be sure, certain housing markets like Miami and Las Vegas continue to recover from completely bombed-out levels. Additionally, construction of new homes, especially multi-family homes, is off the bottom. For now. The problem is that housing is a result, not a cause, of economic expansion. And unless housing is to work in tandem with wage and job growth, housing alone cannot power the US economy. Did the US not already learn that lesson already over the past decade? Let’s take a look at fifteen years of home prices, from the US Census Bureau : The unsustainable peak in 2006, when single-family homes reached a median sales price of $222,000, marked a near-doubling of price over the ten-year period from 1995. But as we now understand, not only were wages (in real terms) not rising during this period, but a new bull market in commodities was getting underway, robbing Americans of discretionary income. The result is that house prices were able to keep up with the loss of purchasing power until slightly past mid-decade. Then they collapsed. Worse, the phase transition in rising energy prices kept going (and continues through today), which had an outsized impact because the topography of US housing, largely dependent on roads and highways, is quite exposed to transportation costs. We can think of housing as facing several key constraints that will be sustained for at least another five years: First, there is the tremendous overhang of personal debt in the US. Much of this is still carried within the mortgage market itself. (Additionally, student loan debt has also emerged as an enormous barrier to home buying.) Second, there is the lack of wage growth and the problem of structural unemployment. The surplus of labor prevents the broad, marginal pressure needed to force national house prices upward. Third, the constraint of oil prices will not ease. This means that urban real estate may do well on a relative basis, but the majority of US homes will continue to adjust downward to reflect the permanent repricing of oil (and hence gasoline). Finally, the notion that real estate prices have bottomed with mortgage rates near all-time lows seems a very risky call. Is it more prudent to presume that a new advance in national real estate prices will be carried on the back of rates going even lower -- or higher? Which is it? The view that real estate has bottomed appears to assert that no matter where interest rates go from here, real estate is going higher. That is the mark of hope and belief; not analysis. It seems very unlikely only five years into such enormous, structural shifts in the US economy that the repricing process is over in housing. At minimum, I expect the median price of single-family existing homes to revert to the 2000 level of $147,000, with the strong possibility of an overshoot to the $125,000 level. This process will take several more years. Jobs As early as 2009, many of us understood that this was not a normal economic decline and therefore would not be followed by a normal economic recovery. Here's the lead paragraph to a New York Times piece, covering the latest GDP data: U.S. Growth Falls to 1.5%; a Recovery Seems Mired The United States economy has lost the momentum it appeared to be building earlier this year, as the latest government statistics showed that it expanded by a mere 1.5 percent annual rate in the second quarter. This is precisely the kind of news flow that the business press can expect to report for years to come. Sure, the stock market may advance from points of low valuation. Certain regions of the country, especially those tied to exports, may thrive for a while. But nationally, a long secular contraction is now in place that will combine stagnant wages, contraction in government payrolls, flat tax revenues, and the shift to a cultural preference for much lower consumption . In addition to the fact that young people will not buy cars, will not buy houses, and in general will not secure high-paying jobs (if they can secure jobs at all), the nature of work in the US has entered a degrading period. Low wages, part-time work, poor benefits, and higher health-care costs all serve to further squeeze consumption. Let’s take a look at the structural shift from full-time to part-time work in the US. At an inflection point in a normal recovery, US workers would quickly be hired back to full-time jobs. But a full-time job with benefits is a cost that US corporations no longer wish to bear. This is partly why US corporate earnings and their accumulation of cash has been so robust. Sited in the US but acquiring labor abroad, US corporations are having their finest hour as they sell products to non-OECD markets that benefit from wave after wave of stimulus from the OECD, while the economy and labor force in their home countries languish. Here in the US, we have effectively stripped out an entire tranche of the full-time US workforce, with no plausible scenario currently in place for adding it back. America used to have nearly five full-time jobs for every part-time job. Now we have four. Meanwhile, Washington, characterized by professional normalcy bias, has finally started figure this out. More importantly, this is why the economy will veer continually towards recession absent some form of stimulus in the years to come. While the jobs market is surely the primary reason why QE 3 will be attempted, it’s also the reason why more radical measures are likely thereafter, as opposed to QE 4. Many of the prognostications for QE’s impact on the labor market, especially from the Fed and Fed-connected economists, simply never came true. That will become even clearer after QE 3 fails. Poverty After leveling off in late 2011 and early 2012, the number of persons taking Food Stamps (Supplemental Nutrition Assistance Program, or SNAP) in the US is starting to push higher again . Given that food prices are set to make their next move higher as well, it’s reasonable to expect SNAP participation to reflect that pressure on household budgets. The annual cost of the program, which rose in the three years 2009-2011 from $50 billion to $64 billion and then to $71 billion, is quickly becoming a significant budget item. For comparison, should SNAP program costs reach $75 billion this current fiscal year, this amount is almost exactly equal to the most recent Department of Transportation Budget , at $74 billion. While SNAP tracks the growth of poverty well, it's not the only measure. And the breadth and scale of US poverty continues to grow. This autumn, the Census Bureau is expected to release its latest figures on the growth in US poverty: Poverty rate nears worst mark since 1965 The ranks of America's poor are on track to climb to levels unseen in nearly half a century, erasing gains from the war on poverty in the 1960s amid a weak economy and a fraying government safety net. Census figures for 2011 will be released this fall in the critical weeks ahead of the November elections. The Associated Press surveyed more than a dozen economists, think tanks and academics, both nonpartisan and those with known liberal or conservative leanings, and found a broad consensus: The official poverty rate will rise from 15.1 percent in 2010, climbing as high as 15.7 percent. Several predicted a more modest gain, but even a 0.1 percentage point increase would put poverty at the highest level since 1965. Poverty is spreading at record levels across many groups, from underemployed workers and suburban families to the poorest poor. More discouraged workers are giving up on the job market, leaving them vulnerable as unemployment aid begins to run out. The Diminishing Marginal Utility of Quantitative Easing QE is a poor transmission mechanism for creating jobs. While there has certainly been a recovery of sorts in US jobs since the deep lows of 2009, in which total employment has risen from 139 million to 142 million jobs, this has been insufficient to keep up with population growth. Accordingly, if the US job market cannot aggregate the number of new workers into its system, then it cannot work off the structural labor surplus. Indeed, the rather narrow targets that QE aims for are exactly the reason why the US and the OECD are fated to try more unconventional solutions once the next round of QE fails. In Part II: WhatRadical Measures to Expect in the Post-QE Era , we forecast that policies to revive stagnant Western economies (and the US, in particular) will swing sharply away from central banks towards elective bodies. Such programs will involve various forms of debt jubilee and massive infrastructure programs. More unconventional is that some of these programs may be initiated using new forms of government scrip, equity participation, or other methods that allow the government to “spend” without incurring new debt. Contrary to the deflationist view, which holds that governments will eventually turn to austerity, the examples of such failed efforts in the United Kingdom (which has entered a double dip recession) suggest that austerity will be nothing more than a brief, economic dalliance of Western policy makers -- recall that the Works Progress Administration (WPA) of the 1930’s was considered radical in its time. We should expect no less this time around, as governments decide to pursue WPA 2.0. Click here to access Part II of this report (free executive summary; paid enrollment required for full access) . Average: 4.411765 Your rating: None Average: 4.4 ( 17 votes) Tweet Login or register to post comments 9887 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: The Weaponization of Economic Theory No Jobs: The Result of Wizard of Oz Economics Poverty In America: A Special Report Guest Post: Middle Class? Here's What's Destroying Your Future You've Seen It Before, And Here It Is Again: "The Chart That Tears Apart The Stimulus Package"
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