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MOST CRITICAL TIPPING POINT ARTICLES TODAY |
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We post throughout the day as we do our Investment Research for:
LONGWave - UnderTheLens - Macro Analytics |
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BLOOMBERG'S ECONOMY INDEX
Divergences Accelerating

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MARGIN & LEVERAGE - Approaching Tech Bubble Levels. Exceeded 2007 Levels
Buying Stocks On Margin At The Top - They Never Learn 10-24-13 Jim Quinn of The Burning Platform blog
It’s like the movie Groundhog Day. Greed and hubris are the downfall of the mighty. Believing it is different this time is the mistake of the feeble minded. Watching the ensuing carnage will be a laugh riot. Seeing the blubbering of the bubble headed bimbos, pinhead pundits and Wall Street shysters when the inevitable collapse occurs will be worth the price of admission. If you think we're wrong, pony up to the trough, borrow some money and buy Twitter on IPO day. You can’t lose.
Of course, "this time is different..." |
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STUDY MARGIN LEVERAGE
RISK |
ANALYTICS |
SENTIMENT - Accelerating Divergences
The Chart That The Fed Fears The Most 10-24-13 Zero Hedge
Inflation, meh! Growth, bleh! Unemployment, whatever! The terrifying news is that it seems, despite the ongoing 'surge' to new all-time highs in stocks, they are losing the confidence of the "rich". With everything hinging on the 'wealth effect' of moar QE and a levitating US stock market, the fact that Bloomberg's Comfort Index for the most affluent earners just collapsed (and stayed at) seven-month lows - in the face a rip-your-face-off rally in stocks - suggests even the wealthy know when the music is beginning to end...
In the short-term, the "belief" of the wealthy is fading...
and the overall economic index is diverging badly...

The bottom-line is that if even the wealthy ain't buying it, then just who is this farce for?
Source: Bloomberg and @Not_Jim_Cramer |
10-25-13 |
PATTERNS
SENTIMENT |
ANALYTICS |
PATTERNS - QE Programs versus S&P 500 Movements
How Much is QE Driving Equity Markets? (Hint: Not 100%) 10-23-13 Jim Bianco via Forbesvia Barry Ritholtz
Over the past few days, we have been discussing what the impact of QE has been on the economy.
Forbes columnist Bob Lenzer channels Michael Cembalest of J.P. Morgan to dive deeper into that concept and look at what markets have been doing in response to QE, in a column titled You Can Thank Ben Bernanke for 100% of the Stock Market Gains Since 2009:
“Here is the most important factual find about the stock market I’ve learned for some many years: More than 100% of equity market gains since January 2009 have taken place during the weeks the Fed purchased Treasury bonds and mortgages. And conversely, during the weeks when the Fed did NOT buy Treasuries or mortgage backed bonds, the stock market declined.”
I have to respectfully disagree with Lenzner, Cembalest, and my pal Jim Bianco (who has also done yeoman’s work tracking the impacts of various Fed interventions).
Note that I do not lightly challenge this trio — Lenzner is an all around smart guy, Cembalest is Chairman of Market and Investment Strategy fpr JPM, and Bianco (also all around smart guy), who was the first major analyst in early 2009 to fully recognize the future impact of QE, how it was going to impact equities and bonds, the transmission mechanism thereto, and articulate it in a way that was readily understandable by most people.
There are several reasons I disagree with the thesis — in no particular order:
1) Complexity: Single vs. Multiple Variable Analysis in Market Forecasts
2) Market Performance Following Secular Bear Markets (or down 50%+, oversold, etc.)
3) Earnings Rallied as Much as Market Have Off of Lows
4) Timing maybe as coincidental (Correlation Does Not Equal Causation)
There are a variety of reasons why I am unwilling to attribute the 100% suggestion. The first and most obvious is that markets are extremely complex, with all manner of psychological, valuation, trend as well as monetary inputs. The intricacy of equities is such that there is almost never any one single factor that causes major market moves in either directions. Invariably, there are a myriad factors that establish conditions, impact traders, affect how people interact that are the prime causes.
If you are willing to say the Fed is the cause of 100% of market gains, you are simultaneously implying that every other factor had a net zero impact. I simply don’t buy that.
Take for example point 2: Do a basic study on market sbased on many of the conditions that existed in 2009: Markets down 57%, less than 5% of equities over 200 DMA, sentiment metrics, valuation analyses, etc. What you will find is a range of possible market returns that were very positive. For example, the secular bear market cycle showed a median gain of 70% over 17 months, with a range of 41% (Italy 1960s) to 295% (Finland, 1990s). If you want domestic version, note that the US gained 170% in the 1930s. You can run studies on all of the rest of the various potential inputs, and you will find similarly huge subsequent returns.
Again, I am unwilling to dismiss this cyclical history in favor of the Fed exclusively.
Same thing with earnings — they plummeted an enormous amount, only to recover almost 150% from the quarterly lows. I don’t believe we should ignore that either.
Last, we know markets sometimes anticipate new elements, and occasionally lag behind reality. We cannot say for sure that this timing is causative. Markets tend to anticipate major events, swinging from overbought to oversold,. Its hard to imagine that more of a discounting mechanism wasn’t taking place.
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10-24-13 |
US MONETARY
PATTERNS |
CETRAL BANKS |
EU MONETARY - EU Equities Responding to Current Account Differential
Euro Comes Out Ahead as Dollar Sinks 10-22-13 WJ
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10-24-13 |
EU MONETARY |
MACRO ECONOMICS |
EMPLOYMENT - With And Without Obama's Recovery Plan
"Unemployment Rate With And Without The Recovery Plan" 10-22-13 Zero Hedge
Putting today's 7.2% unemployment rate (which is actually over 11% if using an accurate labor participation rate), here is the chart that puts it into perspective courtesy of the an "analysis" by Christina Romer and Jared Bernstein titled "The Job Impact of the American Recovery and Reinvestment Plan" from January 10, 2009. Oh yes, the ARRA did pass.
The chart, and the sheer and recurring economist idiocy, is self-explanatory

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10-23-13 |
INDICATORS
CATALYST
EMPLOY- MENT |
7 - Chronic Unemployment |
RECESSION - QE Standing Between Inflated Equity Markets and A Recession
Does No QE = Recession ? 10-22-13 Political Calculations via Barry Ritholtz
Click to Enlarge
Earlier this morning, I suggested that when we consider the results of QE on NFP, we also consider what the world might look like in its absence. (Long term readers might recall I suggested we do the same thing with the bailouts as well, with the results being deeper selloff, more early pain, but a stronger and healthier recovery).
As it turns out, Political Calculations already did imagine what that might look like last month — the results being the chart above:
“The difference between the nominal GDP that was and the counterfactual of the nominal GDP that otherwise would have been is all due to the Fed’s quantitative easing programs, as measured by the cumulative change in total assets held by the Federal Reserve since the end of 2012-Q3. How we measured the relative impact of government spending cuts and tax hikes is explained here and their applicability is explained here.”
If QE never came into existence, the world might look different in a variety of ways:
1) Rates would be higher;
2) Home sales would likely be at both lower prices and lower volumes;
3) Auto Sales would either be weaker or skewed towards less expensive cars (or both);
My assumptions that follow this is that without QE:
1) employment would be softer, perhaps considerably so;
2) The normal clearing process for Housing would be occurring;
3) The economy would be significantly worse;
4) There would be an increasing number of foreclosures;
5) The TBTF bailed out banks would once again be in trouble;
The last assumption is that as things got appreciably worse, Congress would be forced to act with a major stimulus. I fthey failed to do so, there might be a signifciant change November 2014.
There is some irony in that the people who hate the Fed the most are potentially the biggest beneficiaries of their policies . . . |
10-24-13 |
US
MONETARY |
11 - Shrinking Revenue Growth Rate |
THESIS & THEMES |
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DEBT INCREASE - $1 Trillion in One Year
Another One Trillion Dollars ($1,000,000,000,000) In Debt Michael Snyder of The Economic Collapse blog,via ZH
Did you know that the U.S. national debt has increased by more than a trillion dollars in just over 12 months? On September 30th, 2012 the U.S. national debt was sitting at $16,066,241,407,385.89. Today, it is up to $17,075,590,107,963.57. These numbers come directly from official U.S. government websites and can easily be verified. For a long time the national debt was stuck at just less than 16.7 trillion dollars because of the debt ceiling fight, but now that the debt ceiling crisis has been delayed for a few months the national debt is soaring once again. In fact, just one day after the deal in Congress was reached, the U.S. national debt rose by an astounding 328 billion dollars. In the blink of an eye we shattered the 17 trillion dollar mark with no end in sight. We are stealing about $100,000,000 from our children and our grandchildren every single hour of every single day. This goes on 24 hours a day, month after month, year after year without any interruption.
Over the past five years, the U.S. government has been on the greatest debt binge in history. Unfortunately, most Americans don't realize just how bad things have gotten because the true budget deficit numbers are not reported on the news. The following is where the U.S. national debt has been on September 30th during the five years previous to this one...
09/30/2012: $16,066,241,407,385.89
09/30/2011: $14,790,340,328,557.15
09/30/2010: $13,561,623,030,891.79
09/30/2009: $ 11,909,829,003,511.75
09/30/2008: $10,024,724,896,912.49
The U.S. national debt is now 37 times larger than it was 40 years ago, and we are on pace to accumulate more new debt under the 8 years of the Obama administration than we did under all of the other presidents in U.S. history combined.
Of course all of the blame can't be placed at the feet of Obama. During the last two elections the American people have given the Republicans a solid majority in the U.S. House of Representatives, and the government cannot spent a single penny without their approval.
Unfortunately, House Speaker John Boehner and the Republicans that are allied with him have repeatedly turned their backs on the people that gave the Republicans the majority and they have authorized trillions of dollars of new debt which will be passed on to future generations of Americans...
Since John Boehner became speaker of the U.S. House of Representatives on Jan. 5, 2011, the debt of the federal government has increased by $3,064,063,380,067.72. That is more than the total federal debt accumulated in the first 200 years of the U.S. Congress--during the terms of the first 48 speakers of the House.
In fact, if all of that debt had been given directly to the American people, every household in America would have been able to buy a new truck...
The $26,722 in new debt per household accumulated under Speaker Boehner would have been more than enough to buy every household in the United States a minivan or pickup truck--or to pay three years of in-state tuition (not counting room and board) at the typical state college.
Sometimes we forget just how much money a trillion dollars is. In a previous article, I included some illustrations that I believe are helpful...
-If you were alive when Jesus Christ was born and you spent one million dollars every single day since that point, you still would not have spent one trillion dollars by now.
-If right this moment you went out and started spending one dollar every single second, it would take you more than 31,000 years to spend one trillion dollars.
We are doing the exact same thing that Greece did, only on a much larger scale. What we are doing is not even close to sustainable, and it will inevitably end very, very badly. The following is what Michael Pento, the president of Pento Portfolio Strategies, told RT the other day...
"That $17 trillion everybody says its 107 percent of GDP, that’s true. But who really cares about the percentage of GDP? It’s the percentage of the debt as a percentage of the revenue – its 700 percent of our revenue. Deficits are growing at 30 percent of our revenue every year added to the deficits we have already. So it’s unsustainable. What is going to happen eventually – a currency and bond market collapse! And it’s not going out 20 years, as I also heard someone mention. In 2016 we’ll probably be spending 40 percent of all of our revenue just to service our debt. That is what the interest payments will equal."
The U.S. debt situation is so bad that even the Prime Minister of Cyprus is scolding us...
"The U.S. has been fortunate in the sense that it’s like a bank, it prints the money that other people accept. So you can live beyond your means over an extended period of time without being punished by the market."
Unfortunately, we will not be able to live way beyond our means forever. Reality is going to catch up with us at some point.
Right now, the rest of the world is lending us giant mountains of money at interest rates that are far below the real rate of inflation. This is extremely irrational behavior, and this state of affairs will probably not last too much longer.
But if interest rates go up, it will absolutely cripple the U.S. economy. For much more on this, please see this article.
And what would make things much, much worse is if the rest of the globe starts moving away from using the U.S. dollar. At the moment, the U.S. dollar is the de facto reserve currency of the planet and this creates a tremendous demand for U.S. dollars and U.S. debt.
If that changes, it will be absolutely catastrophic for the United States, and unfortunately there are already lots of signs that this is already starting to happen. I wrote about this in my recent article entitled "9 Signs That China Is Making A Move Against The U.S. Dollar".
But don't just take my word for it. Just a couple of days ago a major U.K. newspaper came to the same conclusions...
China has overtaken the US as the world’s largest oil importer and goods trading nation. Over the next five years, it will surpass the rest of the world combined in its consumption of base metals.
Given the scale of the country’s consumption of fossil fuels and raw materials, it is only a matter of time before the renminbi replaces the dollar as the primary currency for trading commodities and resources such as crude oil and iron ore.
The debt ceiling farce in Washington and China’s growing reluctance to continue underwriting the US economy by buying up its bonds and adding to America’s near $17 trillion (£10.5 trillion) debt mountain suggests that this tectonic shift in the global trade system could be just around the corner.
So what will happen when the rest of the world decides that they don't need to use our dollars or buy our debt any longer?
At that point the consequences of decades of incredibly foolish decisions will result in an avalanche of economic pain that the American people are not prepared for.
Earlier today, I came across a photograph that perfectly captures what America is heading for. The following photo of Mt. Rushmore crying has not been photoshopped. It was taken by Megan Ahrens and it was posted on the Tea Party Command Center. If George Washington was alive today, this is probably exactly how he would feel about the nation that he helped establish... |
10-23-13 |
THESIS |
FINANCIAL REPRESSION

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MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - October 20th - October 26th |
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RISK REVERSAL |
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1 |
JAPAN - DEBT DEFLATION |
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JAPAN - BOJ To "Own" 100% Of GDP In 5 Years
When Hyman Minsky Runs For The Hills: Japan Central Bank To "Own" 100% Of GDP In 5 Years 10-19-13 Zero Hedge
ONE YEAR AGO
Over a year ago, in "Japan's WTF Chart" we showed where Japan lies on the sovereign debt-to-tax revenue continuum. The "where", with a WTF-inducing 1900% sovereign debt/revenue, was essentially off the chart as it was nearly 5 times greater than the first runner up: Greece, with 400%. Naturally, that ratio is absolutely unsustainable and the second rates begin creeping higher, all bets are off.
DEBT/GDP


INTEREST/REVENUE

Product of extremely low interest rates and buying by domestic holders.
This is rapidly changing!
SOVEREIGN DEBT/ GOVERNMENT REVENUE
THREE YEARS AGO
However the day of reckoning could be delayed if as we said two years before Japan's berserko QE was unveiled, the BOJ entered "hyprintspeed" and started monetizing debt at a pace that would make Hyman Minsky and Rudy von Havenstein both break out in a lunatic cackle.
TODAY ("ABE-Nomics" is now underway)
One look at the chart below, which shows JPM's estimate for various central bank holdings as a percent of host nation GDP, is enough to explain why that distant giggling is Hyman Minsky warming up... and he is running for the hills.
The reason: while as a result of its recent decision to double its monetary base in (every) two years Japan's central bank now holds about 40% of local GDP on its books, it has precommited to seeing this percentage hit 60% over the next two years. But that's jst the beginning.
As JPM's Mike Cembalest points out, the "contingent" line is where the BOJ's asset holdings as a % of GDP will rise to should Japan's 2% inflation goal prove elusive. Did we say "contingent" - we meant definite. And as the line shows, the Bank of Japan will, for the first time in history, "own" all of Japan's GDP on its balance sheet some time in 2018 when its "assets" as a percentage of GDP surpass 100%, and then proceed in linear fashion to add about 10% of GDP to its balance sheet with every passing year until everything inevitably comes crashing down.

What is most ironic here is that we still have assorted carnival barkers and trolling nobel prize winning op-ed writers working for cash burning media outlets, bitching and moaning about the 90% "unsustainable threshold" level of sovereign debt to GDP. Um, standalone sovereign debt in a world with central banks means nothing.
A far more important question is what happens in a world in which the first official sovereign LBO by a central bank of a sovereign nation (remember those fringe bloggers who said in 2009 the
Fed will keep failing up in its central-planning attempts to "fix" the economy, and whose ridiculed opinions are now mainstream views?... We do) is not just a mere conspiracy theory but just the lastest conspiracy fact.
So just what do Reinhort and Rogoff, or anyone else for that matter with 2 functioning neurons to rub together, think about a world in which a nation's central bank owns more assets, and has thus created more cash and reserves, than all the good and services for its host nation, which it has then effectively LBOed... with debt created out of thin air and collateralized by what can only be defined as funny money.
We can't wait to find out, and neither can the aforementioned Mr. Minsky, who if not running for the hills, is certainly spinning in his grave.
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Some more thoughts on that absolute, circus-like clusterfuck with zero regard for the future that is happening in a very irradiated Japan, which at this point knows quite well it's game over.
I saw the chart above on Japan’s balance sheet compared to the Fed and ECB in a research report from J.P. Morgan Securities last week (their October 11th Global Data Watch). One segment of the line on the chart shows what Japan has already committed to, and another segment showing where its balance sheet might go (“contingent”) if inflation expectations do not rise to the government’s 2% target in time. Japan’s planned massive increase in Central Bank holdings of government bonds looked huge and almost unnatural, like a picture I saw this week of a giant 20-foot oarfish discovered off Catalina Island.
But this is exactly what Japan plans to do: Liquefy the Japanese economy to the point where inflation expectations rise, and where owners of Japanese government bonds decide that real yields are so low that they either
(a) Buy riskier domestic assets, or
(b) Buy any foreign asset,
... which would weaken the Yen and presumably contribute to an export-led recovery.
To propel more of (a), Japan is considering the creation of new investment accounts which allow citizens to contribute money whose subsequent gains are untaxed, but only if they are invested in equities (not bonds, cash or gold).
Amazing.
Yup: the proverbial Bernanke chopper warming up now, somewhere in Tokyo.
Such a strategy is not riskless, of course. One I can think of: if the Yen collapses and oil/natural gas prices remain high, Japanese energy import costs may become intolerably high and threaten any recovery. All the more reason that Japan is going to be under increasing pressure to re-commission nuclear power, even as the situation in Fukushima deteriorates further.
For a couple of decades, being underweight Japanese equities was a very reliable thing to do. For now, owning a normal allocation seems like the best course of action, as long as the Yen exposure can be hedged. Another rise in Japanese equities is going to be easier to engineer than a durable, consistent increase in Japanese growth and inflation; these are two very different things.
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10-21-13 |
MACRO
JAPAN |
2 - Japan Debt Deflation Spiral |
JAPAN - Adjusted trade deficit the worst in Bloomberg's 20 year history
JPY Drops, Nikkei Pops On Japan's Worst Trade Deficit On Record 10-20-13 Zero Hedge
You have to laugh really... We presume the rally in Japanese stocks and weakness in the JPY reflects an assumption that this dismal miss for both imports and exports - leaving Japan's adjusted trade deficit the worst in Bloomberg's 20 year history - means moar Abenomics. Of course, the headlines will be all about Abe's 'any minute now' comments or Kuroda's 'just one more quarter' hope (as he speaks later today) but the reality is that things are not getting better in the radioactive nation as this marks the 30th consecutive trade deficit... but, like Venezuela, when has that even been reason not to buy stocks... S&P futures are up 2.5 points (below Friday's highs still for now), gold has given back its earlier gains and is unchanged, and Treasury Futures are down a tick.
For the 30th consecutive month, Japan ran a trade deficit and this time it was the biggest ever as imports rose 16.5% YoY (missing the 19.9% YoY expectations by the most in 15 months) and exports rose 11.5% (missing the 15.6% YoY expectations by the most in 14 months)...
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10-21-13 |
MACRO
JAPAN |
2 - Japan Debt Deflation Spiral |
BOND BUBBLE |
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3 |
EU BANKING CRISIS |
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SOVEREIGN DEBT CRISIS [Euope Crisis Tracker] |
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CHINA BUBBLE |
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GEO-POLITICAL - The Growing Rift With Saudi Arabia Threatens To Severely Damage The Petrodollar
The Growing Rift With Saudi Arabia Threatens To Severely Damage The Petrodollar 10-24-13 Michael Snyder of The Economic Collapse blog,
The number one American export is U.S. dollars. It is paper currency that is backed up by absolutely nothing, but the rest of the world has been using it to trade with one another and so there is tremendous global demand for our dollars. The linchpin of this system is the petrodollar. For decades, if you have wanted to buy oil virtually anywhere in the world you have had to do so with U.S. dollars. But if one of the biggest oil exporters on the planet, such as Saudi Arabia, decided to start accepting other currencies as payment for oil, the petrodollar monopoly would disintegrate very rapidly. For years, everyone assumed that nothing like that would happen any time soon, but now Saudi officials are warning of a "major shift" in relations with the United States. In fact, the Saudis are so upset at the Obama administration that "all options" are reportedly "on the table". If it gets to the point where the Saudis decide to make a major move away from the petrodollar monopoly, it will be absolutely catastrophic for the U.S. economy.
The biggest reason why having good relations with Saudi Arabia is so important to the United States is because the petrodollar monopoly will not work without them. For decades, Washington D.C. has gone to extraordinary lengths to keep the Saudis happy. But now the Saudis are becoming increasingly frustrated that the U.S. military is not being used to fight their wars for them. The following is from a recent Daily Mail report...
Upset at President Barack Obama's policies on Iran and Syria, members of Saudi Arabia's ruling family are threatening a rift with the United States that could take the alliance between Washington and the kingdom to its lowest point in years.
Saudi Arabia's intelligence chief is vowing that the kingdom will make a 'major shift' in relations with the United States to protest perceived American inaction over Syria's civil war as well as recent U.S. overtures to Iran, a source close to Saudi policy said on Tuesday.
Prince Bandar bin Sultan told European diplomats that the United States had failed to act effectively against Syrian President Bashar al-Assad and the Israeli-Palestinian conflict, was growing closer to Tehran, and had failed to back Saudi support for Bahrain when it crushed an anti-government revolt in 2011, the source said.
Saudi Arabia desperately wants the U.S. military to intervene in the Syrian civil war on the side of the "rebels". This has not happened yet, and the Saudis are very upset about that.
Of course the Saudis could always go and fight their own war, but that is not the way that the Saudis do things.
So since the Saudis are not getting their way, they are threatening to punish the U.S. for their inaction. According to Reuters, the Saudis are saying that "all options are on the table now"...
Saudi Arabia, the world's biggest oil exporter, ploughs much of its earnings back into U.S. assets. Most of the Saudi central bank's net foreign assets of $690 billion are thought to be denominated in dollars, much of them in U.S. Treasury bonds.
"All options are on the table now, and for sure there will be some impact," the Saudi source said.
Sadly, most Americans have absolutely no idea how important all of this is. If the Saudis break the petrodollar monopoly, it would severely damage the U.S. economy. For those that do not fully understand the importance of the petrodollar, the following is a good summary of how the petrodollar works from an article by Christopher Doran...
In a nutshell, any country that wants to purchase oil from an oil producing country has to do so in U.S. dollars. This is a long standing agreement within all oil exporting nations, aka OPEC, the Organization of Petroleum Exporting Countries. The UK for example, cannot simply buy oil from Saudi Arabia by exchanging British pounds. Instead, the UK must exchange its pounds for U.S. dollars. The major exception at present is, of course, Iran.
This means that every country in the world that imports oil—which is the vast majority of the world's nations—has to have immense quantities of dollars in reserve.
These dollars of course are not hidden under the proverbial national mattress. They are invested. And because they are U.S. dollars, they are invested in U.S. Treasury bills and other interest bearing securities that can be easily converted to purchase dollar-priced commodities like oil. This is what has allowed the U.S. to run up trillions of dollars of debt: the rest of the world simply buys up that debt in the form of U.S. interest bearing securities.
This arrangement works out very well for the United States because we can wildly print money and run up gigantic amounts of debt and the rest of the world gobbles it all up.
In 2012, the United States ran a trade deficit of about $540,000,000,000 with the rest of the planet. In other words, about half a trillion more dollars left the country than came into the country. These dollars represent the number one "product" that the U.S. exports. We make dollars and exchange them for the things that we need. Major exporting countries (such as Saudi Arabia) take many of those dollars and "invest" them in our debt at ultra-low interest rates. It is this system that makes our massively inflated standard of living possible.
When this system ends, the era of cheap imports and super low interest rates will be over and the "adjustment" to our standard of living will be excruciatingly painful.
And without a doubt, the day is rapidly approaching when the petrodollar monopoly will end.
Today, Russia is the number one exporter of oil in the world.
China is now the number one importer of oil in the world, and at this point they are actually importing more oil from Saudi Arabia than the United States is.
So why should Russia, China and virtually everyone else continue to be forced to use U.S. dollars to trade oil?
That is a very good question.
In fact, China has been making a whole lot of noise recently about the fact that it is time to start becoming less dependent on the U.S. dollar. The following comes from a recent CNBC article authored by Michael Pento...
Our addictions to debt and cheap money have finally caused our major international creditors to call for an end to dollar hegemony and to push for a "de-Americanized" world.
China, the largest U.S. creditor with $1.28 trillion in Treasury bonds, recently put out a commentary through the state-run Xinhua news agency stating that, "Such alarming days when the destinies of others are in the hands of a hypocritical nation have to be terminated."
For much more on all of this, please see my previous article entitled "9 Signs That China Is Making A Move Against The U.S. Dollar".
But you very rarely hear anything about this on the evening news, and most Americans do not understand these things at all. The fact that the U.S. produces the de facto reserve currency of the planet is an absolutely massive advantage for us. According to John Mauldin, this advantage allows us to consume far more wealth than we actually produce...
What that means in practical terms is that the United States can purchase more with its currency than it produces and sells. In theory those accounts should balance.
But the world's reserve currency, for all intent and purposes, becomes a product. The world needs dollars in order to conduct its trade. Today, if someone in Peru wants to buy something from Thailand, they first convert their local currency into US dollars and then purchase the product with those dollars. Those dollars eventually wind up at the Central Bank of Thailand, which includes them in its reserve balance. When someone in Thailand wants to purchase an imported product, their bank accesses those dollars, which may go anywhere in the world that will take the US dollar, which is to say pretty much anywhere.
And as Mauldin went on to explain in that same article, a significant amount of the money that we ship out to the rest of the globe ends up getting reinvested in U.S. government debt...
That privilege allows US citizens to purchase goods and services at prices somewhat lower than those people in the rest of the world must pay. We can produce electronic fiat dollars, and the rest of the world accepts them because they need them to in order to trade with each other. And they do so because they trust the dollar more than they do any other currency that is readily available. You can take those dollars and come to the United States and purchase all manner of goods, including real estate and stocks. Just this week a Chinese company spent $600 million to buy a building in New York City. Such transactions happen all the time.
And there is one other item those dollars are used to pay for: US Treasury bonds. We buy oil and all manner of goods with our electronic dollars, and those dollars typically end up on the reserve balance sheets of other central banks, which buy our government bonds. It's hard to quantify the exact amount, but these transactions significantly lower the cost of borrowing for the US government. On a $16 trillion debt, every basis point (1/10 of 1%) means a saving of $16 billion annually. So 5 basis points would be $80 billion a year. There are credible estimates that the savings are well in excess of $100 billion a year. Thus, as the debt grows, the savings also grow! That also means the total debt compounds at a lower rate.
Unfortunately, this system only works if the rest of the planet has faith in it, and right now the United States is systematically destroying the faith that the rest of the world has in our financial system.
One way that this is being done is by our reckless accumulation of debt. The U.S. national debt is now 37 times larger than it was 40 years ago, and we are on pace to accumulate more new debt under the 8 years of the Obama administration than we did under all of the other presidents in U.S. history combined. The rest of the world is watching this and they are beginning to wonder if we are going to be able to pay them back the money that we owe them.
Quantitative easing is another factor that is severely damaging worldwide faith in the U.S. financial system. The rest of the globe is watching as the Federal Reserve wildly prints up money and monetizes our debt. They are beginning to wonder why they should continue to loan us gobs of money at super low interest rates when we are beginning to resemble the Weimar Republic.
The long-term damage that we are doing to the "U.S. brand" far, far outweighs any short-term benefits of quantitative easing.
And as Richard Koo has brilliantly demonstrated, quantitative easing is going to cause long-term interest rates to eventually rise much higher than they normally should have.
What all of this means is that the U.S. government and the Federal Reserve are systematically destroying the financial system that has enabled us to enjoy such a high standard of living for the past several decades.
Yes, the U.S. economy is not doing well at the moment, but we haven't seen anything yet. When the monopoly of the petrodollar is broken, it is going to be absolutely devastating.
And as I wrote about the other day, when the next great economic crisis strikes it is going to pull back the curtain and reveal the rot and decay that have been eating away at the social fabric of America for a very long time.
Just check out what happened in Detroit recently. The new police chief was almost carjacked while he was sitting in a clearly marked police vehicle...
Just four months on the job, Detroit’s new police chief got an early taste of the city’s hardscrabble streets.
While in his patrol car at an intersection on Jefferson two weeks ago, Police Chief James Craig was nearly carjacked, police spokeswoman Kelly Miner confirmed today.
Craig said he was in a marked police car with mounted lights when a man quickly tried to approach the side of his car. Craig, who became police chief in June, retold the story Monday during a program designed to crack down on carjackings.
Isn't that crazy?
These days, the criminals are not even afraid to go after the police while they are sitting in their own vehicles.
And this is just the beginning. Things are going to get much, much worse than this.
So let us hope that this period of relative stability that we are enjoying right now will last for as long as possible.
The times ahead are going to be extremely challenging, and I hope that you are getting ready for them. |
10-25-13 |
MACRO
GEO-POLITICAL EVENT |
8 - Geo-Political Event |
ECONOMIC GROWTH - Uneconomic Energy Problematic
Growth Is Obsolete 10-20-13 James H. Kunstler via Peak Prosperity blog,
The word that sticks in the craw of many who cogitate over economics is growth. The condition that the word refers to has proven disturbingly problematic in recent years, especially as world’s population continues to expand exponentially and the global ecology suffers in response. In fact, Thomas Carlyle (1795 – 1881) called economics “the dismal science” in direct reference to the work of the Rev. Thomas Malthus, because the Malthusian conclusions were so unappetizing - that sooner or later rising human populations would outstrip the world’s capacity to provide for them.
Now it happened that the Reverend Malthus’s notorious Essay on the Principle of Population was first published in 1798, which was about exactly the take-off moment for the industrial revolution. That extravagant melodrama was about marshaling mechanical invention with fossil fuel. The first act ran on coal and allowed populations to expand because it extended the extractive reach for resources by colonialist nations. The second act featured exploitation of oil, which was more powerful and versatile than coal. It also lent itself much more directly than coal to being converted into food for people. The use of oil powered farming machines, oil and gas (an oil byproduct) based herbicides, insecticides, and fertilizers, and oil based long distance food transport, has allowed us to convert oil into food pretty directly. This has led to the “hockey-stick” swerve of population growth that took human numbers worldwide from under 2 billion in the year 1900 to more than 7 billion today.
We are in the third act of the industrial melodrama now where the dire sub-plot of peak oil has taken stage. Despite the wishful thinking and happy-talk propaganda lighting up the media-space, we have arrived at the problematic point of the story: the end of cheap oil. This is poorly understood by the public and, apparently, by leaders in business, politics, and the media, too. They misunderstand because they insist on thinking that peak oil was simply about running out of oil. It’s not. It’s about running out of the ability to extract it from the earth in a way that makes economic sense — that is, at a price we can afford in terms of available capital and energy invested (and also ecological destruction). That dynamic is now exerting a powerful influence on modern civilizations. We ignore it -- even at the highest levels of intellectual endeavor -- because we have made no alternate plans for running the complex operations of everyday life, and because the early manifestations of the dynamic present themselves in the realm of finance, which is dominated by academic viziers and money-grubbing opportunists who benefit from obfuscating reality.
The sad, stark fact is that oil is now too expensive to permit further expansion of economies and populations. Expensive oil upsets the cost structure of virtually every system we need to run modern life: transportation, commerce, food production, governance, to name a few. In particular expensive oil destroys the cost structures of banking and finance because not enough new wealth can be generated to repay previously accumulated debt, and new credit cannot be extended without a reasonable expectation that more new wealth will be generated to repay it. Through the industrial age, our money has become an increasingly abstract and complex product of debt creation. As Chris Martenson has put it so succinctly in The Crash Course, money is loaned into existence. Thus, the growth of debt (allowing the growth of money) has played a crucial role at the heart of our banking operations, and the very word “growth” has become shorthand for this process in the lingo of current economic discourse.
It is quite clear that the banking system has been thrown into great disarray as the price of oil levitated from $11-a-barrel in 1999 to the great spike of $140 in 2008, and then settled into a range between $75 and $110 since 2010. Most of this disarray is a result of attempts to offset the failure to create new real wealth with fake wealth generated by accounting fraud, "innovative" swindling, insider chicanery, high frequency front-running, naked shorting of securities, and the construction of a vast untested network of derivative counterparty wagers that give every sign of being booby-trapped. All this private monkey business has been abetted by public mischief in central bank interventions and market manipulations, fiscal irresponsibility, political payoffs for favorable legislation, statistical misreporting, and the failure to apply the rule of law in cases of blatant misconduct (e.g., the MF Global confiscation of segregated client accounts; the Goldman Sachs “Timberwolf” CDO scam… the list is very long).
In short, a society with deeply impaired capital formation has turned to crime, corruption, fakery, and subterfuge in order to pretend that “growth” — i.e. expansion of capital — is still happening. The consequences are many and profound. The chief one is that the manufacture of fake wealth is such an alluring activity that some of the smartest people in society have devoted their waking hours to making a profit off it. It absorbs all their energies and they are simply not available for other work, such as figuring out a sane and practical way to run civilization in the absence of cheap energy. Added to this is the administrative effort and the work-arounds needed to support all this corruption and dishonesty, which occupy the hours of another class of smart people who work in government, academia, public relations, and the media. The sustenance of these parasitical cohorts more and more continues at the expense of everybody else in society, who cannot find work, or cannot make enough money to pay their living expenses, and who have become deeply discouraged, disappointed, demoralized, and disengaged in their losing struggle to thrive. Hence there is little public vigor to even mount a discussion of these vexing problems and the final result is the greater wholesale failure to construct a coherent consensus about what is happening to us and what we might do about it.
Another consequence to these disorders of capital is the massive malinvestment directed into things with no future in themselves or, much worse, things that actively undermine the future of everything needed to support any civilized future. For instance, the "innovation" in securitizing and repackaging mortgages -- which continues to be a boon for the giant banks in concert with the thoroughly dishonest and technically bankrupt "government sponsored enterprises" Fannie Mae and Freddie Mac -- expresses itself in the activity we call "housing starts." Economists overwhelmingly agree that a higher number of housing starts is a good thing for the economy and hence for society. But what do housing starts actually represent? These days they mostly take the form of new suburban housing subdivisions, which are inevitably joined by the kit of the strip mall, the big box store, and all the other furnishings of the highway strip. In short, all that glorious "innovation" by the banks produces more suburban sprawl and destruction of rural land, which is about the last thing this society needs when faced with the realities of peak cheap oil, since it is absolutely certain to make these things obsolete, and very soon. It is not any better, either, if the nominal capital -- nominal because it is sure to someday represent a loss for some bond-holder or stockholder -- gets invested in a 30-story high rise apartment because, contrary to a lot of current delusional thinking, skyscrapers also have no practical future for reasons I have explained in other essays here.
Similarly, the public investments going into "shovel-ready" highway projects, although the fiscal outlays are more transparently based on money that doesn't really exist. The public, as well as leaders all across society, serenely believe that the Happy Motoring matrix will find a way to go on forever, and that therefore we must make provision for it, not to mention the beneficial side of effect of "job creation" for all the additional workers. Yet the dynamic at work must be obvious: oil will never be cheap again; it will impair future capital formation; there will be far fewer car loans; there will dwindling public funds to maintain the roads; and there is no practical substitute for gasoline that scales to the existing system, nor any prospect of one within a time frame that makes sense -- not to mention the gigantic background problem of pouring evermore carbon into the sky.
If these things I mention -- highways, tract houses, condo towers, strip malls -- represent our current idea of "growth," and if they are self-evidently bad investments, then we can infer that our current concept of "growth" no longer applies to a reality-based model of our economic prospects. We ought to junk the term and what it implies about the daily business of mankind, and come up with a new way of understanding the place we're at.
In Part II: Getting To a Future That Has a Future, we take a hard look at the critical task facing humanity if we want to enjoy a future of any worth -- and that's managing contraction. We have to reorganize all the major systems of civilized daily life. We have to produce our food differently, we have to do commerce differently, and so on with any number of ongoing endeavors including transportation, manufacturing, governance, banking, education, health care, and more.
Click here to access Part II of this report (free executive summary; enrollment required for full access).
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10-21-13 |
MACRO
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11 - Shrinking Revenue Growth Rate |
TO TOP |
MACRO News Items of Importance - This Week |
GLOBAL MACRO REPORTS & ANALYSIS |
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GLOBAL GROWTH - GDP Forecasts Continue to Be Taken Down
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10-23-13 |
MACRO INDICATORS
GROWTH |
GLOBAL MACRO |
EMERGING MARKETS - Crisis Only Temporarily Averted
Emerging Market Crisis—Redux? 10-21-13 Satyajit Das via Prudent Bear
EM represent 60-70% of global economic growth since 2008; their slowdown will rapidly affect developed economies.
To paraphrase writer Robert Louis Stevenson, financial markets have “a grand memory for forgetting.” Multiple Latin debt crises and the 1997/1998 Asian emerging market crisis have been forgotten. Now, the risk of an emerging market crisis is very real.
BRICs on Credit
Investors have been romancing emerging markets, exemplified by the dalliance with the BRIC economies (Brazil, Russia, India and China), a term coined by Goldman Sachs’ Jim O’Neill in 2001.
- Slowing economic growth in developed economies following the 2007/2008 global financial crisis resulted in a sharp slowdown in emerging economies.
- To restore growth, emerging markets switched to development models more reliant on credit.
- Double-digit annual credit growth drove economic activity in China, Brazil, India, Turkey and many economies in Asia, Latin America and Eastern Europe.
- Loose monetary policies in developing countries:
- low or zero interest rates,
- quantitative easing and
- currency devaluation
... encouraged capital inflows into emerging markets, in search of
- higher returns and
- currency appreciation
- Banks, awash with liquidity, sought lending opportunities in emerging markets.
- International investors, such as pension funds, investment managers, central banks and sovereign wealth funds, increased allocations to emerging markets.
Foreign ownership of emerging market debt increased sharply.
- In Asia, 30-50% of Indonesian rupiah government bonds, up from less than 20% at the end of 2008, are held by foreigners.
- Approximately 40% of government debt of Malaysia and the Philippines is held by foreigners.
Capital inflows drove sharp falls in emerging market borrowing costs.
- Brazilian dollar-denominated bond yields fell from above 25% in 2002 to a record low 2.5% in 2012.
- After averaging about 7% for the period 2003-2011, Turkish dollar-denominated bond yields sank to a record low 3.17% in November 2012.
- Indonesian dollar bond yields fell to a record low 2.84%.
Local currency interest rates also fell. Increased availability of funds and low rates encouraged rapid increases in borrowings and speculative investment. Asset prices, particularly real estate prices, increased sharply.
The Band Stops Playing
In the last 12 months, investor concern about developments in emerging markets has increased, reflecting slowing growth and a potential reversal of capital inflows.
- China’s growth has fallen below 7%.
- India’s growth is below 5%.
- Brazil’s growth has slowed to near zero.
- Russian growth forecasts have been downgraded repeatedly to under 2%.
The slowdown reflects economic stagnation in the U.S., Europe and Japan.
In addition, slowing Chinese growth affected commodity demand and prices, in turn affecting producers like Brazil. The slowdown flowed through the supply chains affecting suppliers to Chinese manufacturers.
The growth slowdown is now attenuated by capital outflows, driven by fundamental concerns about emerging market economies but also changing U.S. policy dynamics. Improvements in American economic conditions have encouraged discussion about ‘tapering’ the U.S. Federal Reserve’s liquidity support, currently $85 billion per month. U.S. Treasury bond interest rates have increased, with the 10-year rate rising by nearly 1.00% per annum, in anticipation of stronger growth, inflation and higher official rates. Rates in other developed countries such as Germany have also increased sharply.
As investors shift asset allocation back in favor of developed economies, especially the U.S., there have been significant capital outflows from emerging markets, resulting in sharp falls in currency values and rises in borrowing rates. In the first nine months of 2013, the Brazilian real declined around 13%, the Indian rupee around 15%, the Russian rouble around 8%, the Turkish lira around 10%, the Indonesia rupiah around 12%, the Malaysian ringgit around 7%, the Thai baht 4% and the South African rand around 18%. The falls accelerated in the third quarter.
The ability to raise debt has declined; the cost of funding has increased. Brazilian dollar-denominated bond yields have risen to around 5%, well above the lows of 2.5% last year. Turkish dollar-denominated have risen to nearly 6% from a low of 3.17%. Indonesian dollar bond yields are above 6.00%, up from lows of 2.84%. Emerging market central banks, excluding China, have seen outflows of reserves of around U.S. $80 billion (around 2% of total reserves). Over the last three months, Indonesia has lost around 14% of central bank reserves, Turkey has lost 13% and India has lost around 6%.
Like an outgoing tide revealing treacherous rocks hidden when the water level is high, slowing growth and the withdrawal of capital is now exposing deep-seated problems, especially high debt levels, financial system problems, current and trade account deficits and structural deficiencies.
Cheap Money, Expensive Problems
Debt levels in emerging markets have risen significantly, with total credit growth since 2008 in the range 10-30% depending on the country. Credit growth has been especially strong in Asia. Total debt above 150-200% of GDP is now common. Credit intensity has also increased sharply. New credit needed to generate each extra dollar of GDP has doubled to around $4-8 for each dollar of GDP growth.
Bank credit has increased rapidly and is above the levels of 1997 (as percentage of GDP) in most countries. There has also been rapid growth in debt securities issued by emerging market borrowers, in both local and foreign currencies. Borrowing varies between sectors, depending on country. Consumer credit has grown strongly in many Asian countries and also in Brazil. Many corporations in China, South Korea, India and Brazil are highly leveraged. Combined gross debts at India’s biggest ten industrial conglomerates have risen 15% in the past year to U.S. $102 billion. Many borrowers are over-extended with inadequate cash flow to meet interest and principal payments, especially in a weak economic environment.
With notable exceptions like China and India, government debt levels are not high. However, state involvement in banks and industry mean that effective level of government obligations is higher than stated. Sustainable levels of public debt are lower for emerging market countries, given lower per capita income and wealth.
Banks and investors with exposure to emerging markets are at significant risk. Borrowing has been used, worryingly, to finance consumption, investment in infrastructure projects with uncertain rates of return or speculation. In many emerging countries, quasi-government bank officials have financed projects sponsored by politically connected businesses and elites. Lending practices have been weak, helping finance expensive property and grand vanity projects with dubious economics.
Many borrowers will struggle to repay the debt. Losses are currently hidden by an officially sanctioned policy of restructuring potential non-performing loans. Bad and restructured loans at Indian state banks have reached around 12% of total assets, doubling in the past four years.
Trouble Abroad, Trouble At Home
Short-term foreign capital inflows have financed external accounts, masking underlying imbalances. The current account surplus of emerging market countries has fallen to 1% of combined GDP, from around 5% in 2006. The deterioration is greater, as large trade surpluses of China and energy exporters distort the overall result. The falls reflect slow growth in export markets, lower commodity prices, higher food and energy import costs and domestic consumption driven by excessive credit growth.
India, Brazil, South Africa and Turkey have large current account deficits that must be financed overseas. India has a current account deficit of around 6-7% and a budget deficit (federal and state government) approaching 10% that requires funding. Countries dependent on commodity exports are also vulnerable, given the fall in prices and anemic global economic growth.
Emerging countries require around US$1.5 trillion per annum in external funding to meet financing needs, including maturing debt. A deteriorating financing environment combined with falling currency reserves, reduced cover for imports and short term borrowings, declining currencies and diminished economic prospects have increased their vulnerability.
Investors fear that many emerging markets may be caught in a middle-class income trap, where countries experience a sharp slowdown in economic growth when GDP per capita reaches around $15,000.
Emerging economics remain highly linked to developed economies, through trade, need for development capital and the investment of foreign exchange reserves, totalling in excess of U.S. $7.5 trillion. Weak growth in developed markets and decreasing credit quality of developed-country sovereign bonds may adversely affect emerging markets. Emerging countries have also lost competitiveness as a result of rising costs, especially labor.
Investors are concerned about mal- and mis-investment. Trophy projects, such as the 2008
Beijing Olympics (costing U.S. $40 billion), Russia’s 2014 Sochi Winter Olympics (U.S. $51 billion) and Brazil’s 2014 football World Cup and 2016 Olympics, have absorbed scarce resources at the expense of essential infrastructure.
Income inequality, corruption, hostile and difficult business environments, excessive concentration of economic power in heavily subsidized state corporations and political rigidities increasingly compound the problems of debt and capital outflows. Political instability exacerbates economic problems, for example in Brazil, Turkey, South Africa and India.
1994 Redux
Battle-weary policy makers do not want to believe an emerging market crisis is possible. Like former Secretary of State Henry Kissinger, they believe: “There cannot be a crisis next week. My schedule is already full.” But there are striking resemblances to the 1990s. Then, loose monetary policies pursued by the U.S. Federal Reserve and the Bank of Japan led to large capital inflows into emerging markets, especially Asia. In 1994, Federal Reserve Chairman Alan Greenspan withdrew liquidity, resulting in a doubling of U.S. interest rates over 12 months.
In the 1994 ‘Great Bond Massacre’, holders of U.S. Treasury bonds suffered losses of around $600 billion. Trading losses led to the bankruptcy of Orange County in California, the effective closure of Kidder Peabody and failures of many investment funds. It triggered emerging market crisis in Mexico and Latin America. It precipitated the Asian monetary crisis, requiring International Monetary Fund (IMF) bailouts for Indonesia, South Korea and Thailand. Asia took over a decade to recover from the economic losses.
Many now fear a re-run, triggered by rapid capital outflows and a rising dollar.
Weaknesses in the real economy and financial vulnerabilities will rapidly feed each other in a vicious cycle. Even if the reduction of excessive monetary accommodation in developed economies is slow or deferred, the fundamental fragilities of emerging markets—
- the current account deficits,
- inadequate investment returns and
- high debt levels
.... will prove problematic.
Capital withdrawals will cause currency weakness, which, in turn, will drive falls in asset prices, such as bonds, stocks and property. Decreased availability of finance and higher funding costs will increase pressure on over-extended borrowers, triggering banking problems that feed back into the real economy. Credit rating and investment downgrades will extend the cycle through repeated iterations.
Policy responses will compound the problems. Central bank currency purchases, money market intervention or capital controls will reduce reserves or accelerate capital outflow. Higher interest rates to support the currency and counter imported inflation will reduce growth, exacerbating the problems of high debt. India, Indonesia, Thailand, Brazil, Peru and Turkey have implemented some of these measures.
The ‘this time it’s different’ crowd argues that critical vulnerabilitie:
- fixed exchange rates,
- low foreign exchange reserves,
- foreign currency debt
... have been addressed, avoiding the risk of the familiar emerging-market death spiral. This is an overly optimistic view. Structural changes may slow the onset of the crisis. But real economy and financial weaknesses mean that the risks are high. Fundamental weaknesses and a weak external environment limit policy options. The IMF’s capacity to assist is constrained because of concurrent crises, especially in Europe.
Blowback
At the annual central bankers meeting at Jackson Hole in August 2013, Western policy makers denied the role of developed economies in the problems now facing emerging markets, arguing that the policies had ‘benefitted’ emerging markets. But developed economies now face serious economic blowback.
Since 2008, emerging markets have contributed around 60-70% of global economic growth. A slowdown will rapidly affect developed economies. Demand for exports that has boosted economic activity will decrease. Earnings of multi-national businesses will fall as earnings from overseas operations decline. Investment losses will affect pension funds, investment managers and individual investors. Loans and trading losses will affect international banks active in emerging markets.
Emerging markets have around U.S. $7.4 trillion in foreign exchange reserves, invested primarily in U.S., Japanese, European and UK government securities. If emerging market central banks move to sell holding to support their weak currencies or the domestic economy, then the sharp rise in interest rates will attenuate the increase resulting from the reduction of monetary stimulus. This will result in immediate large losses to holders. It will also increase financial stress, adversely affecting the fragile recovery in developed economies.
Emerging market currency weakness is driving a rise in major currencies, such as the U.S. dollar. This will erode improvements in cost structures and competitiveness engineered through currency devaluation by low interest rates and quantitative easing. The higher dollar would truncate any nascent recovery.
Over time, the destabilizing effect of national actions and complex policy cross current may accelerate the move to closed economies, damaging the global growth prospects.
In reality, developed economies sought to export more than goods and services, shifting the burden of adjustment necessitated by the 2008 crisis onto emerging economies. Like a drowning man grabbing another barely able to swim, the policies may ensure that both drown together.
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10-23-13 |
GROUP
EMERGING MARKETS |
GLOBAL MACRO |
EMERGING MARKETS - Losing Their Punch
Emerging Markets Lose Their Punch 10-22-13 Wharton Knowledge
It’s been a good 10-year run for fast-growing emerging markets. But now many of them face severe economic imbalances and slowing growth built up during the go-go years. Those structural flaws could be papered over in good times, but they have finally undermined sustainable strong growth, and the cracks are starting to show. In this video interview, Wharton management professor Mauro F. Guillen discusses how formerly hot emerging market countries are passing the growth engine baton back to developed countries.
An edited transcript of the conversation appears below.
Knowledge@Wharton: Can you discuss what’s been happening in emerging economies? A lot of money has been flowing out. Their growth rates look like they’re slowing. It’s hard to generalize, but it is happening in a lot of countries, perhaps for different reasons. And one of the explanations for this is that the Fed’s so-called tapering off is a worry because that may mean that U.S. interest rates would go up and look relatively more interesting than the returns that investors are getting on their so-called hot money in these emerging economies. So
it’s about these financial flows rather than foreign direct investments in bricks and mortar and that sort of thing.
Guillen: You’re absolutely right. The fact that investors are anticipating that the Federal Reserve will change its policy in the near future is obviously putting some pressure on those short-term hot money flows into emerging economies, and people of course don’t want to be caught in the middle. And they tend to move their money to where it can get the highest possible yield. I think that’s a very important background factor. I don’t think it’s the only one.
“What we see in many emerging economies, speaking broadly, is that the current model of growth is becoming exhausted, which has been, in many of these emerging economies, export-led.” –Mauro F. Guillen
What we see in many emerging economies, speaking broadly, is that the current model of growth is becoming exhausted, which has been, in many of these emerging economies, export-led. So we’ve seen very little progress in most of these countries — China, India, Brazil — in terms of the development of a domestic market that would compensate for slower growth in terms of exports. There’s been some progress, but not enough to essentially keep the economy going at a very fast pace, which is what happened throughout the last few years.
We shouldn’t forget [how] remarkable [it is] that even during the 2008, 2009 and 2010 financial crisis, emerging economies continued growing as they did. But now they’re at a crossroads. And this comes at a very bad moment,
- POLITICAL TURMOIL: When there is also political turmoil in several of these countries. There are street protests in many of these economies, Brazil most recently.
- INCOME INEQUALITY: There’s rising income inequality, which also adds to the problems.
- BUBBLES: And, more broadly, there are bubbles. There’s clearly a real estate bubble in several of the markets in Brazil. There’s clearly a real estate bubble in several areas in China, or perhaps all over the country, and so on.
So there are many imbalances that have been building up in several markets over the last 10 years of rapid growth.
Just to make things even worse, the banking system always, always suffers from the build up of these bubbles. And we’re beginning to see in some of these markets that the percentage of non-performing loans is starting to increase in bad assets on the balance sheets of banks. So yes, we are at a crossroads, there’s a lot of uncertainty, and one of the biggest problems for emerging economies is that neither the U.S. nor Europe, which are traditionally the most important export markets, are growing that much. So this comes at a bad moment. It comes at a bad moment for everybody.
Knowledge@Wharton: U.S. GDP growth was upgraded from 1.7% to 2.5% for the second quarter [at an annualized rate]. So that’s one hopeful sign. Who knows what will happen in Japan? There is an effort there to crank up the economy in ways that haven’t been done in the last 20 years or so, during the so called “lost decades.” And Europe is struggling with just its nose above the water. So is there perhaps a grand shift, even if it’s a mild one, where the emerging economies — which had been carrying the world economy, or at least preventing something worse than what happened — are now passing the baton to the developed countries?
Guillen: Right, exactly. The baton seems to be passing, not perhaps fast enough, because the U.S., as you just said, is enjoying a little bit faster growth, but not the kind of growth that we would like to have here in order to reduce unemployment. And then in Europe, of course, it’s just not enough. So this is much better from the point of view of emerging economies than the situation a year ago or two years ago, but I think the big question mark is whether it’s big enough. And I think it is very clear that all of the debate about the development of the domestic market, domestic consumption market in BRIC [countries (Brazil, Russia, India and China)], in Mexico, now has become very relevant. I don’t think that these economies can continue enjoying high growth rates, let’s say into the next five or 10 or 15 years unless the domestic markets in these countries become so much more important — in other words that they switch away from an export-led model of growth to one that is more balanced between exports and domestic consumption.
Knowledge@Wharton: Which of the emerging economies would you worry about the most under the circumstances you’ve been talking about?
Guillen: Well, I think there are reasons to be worried in each of the large emerging economies. I think Brazil probably right now stands out as being the biggest underperformer. Brazil was growing at 6%-7%-8% just a few years ago. And now it’s barely growing. We see over there many of these tensions and the overheating. I worry about Brazil also because Brazil is more vulnerable than the others because it is highly dependent on the hot money that has been coming into the country to cover the deficit that they have in their current account with their relationship in terms of trade and other kinds of flows.
“I don’t think that these economies can continue enjoying high growth rates, let’s say into the next five or 10 or 15 years, unless the domestic markets in these countries become so much more important ….” –Mauro F. Guillen
Brazil, in spite of being a major export power, is still a country that imports more than what it exports. They need money, capital flows, to come in and bridge the gap. So I worry about Brazil. And I think I worry about Brazil also because Brazil is 40% of Latin America. If something bad happens in Brazil, then that’s going to have a big impact on the region.
But having said that, I think there’s plenty to worry about in China these days and also in India. India, with all of its poverty and all of the need for more growth, is now very clearly under performing as well. I don’t worry that much about Russia, quite frankly. I think Russia is, to a very large extent, shielded from much of this because it is an economy that generates enough export earnings. It is an economy that has such natural wealth that unless they grossly mismanage it, they will probably weather any kind of storm.
Knowledge@Wharton: What about places like Indonesia and Thailand, those kinds of countries? As China goes, so go those countries? Is that what is most likely to happen?
Guillen: Well, that’s part of it, but more important is the U.S. and Europe because those are the most important export markets. Thailand, Indonesia, Vietnam and Malaysia; these are countries that very much depend on the U.S. market and also European markets for their exports. Now having said that, I think they have one advantage, which is that I don’t think you are seeing in those economies the kinds of bubbles that have emerged in places like Brazil or China.
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10-23-13 |
GROUP
EMERGING MARKETS |
GLOBAL MACRO |
EMERGING MARKETS - Risk-On!
Budget Deal Opens Door for Emerging-Market Rally 10-18-13 WSJ
The deal to reopen the U.S. government and suspend the debt ceiling has opened the door for a rally in emerging markets, analysts say. With the possibility of a U.S. default out of the way until early 2014, investors now have
"A window to pick up emerging-market currencies and local-currency government bonds at attractive prices", they say.
The drag on the U.S. economy from the 16-day shutdown likely means the Federal Reserve will keep its stimulus program running for the next couple months, at least. That buys investors, and emerging economies, some time. For much of the second and third quarters, emerging-market assets had plummeted on fears that the Fed would roll back some of its bond-buying in September. That didn’t happen, and thanks to the economic damage done by the shutdown, many analysts and economists are now predicting that it probably won’t until the first quarter of next year.
With the Fed still pumping liquidity into the financial system, analysts are predicting that
Investors should once again embrace the appeal of the higher yields that emerging-market currencies and bonds have to offer.
And with investors’ emerging-market holdings still relatively low after the summer selloff, that leaves plenty of space for the assets to run.
“Now that the U.S. debt ceiling issue is off the table, we think that this creates room for a sizeable rally in global emerging markets,” Societe Generale analysts wrote in a note to clients
Thursday. “All stars are aligned in our view, including signals that the Fed tapering is at risk of being further delayed.” “Tactically cheap” currencies like the Mexican peso and Turkish lira are well positioned to rally, while emerging-market local currency bond yields are still too high, Societe Generale said. Emerging-market currencies already rallied significantly on Wednesday, ahead of the deal’s approval in Congress. On Friday, the South African rand gained 0.7% against the dollar, though many other emerging-market currencies were unchanged or slightly down on the day versus the greenback.
Sara Zervos, portfolio manager at OppenheimerFunds, which has $212.25 billion under management, says that emerging-market currencies
could perform well if the U.S. dollar remains weak on continued Fed bond-buying.
Interest-rate increases from various emerging-market central banks in recent months should be another source of support for these currencies, she adds. Higher interest rates typically raise the rate of return on a currency versus a currency with lower interest rates. Since September, Ms. Zervos has added to holdings of South African and Mexican local-currency government bonds and to various emerging currencies, and said she was comfortable holding those positions in part because of the likelihood that the Fed won’t cut back on its stimulus program, called “quantitative easing,” this quarter.
Analysts acknowledge that the expected emerging-market rally may only last for a few months. After all, a pullback of Fed stimulus is still on the horizon, and political gridlock could return to Washington in February, when the suspension of the debt ceiling ends. But until the U.S. economy improves enough to make tapering a dominant theme once again,
“the combination of QE-taper delay and fiscal debt resolution should provide a sweet spot for EM assets,” Bank of America Merrill Lynch analysts said in a note Thursday.
They recommend the Brazilian real, Mexican peso and South Korean won, as well as local currency bonds in Russia and Hungary.
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10-21-13 |
GROUP
EM - ECHO |
GLOBAL MACRO |
US ECONOMIC REPORTS & ANALYSIS |
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CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES |
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FEDERAL RESERVE - Mounting Policy Failures
Lacy Hunt Warns Federal Reserve Policy Failures Are Mounting 10-18-13 Authored by Lacy Hunt via Casey Research,via ZH
The Fed's capabilities to engineer changes in economic growth and inflation are asymmetric. It has been historically documented that central bank tools are well suited to fight excess demand and rampant inflation; the Fed showed great resolve in containing the fast price increases in the aftermath of World Wars I and II and the Korean War. In the late 1970s and early 1980s, rampant inflation was again brought under control by a determined and persistent Federal Reserve.
However, when an economy is excessively over-indebted and disinflationary factors force central banks to cut overnight interest rates to as close to zero as possible, central bank policy is powerless to further move inflation or growth metrics. The periods between 1927 and 1939 in the U.S. (and elsewhere), and from 1989 to the present in Japan, are clear examples of the impotence of central bank policy actions during periods of over-indebtedness.
Four considerations suggest the Fed will continue to be unsuccessful in engineering increasing growth and higher inflation with their continuation of the current program of Large Scale Asset Purchases (LSAP):
- First, the Fed's forecasts have consistently been too optimistic, which indicates that their knowledge of how LSAP operates is flawed. LSAP obviously is not working in the way they had hoped, and they are unable to make needed course corrections.
- Second, debt levels in the U.S. are so excessive that monetary policy's traditional transmission mechanism is broken.
- Third, recent scholarly studies, all employing different rigorous analytical methods, indicate LSAP is ineffective.
- Fourth, the velocity of money has slumped, and that trend will continue—which deprives the Fed of the ability to have a measurable influence on aggregate economic activity and is an alternative way of confirming the validity of the aforementioned academic studies.
1. The Fed does not understand how LSAP operates
If the Fed were consistently getting the economy right, then we could conclude that their understanding of current economic conditions is sound. However, if they regularly err, then it is valid to argue that they are misunderstanding the way their actions affect the economy.
During the current expansion, the Fed's forecasts for real GDP and inflation have been consistently above the actual numbers. Late last year, the midpoint of the Fed's central tendency forecast projected an increase in real GDP of 2.7% for 2013—the way it looks now, this estimate could miss the mark by nearly 50%.
One possible reason why the Fed have consistently erred on the high side in their growth forecasts is that they assume higher stock prices will lead to higher spending via the so-called wealth effect. The Fed's ad hoc analysis on this subject has been wrong and is in conflict with econometric studies. The studies suggest that when wealth rises or falls, consumer spending does not generally respond, or if it does respond, it does so feebly. During the run-up of stock and home prices over the past three years, the year-over-year growth in consumer spending has actually slowed sharply from over 5% in early 2011 to just 2.9% in the four quarters ending Q2.
Reliance on the wealth effect played a major role in the Fed's poor economic forecasts. LSAP has not been able to spur growth and achieve the Fed's forecasts to date, and it certainly undermines the Fed's continued assurances that this time will truly be different.
2. US debt is so high that Fed policies cannot gain traction
Another impediment to LSAP's success is the Fed's failure to consider that excessive debt levels block the main channel of monetary influence on economic activity. Scholarly studies published in the past three years document that economic growth slows when public and private debt exceeds 260% to 275% of GDP. In the U.S., from 1870 until the late 1990s, real GDP grew by 3.7% per year. It was during 2000 that total debt breached the 260% level. Since 2000, growth has averaged a much slower 1.8% per year.
Once total debt moved into this counterproductive zone, other far-reaching and unintended consequences became evident. The standard of living, as measured by real median household income, began to stagnate and now stands at the lowest point since 1995. Additionally, since the start of the current economic expansion, real median household income has fallen 4.3%, which is totally unprecedented. Moreover, both the wealth and income divides in the U.S. have seriously worsened.
Over-indebtedness is the primary reason for slower growth, and unfortunately, so far the Fed's activities have had nothing but negative, unintended consequences.
3. Academic studies indicate the Fed's efforts are ineffectual
Another piece of evidence that points toward monetary ineffectiveness is the academic research indicating that LSAP is a losing proposition. The United States now has had five years to evaluate the efficacy of LSAP, during which time the Fed's balance sheet has increased a record fourfold.
It is undeniable that the Fed has conducted an all-out effort to restore normal economic conditions. However, while monetary policy works with a lag, the LSAP has been in place since 2008 with no measurable benefit. This lapse of time is now far greater than even the longest of the lags measured in the extensive body of scholarly work regarding monetary policy.
Three different studies by respected academicians have independently concluded that indeed these efforts have failed. These studies, employing various approaches, have demonstrated that LSAP cannot shift the Aggregate Demand (AD) Curve. The AD curve intersects the Aggregate Supply Curve to determine the aggregate price level and real GDP and thus nominal GDP. The AD curve is not responding to monetary actions, therefore the price level and real GDP, and thus nominal GDP, are stuck—making the actions of the Fed irrelevant.
The papers I am talking about were presented at the Jackson Hole Monetary Conference in August 2013. The first is by Robert E. Hall, one of the world's leading econometricians and a member of the prestigious NBER Cycle Dating Committee. He wrote, "The combination of low investment and low consumption resulted in an extraordinary decline in output demand, which called for a markedly negative real interest rate, one unattainable because the zero lower bound on the nominal interest rate coupled with low inflation put a lower bound on the real rate at only a slightly negative level."
Dr. Hall also wrote the following about the large increase in reserves to finance quantitative easing: "An expansion of reserves contracts the economy." In other words, not only have the Fed not improved matters, they have actually made economic conditions worse with their experiments. Additionally, Dr. Hall presented evidence that forward guidance and GDP targeting both have serious problems and that central bankers should focus on requiring more capital at banks and more rigorous stress testing.
The next paper is by Hyun Song Shin, another outstanding monetary theorist and econometrician and holder of an endowed chair at Princeton University. He looked at the weighted-average effective one-year rate for loans with moderate risk at all commercial banks, the effective Fed Funds rate, and the spread between the two in order to evaluate Dr. Hall's study. He also evaluated comparable figures in Europe. In both the U.S. and Europe these spreads increased, supporting Hall's analysis.
Dr. Shin also examined quantities such as total credit to U.S. non-financial businesses. He found that lending to non-corporate businesses, which rely on the banks, has been essentially stagnant. Dr. Shin states, "The trouble is that job creation is done most by new businesses, which tend to be small." Thus, he found "disturbing implications for the effectiveness of central bank asset purchases" and supported Hall's conclusions.
Dr. Shin argued that we should not forget how we got into this mess in the first place when he wrote, "Things were not right in the financial system before the crisis, leverage was too high, and the banking sector had become too large." For us, this insight is highly relevant since aggregate debt levels relative to GDP are greater now than in 2007. Dr. Shin, like Dr. Hall, expressed extreme doubts that forward guidance was effective in bringing down longer-term interest rates.
The last paper is by Arvind Krishnamurthy of Northwestern University and Annette Vissing-Jorgensen of the University of California, Berkeley. They uncovered evidence that the Fed's LSAP program had little "portfolio balance" impact on other interest rates and was not macro-stimulus. A limited benefit did result from mortgage-backed securities purchases due to the announcement effects, but even this small plus may be erased once the still unknown exit costs are included.
Drs. Krishnamurthy and Vissing-Jorgensen also criticized the Fed for not having a clear policy rule or strategy for asset purchases. They argued that the absence of concrete guidance as to the goal of asset purchases, which has been vaguely defined as aimed toward substantial improvement in the outlook for the labor market, neutralizes their impact and complicates an eventual exit. Further, they wrote, "Without such a framework, investors do not know the conditions under which (asset buys) will occur or be unwound." For Krishnamurthy and Vissing-Jorgensen, this "undercuts the efficacy of policy targeted at long-term asset values."
4. The velocity of money—outside the Fed's control
The last problem the Fed faces in their LSAP program is their inability to control the velocity of money. The AD curve is planned expenditures for nominal GDP. Nominal GDP is equal to the velocity of money (V) multiplied by the stock of money (M), thus GDP = M x V. This is Irving Fisher's equation of exchange, one of the important pillars of macroeconomics.
V peaked in 1997, as private and public debt were quickly approaching the nonproductive zone. Since then it has plunged. The level of velocity in the second quarter is at its lowest level in six decades. By allowing high debt levels to accumulate from the 1990s until 2007, the Fed laid the foundation for rendering monetary policy ineffectual. Thus, Fisher was correct when he argued in 1933 that declining velocity would be a symptom of extreme indebtedness just as much as weak aggregate demand.
Fisher was able to make this connection because he understood Eugen von Böhm-Bawerk's brilliant insight that debt is future consumption denied. Also, we have the benefit of Hyman Minsky's observation that debt must be able to generate an income stream to repay principal and interest, thereby explaining that there is such a thing as good (productive) debt as opposed to bad (non-productive) debt. Therefore, the decline in money velocity when there are very high levels of debt to GDP should not be surprising. Moreover, as debt increases, so does the risk that it will be unable to generate the income stream required to pay principal and interest.
Perhaps well intended, but ill advised
The Fed's relentless buying of massive amounts of securities has produced no positive economic developments, but has had significant negative, unintended consequences.
For example, banks have a limited amount of capital with which to take risks with their portfolio. With this capital, they have two broad options: First, they can confine their portfolio to their historical lower-risk role of commercial banking operations—the making of loans and standard investments. With interest rates at extremely low levels, however, the profit potential from such endeavors is minimal.
Second, they can allocate resources to their proprietary trading desks to engage in leveraged financial or commodity market speculation. By their very nature, these activities are potentially far more profitable but also much riskier. Therefore, when money is allocated to the riskier alternative in the face of limited bank capital, less money is available for traditional lending. This deprives the economy of the funds needed for economic growth, even though the banks may be able to temporarily improve their earnings by aggressive risk taking.
Perversely, confirming the point made by Dr. Hall, a rise in stock prices generated by excess reserves may sap, rather than supply, funds needed for economic growth.
Incriminating evidence: the money multiplier
It is difficult to determine for sure whether funds are being sapped, but one visible piece of evidence confirms that this is the case: the unprecedented downward trend in the money multiplier.
The money multiplier is the link between the monetary base (high-powered money) and the money supply (M2); it is calculated by dividing the base into M2. Today the monetary base is $3.5 trillion, and M2 stands at $10.8 trillion. The money multiplier is 3.1. In 2008, prior to the Fed's massive expansion of the monetary base, the money multiplier stood at 9.3, meaning that $1 of base supported $9.30 of M2.
If reserves created by LSAP were spreading throughout the economy in the traditional manner, the money multiplier should be more stable. However, if those reserves were essentially funding speculative activity, the money would remain with the large banks and the money multiplier would fall. This is the current condition.
The September 2013 level of 3.1 is the lowest in the entire 100-year history of the Federal Reserve. Until the last five years, the money multiplier never dropped below the old historical low of 4.5 reached in late 1940. Thus, LSAP may have produced the unintended consequence of actually reducing economic growth.
Stock market investors benefited, but this did not carry through to the broader economy. The net result is that LSAP worsened the gap between high- and low-income households. When policy makers try untested theories, risks are almost impossible to anticipate.
The near-term outlook
Economic growth should be very poor in the final months of 2013. Growth is unlikely to exceed 1%—that is even less than the already anemic 1.6% rate of growth in the past four quarters.
Marked improvement in 2014 is also questionable. Nominal interest rates have increased this year, and real yields have risen even more sharply because the inflation rate has dropped significantly. Due to the recognition and implementation lags, only half of the 2013 tax increase of $275 billion will have been registered by the end of the year, with the remaining impact to come in 2014 and 2015.
Additionally, parts of this year's tax increase could carry a negative multiplier of two to three. Currently, many of the taxes and other cost burdens of the Affordable Care Act are in the process of being shifted from corporations and profitable small businesses to households, thus serving as a de facto tax increase. In such conditions, the broadest measures of inflation, which are barely exceeding 1%, should weaken further. Since LSAP does not constitute macro-stimulus, its continuation is equally meaningless. Therefore, the decision of the Fed not to taper makes no difference for the outlook for economic growth.
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10-22-13 |
MACRO MONETARY
US MONETARY |
CENTRAL BANKS |
FEDERAL RESERVE - QE Doesn't Help the Economy
Fed Policy Hasn’t Worked: 3 Academic Studies Show that Quantitative Easing Doesn’t Help the Economy 10-21-13 Washington Blog via Barry Ritholtz
Quantitative easing doesn’t help Main Street or the average American. It only helps
- Big banks,
- Giant corporations, and
- Big investors.
(In reality, Federal Reserve policy works … just not for the average American. And a lot of the money goes abroad).
Lacy Hunt – former senior economist for the Federal Reserve in Dallas, chief economist for Fidelity Bank, chief U.S. economist for HSBC, and now Vice President of Hoisington Investment Management Company (with more than $5 billion under management) – writes today:
Academic studies indicate the Fed’s efforts are ineffectualAnother piece of evidence that points toward monetary ineffectiveness is the academic research indicating that LSAP [the Federal Reserve's program of Large Scale Asset Purchases] is a losing proposition. The United States now has had five years to evaluate the efficacy of LSAP, during which time the Fed’s balance sheet has increased a record fourfold.
It is undeniable that the Fed has conducted an all-out effort to restore normal economic conditions. However, while monetary policy works with a lag, the LSAP has been in place since 2008 with no measurable benefit. This lapse of time is now far greater than even the longest of the lags measured in the extensive body of scholarly work regarding monetary policy.
Three different studies by respected academicians have independently concluded that indeed these efforts have failed. These studies, employing various approaches, have demonstrated that LSAP cannot shift the Aggregate Demand (AD) Curve. The AD curve intersects the Aggregate Supply Curve to determine the aggregate price level and real GDP and thus nominal GDP. The AD curve is not responding to monetary actions, therefore the price level and real GDP, and thus nominal GDP, are stuck—making the actions of the Fed irrelevant.
The papers I am talking about were presented at the Jackson Hole Monetary Conference in August 2013. The first is by Robert E. Hall, one of the world’s leading econometricians and a member of the prestigious NBER Cycle Dating Committee. He wrote, “The combination of low investment and low consumption resulted in an extraordinary decline in output demand, which called for a markedly negative real interest rate, one unattainable because the zero lower bound on the nominal interest rate coupled with low inflation put a lower bound on the real rate at only a slightly negative level.”
Dr. Hall also wrote the following about the large increase in reserves to finance quantitative easing: “An expansion of reserves contracts the economy.” In other words, not only have the Fed not improved matters, they have actually made economic conditions worse with their experiments. Additionally, Dr. Hall presented evidence that forward guidance and GDP targeting both have serious problems and that central bankers should focus on requiring more capital at banks and more rigorous stress testing.
The next paper is by Hyun Song Shin, another outstanding monetary theorist and econometrician and holder of an endowed chair at Princeton University. He looked at the weighted-average effective one-year rate for loans with moderate risk at all commercial banks, the effective Fed Funds rate, and the spread between the two in order to evaluate Dr. Hall’s study. He also evaluated comparable figures in Europe. In both the U.S. and Europe these spreads increased, supporting Hall’s analysis.
Dr. Shin also examined quantities such as total credit to U.S. non-financial businesses. He found that lending to non-corporate businesses, which rely on the banks, has been essentially stagnant. Dr. Shin states, “The trouble is that job creation is done most by new businesses, which tend to be small.” Thus, he found “disturbing implications for the effectiveness of central bank asset purchases” and supported Hall’s conclusions.
Dr. Shin argued that we should not forget how we got into this mess in the first place when he wrote, “Things were not right in the financial system before the crisis, leverage was too high [indeed], and the banking sector had become too large [exactly].” For us, this insight is highly relevant since aggregate debt levels relative to GDP are greater now than in 2007. Dr. Shin, like Dr. Hall, expressed extreme doubts that forward guidance was effective in bringing down longer-term interest rates.
The last paper is by Arvind Krishnamurthy of Northwestern University and Annette Vissing-Jorgensen of the University of California, Berkeley. They uncovered evidence that the Fed’s LSAP program had little “portfolio balance” impact on other interest rates and was not macro-stimulus. A limited benefit did result from mortgage-backed securities purchases due to the announcement effects, but even this small plus may be erased once the still unknown exit costs are included.
Drs. Krishnamurthy and Vissing-Jorgensen also criticized the Fed for not having a clear policy rule or strategy for asset purchases. They argued that the absence of concrete guidance as to the goal of asset purchases, which has been vaguely defined as aimed toward substantial improvement in the outlook for the labor market, neutralizes their impact and complicates an eventual exit. Further, they wrote, “Without such a framework, investors do not know the conditions under which (asset buys) will occur or be unwound.” For Krishnamurthy and Vissing-Jorgensen, this “undercuts the efficacy of policy targeted at long-term asset values.”
***
The Fed’s relentless buying of massive amounts of securities has produced no positive economic developments, but has had significant negative, unintended consequences.
For example, banks have a limited amount of capital with which to take risks with their portfolio. With this capital, they have two broad options: First, they can confine their portfolio to their historical lower-risk role of commercial banking operations—the making of loans and standard investments. With interest rates at extremely low levels, however, the profit potential from such endeavors is minimal.
Second, they can allocate resources to their proprietary trading desks to engage in leveraged financial or commodity market speculation. By their very nature, these activities are potentially far more profitable but also much riskier. Therefore, when money is allocated to the riskier alternative in the face of limited bank capital, less money is available for traditional lending. This deprives the economy of the funds needed for economic growth, even though the banks may be able to temporarily improve their earnings by aggressive risk taking.
Perversely, confirming the point made by Dr. Hall, a rise in stock prices generated by excess reserves may sap, rather than supply, funds needed for economic growth.
***
The money multiplier is 3.1. In 2008, prior to the Fed’s massive expansion of the monetary base, the money multiplier stood at 9.3, meaning that $1 of base supported $9.30 of M2.
If reserves created by LSAP were spreading throughout the economy in the traditional manner, the money multiplier should be more stable. However, if those reserves were essentially funding speculative activity, the money would remain with the large banks and the money multiplier would fall. This is the current condition.
The September 2013 level of 3.1 is the lowest in the entire 100-year history of the Federal Reserve. Until the last five years, the money multiplier never dropped below the old historical low of 4.5 reached in late 1940. Thus, LSAP may have produced the unintended consequence of actually reducing economic growth. [Indeed, 81.5% of money created through quantitative easing is sitting there gathering dust, due to a conscious decision by the Fed to tie up the money and prevent it from being loaned out to Main Street.]
Stock market investors benefited, but this did not carry through to the broader economy. The net result is that LSAP worsened the gap between high- and low-income households. [Indeed, it's been known for some time that quantitative easing quantitative easing increases inequality (and see this and this.)]
No wonder even former and current Fed officials have slammed the Fed’s policies over the last 5 years.
And see this
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10-22-13 |
MACRO MONETARY
US MONETARY |
CENTRAL BANKS |
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Market Analytics |
TECHNICALS & MARKET ANALYTICS |
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EARNINGS - Top Line Growth A Growing Problem
Third Quarter Earnings and Revenue Beat Rates 10-18-13 Bespoke Investment Group
We're now a week and a half into earnings season, and 190 US companies have reported their third quarter numbers so far. By the end of earnings season, more than 2,000 companies will have reported, so we're still in the very early stages of this quarter's reporting period.
Below is a look at the historical earnings beat rate for US stocks by quarter since 2001. As shown, 60.5% of the companies that have reported so far this season have beaten consensus analyst EPS estimates. This is a mediocre reading compared to the average beat rate of 63% that we've seen since the bull market began in March 2009.

Top-line numbers have also been mediocre so far this season. As shown below, 50.9% of the companies that have reported have beaten revenue estimates, which is 9 percentage points below the average of 60% that we've seen since the bull market began.
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10-22-13 |
Q3 EARNINGS |
ANALYTICS |
COMMODITY CORNER - HARD ASSETS |
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PORTFOLIO |
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PRIVATE EQUITY - REAL ASSETS |
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PORTFOLIO |
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AGRI-COMPLEX |
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PORTFOLIO |
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SECURITY-SURVEILANCE COMPLEX |
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PORTFOLIO |
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THESIS Themes |
2013 - STATISM |
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2012 - FINANCIAL REPRESSION |
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2011 - BEGGAR-THY-NEIGHBOR -- CURRENCY WARS |
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2010 - EXTEND & PRETEND |
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THEMES |
CORPORATOCRACY - CRONY CAPITALSIM |
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GLOBAL FINANCIAL IMBALANCE |
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SOCIAL UNREST |
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SOCIAL CHANGE - What America Will Look Like When The Next Great Economic Crisis Strikes
12 Shocking Clues For What America Will Look Like When The Next Great Economic Crisis Strikes 10-21-13 Michael Snyder via The Economic Collapse blog VIA zh
The collapse of American society is accelerating. For the moment, much of our social decay is being masked by the tremendous level of affluence that we are experiencing in aggregate. It has been reported that 4 out of every 5 adults in the United States "struggle with joblessness, near-poverty or reliance on welfare for at least parts of their lives", but in general Americans still enjoy a debt-fueled standard of living that is far beyond what most of the rest of the world enjoys. When that debt-fueled standard of living permanently disappears, it is going to unleash chaos unlike anything that America has ever seen before.
Right now, economic conditions in this country are not anywhere close to where they were before 2008, but this is just the beginning. We are in the midst of an ongoing economic collapse which is going to get much, much worse in the years ahead. When the next major wave of the economic crisis strikes, millions of people are going to become extremely desperate. And desperate people do desperate things. We are already starting to see this play out all over the nation, but this is only a preview of coming attractions. What we are going to witness in future years is going to be almost too horrible for words.
So how can I be so sure that this is going to happen? After all, the United States didn't descend into complete and utter chaos during the Great Depression of the 1930s. Wouldn't an economic depression unfold in a similar manner today?
Unfortunately, a lot has changed since then. A lot more Americans were self-sufficient back in those days, and the truth is that the character of our nation has been rotting and decaying for decades. In a previous article, I described it this way...
"We are simply not the same country that we used to be. Americans are proud, selfish, greedy, arrogant, ungrateful, treacherous and completely addicted to entertainment and pleasure. Our country is literally falling apart all around us, but most Americans are so plugged into entertainment that they can't even be bothered to notice what is happening."
Just last weekend, there were "mini-riots" in several U.S. states when "technical issues" caused the food stamp system to go haywire for a few hours.
What would have happened if there had been an extended outage or if the political crisis in D.C. had caused food stamps to be completely cut off at some point in November?
Let's be thankful that we did not have to find out.
But even though major food stamps riots may have been averted (at least for now), there are a whole host of other signs that America is going to become a very unstable place during the next major economic downturn. The following are 12 shocking clues about what America will look like when the next great economic crisis strikes...
#1 Would you continue to work as a bus driver if you were stabbed while driving or if a passenger poured urine all over you? Just check out what has been going on in Detroit lately...
After two drivers were recently stabbed and another had urine poured on her by an angry rider, union officials representing bus drivers for the city of Detroit are set to protest in front of city hall at 10 a.m. on Monday.
#2 We are starting to see a lot of "group crimes" happen all over America. For example, just the other day in Brooklyn, New York a gang of 10 young thugs dragged a young couple out of their vehicle and brutally beat them...
Ronald Russo was dragged to the ground. Then he was punched and kicked in the head. He felt more blows all over his body, investigators said. He suffered a fractured nose, a broken septum, a blood clot and abrasions to his shoulder. He was treated and released from Beth Israel Medical Center.
In the midst of the attack, there was a steady chorus of epithets. “White motherf-----!” screamed the attackers, who ranged in age from 12 to 18.
Alanna Russo, 30, was calling 911 when the 12-year-old girl pulled the woman’s hair and threw her to the ground. The victim’s head slammed into the concrete. She suffered a black eye, bleeding and difficulty breathing, prosecutors said, but she refused medical attention.
#3 A lot of people assume that they are perfectly safe inside their own vehicles but that is not the case at all. A story in the New York Post about a gang of bikers that ruthlessly hunted down a young family that was driving an SUV made national headlines a few weeks ago...
A gang of bikers terrorized a dad driving with his wife and baby daughter on the West Side Highway — chasing after their SUV and then dragging the man out and beating him to a pulp in front of his horrified family, authorities said.
When the bikers caught up with this family they showed the father of the baby daughter absolutely no mercy...
One biker can be seen on the video ripping off his helmet and using it to bash in Lien’s driver’s-side window.
The crew pummeled Lien on the pavement in front of his wife, Rosalyn Ng, and their 2-year-old daughter, police sources said.
Lien, who also was slashed during the melee, was rushed to Columbia University Medical Center. He needed stitches to his face and chest and had two black eyes.
#4 We are living at a time when hearts are becoming very cold. Some Americans are becoming so desperate for money that they will do almost anything to get it. In fact, one couple in Tennessee has actually been charged with selling their four daughters for use in sex films...
An East Tennessee couple is facing a list of charges, accused of selling their children to take part in sex films.
Connie Sue McCall, 40, and her husband, Ronnie Lee McCall, 61, of Johnson City have been charged by a federal grand jury.
Paperwork shows the couple was selling their four daughters.
Prosecutors say the four girls were between the ages of 5 and 16 when this happened.
Could you imagine such a thing happening in your neighborhood?
Perhaps it is happening, but you just don't know that it is going on.
#5 And it is not only older people that are having their hearts grow cold. It is happening to young people too. Last week, a 17-year-old girl was caught carrying around a dead baby (which she probably gave birth to) in a shopping bag in a Victoria's Secret store right in the heart of Manhattan...
The dead baby found in the teen’s shopping bag at a Victoria’s Secret store in Manhattan was born alive and then asphyxiated, police said Friday, as the macabre discovery turned toward a possible homicide case.
Police believe 17-year-old Tiana Rodriguez gave birth to the baby at a friend’s house and that the infant was later asphyxiated. However, the city medical examiner’s office said an autopsy was inconclusive, and more tests were needed.
Who does something like that?
#6 Sadly, a lot of mothers appear to be losing the natural affection that they should have for their children. Just check out another incident that happened in New York City recently...
So much for no child left behind.
A stroller-toting mom who used her 1-year-old son as cover during a massive candy shoplifting spree at a downtown Duane Reade used the tot's pram as a battering ram when workers confronted her — and then ran away without the baby, the NYPD said.
#7 One of the clearest signs that American society is decaying is the fact that groups of kids are banding together and agreeing to commit absolutely horrible crimes. We have seen this with the "flash mob" robberies that are plaguing many cities, but what is even worse is when groups of kids band together to commit violent acts. In Pennsylvania recently, a group of teens cheered on attackers as they beat up a 15-year-old girl...
Speaking exclusively to CBS 3, a 15-year-old high school student, whose identity we are concealing, described a terrifying attack by a gang of at least nine teenage boys as she was leaving an Interboro High School football game Monday night.
The teenage victim described first being taunted by the attackers, who followed her down a neighborhood street, cursing and spitting at her, before she was repeatedly kicked and punched, suffering at least one blow to her head.
The attackers even tried to throw her in front of a passing vehicle and nobody tried to stop them...
The victim says as at least two of the teenagers pummeled her, the others cheered them on shouting, “Come on, let’s get her!” At one point, the victim says, the gang tried to throw her under the wheels of a passing car, which swerved, narrowly missing her.
What is happening to this country?
#8 We have also been hearing about a lot of "gang rapes" lately as well. The following is an excerpt from a first-hand account from a 14-year-old girl in Missouri that experienced this type of horrible ordeal...
About five shots tall, I drank it. I guess I didn't know how badly it would mess me up. But the boys who gave it to me did.
Then it was like I fell into a dark abyss. No light anywhere. Just dark, dense silence -- and cold. That's all I could ever remember from that night. Apparently, I was there for not even an entire hour before they discarded me in the snow.
You can read the rest of her sobering story right here.
Are you starting to understand why I am so convinced that we have a major problem with our young men in America today?
Instead of raising young gentlemen, we are raising wild animals that seem to have very little self-control.
#9 And sometimes the public does not do anything to stop sexual assaults even when they happen on public streets. In a recent incident in Athens, Ohio, not only did the public not stop a sexual assault, many actually took photos of the assault and posted them on social media websites...
Horrific photos of an alleged rape in progress have been shared on social media after crowds at a college homecoming celebration chose to take pictures and videos of the sex act rather than stopping it.
Would such a thing have happened in our country 50 years ago?
Of course not.
We need to come to grips with how far we have fallen.
#10 In America today, young kids can beat a homeless man to death and it barely even makes a blip on the news. I'll bet hardly any of you have heard about what happened recently to a homeless man in New Jersey...
Three teenagers were in custody Saturday morning, on charges of beating a homeless man to his death in Hoboken, N.J.
As CBS 2’s Janelle Burrell reported, Hudson County Acting Prosecutor Gaetano T. Gregory said two 13-year-olds and a 14-year-old were charged in the Sept. 10 death of Ralph Eric Santiago, 46.
What would cause 13-year-olds and 14-year-olds to behave so savagely?
Could it be because we are raising them in a society where basic morality is not taught any longer?
#11 Our young people certainly do not have much respect for the very elderly anymore either. Instead, the elderly are looked at as "weak" and "easy prey". Just check out what recently happened to a 70-year-old man in upstate New York...
A 70-year-old man was seriously injured early Saturday morning after being attacked outside of a 7-Eleven in Syracuse.
Police say James Gifford had just left the store at the intersection of Valley Drive and South Street just after 6:00 a.m. and was attacked by a group of five or six black males, according to Syracuse Police.
Police also said this appears to be an unprovoked incident with an innocent victim.
#12 In this day and age, it is very hard to tell who you can trust. You might meet someone on the street and they might smile and seem very nice, but inside they may be full of all kinds of garbage. For example, just check out what one man in the Boston area planned to do…
A Boston-area man, who was planning to kidnap children, lock them in a basement dungeon, rape and eat them, should be imprisoned for at least 27 years, federal authorities said in court documents filed this week.
Geoffrey Portway pleaded guilty in May to distribution and possession of child pornography and solicitation to commit a crime of violence, according to court documents. He is scheduled to be sentenced on September 17.
“Portway has pled guilty to some of the most vile and heinous crimes known to our society,” federal prosecutors wrote in a sentencing recommendation.
This is how twisted and perverted our society has become.
A lot of Americans believe that if we could just elect "the right politicians" or if we could just change our economic system or if we could just fix one particular issue that everything would be right in America again.
Unfortunately, what we are facing is not so simple. Our problems are not just in Washington D.C. or on Wall Street. The truth is that our biggest problem is what is going on inside of us.
America is rotting and decaying on the inside, and the next great economic crisis is going to reveal just how bad things have gotten.
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10-22-13 |
THEME |
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SOCIAL CHANGE - Profound Changes In Global Youth As Japan Leads the Way
Why Have Young People In Japan Stopped Having Sex? 10-20-13 Zero Hedge
Japan's under-40s appear to be losing interest in conventional relationships. Millions aren't even dating, and increasing numbers can't be bothered with sex. For their government, "celibacy syndrome" is part of a looming national catastrophe. Japan already has one of the world's lowest birth rates. As The Guardian reports, 45% of Japanese women aged 16-24 are "not interested in or despise sexual contact". More than a quarter of men feel the same way. Is Japan providing a glimpse of all our futures? Many of the shifts there are occurring in other advanced nations, too. Across urban Asia, Europe and America, people are marrying later or not at all, birth rates are falling, single-occupant households are on the rise and, in countries where economic recession is worst, young people are living at home...
Via The Guardian,
Ai Aoyama is a sex and relationship counsellor who works out of her narrow three-storey home on a Tokyo back street... she did "all the usual things" like tying people up and dripping hot wax on their nipples. Her work today, she says, is far more challenging. Aoyama, 52, is trying to cure what Japan's media calls sekkusu shinai shokogun, or "celibacy syndrome".
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Japan's under-40s appear to be losing interest in conventional relationships. Millions aren't even dating, and increasing numbers can't be bothered with sex. For their government, "celibacy syndrome" is part of a looming national catastrophe. Japan already has one of the world's lowest birth rates. Its population of 126 million, which has been shrinking for the past decade, is projected to plunge a further one-third by 2060. Aoyama believes the country is experiencing "a flight from human intimacy" – and it's partly the government's fault.
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The number of single people has reached a record high. A survey in 2011 found that 61% of unmarried men and 49% of women aged 18-34 were not in any kind of romantic relationship, a rise of almost 10% from five years earlier. Another study found that a third of people under 30 had never dated at all. (There are no figures for same-sex relationships.) Although there has long been a pragmatic separation of love and sex in Japan – a country mostly free of religious morals – sex fares no better. A survey earlier this year by the Japan Family Planning Association (JFPA) found that 45% of women aged 16-24 "were not interested in or despised sexual contact". More than a quarter of men felt the same way.
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Official alarmism doesn't help. Fewer babies were born here in 2012 than any year on record. (This was also the year, as the number of elderly people shoots up, that adult incontinence pants outsold baby nappies in Japan for the first time.) Kunio Kitamura, head of the JFPA, claims the demographic crisis is so serious that Japan "might eventually perish into extinction".
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"Both men and women say to me they don't see the point of love. They don't believe it can lead anywhere," says Aoyama. "Relationships have become too hard."
Marriage has become a minefield of unattractive choices. Japanese men have become less career-driven, and less solvent, as lifetime job security has waned. Japanese women have become more independent and ambitious.
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Aoyama says the sexes, especially in Japan's giant cities, are "spiralling away from each other". Lacking long-term shared goals, many are turning to what she terms "Pot Noodle love" – easy or instant gratification, in the form of casual sex, short-term trysts and the usual technological suspects: online porn, virtual-reality "girlfriends", anime cartoons. Or else they're opting out altogether and replacing love and sex with other urban pastimes.
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Aoyama cites one man in his early 30s, a virgin, who can't get sexually aroused unless he watches female robots on a game similar to Power Rangers.
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Mendokusai translates loosely as "Too troublesome" or "I can't be bothered". It's the word I hear both sexes use most often when they talk about their relationship phobia. Romantic commitment seems to represent burden and drudgery, from the exorbitant costs of buying property in Japan to the uncertain expectations of a spouse and in-laws. And the centuries-old belief that the purpose of marriage is to produce children endures. Japan's Institute of Population and Social Security reports an astonishing 90% of young women believe that staying single is "preferable to what they imagine marriage to be like".
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The sense of crushing obligation affects men just as much. Satoru Kishino, 31, belongs to a large tribe of men under 40 who are engaging in a kind of passive rebellion against traditional Japanese masculinity. Amid the recession and unsteady wages, men like Kishino feel that the pressure on them to be breadwinning economic warriors for a wife and family is unrealistic. They are rejecting the pursuit of both career and romantic success.
"It's too troublesome," says Kishino, when I ask why he's not interested in having a girlfriend. "I don't earn a huge salary to go on dates and I don't want the responsibility of a woman hoping it might lead to marriage." Japan's media, which has a name for every social kink, refers to men like Kishino as "herbivores" or soshoku danshi (literally, "grass-eating men"). Kishino says he doesn't mind the label because it's become so commonplace. He defines it as "a heterosexual man for whom relationships and sex are unimportant".
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Is Japan providing a glimpse of all our futures? Many of the shifts there are occurring in other advanced nations, too. Across urban Asia, Europe and America, people are marrying later or not at all, birth rates are falling, single-occupant households are on the rise and, in countries where economic recession is worst, young people are living at home.
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"Gradually but relentlessly, Japan is evolving into a type of society whose contours and workings have only been contemplated in science fiction,"
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Japan's 20-somethings are the age group to watch. Most are still too young to have concrete future plans, but projections for them are already laid out. According to the government's population institute, women in their early 20s today have a one-in-four chance of never marrying. Their chances of remaining childless are even higher: almost 40%.
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"Japan has developed incredibly sophisticated virtual worlds and online communication systems. Its smart phone apps are the world's most imaginative." Kelts says the need to escape into private, virtual worlds in Japan stems from the fact that it's an overcrowded nation with limited physical space. But he also believes the rest of the world is not far behind.
Getting back to basics, former dominatrix Ai Aoyama – Queen Love – is determined to educate her clients on the value of "skin-to-skin, heart-to-heart" intimacy. She accepts that technology will shape the future, but says society must ensure it doesn't take over. "It's not healthy that people are becoming so physically disconnected from each other," she says. "Sex with another person is a human need that produces feel-good hormones and helps people to function better in their daily lives."
Aoyama says she sees daily that people crave human warmth, even if they don't want the hassle of marriage or a long-term relationship. She berates the government for "making it hard for single people to live however they want" and for "whipping up fear about the falling birth rate". Whipping up fear in people, she says, doesn't help anyone. And that's from a woman who knows a bit about whipping.
Read more here
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10-21-13 |
MACRO TRENDS |
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CENTRAL PLANNING |
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STANDARD OF LIVING |
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CORRUPTION & MALFEASANCE |
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NATURE OF WORK |
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CATALYSTS - FEAR & GREED |
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GENERAL INTEREST |
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