On his weekly podcast, Andy Hoffman
discusses market manipulation, physical gold and silver, Japan’s
Abenomics, currency devaluation, retails sales are dropping,
unemployment, China’s real estate decline.
Sunday, September 14, 2014
Special report: Tauranga graduates lumbered with debt
An Inland Revenue spokeswoman said 18,500 borrowers with post codes registered to the city had a total student balance of $315 million on July 31, 2014. Nationally, $14.3 billion was outstanding including $3.1 billion owed by borrowers living overseas.
The majority of people "did the right thing and repaid loans on time," she said and while those living in New Zealand paid no interest, borrowers living off shore for more than six months were charged 5.5 per cent.
An arrest warrant could be issued as a last resort if people persistently refused to make repayment arrangements and Inland Revenue was notified if an overseas borrower with significant student loan arrears returned to New Zealand, she said.
Maddi Brown has $40,000 in student debt and said the magnitude "hasn't hit me yet".
The 21-year-old studied at Victoria and Otago University and had a Degree in Communication Studies with a Minor in Media and Film but was working in an administration role in Tauranga.
Not being able to secure a career relevant to her qualification had left her disheartened, Ms Brown said.
"I don't know if worthless is quite the right word for how I am feeling. I have spent all this money and put a lot of effort into getting my degree and it's still notenough," she said.
Television or radio was her preferred vocation but she had applied for various jobs in marketing and communications but said, 'If anyone else applies with experience you're buggered'.
Bay of Plenty Polytechnic Bachelor of Sport and Recreation student Esther Richmond said she knew a few people who owed $50,000 in fees, had degrees and continued to study because they could not get jobs. "I think that is completely ridiculous and now they are in their 30s. I didn't want to be one of those people."
The 19-year-old said a scholarship covered her first year of fees and she had a student loan of $6500 to cover this year.
However, the student ambassador had a job and planned to pay it off quickly.
Emma Brown said her student loan was about $8000.
The Bay of Plenty Polytechnic Diploma in Tourism student said she knew people that had done studies and did not have a job two years later. It was wise to target careers in growth industries, she said. "I believe there are big opportunities in tourism and it contributes a lot to the New Zealand economy."
The part-time waitress hopes to go to Auckland next year and wants to pay off her loan before she leaves.
But if the Internet Mana Party was elected to government next Saturday it plans to push to scrap fees and pay a universal student allowance.
Internet party leader Laila Harre said the scheme would cost about $1.2 billion a year and was a matter of priorities not affordability.
National's Tertiary Education, Skills and Employment spokesman Steven Joyce said its policy on student loans and student support would stay in place.
It would be unfair to ask other taxpayers to pay the full cost of their tertiary study, he said.
Green Party adviser Holly Donald said it would retain interest free student loans and review levels of student support including student allowances, living costs and the accommodation benefit.
Labour Party teritary education spokesperson Maryan Street said it would review all student support including loans, allowances and accommodation support and scholarships.
Students were the only group that are required by society to borrow to live, she said.
Human Beings on Track: The First Free Street Store for the Homeless in Cape Town, South Africa..
Introducing the world’s first
rent free, premises free pop up clothing store found on the streets.
saare free for the homeless to browse through and keep.
The folks that started this created a simple template for anyone to
replicate. As a result, The Street Store has popped up in dozens of
cities all around the world. You could start one, too.
China mulls joining Eurasian Development Bank
The
two-day summit of the Shanghai Cooperation Organization (SCO) kicked
off on Thursday in Dushanbe, capital of Tajikistan, with the possibility
of China joining the Eurasian Development Bank (EADB), anti-terrorism
and expanding SCO membership expected to be high on the agenda, said
analysts.
The 13th annual SCO summit, attended by the leaders of China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan, is very likely to see China joining the EADB this time, according to Feng Yujun, director of the Institute of Russian Studies at the China Institutes of Contemporary International Relations.
Feng told Global Times that he believes if China is to join the EADB, it will need to decide on its share and input in the bank as well as the functions it hopes to serve.
But he believes the chances are higher for an SCO-China bank union with China being a key player.
"A lot of the member states are very interested in the idea of establishing the bank, as China will play a key role in it with its economic power," said Feng.
Source and full story: Global Times, 12 September 2014
The 13th annual SCO summit, attended by the leaders of China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan, is very likely to see China joining the EADB this time, according to Feng Yujun, director of the Institute of Russian Studies at the China Institutes of Contemporary International Relations.
Feng told Global Times that he believes if China is to join the EADB, it will need to decide on its share and input in the bank as well as the functions it hopes to serve.
But he believes the chances are higher for an SCO-China bank union with China being a key player.
"A lot of the member states are very interested in the idea of establishing the bank, as China will play a key role in it with its economic power," said Feng.
Source and full story: Global Times, 12 September 2014
End Of Empire - The 'De-Dollarization' Chart That China And Russia Are Banking On
History did not end with the Cold War and, as Mark Twain put it, whilst history doesn’t repeat it often rhymes. As Alexander, Rome and Britain fell from their positions of absolute global dominance, so too has the US begun to slip. America’s global economic dominance has been declining since 1998,
well before the Global Financial Crisis. A large part of this decline
has actually had little to do with the actions of the US but rather with
the unraveling of a century’s long economic anomaly. China has begun to
return to the position in the global economy it occupied for millenia
before the industrial revolution. Just as the dollar emerged to global
reserve currency status as its economic might grew, so the chart below suggests the increasing push for de-dollarization across the 'rest of the isolated world' may be a smart bet...
As Deutsche Bank's Jim Reid explains,
In 1950 China’s share of the world’s population was 29%, its share of world economic output (on a PPP basis) was about 5% (Figure 98). By contrast the US was almost the reverse, with 8% of the world’s population the US commanded 28% of its economic output.
By 2008, China’s huge, centuries-long economic underperformance was well down the path of being overcome (Figure 97).
Based on current trends China’s economy will overtake America’s in purchasing power terms within the next few years. The US is now no longer the world’s sole economic superpower and indeed its share of world output (on a PPP basis) has slipped below the 20% level which we have seen was a useful sign historically of a single dominant economic superpower. In economic terms we already live in a bipolar world. Between them the US and China today control over a third of world output (on a PPP basis).
However as we have already highlighted, the relative size of a nation’s economy is not the only determinant of superpower status. There is a “geopolitical” multiplier that must be accounted for which can allow nations to outperform or underperform their economic power on the global geopolitical stage. We have discussed already how first the unwillingness of the US to engage with the rest of the world before WWII meant that on the world stage the US was not a superpower inspite of its huge economic advantage, and second how the ability and willingness of the USSR to sacrifice other goals in an effort to secure its superpower status allowed it to compete with the US for geopolitical power despite its much smaller economy. Looking at the world today it could be argued that the US continues to enjoy an outsized influence compared to the relative size of its economy, whilst geopolitically China underperforms its economy. To use the term we have developed through this piece, the US has a geopolitical multiplier greater then 1, whilst China’s is less than 1. Why?
On the US side, almost a century of economic dominance and half a century of superpower status has left its impression on the world. Power leaves a legacy. First the USA’s “soft power” remains largely unrivalled - US culture is ubiquitous (think McDonald’s, Hollywood and Ivy League universities), the biggest US businesses are global giants and America’s list of allies is unparalleled. Second the US President continues to carry the title of “leader of the free world” and America has remained committed to defending this world. Although more recently questions have begun to be asked (more later), the US has remained the only nation willing to lead intervention in an effort to support this “free world” order and its levels of military spending continues to dwarf that of the rest of the world. US military spending accounts for over 35% of the world total and her Allies make up another 25%.
In terms of Chinese geopolitical underperformance there are a number of plausible reasons why China continues to underperform its economy on the global stage. First and foremost is its list of priorities. China remains committed to domestic growth above all other concerns as, despite its recent progress, millions of China’s citizens continue to live in poverty. Thus so far it has been unwilling to sacrifice economic growth on the altar of global power. This is probably best reflected in the relative size of its military budget which in dollar terms is less than a third the size of Americas. Second China has not got the same level of soft power that the US wields. Chinese-style communism has not had the seductive draw that Soviet communism had and to date the rise of China has generally scared its neighbors rather then made allies of them. These factors probably help explain why in a geopolitical sense the US has by and large appeared to remain the world’s sole superpower and so, using the model of superpower dominance we have discussed, helps explain why global geopolitical tensions had remained relatively low, at least before the global financial crisis.
However there is a case to be made that this situation has changed in the past five or so years. Not only has China’s economy continued to grow far faster than America’s, perhaps more importantly it can be argued that the USA’s geopolitical multiplier has begun to fall, reducing the dominance of the US on the world stage and moving the world towards the type of balanced division of geopolitical power it has not seen since the end of the Cold War. If this is the case then it could be that the world is in the midst of a structural, not temporary, increase in geopolitical tensions.
Why do we suggest that the USA’s geopolitical multiplier, its ability to turn relative economic strength into geopolitical power, might be falling? Whilst there are many reasons why this might be the case, three stand out. First, since the GFC the US (and the West in general) has lost confidence. The apparent failure of laissez faire economics that the GFC represented combined with the USA’s weak economic recovery has left America less sure then it has been in at least a generation of its free market, democratic national model. As this uncertainty has grown, so America’s willingness to argue that the rest of the world should follow America’s model has waned. Second the Afghanistan and in particular the Iraq War have left the US far less willing to intervene across the world. One of the major lessons that the US seems to have taken away from the Iraq war is that it cannot solve all of the world’s problems and in fact will often make them worse. Third, the rise of intractable partisan politics in the US has left the American people with ever less faith in their government.
The net result of these changes in sentiment of the US people and its government has been the diminishment of its global geopolitical dominance. The events of the past 5+ years have underlined this. Looking at the four major geopolitical issues of this period we raised earlier – the outcome of the Arab Spring (most notably in Syria), the rise of the Islamic State, Russia’s actions in Ukraine and China’s regional maritime muscle flexing – the US has to a large extent been shown to be ineffective. President Obama walked away from his “red line” over the Syrian government’s use of chemical weapons. The US has ruled out significant intervention in Northern Iraq against the Islamic State.
America has been unable to restrain Pro-Russian action in Ukraine and took a long time (and the impetus of a tragic civilian airplane disaster) to persuade her allies to bring in what would generally be considered a “first response” to such a situation - economic sanctions. And so far the US has had no strategic response to China’s actions in the East and South China seas. Importantly these policy choices don’t necessarily just reflect the choice of the current Administration but rather they reflect the mood of the US people. In Pew’s 2013 poll on America’s Place in the World, a majority (52%) agreed that “the US should mind its own business internationally and let other countries get along the best they can on their own”. This percentage compares to a read of 20% in 1964, 41% in 1995 and 30% in 2002.
The geopolitical consequences of the diminishment of US global dominance
Each of these events has shown America’s unwillingness to take strong foreign policy action and certainly underlined its unwillingness to use force. America’s allies and enemies have looked on and taken note. America’s geopolitical multiplier has declined even as its relative economic strength has waned and the US has slipped backwards towards the rest of the pack of major world powers in terms of relative geopolitical power.
Throughout this piece we have looked to see what we can learn from history in trying to understand changes in the level of structural geopolitical tension in the world. We have in general argued that the broad sweep of world history suggests that the major driver of significant structural change in global levels of geopolitical tension has been the relative rise and fall of the world’s leading power. We have also suggested a number of important caveats to this view – chiefly that a dominant superpower only provides for structurally lower geopolitical tensions when it is itself internally stable. We have also sought to distinguish between a nation being an “economic” superpower (which we can broadly measure directly) and being a genuine “geopolitical” superpower (which we can’t). On this subject we have hypothesised that the level of a nations geopolitical power can roughly be estimated multiplying its relative economic power by a “geopolitical multiplier” which reflects that nations ability to amass and project force, its willingness to intervene in the affairs of the world and the extent of its “soft power”.
Given this analysis it strikes us that today we are in the midst of an extremely rare historical event – the relative decline of a world superpower. US global geopolitical dominance is on the wane – driven on the one hand by the historic rise of China from its disproportionate lows and on the other to a host of internal US issues, from a crisis of American confidence in the core of the US economic model to general war weariness. This is not to say that America’s position in the global system is on the brink of collapse. Far from it. The US will remain the greater of just two great powers for the foreseeable future as its “geopolitical multiplier”, boosted by its deeply embedded soft power and continuing commitment to the “free world” order, allows it to outperform its relative economic power. As America’s current Defence Secretary, Chuck Hagel, said earlier this year, “We (the USA) do not engage in the world because we are a great nation. Rather, we are a great nation because we engage in the world.” Nevertheless the US is losing its place as the sole dominant geopolitical superpower and history suggests that during such shifts geopolitical tensions structurally increase. If this analysis is correct then the rise in the past five years, and most notably in the past year, of global geopolitical tensions may well prove not temporary but structural to the current world system and the world may continue to experience more frequent, longer lasting and more far reaching geopolitical stresses than it has in at least two decades. If this is indeed the case then markets might have to price in a higher degree of geopolitical risk in the years ahead.
As Deutsche Bank's Jim Reid explains,
In 1950 China’s share of the world’s population was 29%, its share of world economic output (on a PPP basis) was about 5% (Figure 98). By contrast the US was almost the reverse, with 8% of the world’s population the US commanded 28% of its economic output.
By 2008, China’s huge, centuries-long economic underperformance was well down the path of being overcome (Figure 97).
Based on current trends China’s economy will overtake America’s in purchasing power terms within the next few years. The US is now no longer the world’s sole economic superpower and indeed its share of world output (on a PPP basis) has slipped below the 20% level which we have seen was a useful sign historically of a single dominant economic superpower. In economic terms we already live in a bipolar world. Between them the US and China today control over a third of world output (on a PPP basis).
However as we have already highlighted, the relative size of a nation’s economy is not the only determinant of superpower status. There is a “geopolitical” multiplier that must be accounted for which can allow nations to outperform or underperform their economic power on the global geopolitical stage. We have discussed already how first the unwillingness of the US to engage with the rest of the world before WWII meant that on the world stage the US was not a superpower inspite of its huge economic advantage, and second how the ability and willingness of the USSR to sacrifice other goals in an effort to secure its superpower status allowed it to compete with the US for geopolitical power despite its much smaller economy. Looking at the world today it could be argued that the US continues to enjoy an outsized influence compared to the relative size of its economy, whilst geopolitically China underperforms its economy. To use the term we have developed through this piece, the US has a geopolitical multiplier greater then 1, whilst China’s is less than 1. Why?
On the US side, almost a century of economic dominance and half a century of superpower status has left its impression on the world. Power leaves a legacy. First the USA’s “soft power” remains largely unrivalled - US culture is ubiquitous (think McDonald’s, Hollywood and Ivy League universities), the biggest US businesses are global giants and America’s list of allies is unparalleled. Second the US President continues to carry the title of “leader of the free world” and America has remained committed to defending this world. Although more recently questions have begun to be asked (more later), the US has remained the only nation willing to lead intervention in an effort to support this “free world” order and its levels of military spending continues to dwarf that of the rest of the world. US military spending accounts for over 35% of the world total and her Allies make up another 25%.
In terms of Chinese geopolitical underperformance there are a number of plausible reasons why China continues to underperform its economy on the global stage. First and foremost is its list of priorities. China remains committed to domestic growth above all other concerns as, despite its recent progress, millions of China’s citizens continue to live in poverty. Thus so far it has been unwilling to sacrifice economic growth on the altar of global power. This is probably best reflected in the relative size of its military budget which in dollar terms is less than a third the size of Americas. Second China has not got the same level of soft power that the US wields. Chinese-style communism has not had the seductive draw that Soviet communism had and to date the rise of China has generally scared its neighbors rather then made allies of them. These factors probably help explain why in a geopolitical sense the US has by and large appeared to remain the world’s sole superpower and so, using the model of superpower dominance we have discussed, helps explain why global geopolitical tensions had remained relatively low, at least before the global financial crisis.
However there is a case to be made that this situation has changed in the past five or so years. Not only has China’s economy continued to grow far faster than America’s, perhaps more importantly it can be argued that the USA’s geopolitical multiplier has begun to fall, reducing the dominance of the US on the world stage and moving the world towards the type of balanced division of geopolitical power it has not seen since the end of the Cold War. If this is the case then it could be that the world is in the midst of a structural, not temporary, increase in geopolitical tensions.
Why do we suggest that the USA’s geopolitical multiplier, its ability to turn relative economic strength into geopolitical power, might be falling? Whilst there are many reasons why this might be the case, three stand out. First, since the GFC the US (and the West in general) has lost confidence. The apparent failure of laissez faire economics that the GFC represented combined with the USA’s weak economic recovery has left America less sure then it has been in at least a generation of its free market, democratic national model. As this uncertainty has grown, so America’s willingness to argue that the rest of the world should follow America’s model has waned. Second the Afghanistan and in particular the Iraq War have left the US far less willing to intervene across the world. One of the major lessons that the US seems to have taken away from the Iraq war is that it cannot solve all of the world’s problems and in fact will often make them worse. Third, the rise of intractable partisan politics in the US has left the American people with ever less faith in their government.
The net result of these changes in sentiment of the US people and its government has been the diminishment of its global geopolitical dominance. The events of the past 5+ years have underlined this. Looking at the four major geopolitical issues of this period we raised earlier – the outcome of the Arab Spring (most notably in Syria), the rise of the Islamic State, Russia’s actions in Ukraine and China’s regional maritime muscle flexing – the US has to a large extent been shown to be ineffective. President Obama walked away from his “red line” over the Syrian government’s use of chemical weapons. The US has ruled out significant intervention in Northern Iraq against the Islamic State.
America has been unable to restrain Pro-Russian action in Ukraine and took a long time (and the impetus of a tragic civilian airplane disaster) to persuade her allies to bring in what would generally be considered a “first response” to such a situation - economic sanctions. And so far the US has had no strategic response to China’s actions in the East and South China seas. Importantly these policy choices don’t necessarily just reflect the choice of the current Administration but rather they reflect the mood of the US people. In Pew’s 2013 poll on America’s Place in the World, a majority (52%) agreed that “the US should mind its own business internationally and let other countries get along the best they can on their own”. This percentage compares to a read of 20% in 1964, 41% in 1995 and 30% in 2002.
The geopolitical consequences of the diminishment of US global dominance
Each of these events has shown America’s unwillingness to take strong foreign policy action and certainly underlined its unwillingness to use force. America’s allies and enemies have looked on and taken note. America’s geopolitical multiplier has declined even as its relative economic strength has waned and the US has slipped backwards towards the rest of the pack of major world powers in terms of relative geopolitical power.
Throughout this piece we have looked to see what we can learn from history in trying to understand changes in the level of structural geopolitical tension in the world. We have in general argued that the broad sweep of world history suggests that the major driver of significant structural change in global levels of geopolitical tension has been the relative rise and fall of the world’s leading power. We have also suggested a number of important caveats to this view – chiefly that a dominant superpower only provides for structurally lower geopolitical tensions when it is itself internally stable. We have also sought to distinguish between a nation being an “economic” superpower (which we can broadly measure directly) and being a genuine “geopolitical” superpower (which we can’t). On this subject we have hypothesised that the level of a nations geopolitical power can roughly be estimated multiplying its relative economic power by a “geopolitical multiplier” which reflects that nations ability to amass and project force, its willingness to intervene in the affairs of the world and the extent of its “soft power”.
Given this analysis it strikes us that today we are in the midst of an extremely rare historical event – the relative decline of a world superpower. US global geopolitical dominance is on the wane – driven on the one hand by the historic rise of China from its disproportionate lows and on the other to a host of internal US issues, from a crisis of American confidence in the core of the US economic model to general war weariness. This is not to say that America’s position in the global system is on the brink of collapse. Far from it. The US will remain the greater of just two great powers for the foreseeable future as its “geopolitical multiplier”, boosted by its deeply embedded soft power and continuing commitment to the “free world” order, allows it to outperform its relative economic power. As America’s current Defence Secretary, Chuck Hagel, said earlier this year, “We (the USA) do not engage in the world because we are a great nation. Rather, we are a great nation because we engage in the world.” Nevertheless the US is losing its place as the sole dominant geopolitical superpower and history suggests that during such shifts geopolitical tensions structurally increase. If this analysis is correct then the rise in the past five years, and most notably in the past year, of global geopolitical tensions may well prove not temporary but structural to the current world system and the world may continue to experience more frequent, longer lasting and more far reaching geopolitical stresses than it has in at least two decades. If this is indeed the case then markets might have to price in a higher degree of geopolitical risk in the years ahead.
The Fed Has A Big Surprise Waiting For You
Submitted by Raul Ilargi Meijer via The Automatic Earth blog,
Risdon Tillery Greenwich House day care, New York May 1944
The topic of potential interest rate hikes by central
banks is no longer ever far from any serious mind interested in finance.
Still, the consensus remains that it will take a while longer, it will
take place in a very gradual fashion, and it will all be telegraphed
through forward guidance to anyone who feels they have a need or a right
to know. Sounds like complacency, doesn’t it?
Now, it seems obvious that the Bank of Japan and the ECB are not about to hike rates tomorrow morning. In Europe, dozens of national politicians wouldn’t accept it, and in Japan, it would mean an early end to many things including Shinzo Abe.
But the Bank of England and the Fed are another story. Though if the Yes side wins in Scotland next week, the narrative may change a lot of Mark Carney and the City. That leaves the Fed. And it’s important to realize and remember that, certainly after Greenspan entered the scene, speaking in tongues, the Fed has become a piece of theater. The Fed is about perception. About trying to make people believe something, and make them act a certain way that they choose for them.
That’s why after the Oracle left they pushed first a bearded gnome and then a grandma forward as the public face. The kind of people nobody would perceive as a threat. Putting a guy who looks like second hand car salesman in charge of the Fed wouldn’t work.
Not when a big financial crisis looms, and then continues on for a decade and counting. That makes keeping up appearances the no. 1 priority. That’s when you want a grandma, or you’d lose your credibility real fast. You need grandma for your theater, for the next play you’re going to stage.
That market volatility today is at record lows is part of a big play, or a big scene in a play if you will. And the goal is not to make markets look good, as many people think. Making markets look good, making the economy look good, is just an intermediate step designed to lure everyone in.
You make people believe you got their back. All the big investors. Because they make tons of money, while they thought maybe the crisis could have really hurt them. Even the public at large feels you got their back. Because they don’t understand what the sleight of hand is.
The big investors understand, but you got them believing you will play that hand forever, or let them know well ahead of time when you intend to fold. The big investors think you will skim the public, but not them. They think you’re all on the same side. And the public thinks you’re healing the economy, and saving their jobs and homes and pensions.
When rate hikes are discussed, like I did two weeks ago in This Is Why The Fed Will Raise Interest Rates, most people have similar initial reactions. ‘They can’t do that, it would kill the economy, or at least the recovery’.
But the truth is, there is no recovery. It’s just a scene in a play. And the economy is completely shot, it only appears to be left standing because the Fed poured oodles of money into it. Or rather, into a part of the economy that it can control, that it can get the money out of again easily: Wall Street banks. And Wall Street equals the Fed.
Charles Hugh Smith, in What If the Easy Money Is Now on the Bear Side?, notices that there are hardly any bears left in the market, and that shorts are disappearing as a source of revenue for bulls. Interesting, but he doesn’t yet connect all the dots. CHS thinks big money managers can make ‘the play’, that they can fool the rest of the market and unleash a tsunami that will bury the bulls.
I don’t think so. I think what goes on is that the Wall Street banks, many times bigger than the biggest money managers, see their revenues plunge. As they knew they would, because free money and ultra low rates are not some infinite source of income, since other market participants adapt their tactics to those things as well.
Which is what Charles Hugh Smith points to, but doesn’t fully exploit. And it’s not as Wolf Richter presumes either:
Philip Van Doorn, who I quoted two weeks ago, got quite a bit closer in Big US Banks Prepare To Make Even More Money
The US economy is dead. The Fed has known this for a long time, but pumped it up to where it is now to draw in all the greater fools, the so-called big investors who have made money like honey from QE and ZIRP. They are the greater fools. The American real economy ceased being a consideration long ago.
We’re in for big surprises, and they won’t be pretty, they’ll be pretty nasty. There are far too many people who think of themselves as smart who don’t see the difference between a theater play and a reality show. And I don’t mean CHS or Wolf, they’re much more clever than your average investment advisor.
The Fed will raise rates because that will make the biggest banks the most money. There’s nothing else that matters. The Fed can’t revive the US economy, that’s just a foolish notion. But it can suck a lot of wealth out of it.
Risdon Tillery Greenwich House day care, New York May 1944
Now, it seems obvious that the Bank of Japan and the ECB are not about to hike rates tomorrow morning. In Europe, dozens of national politicians wouldn’t accept it, and in Japan, it would mean an early end to many things including Shinzo Abe.
But the Bank of England and the Fed are another story. Though if the Yes side wins in Scotland next week, the narrative may change a lot of Mark Carney and the City. That leaves the Fed. And it’s important to realize and remember that, certainly after Greenspan entered the scene, speaking in tongues, the Fed has become a piece of theater. The Fed is about perception. About trying to make people believe something, and make them act a certain way that they choose for them.
That’s why after the Oracle left they pushed first a bearded gnome and then a grandma forward as the public face. The kind of people nobody would perceive as a threat. Putting a guy who looks like second hand car salesman in charge of the Fed wouldn’t work.
Not when a big financial crisis looms, and then continues on for a decade and counting. That makes keeping up appearances the no. 1 priority. That’s when you want a grandma, or you’d lose your credibility real fast. You need grandma for your theater, for the next play you’re going to stage.
That market volatility today is at record lows is part of a big play, or a big scene in a play if you will. And the goal is not to make markets look good, as many people think. Making markets look good, making the economy look good, is just an intermediate step designed to lure everyone in.
You make people believe you got their back. All the big investors. Because they make tons of money, while they thought maybe the crisis could have really hurt them. Even the public at large feels you got their back. Because they don’t understand what the sleight of hand is.
The big investors understand, but you got them believing you will play that hand forever, or let them know well ahead of time when you intend to fold. The big investors think you will skim the public, but not them. They think you’re all on the same side. And the public thinks you’re healing the economy, and saving their jobs and homes and pensions.
When rate hikes are discussed, like I did two weeks ago in This Is Why The Fed Will Raise Interest Rates, most people have similar initial reactions. ‘They can’t do that, it would kill the economy, or at least the recovery’.
But the truth is, there is no recovery. It’s just a scene in a play. And the economy is completely shot, it only appears to be left standing because the Fed poured oodles of money into it. Or rather, into a part of the economy that it can control, that it can get the money out of again easily: Wall Street banks. And Wall Street equals the Fed.
Charles Hugh Smith, in What If the Easy Money Is Now on the Bear Side?, notices that there are hardly any bears left in the market, and that shorts are disappearing as a source of revenue for bulls. Interesting, but he doesn’t yet connect all the dots. CHS thinks big money managers can make ‘the play’, that they can fool the rest of the market and unleash a tsunami that will bury the bulls.
I don’t think so. I think what goes on is that the Wall Street banks, many times bigger than the biggest money managers, see their revenues plunge. As they knew they would, because free money and ultra low rates are not some infinite source of income, since other market participants adapt their tactics to those things as well.
Which is what Charles Hugh Smith points to, but doesn’t fully exploit. And it’s not as Wolf Richter presumes either:
After years of using its scorched-earth monetary policies to engineer the greatest wealth transfer of all times, the Fed seems to be fretting about getting blamed for yet another implosion of the very asset bubbles these policies have purposefully created.The Fed doesn’t fret. The Fed has known for years that the US economy is dead on arrival. They’ve spent trillions of dollars backed, in the end, by American taxpayers, knowing full well that it would have no effect other than to fool people into believing something else than what reality says loud and clear.
Philip Van Doorn, who I quoted two weeks ago, got quite a bit closer in Big US Banks Prepare To Make Even More Money
For most banks, the extended period of low interest rates has become quite a drag on earnings. Net interest margins – the spread between the average yield on loans and investments and the average cost for deposits and borrowings – are still being squeezed, since banks realized the bulk of the benefit of very low interest rates years ago …That is the essence, and that is why grandma will announce higher rates, against a backdrop of 4% GDP growth numbers and a plethora of other ‘great’ economic data and military chest thumping abroad.
The US economy is dead. The Fed has known this for a long time, but pumped it up to where it is now to draw in all the greater fools, the so-called big investors who have made money like honey from QE and ZIRP. They are the greater fools. The American real economy ceased being a consideration long ago.
We’re in for big surprises, and they won’t be pretty, they’ll be pretty nasty. There are far too many people who think of themselves as smart who don’t see the difference between a theater play and a reality show. And I don’t mean CHS or Wolf, they’re much more clever than your average investment advisor.
The Fed will raise rates because that will make the biggest banks the most money. There’s nothing else that matters. The Fed can’t revive the US economy, that’s just a foolish notion. But it can suck a lot of wealth out of it.
The Ultimate Smart Money Sits On A Near-Record Pile Of Cash, Sells Holdings Instead Of Buying, And Waits For Market Swoon.
Wolf Richter wolfstreet.com, www.amazon.com/author/wolfrichter
Mergers and Acquisitions
activity in the US jumped 60% this year over the same period last year,
according to a Goldman Sachs report. But LBOs?
After years of a relentless
run-up in stock prices, corporations are busy gobbling up overvalued
companies with their own overvalued shares of which they can print an
unlimited amount, and they’re raising debt that is nearly free after
inflation, and/or they’re using the cash on their balance sheets rather
than investing it in plant, equipment, and personnel.
The higher the price, the
better. Bidding up each other’s stocks collectively has been one of the
powerful drivers behind the soaring stock market, which has encouraged
even more acquisitions, and everyone on Wall Street knows this, so they
push M&A activity relentlessly. And then there are the big fat fees
extracted from every deal.
Companies have other reasons.
Acquisitions add to their revenues when organic revenue growth has
stalled or turned negative. They’re a way of getting rid of a pesky
competitor and clear the way for an oligopoly that has more pricing and
lobbying power. And best of all, acquisition accounting allows acquirers
to lump all sorts of expenses paid for with real dollars and real
shares, both of which come out of the stockholders’ pocket, into a
“non-cash” acquisition-related charge that analysts and investors have
been well-trained over the years to ignore. Expense problem solved.
And so corporate M&A activity has soared this year. But according to a Goldman Sachs report cited by the Wall Street Journal, the number of LBOs year has collapsed.
A typical LBO involves one or
more private equity firms, in association perhaps with some lenders, who
take a publically traded company private. In the process, they leverage
up the acquired company with a mountain of debt. For instant
gratification, PE firms then often draw cash out of the acquired company
via a special dividend.
But not this year.
PE firms are awash in cash:
$465 billion “recently,” up nearly 20% from the same period last year,
according to the report. PE firms are the ultimate smart money; instead
of buying companies and doing new LBOs, they’ve been dumping their prior
LBOs, either by selling them to the public as IPOs or by selling them
to large corporations that can print an unlimited amount of their
overvalued shares to buy an overvalued company from a smart PE firm….
You get the idea who is going to pay for this.
This year, public-to-private
LBO volume plunged to $3 billion, the lowest level since crisis year
2009, when deal volume dropped to zero.
Last year, there were still $80
billion in public-to-private LBOs, including four deals of over $5
billion each: H.J. Heinz, Dell, BMC Software, and Neiman Marcus.
Between 2004 and 2013, the average was $75 billion in these deals per
year. The record? LBO bubble year 2007, just before the house of cards
came crashing down: $275 billion in deals.
This included the most gigantic
LBO of them all, the buyout of TXU, the largest electric utility in
Texas, which was acquired in a $47 billion masterpiece of Wall-Street
engineering by KKR, TPG Capital, and Goldman Sachs. The smart money
piled $40 billion in debt on the utility. Now, Energy Future Holdings,
as it has been renamed, is trying to sort out its future in bankruptcy.
While PE firms are ferretting
out opportunities overseas, there’s no appetite for public-to-private
LBOs in the US this year – despite the near record piles of cash PE
firms are wallowing in. But there’s a reason.
Unlike corporations that can
just print more of their overvalued shares to buy already overvalued
companies at a big premium, PE firms are turned off by the current
valuations. Their business model gets very tough if they overpay by
ridiculous proportions for their acquisitions. And so the smart money is
more interested in selling its current holdings into this wondrous
stock market, rather than buying at these levels.
And when will PE firms, the
ultimate smart money, become buyers again? Goldman gives it a good
guess: they will likely wait until after the stock market has come down
from its lofty heights. And this could be by a lot, because that’s what
it would take to make the equation work. Until then, the ultimate smart
money will just keep its powder dry.
Markets are ebullient and in no
mood to listen to the Fed’s rate-hike cacophony. So it found that
investors are pricing in “a later liftoff date” for rate increases and a
slower pace of tightening than FOMC participants themselves. That
disconnect could cause financial instability. Read….. To Avert Sudden Market Collapse, the Fed Tries to Spook Utterly Unspookable Markets
2008 Bank Bailout Strikes Back
The 2008 bank bailout has been criticized
for helping out Wall Street ahead of citizens, and we explore the perks
that were extended to BofA, JPMorgan Chase, Goldman Sachs, Chase,
Citigroup and Morgan Stanley, and how those banks have actually become
more powerful as a result of their wrecking the economy. The fear
tactics of the establishment warning of an imminent great depression,
and how the American people were exploited for another payoff is
discussed with Nomi Prins in this excerpt from the Buzzsaw interview.
Andrew Hoffman – Surprise! Central Banks Are CME’s Best Customers
Another Manipulation Monday with Andrew Hoffman. Listen in as we discuss:
Global economic collapse
European recession
France in outright collapse, Italy triple-dip recession, Spanish banks as insolvent as is Portugal
Japan’s massive economic data negative revisions this weekend
China housing bubble burst accelerates
ECB rate cuts and $1 trillion QE announced, starting October
NFP jobs: 142,000 vs. expected 230,000, and 0 manufacturing jobs
35 year low labor participation rate
New meme of U.S. QE ending and Japan/Europe accelerating, thus creating a “strong dollar”
Bombshell that CME boasting “governments” and “central banks” as customers, and offering volume discounts to them for overnight PM futures “trading”
European recession
France in outright collapse, Italy triple-dip recession, Spanish banks as insolvent as is Portugal
Japan’s massive economic data negative revisions this weekend
China housing bubble burst accelerates
ECB rate cuts and $1 trillion QE announced, starting October
NFP jobs: 142,000 vs. expected 230,000, and 0 manufacturing jobs
35 year low labor participation rate
New meme of U.S. QE ending and Japan/Europe accelerating, thus creating a “strong dollar”
Bombshell that CME boasting “governments” and “central banks” as customers, and offering volume discounts to them for overnight PM futures “trading”
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