Simon Black: Atlas Shrugged Goes Real Time

From the Sovereign Man’s prolific Simon Black (bold original)

“John Galt is Prometheus who changed his mind. After centuries of being torn by vultures in payment for having brought to men the fire of the gods, he broke his chains—and he withdrew his fire—until the day when men withdraw their vultures.”

Sick of the overbearing regulation, taxation, and entitlement mentality in society—in the book Atlas Shrugged, John Galt went to one entrepreneur after another to convince them that they just didn’t need to put up with it anymore.

They didn’t need to keep propping up a system that was trying to destroy them. Where’s the point in continuing to feed a parasitic system?

So one by one, these innovators and producers simply closed up shop, deciding to just “shrug” and abandon what they were providing thanklessly to the looters.

Today many companies are doing the same. They may not be abandoning their businesses altogether, but they are moving them out of the hands of the parasites by moving their tax bases abroad.

In Ayn Rand’s book, the Economic Planning Bureau dealt with this by legislating that no businesses could leave: “[a]ll the manufacturing establishments of the country, of any size and nature, were forbidden to move from their present locations, except when granted a special permission to do so.”

In real life today, we have a string of policies being proposed to similarly discourage companies from leaving, or failing that, to try to claw as much money as possible from them first.

First, take the H.R. 5278: No Federal Contracts for Corporate Deserters Act, which bars federal contracts for American companies that have gone overseas for tax purposes.

Then take the H.R. 5549: Pay What You Owe Before You Go Act, which seeks the seizure of unrepatriated corporate revenue.

Even the language used by these bill’s supporters is eerily similar to the novel, as politicians call for corporations to pay their “fair share” and bemoan that Americans have to “pick up the tax burden inverted companies shrug off.”

At the time, Rand might have thought that she was writing about an extreme, fictional society. But it seems that the Land of the Free is eager to exceed even her worst expectations.

When she wrote about the “Economic Emergency Law”, which forbade any discrimination “for any reason whatever against any person in any matter involving his livelihood”, she was likely thinking about criteria such as race, gender, and age.

She might have even considered they would try to prevent employers from making judgments based on a person’s ability, though I’m sure she would not have even imagined what politicians have actually come up with in the US.

Try the S. 1972/ H.R. 3972: Fair Employment Opportunity Act that proposed to prohibit discrimination according to a person’s history of unemployment.

Or even worse, the S. 1837: Equal Employment for All Act that would have prohibited employers from even looking at prospective employee’s credit ratings.

The literary similarities don’t just stop with corporations either. Compare the fictional Project Soybean, designed to “recondition” people’s dietary habits to the actual H.R. 4904: Vegetables Are Really Important Eating Tools for You (VARIETY).

Tell me, which one sounds more ludicrous to you?

With each new piece of legislation being proposed in the Land of the Free, Atlas Shrugged seems to be ever more prophetic.

While even the most terrifying elements of the book are coming true, so are the reactions.

People and companies are leaving, refusing the put up with the looting of their efforts any longer.

Start of the Breakdown? European Stocks Collapse!

What a night. 

European stocks went into a broad based meltdown...

The Europe’s blue chip bellwethers the Stox 50 and Stoxx 600 dived by a stunning 3.61% and 3.16%!

The bloodied benchmarks reflected the intense selloff in the major equity benchmarks of Europe’s largest economies: German Dax –2.87%, France CAC –3.63% and UK’s FTSE –2.83%

Europe's periphery took even more punishment: Spain’s IBEX –3.59%, Portugal’s PSI -3.21%, Italy’s MIB –4.44% and Greece’s ATG –6.25%. 

Scandinavian stocks had likewise been pummeled: Denmark's Copenhagen 20 -2.27%, Norway's Oslo All shares -2.1%, Sweden's Stockholm 30 -2.9%, as well as Finland's Helsinki index -2.98% and Iceland's ICEX -1.65% 

All charts above from stockcharts.com

The bloodletting in Greece financial assets apparently spilled over to her sovereign bonds where 10 year yields have spiked.

Should the meltdown in equities intensify, the Greece bond selloff should spread to other European periphery bonds.

And even prior to last night’s collapse, Europe’s market breadth continues to deteriorate

Notes the Gavekal Team:

To say that MSCI Europe has been the hardest hit equity region over the past several weeks would be a major understatement. European stocks have been washed out more recently than at anytime since 2011. However, if 2011 is an indicator, a vast majority of stocks can continue to trade below its 200-day moving average for quite a few months so the bottom probably hasn't been seen in Europe yet.

US markets came strongly back from an early deep drubbing, nonetheless still closed red.

The periphery to the core dynamic seems to be spreading fast and intensifying.

Will a Collapse in Oil Prices Burst the Middle East Bubble?

Last late June 2014, I noted of tremors in the some of the stock markets of major Arab oil producers, the Gulf Cooperation Council (GCC). The GCC is composed of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. 

The key concern then has been on the region’s escalating wars or increase in social instability, compounded by some worries over property bubbles. Apparently the global risk ON environment has been strong enough for speculators to gloss over or ignore these concerns from which their respective stock markets have partially recovered.

But now a new dynamic compounds on the existing predicaments: Collapsing oil prices in the face of the rallying US dollar.

Pardon me but I will have to compress these charts so as not to make my blog size too big.

As example, one would note of the skyrocketing US dollar against the Kuwaiti dinar and Saudi riyal.

The strong US dollar which has been become a broad based phenomenon has usually underscored a risk OFF environment. As I noted back in mid-September:

As a final note on markets, the US dollar index has been firming of late. Since July 1, the US dollar index has been up by 5%!

The basket of the US dollar index consist of the euro (57.6%), the Japanese yen (13.6%),British pound (11.9%), the Canadian loonie (9.1%), the Swedish Krona (4.2%) and the Swiss franc (3.6%).

Their individual charts reveal that the US dollar has been rising broadly and sharply against every single currency in the basket during the past 3 months.

This may have been due to a combination of myriad complex factors: ECB’s QE, expectations for the Bank of Japan to further ease, Scotland’s coming independence referendum, or expectations for the US Federal Reserve to raise rates in 1H 2015 (this has led to a sudden surge in yields of US treasuries last week), escalating Russian-US proxy war in Ukraine and now in Syria (as US Obama has authorized airstrikes against anti-Assad rebels associated with ISIS, but who knows if US will bomb both the Syrian government and the rebels?) more signs of a China slowdown and more.

Yet a rising US dollar has usually been associated with de-risking or a risk OFF environment. Last June 2013’s taper tantrum incident should serve an example.

So the strong US dollar contributed to last night’s hammering of the US West Intermediate Crude (WTI-lower left) which dived by 3.18% and Europe’s Brent (lower right) which crashed by 4.33%. Yesterday's sharp cascade has been part of the recent downhill trend of oil prices.

The Zero Hedge notes that “WTI has just hit the most oversold levels since Lehman” and “what is gong on with Brent turned out to be far worse, and as the weekly RSI indicator shows the selloff in Brent is now the worst, well, ever!” (bold original)

Some will argue that this should help consumption which subsequently implies a boost on “growth”, but I wouldn’t bet on it. 

Current events don’t seem to manifest a problem of oversupply. To the contrary current developments in the oil markets seem to signify a problem of shrinking global liquidity and slowing economic demand whose deadly cocktail mix has been to spur the incipient phase of asset deflation (bubble bust)

Others argue that this could part of an alleged “predatory pricing” scheme designed as foreign policy tool engaged by some of major oil producers to strike at Russia, Iran or even against Shale gas producers in the US. 

This would hardly be a convincing case since doing so would mean to inflict harm on the oil producers themselves in order to promote a flimsy case of “market share” or to “punish” other governments.

Say Shale oil. There are LOTS more at stake for welfare states of OPEC-GCC nations than are from the private sector shale operators (mostly US). Shale operators may close operations or defer investments until prices rise again. There could also be new operators who could pick up the slack from existing “troubled” Shale oil and gas operators. Such aren’t choices available for oil dependent welfare governments of oil producing nations. As one would note from the above table from Wall Street Journal, at current prices only Kuwait, the UAE and Qatar remains as oil producers with marginal surpluses.

And a shortfall from oil revenues means to dip on reserves to finance public spending. And once these resources drain out from a prolonged oil price slump, the risks of a regional Arab Spring looms.

And the heightened risk of Arab Springs would further complicate the region’s social climate tinderbox. Add to this the economic impact from a weak oil prices-strong dollar, regional malinvestments would compound on the region’s fragility.

Thus, the adaption of "predatory pricing" supposedly aimed at punishing other governments would only aggravate the region’s already dire conditions that risks a widespread unraveling towards total regional chaos.

Two wrongs don’t make a right.

While I don’t expect politicians to be “smart”, their self-interests in maintaining power would hardly let them be dismissive of the welfare state which has been the source of their current political privilege.

As a side note, the region’s complex and deteriorating conditions can be seen in the following developments: Despite aerial bombing by Allied forces, Sunni Islam militants the ISIS has reportedly taken control of much of Western Iraq and has been closing in fast on Baghdad This is aside from advances by the ISIS on the Syrian Kurdish town of Kobani on the Syrian-Turkish border which has reportedly “threatened” to destabilize Turkey

Meanwhile Russia has dipped into $6 billion from its reserve to support her currency the ruble afflicted by sanctions, capital flight and collapsing oil prices. So crumbling oil prices are having a broad based effect on the oil revenue dependent welfare state even from the non-GCC nations.

And as one can see, the GCC has long depended on a weak dollar (easy money) environment. This appears to have now reversed, thus exposing their internal structural fragilities from unsustainable economic bubbles and the welfare state as well as tenuous regional and geopolitical relationships.

This brings us back to the stock markets. There has been renewed signs of stock market tremors among GCC states.

Bahrain’s All Share index appears to be in a topping process, so as with Kuwait Stock Exchange Index whose rally from the Apr-June meltdown appears to have winded down.

Meanwhile Oman’s Muscat index experienced a waterfall as Qatar Exchange Index seems least affected among the GCC, nonetheless has exhibited signs of innate weakness.

Both equity benchmarks of Saudi and UAE crashed 6.5% early this week.

Saudi Arabia’s Tadawul index was hardly affected by the April-June meltdown but the weak oil price-strong US dollar dynamic seems to have permeated to the second largest oil producer (after the US). 

Meanwhile like Kuwait, the seeming recovery of UAE’s Dubai Financial General from the collapse a quarter back seems to have faded. 

Unlike the April-June episode, GCCs stock markets appear to be in unison in signaling a downturn.

I’d say that this serves as reinforcing signs of the periphery to the core dynamics in motion.

Will the current weakness deepen? Or will this just be another cyclical dip? We’ll see.

What has China’s stock market got to do with export growth?

I have always questioned the sanctity of the government statistics. I guess the account below adds to my skepticism.

Some economists have reportedly questioned on the supposed recent strength of China’s exports.

From the Wall Street Journal Real Time Economics Blog: (bold mine)

A sharp increase in Chinese exports to Hong Kong seen in September data released Monday has some analysts wondering whether traders are engaged in another round of overinvoicing or round-tripping, a variety of practices wherein trade flows are used to get around strict capital market restrictions.

China’s exports through Hong Kong – a major trade gateway — should roughly track the nation’s total exports. In September, however, even as year-on-year exports to all regions rose a stronger-than-expected 15.3% year on year, those to Hong Kong grew by 34%. (This compared with a drop in exports to Hong Kong of 2.1%  in August.)

The sharp September increase comes amid recent appreciation of China’s currency, the renminbi.

“Given that China’s exports to Hong Kong have surged again while the RMB is appreciating, it is natural to suspect the round-tripping trade is reviving,” said ANZ economist Li-Gang Liu, who added that trade developments between Hong Kong and China need to be closely monitored.

China’s monthly exports to Hong Kong should in theory equal Hong Kong’s imports from China. In practice, they tend to differ by a few billion dollars, largely because each side counts trade differently. Between late 2012 and March 2013, however, that monthly gap rose to a peak of $27.8 billion.

“It was a blow-out,” said Oliver Barron, head of investment bank North Square Blue Oak’s Beijing office.  “The latest data clearly exhibits some symptoms of the first quarter of 2013.”

Stealth fund flows into the stock market?

If in fact another round of overinvoicing is under way, analysts said, it could be driven by recent appreciation of the RMB or yuan, which is up nearly 2% over the past three months. Overinvoicing also may be driven in part by recent gains in Chinese stocks, some added, which have appreciated some 20% since May.

New brokerage accounts rose by as much as 200,000 per week last month, the highest level since March 2012, said Mr. Barron. And China has announced a new program to link the Shanghai and Hong Kong stock exchanges, said Mizuho Securities economist Jianguang Shen, giving investors an incentive to pre-position funds.

“There’s no evidence so far that it’s definitely overinvoicing, but the pattern and the export growth rates are abnormal,” Mr. Shen said. “I’m pretty suspicious.”

Of course there will hardly be “direct” evidence in support of such surreptitious fund flows. But “evidence” will hardly surface given the reality of China’s tight capital controls despite promises to liberalize. That would be like asking for the moon!

Yet in the face of stringent regulations or "strict capital market restrictions", the universal market response has always been via the black market or shadow economy or related activities. The statistical disparity alone suggest that there has been a sizeable padding up of export figures. Since money has to flow somewhere, then whether such (in)flows had been channeled to speculate on the RMB or to stocks or even both could be a large possibility, given the growing signs of economic weakness.

This goes to show that economic numbers don’t seem as they are. 

And this also exhibits how the Chinese government has been whitewashing their beleaguered overleveraged economy by sprucing up financial assets via stealth QE and by managing IPOs

Ron Paul: Liberty, Not Government, is Key to Containing Ebola

The great libertarian Ron Paul suggests of how the Ebola outbreak can be contained.

From the Ron Paul Institute

According to Forbes magazine, at least 5,000 Americans contacted healthcare providers fearful they had contracted Ebola after the media reported that someone with Ebola had entered the United States. All 5,000 cases turned out to be false alarms. In fact, despite all the hype about Ebola generated by the media and government officials, as of this writing there has only been one preliminarily identified case of someone contracting Ebola within the United States.

Ebola is a dangerous disease, but it is very difficult to contract. Ebola spreads via direct contact with the virus. This usually occurs though contact with bodily fluids. While the Ebola virus may remain on dry surfaces for several hours, it can be destroyed by common disinfectants. So common-sense precautions should be able to prevent Ebola from spreading.

It is no coincidence that many of those countries suffering from mass Ebola outbreaks have also suffered from the plagues of dictatorship and war. The devastation wrought by years of war has made it impossible for these countries to develop modern healthcare infrastructure. For example, the 14-year civil war in Liberia left that country with almost no trained doctors. Those who could leave the war-torn country were quick to depart. Sadly, American foreign aid props up dictators and encourages militarism in these countries.

President Obama’s response to the Ebola crisis has been to send 3,000 troops to West African countries to help with treatment and containment. Obama did not bother to seek congressional authorization for this overseas military deployment. Nor did he bother to tell the American people how long the mission would last, how much it would cost, or what section of the Constitution authorizes him to send US troops on “humanitarian” missions.

The people of Liberia and other countries would be better off if the US government left them alone. Leave it to private citizens to invest in African business and trade with the African people. Private investment and trade would help these countries develop thriving free-market economies capable of sustaining a modern healthcare infrastructure.

Legitimate concerns about protecting airline passengers from those with Ebola or other infectious diseases can best be addressed by returning responsibility for passenger safety to the airlines. After all, private airlines have a greater incentive than does government to protect their passengers from contagious diseases. They can do so while providing a safe means of travel for those seeking medical treatment in the United States. This would remove the incentive to lie about exposure to the virus among those seeking to come here for treatment.

Ebola patients in the US have received permission from the Food and Drug Administration to use “unapproved” drugs. This is a positive development. But why should those suffering from potentially lethal diseases have to seek special permission from federal bureaucrats to use treatments their physicians think might help? And does anyone doubt that the FDA’s cumbersome approval process has slowed down the development of treatments for Ebola?

Firestone Tire and Rubber Company has successfully contained the spread of Ebola among 80,000 people living in Harbel, the Liberian town housing employees of Firestone's Liberian plant and their families. In March, after the wife of a Firestone employee developed Ebola symptoms, Firestone constructed its own treatment center and implemented a program of quarantine and treatment. Firestone has successfully kept the Ebola virus from spreading among its employees. As of this writing, there are only three Ebola patients at Firestone's treatment facility.

Firestone's success in containing Ebola shows that, far from justifying new state action, the Ebola crises demonstrates that individuals acting in the free market can do a better job of containing Ebola than can governments. The Ebola crisis is also another example of how US foreign aid harms the very people we are claiming to help. Limiting government at home and abroad is the best way to protect health and freedom.

No Formal Phisix-Financial Commentary this week; Start of the Breakdown?

It’s due time for me to take a weekend recess from my weekly regular market updates to spend valuable scarce time with my family. 

Anyway here is the music by 1980s new wave band, Tears for Fears’ (TFF), a favorite of mine, with the “Start of the Breakdown” from their first album "The Hurting" (youtube source here)

The basic theme of the all the music from “The Hurting” album has been on emotional distress and the primal scream therapy.

So TFF singer and songwriter Roland Orzabal may have vented his “primal scream” through the morose song when faced with their past “breakdown”

Considering that markets across the globe have essentially risen and has become heavily dependent from central bank subsidies or inflationary steroids, those artificial monetary stilts have been fundamentally unsustainable. Thus, a systemic "breakdown" from all accrued imbalances over the past years, for me, signifies an issue of a WHEN and not an IF. 

And as I have been documenting here, various international political agents have recently been hurriedly jumping on the bandwagon to warn of its symptoms, e.g. excessive risk taking, extremely low volatility, chasing the markets, substantially stretched valuations, et. al.

It is not clear yet whether the heightened global market volatility over the past weeks presages the advent of such a monumental "breakdown" or if current events merely reflects on seasonality or cyclicality.

All these will ultimately be revealed by time

Yet if my hunch is right that this may be early phases of THE "breakdown", or as Credit Bubble Bulletin's Doug Noland recently observed "it appears that the global bubble has been pierced", then this would be bad news for “bullish” stock market consensus (as well as for the bubble segments of every economy that has embraced on such steroids).

As fund manager Dr. John Hussman recently wrote, “Somebody will have to hold stocks over the completion of the present cycle, and encouraging one investor to reduce risk simply means that someone else will have to bear it instead”. 

Since every financial security transaction requires a buyer and seller, financial market meltdowns would imply steep financial losses for each buyer of securities from current record "high" extremely overpriced levels.

The prospect of such staggering losses may be accompanied by eventual emotional distresses too...which brings back the memories and relevance of TFF's music.

Infographics: The History of Metals

From Visual Capitalist (hat zero hedge)

Courtesy of: Visual Capitalist

Quote of the Day: Fed’s allocation of credit is an Inappropriate Use of Central Bank’s Asset Portfolio

A balance sheet has two sides, though, and it is the asset side that can be problematic. When the Fed buys Treasury securities, any interest-rate effects will flow evenly to all private borrowers, since all credit markets are ultimately linked to the risk-free yields on Treasurys. But when the central bank buys private assets, it can tilt the playing field toward some borrowers at the expense of others, affecting the allocation of credit.

If the Fed’s MBS holdings are of any direct consequence, they favor home-mortgage borrowers by putting downward pressure on mortgage rates. This increases the interest rates faced by other borrowers, compared with holding an equivalent amount of Treasurys. It is as if the Fed has provided off-budget funding for home-mortgage borrowers, financed by selling U.S. Treasury debt to the public.

Such interference in the allocation of credit is an inappropriate use of the central bank’s asset portfolio. It is not necessary for conducting monetary policy, and it involves distributional choices that should be made through the democratic process and carried out by fiscal authorities, not at the discretion of an independent central bank.

Some will say that central bank credit-market interventions reflect an age-old role as “lender of last resort.” But this expression historically referred to policies aimed at increasing the supply of paper notes when the demand for notes surged during episodes of financial turmoil. Today, fluctuations in the demand for central bank money can easily be accommodated through open-market purchases of Treasury securities. Expansive lending powers raise credit-allocation concerns similar to those raised by the purchase of private assets.

Moreover, Federal Reserve actions in the recent crisis bore little resemblance to the historical concept of a lender of last resort. While these actions were intended to preserve the stability of the financial system, they may have actually promoted greater fragility. Ambiguous boundaries around Fed credit-market intervention create expectations of intervention in future crises, dampening incentives for the private sector to monitor risk-taking and seek out stable funding arrangements.

This is from Federal Reserve Bank of Richmond President Jeffrey M. Lacker and his Director of Research John A Weinberg at the Wall Street Journal

The point is that the de facto easing policies embraced by central banks as the FED has been to invisibly redistribute resources in favor of certain parties which leads not only to the accumulation of imbalances but also to ethical controversies such as moral hazard, inequality et.al.

And along the same redistributive basis, Germany’s Bundesbank chief Jens Weidmann last week warned against the ECB’s proposed QE via Asset Backed Securities

From Reuters: (bold mine)

ABS are created by banks pooling mortgages and corporate, auto or credit card loans and selling them to insurers, pension funds or now the ECB.

Then the credit risks taken by private banks would be transferred to the central bank and therefore taxpayers without them getting anything in return," said Weidmann, who is also an ECB policymaker.

"But that goes against the basic principle of liability that is fundamental to a market economy: Those who derive benefit from something should bear the loss if there are negative developments," he was quoted as saying.

Bottom line: There are natural limits to the central bank’s embrace of Keynesian zero bound quasi boom policies. Those limits are becoming increasingly apparent even to central bankers.

US Fed’s Reserve’s Verbal Easing Spurs Fantastic US-Europe Stock Market Roller Coaster Ride

US stocks partied Wednesday when the Fed minutes hinted that they would go slow on rate hikes and at the same time talked down the US dollar.

But Asian markets responded tepidly to US stock market ebullience, Japan’s Nikkei even fell .75% yesterday.

What’s more surprising has been that European stocks, which has been battered during the past few days, opened strongly—evidently carried over by US sentiment—but gains of which just evaporated going into the close of the session.

Here is the intraday chart of the German DAX which closed with marginal gains.

UK’s FTSE 100 which got clobbered down by .78%.

Europe’s largest 50 companies via the Stoxx 50 likewise exhibiting the same glee to dour sentiment. Most of Europe’s major benchmarks closed markedly down

 

And what has been even more fascinating has been the twist of fate in US stocks. Whatever one day gains acquired during the verbal easing has been more than erased…as yesterday’s broad based losses exceeded the other day’s gains! 

The S&P 500 two day chart exhibits the magnificent roller coaster ride!

Bloody Thursday for US stocks in general led by the small caps. (from stockcharts.com)…

One more revealing chart has been the collapse of oil prices specifically the WTIC (-3.84%) as well as the Brent (-1.46%) yesterday.

The commodity benchmark the CRB has also been on a downtrend. 

The meltdown of oil prices have significant impact to the welfare states of major oil producers. It also serves as an indicator to the state of the global economy and global liquidity.

Has Fed (as well as her cohorts) lost their potency to stimulate risk assets?

Is this the start of the breakdown?

Abenomics: Weak Yen Takes Toll on Small Japanese Companies

I have recently posted on how the weak yen has wreaked havoc on profitability of many corporations, now we see evidence of the discriminatory effect from the weak yen mostly on small Japanese companies.

From the Wall Street Journal Real Times Economic Blog

While the total number of corporate bankruptcies hit a 24-year low for the six months to September, suggesting corporate Japan is doing well, in part helped by public works spending, a closer look at the data shows that the number of corporate bankruptcies caused by factors related to the yen’s weakness is rapidly rising.

Bankrupt firms citing the weaker yen surged to 214 during the first nine months of the year, compared with just 89 during the corresponding period last year, data released Wednesday by Tokyo Shoko Research Ltd. showed. Only the sales slump following April’s increase in the sales tax was cited by more firms as the main factor behind their bankruptcies.

The failed businesses, many of them small, were struck by the higher costs of imported materials such as fuel, minerals and food as the exchange rate shifted from less than ¥80 per dollar two years ago to as high as ¥110 in recent days. Hit hardest was the transportation industry, including trucking companies, which saw 81 companies go bankrupt. The number of insolvencies totaled 44 in manufacturing, 41 in wholesale and 19 in services, the research company said.

Understand that a weak yen policy (as well as other forms of interventions) redistributes resources politically from one group at the expense of the others. 

For instance, a weak yen policy has been partly designed to subsidize foreign exchange earners such as exporters compared to the rest. I say partly because there are other motives, viz inflate away debt or generate price inflation or subsidize government actions.

In the context of exports, now if we look at Japan’s merchandise trade as % to GDP, which is at 28.4% as of 2012 based on World Bank data, assuming that exports and imports are evenly distributed (even when they are not as Japan trade balance has been in a deficit that got worsened under Abenomics), this means that a weak yen policy supports only 14.2% (28.4/2) of the statistical GDP. As a caveat, this back of the envelop estimates assumes evenly distributed gains to exporters when they are not. [Exports have actually hardly gained under Abenomics] Also this looks merely at statistical numbers without considering the real economic transmission mechanism of a weak yen policy.

Yet because of natural limits in the Japanese economy, say how inflation changes the patterns of domestic consumer spending by putting a kibosh on discretionary spending, the effect would be to put pressure on corporate profits as input costs rise while firms have not been able to pass the costs to consumers as previously predicted:

In short, corporations appear to be very hesitant to raise prices perhaps in fear of demand slowdown. Thereby this means a squeeze in corporate profits. Abenomics has only worsened such existing conditions.

Yet the most vulnerable group to inflationism have been no less than small businesses. 

So while the “total number of corporate bankruptcies hit a 24-year low…in part helped by public works spending” the surge in “bankrupt firms citing the weaker yen to 214..compared with just 89 during the corresponding period last year” or signifying 140% jump, it has been the small businesses catering to domestic markets that has mostly been hit. 

Further note that so-called improvements in corporate bankruptcies has been due to “public works spending” which means many of the mainstream corporations have been benefiting not from organic economic demand but from political redistribution of resources.

As one would note Abenomics weak yen policy has about rechanneling of resources to favored interest groups or crony capitalism.

Yet the massive distortions from government interventions as I previously noted would only disrupt the economy: 

It’s a wonder how the Japanese economy can function normally when the government destabilizes money and consequently the pricing system, and equally undermines the economic calculation or the business climate with massive interventions such as 60% increase in sales tax from 5-8% (yes the government plans to double this by the end of the year to 10%[21]), and never ending fiscal stimulus which again will extrapolate to higher taxes.

It's a wonder how the Japanese economy can ever recover when small and medium scale businesses, whom have been the main victims of Abenomics, have been the heart and blood of the Japanese economy. As the Economist noted in 2010: (bold mine) More than 99% of all businesses in Japan are small or medium-sized enterprises(SMEs); they also employ a majority of the working population and account for a large proportion of economic output. While most of these companies are not as well known as Japan’s giants, they form the backbone of the service sector and are a crucial part of the manufacturing and export supply chain. 

Notice too why exports haven't picked up? 

Also given Japan highly fragile fiscal conditions, all these interventions implies that it’s a system that has been thriving on borrowed time and is not bound to last. 

Booming Japanese stocks, one of the major beneficiaries of political redistribution and direct interventions in particular BoJ's record buying of Japanese stocks, will eventually face economic reality.

US Stock Markets Celebrate on the Fed’s Easing of Rate Hike Concerns and on the Talking Down the US Dollar

Russian physiologist Ivan Pavlov, in his classical conditioning experiment, used the ringing of the bells to stimulate or alert (conditioned) dogs that food was present.

All it took for the US stock markets to reverse gear from fear to greed has been for officials of the US Federal Reserve to assuage the public on rate hikes and to talk down the US dollar (implied easing).

The intraday chart of the S&P 500 from stockcharts.com reveals of the vertical lift off from post Fed minutes

First the verbal easing, from the BBC: (bold mine)

US markets rose sharply after minutes from the September meeting of the Federal Reserve were released.

The transcript indicated that US central bankers were wary of raising rates too soon.

Officials were worried markets were too focused on a rate rise happening during a specific period of time.

The minutes reveal an eagerness to assure observers that a rate rise would be linked solely to positive economic data.

The Fed has kept its benchmark federal funds rate - which determines other short-term interest rates in the US economy, from car loans to mortgages - at 0% since the end of 2008, when the financial crisis hit.

Now that the central bank has announced an end to its extraordinary stimulus measures - which included buying bonds to keep long-term interest rates low - focus has shifted to when it will raise the short term rate.

Then the specter of a strong dollar, from the Telegraph: (bold added)

The US Federal Reserve has raised fears that the strengthening dollar and weak growth overseas could lead to a drop in American exports.

Officials at the central bank said that slowing growth in Europe, Japan and China could limit demand for goods produced in the US. Meanwhile, they also worried that the strengthening dollar would make foreign goods and services seem cheaper by comparison, holding inflation below the central bank’s 2pc target.

“Some participants expressed concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the dollar and have adverse effects on the US external sector,” the Fed said in the minutes of its September meeting, published on Wednesday.

The schizophrenic rally has been broad based…

…as the US dollar index slumped 

Oh, the Fed seems wishy washy over financial stability risks but renewed her concerns over stock market valuations. From the Fed minutes (bold mine)

The improvement in business conditions was reflected in reports of increased demand for loans at banks in several Districts. Demand rose for loans to both households and businesses, and a couple of participants indicated that borrowers were expanding their use of existing credit lines as well as obtaining new commitments. Bankers in one District stated that, while they had eased the terms and conditions on loans in response to competition from other lenders, they had not taken on riskier loans. Some financial developments that could undermine financial stability over time were noted, including a deterioration in leveraged lending standards, stretched stock market valuations, and compressed risk spreads. However, one participant suggested that the leveraged loan market seemed to be moving into better balance, and that market participants appeared to be taking appropriate account of the changes in interest rates that might be associated with the eventual normalization of the stance of monetary policy. Moreover, a couple of participants, while stressing the importance of remaining vigilant about potential risks to financial stability, observed that conditions in financial markets at present did not suggest the types of financial stability considerations that would impede the achievement of the Committee's macroeconomic objectives.

Slowdown in Europe, Japan and China?  Who cares, stocks surge!

Fed warns again of “stretched stock market valuations”. Who cares, stocks soar!

Like Pavlov’s dogs all it takes for the market to trigger an autopilot frenzied bidding has been for the Fed to utter E-A-S-I-N-G (here implicitly)

Everything else doesn’t matter. Stocks are bound to rise forever!

How Prostitution, Drug Dealing and Smuggling Bolsters Europe’s Economy

Recently I wrote on how governments desperately try to pump economic G-R-O-W-T-H by massaging statistics: (bold original)

In Italy, sagging economic growth has impelled the government to include the illegal drug sales, smuggling and prostitution in the gross domestic product calculation in order to buoy the statistical economy in May 2014. How does one get to compute “illegal” into GDP? Beats me. The United Kingdom also followed to include the sex and drug industry also in their GDP late May 2014.

Sovereign Man’s Simon Black explains the new accounting methods used by some governments to compute for the “illegal” activities in the markets as part of G-R-O-W-T-H: (bold mine)

For example, to figure out how prostitution contributed to the country’s economy, Spain’s national statistics agency counted the number of “known prostitutes” working in the country and consulted sex clubs to calculate how much they earned.

Known prostitutes? Do they have a Facebook group?

And how about if these “known prostitutes” move around the borderless Schengen area? Their contribution to GDP is probably counted several times then.

So, using these scientific methods Spain’s statistics agency announced that illicit activities accounted for 0.87% of GDP.

(Perhaps this is one of the reasons why a whopping 547,890 people left Spain last year, most of them to Latin America, according to the national statistics agency.)

This compares similarly to the UK where Britons, according to its own statistics agency, spent 12.3 billion pounds on drugs and prostitutes in 2013, or 0.79% of GDP.

That’s more than they spent on beer and wine, which only amounted to 11 billion pounds.

And you probably thought Britons were heavy drinkers. Turns out they enjoy hookers and blow even more.

On the more uptight and conservative spectrum of Europeans, Slovenian households spent 200 million euros last year on prostitutes and drugs, or 0.33% of Slovenia’s GDP.

Curiously enough, Slovenia’s Finance Minister just announced today that the country’s budget deficit will be 200 million euros higher than previously thought. Coincidence? I don’t think so.

On the more libertine extreme, in Germany estimates suggest that prostitution and drugs amounted to as much as $91 billion in 2013—or an incredible 2.5% of the total economy.

This is the sign of the times. Governments are so desperate to maintain the illusion of growth that they’re turning to desperate, comical measures.

Across the entire continent, Eurostat estimates that gross EU GDP is larger by 2.4% if all illegal activities (not just prostitution and drugs) are accounted for.

Funny thing, they also report that total real GDP growth in 2013 (the year they started counting illegal activities) was just 0.1%.

In other words, illegal activities are now the difference between economic growth and economic recession in Europe.

As Mark Twain quoted 19th century British Prime Minister Benjamin Disraeli "There are three kinds of lies: lies, damned lies, and statistics."

Don’t worry be happy. For the statistics worshiping consensus, stocks backed by G-R-O-W-T-H have been predestined to rise forever!!!!

US President Obama Joins Chorus, Warns on Wall Street’s excessive risk-taking

Remember what I earlier wrote?

The point is the IMF, like many other global political or mainstream institutions or establishments, CANNOT deny the existence of bubbles anymore. So their recourse has been to either downplay on the risks or put an escape clause to exonerate them when risks transforms into reality which is the IMF position.

Well, US President Obama seems to have joined the bandwagon of political agents decrying “excessive risk taking” (euphemism for bubbles)

From the Wall Street Journal: (bold mine)

President Barack Obama on Monday urged U.S. financial regulators to keep looking for new ways to rein in excessive risk-taking in the financial sector, possibly through compensation and additional capital rules for the biggest financial firms, a White House spokesman said.

In a meeting Monday morning at the White House, Mr. Obama urged regulators “to consider additional ways to prevent excessive risk-taking across the financial system, including as they continue to work on compensation rules and capital standards,” White House press secretary Josh Earnest said during a press briefing Monday.

No new initiatives in these areas were considered Monday; rather Mr. Obama and participants discussed the need to finish outstanding compensation rules required by the 2010 Dodd-Frank law and reviewed the current state of capital rules, according to people familiar with the meeting.

In the case of the POTUS, the admonition doesn’t seem to be about “escape valves” but about the opportunity to expand government control on the financial markets. This resonates with the call of his former chief of staff, Emanuel Rahm (now Chicago Mayor) who in 2008 said, "You never want a serious crisis to go to waste. Things that we had postponed for too long, that were long-term, are now immediate and must be dealt with. This crisis provides the opportunity for us to do things that you could not do before."

President Obama doesn’t say that such “excessive risk taking” have been products of financial repression policies that has largely benefited the US government in two ways: subsidies on public debt and government spending through suppressed interest rates and from the inflation of tax revenues that has cosmetically improved US fiscal standings. 

Nonetheless for the POTUS to implicitly raise the risk of bubbles means that politically influential elites, as I have previously discussed, appear to be apprehensive of the current developments for them to have these politicians express (on proxy) their sentiments.

Again this shows that bubbles have natural limits. And the natural limits are working their way to the mindsets of even the major beneficiaries the political agents. Changes occur at the margins.

Again as the great Austrian economist Ludwig von Mises warned: (bold mine)

But the boom cannot continue indefinitely. There are two alternatives. Either the banks continue the credit expansion without restriction and thus cause constantly mounting price increases and an ever-growing orgy of speculation, which, as in all other cases of unlimited inflation, ends in a “crack-up boom” and in a collapse of the money and credit system. Or the banks stop before this point is reached, voluntarily renounce further credit expansion and thus bring about the crisis. The depression follows in both instances.

If they mean what they say these barrage of warnings will translate to policies.

I don’t know if current global stock market developments signify a head fake or heralds the advent of the real thing…

US stocks have converged to the downside…

And so as with global stocks: MSCI World $MSWORLD, Asia ex-Japan AAXJ, Europe Stoxx600 and iShares Emerging Markets (EEM)

Is this the start of the breakdown? We’ll see.