Doug Casey on US government debt

Some juicy excerpts from the legendary investor Doug Casey at his International Man website: (bold mine)

The only way a society (or an individual) can grow in wealth is by producing more than it consumes; the difference is called “saving.” It creates capital, making possible future investments or future consumption. Conversely, “borrowing” involves consuming more than is produced; it’s the process of living out of capital or mortgaging future production. Saving increases one’s future standard of living; debt reduces it.

If you were to borrow a million dollars today, you could artificially enhance your standard of living for the next decade. But, when you have to repay that money, you will sustain a very real decline in your standard of living. Even worse, since the interest clock continues ticking, the decline will be greater than the earlier gain. If you don’t repay your debt, your creditor (and possibly his creditors, and theirs in turn) will suffer a similar drop. Until that moment comes, debt can look like the key to prosperity, even though it’s more commonly the forerunner of disaster.

Of course, debt is not in itself necessarily a bad thing. Not all debt is for consumption; it can be used to finance capital goods, intended to produce further wealth. But most US debt today finances consumption—home mortgages, car loans, student loans, and credit card debt among other things.

Government Debt

It took the US government from 1791 to 1916 (125 years) to accumulate $1 billion in debt. World War I took it to $24 billion in 1920; World War II raised it to $270 billion in 1946. Another 24 years were needed to add another $100 billion, for a total of $370 billion in 1970. The debt almost tripled in the following decade, with debt crossing the trillion-dollar mark in October 1981. Only four and half years later the debt had doubled to $2 trillion in April 1986; four years more added another trillion by 1990; and then in only 34 months it reached $4.2 trillion in February 1993. The exponential growth continued unabated. US government debt stood at $18 trillion in early 2015. Off-balance-sheet borrowing and the buildup of massive contingent liabilities aren’t included. That may add another $50 trillion or so.

In 1964—the year Lyndon Johnson was elected—US federal debt stood at $316 billion, and interest on it was $10.7 billion, which was equal to 14.8% of personal and corporate tax revenues. When Reagan left office in 1989, the debt stood at $3.2 trillion, and interest was $214 billion, taking 43% of tax revenues. When Bush left office in 1993, the debt stood at $4.2 trillion and interest at $293 billion, consuming 52% of personal and corporate income taxes.

As of fiscal-year 2013, there was $16.8 trillion in federal debt and $416 billion in interest payments, which consumed about 15% of tax revenues. When interest rates rise again, even to their historical average, the US government will find most of its tax revenue is going just to pay interest. There will be little left over for the military and domestic transfer payments.

When the government borrows just to pay interest, a tipping point will be reached. It will have no flexibility at all, and that will be the end of the game.

In principle, an unsustainable amount of government debt should be a matter of concern only to the government (which is not at all the same thing as society at large) and to those who foolishly lent them money. But the government is in a position to extract tax revenues from its subjects, or to inflate the currency to keep the ball rolling. Its debt indirectly, therefore, becomes everyone’s burden.

The consequences of all this are grim, but the timing is hard to predict. Perhaps the government can somehow borrow amounts that no one previously thought possible. But its creditors will look for repayment. Either the creditors are going to walk away unhappy (in the case of default), or the holders of all dollars are going to be stuck with worthless paper (in the case of hyperinflation), or the taxpayers’ pockets will be looted (the longer things muddle along), or most likely a combination of all three will happen. This will not be a happy story for all but a few of us.

Ron Paul’s Prediction for 2015

Former US Congressman Ron Paul’s crystal ball for 2015 as published at the Ron Paul Institute. 

Mr. Paul’s forecast has been extracted from a lengthy treatise  which also covers the numerous topics including welfare-warfare state, inequality, war on drugs, cronyism  and US empire and its blowback 

(bold mine)

What to expect in 2015?

Foreign Affairs

More American troops will be sent overseas to places like Iraq, Afghanistan, Syria, and Ukraine. There will be no military victories to brag about. More American military personnel will be killed in 2015 than in 2014. Military contractors will be used in growing numbers and their casualties will not be counted as military casualties.

The Ukraine civil war will not end, and the United States will be further bogged down in this conflict. Relations with Russia will continue to deteriorate. The neocons in Congress will gain even more influence over our foreign policy. Punishing sanctions will continue to be made more severe and push Russia further into China’s sphere of influence. Gold will gain credibility as we isolate the Russians from the financial markets.

Sanctions on Russia will alienate Europe against the United States. The British oil industry will suffer from the “conspiracy” of the US and Saudi Arabia to drive oil prices down to punish Russia.

The military-industrial complex will continue to thrive and make even more money with the greater influence of the neocons in the new Congress. Supplemental budgets for the military should be expected, along with covert assistance and additional foreign aid to finance the management of our Empire.

Our enemies’ strength will grow and prompt even more abuse of American citizens’ privacy and free expression. We should not be surprised if there is a reigniting of the conflict in the Balkans. The first of the color revolutions in 2000 in Serbia can hardly be claimed a permanent victory. Generally, bombs from outsiders don’t solve internal problems. Those problems must eventually be solved from within a country rather than from outside interference.

The US and NATO announced that the 13 year war in Afghanistan has ended. There has been neither the pretense of "Mission Accomplished" nor an admission of outright failure, along with an exodus. In reality the war has not ended and instead will continue for a long time. No victory for US policy is possible. The conflict will actually spread and increase in intensity since our goals are undefinable and therefore the war is un-winnable.

Sanity will not return to US leaders until our financial system collapses — an event for which they are feverishly working

Domestic issues

An honest assessment of the economy will not reveal any significant improvement in 2015. Inflation will continue to plague us, possibly even with the government-rigged CPI figures showing an increase. But the true inflation of the Fed’s credit creation, as well as the subsequent mal- investment and the various bubbles bursting will accelerate. Debt in all categories will continue to increase at unsustainable rates. The Fed will not permit interest rates to rise — at least on purpose. Eventually the market will demand that rates do rise, however.

Tax revenues will continue to rise, aiding the policy of the government spending the people’s money rather than those who earned it. Regulations, even with (or maybe especially with) a Republican Congress will continue to increase and make the Federal Register more incomprehensible. Friction between the middle class and the one percent, many of whom are living off government privileges, will escalate further and be reflected in confrontations especially in the large cities. Financial currency controls will continue to expand especially with cross-border transactions.

Blowback and unintended consequences from our sanctions and foreign policy in general will continue to threaten our domestic security and our economy, as well as our liberties.

Relations with Cuba will be improved with the president’s effort to resume diplomatic relations, but the radicals and isolationists who oppose free trade will place roadblocks in the way and slow the process.

A major geopolitical or economic event, greater than the crisis of 2008, is fast approaching. The precipitating event will be a surprise to the majority of politicians and economists. There are many “next shoe to drop” possibilities, and one could happen any time or any place.

Wall Street will be protected, and the trillions of dollars of big banks derivatives will be absorbed by the Fed, the FDIC, and ultimately by the American taxpayers in the next financial crisis. There’s no doubt the poor will get poorer and the rich richer until the spirit of revolution in the people calls a halt to the systematic destruction of freedom in America.

Conclusion: Toward a Peaceful Revolution

Authoritarianism has overtaken our economic system as the welfare mentality takes over at every level of government. Once the initiation of force by government is accepted by the people, even minimally, it escalates and involves every aspect of society. The only question that remains is just who gets to wield the power to distribute the largess to their friends and chosen beneficiaries. It’s a recipe for steady growth of the government at the expense of liberties, even if official documents and laws written to limit government power are in place. Planting even small seeds of monopoly power in the hands of a few people in government, whether democratically elected or not, will always metastasize like a cancer. This was Jefferson’s concern when he advised that “[t]he tree of liberty must be refreshed from time to time.” He believed the people must warn the rulers that taking up arms against the government is legitimate if the government fails to protect the people’s liberty.

This should be a consideration. But if the spirit of liberty is not alive and well in the hearts and minds of the people, violence alone against the government will not be a solution. History has shown that, more often than not, people who rebel against abusive governments, whether run by kings or modern day dictators, do not gain much — overthrowing one dictator and replacing him with another just as bad.

A clear understanding of the nature and source of liberty is required for revolutions to be beneficial. Restraining the few who thrive on the use of force to rule over us is the challenge. Fortunately they are outnumbered by those who would choose liberty yet lack the will to challenge the humanitarian monsters who gain support from naive and apathetic citizens. All positive revolutions must be philosophic in nature to make a difference. Violence alone achieves nothing.

Before we can actually restore our liberties, we most likely will have to become a lot less free and much poorer. This is sad since correct and workable answers are available to us if only the people understood them and demanded liberty and honesty, rather than being dependent on excessive government power and believing the false promises of politicians.

Even with the problems we face today and the bleak outlook for the coming year there’s much to encourage us. During this next year there will be the continuation of many more people recognizing the failure of government to create peace and prosperity. More widespread understanding of this truth is required in order to bring about a successful revolution.

The freedom movement, especially with many young people involved, will grow in numbers and influence.

Current monetary policy and the Federal Reserve will continue to lose credibility, especially with the next bailout. Although “too big to fail” will stay in place, it will further alienate Main Street America causing it to rebel against the system.

The real problem of course is that too many “stupid people” are IN our government and have high visibility on the major TV networks. There will be plenty of people, not officially associated with government, who will rebel against various governments around the world. The sentiments supporting secession, jury nullification, nullification of federal laws by state legislatures, and a drive for more independence from larger governments will continue.

We should not be discouraged. Enlightenment is not nearly as difficult to achieve as it was before the breakthrough with Internet communications occurred.  Besides we must remember that “an idea whose time has come” cannot be stopped by armies, demagogues, politicians, or even Fox News or MSNBC. The time has come for the ideas of liberty to prevail. I smell progress. Let’s make 2015 a fun year for LIBERTY.

Read the entire article here.

ECB and Fed Easing Promises Prompts for a Global Stock Market Melt-UP

All it takes to reverse the mood has been promises of more monetary steroids by central banks to steroid addicted financial markets…

First the European stock market melt-UP, from Bloomberg:

European stocks climbed the most in three weeks, erasing their losses for 2015, amid optimism monetary policies by central banks will support the economy.

The Stoxx Europe 600 Index rallied 2.8 percent to 342.35 at the close of trading, extending gains as ECB President Mario Draghi said the central bank’s measures may include buying sovereign bonds. A report today showed German factory orders in November fell more than projected, adding to yesterday’s weak inflation data in boosting speculation the ECB will begin quantitative easing at its next meeting on Jan. 22.

See bad economic data extrapolates to good news—a justification for more bailouts.

Image from stockcharts.com

Next the US version, from another Bloomberg article: (bold mine)

U.S. stocks climbed, with the Standard & Poor’s 500 Index erasing its 2015 declines after the Federal Reserve signaled caution on interest rates even as growth shows signs of accelerating. The euro sank on speculation policy makers in the region will need to bolster stimulus…

Most Fed officials agreed their new policy guidance means they are unlikely to raise rates before late April, according to the minutes released yesterday. A number also expressed concern inflation could remain below target. Some policy makers are concerned over the risks posed by overseas economies. Policy actions by foreign central banks may help, the minutes said.

Those sentiments were echoed in comments by Fed Bank of Chicago President Charles Evans.

Rate ‘Catastrophe’

“I don’t think we should be in a hurry to increase interest rates,” Evans said during a discussion yesterday with Lars Peter Hansen, a Nobel prize-winning economist at the University of Chicago. Later in the presentation, Evans said such a move to tighten too soon would be a “catastrophe.”

Each time US stock markets suffer a tantrum, the FED bails them out. The result has been dramatic bouts of short squeezes. This would mark the “2nd biggest 2-day short-squeeze in 14 months... 2nd only to the one that occurred on the December FOMC meeting” according to the Zero Hedge.

Claudio Borio, Head of the Monetary and Economic Department of the Bank for International Settlement warned on this during their Quarterly review last December:

Once again, on the heels of the turbulence, major central banks made soothing statements, suggesting that they might delay normalisation in light of evolving macroeconomic conditions. Recent events, if anything, have highlighted once more the degree to which markets are relying on central banks: the markets' buoyancy hinges on central banks' every word and deed

The only thing  “easing” means has been to tolerate conditions for more debt acquisition to bid up financial assets.

Stock markets are about G-R-O-W-T-H or about liquidity credit and confidence? 

For the Phisix: Will team OPLAN 7,400, with their fantastic manipulation of the index, see their wish fulfilled for a new historic high today?

Voluntary Exchange vs. Government Mandates: Why State ownership is not real ownership

At the Mises Institute, Austrian economist Patrick Barron eloquently explains the difference between individual (voluntary) transactions and government interventions or mandates: (italics original; bold mine)

The basic unit of all economic activity is the uncoerced, free exchange of one economic good for another. Moreover, the decision to engage in exchange is based upon the ordinally ranked subjective preferences of each party to the exchange. To achieve maximum satisfaction from the exchange, each party must have full ownership and control of the good that he wishes to exchange and may dispose of his property without interference from a third party, such as government.

The exchange will take place when each party values the good to be received more than the good that he gives up. The expected — but by no means guaranteed — result is a total higher satisfaction for both parties. Any subsequent satisfaction or dissatisfaction with the exchange must accrue completely to the parties involved. The expected higher satisfaction that one or each expects may not be dependent upon harming a third party in the process. 

Third Parties Cannot Create Value by Forcing Exchange 

Several observations can be deduced from the above explanation. It is not possible for a third party to direct this exchange in order to create a more satisfactory outcome. No third party has ownership of the goods to be exchanged; therefore, no third party can hold a legitimate subjective preference upon which to base an evaluation as to the higher satisfaction to be gained. Furthermore, the higher satisfaction of any exchange cannot be quantified in any cardinal way, for each party's subjective preference is ordinal only. 

This rules out all utilitarian measurements of satisfaction upon which interventions may be based. Each exchange is an economic world unto itself. Compiling statistics of the number and dollar amounts of many exchanges is meaningless for other than historical purposes, both because the dollars involved are not representative of the preferences and satisfactions of others not involved in the exchange, and because the volume and dollar amounts of future exchanges are independent of past exchanges. 

One Example: The Case of Ethanol 

Let us examine a recent, typical exchange that violates our definition of a true exchange yet is justified by government interventionists today: subsidized, protected, and mandated use of ethanol.

The use of ethanol is coerced; i.e., the government requires its mixture into gasoline. Government does not own the ethanol, so it cannot possibly hold a valid subjective preference. The parties forced to buy ethanol actually receive some dissatisfaction. Had they desired to purchase ethanol, no mandate would have been required.

Because those engaging in the forced exchange did not desire the ethanol in the first place, including the dollar value of ethanol sales in statistics purporting to measure the societal value of goods exchanged in our economy is meaningless. Yet the government includes all mandated exchanges as a source of “value” in its own calculations.

This is just one egregious example of many such measurements that are included in our GDP statistics purporting to convince us that we have "never had it so good." 

Another Example: The Soviet Economy 

Our flawed view that governments can improve satisfaction caused us to misjudge the military threat of the Soviet Union for decades. Our CIA placed western dollar values on Soviet production data to arrive at the conclusion that its economy was growing faster than that of the US and would surpass US GDP at some point in the not too distant future. Except for very small exceptions, all economic production resources in the Soviet Union were owned by the state. This does not necessarily mean that it was possible for the state to hold valid subjective preferences, for those who occupied important offices in the state held them at the sufferance of what can only be described as gang lords, who themselves held office very tentatively. 

State ownership is not real ownership. Those in positions of power with responsibility over resources hold their offices for a given period of time and have little or no ability to pass their office on to their heirs. Thus, the resources eventually succumb to the law of the tragedy of the commons and are plundered to extinction. Nevertheless the squandering of the Soviet Union's commonly held resources was tallied by our CIA as meeting legitimate demand.

Professor Yuri Maltsev saw first-hand the total destruction of the Soviet economy. In Requiem for Marx he gives a heartbreaking portrayal of the suffering of the Russian populace through state directed, irrational central planning that did not come close to meeting the people's legitimate needs, while our CIA continued to crank out bogus statistics of the supposed strength of the Soviet economy upon which the Reagan administration based its unprecedented peacetime military expansion. 

Peaceful Exchange Allowed, Violent Exchange Redressed

With the proviso that no exchange may harm another, as explained so well in Dr. Thomas Patrick Burke's book No Harm: Ethical Principles for a Free Market, we are led to the conclusion that no outside agency can create greater economic satisfaction than can a free and uncoerced exchange. The statistics that support such interventions are meaningless, because they cannot reflect the satisfaction obtained from true ordinally held subjective preferences. Once this understanding is acknowledged and embraced, the consequences for the improvement of our total satisfaction are tremendous. Our economy can be unshackled from government directed economic exchanges and regulations. 

Even the individual's preferences are fickle or may change across time. So aggregating numbers can provide a misleading picture of actual conditions.

 

This represents a teleological reason to doubt those government ‘aggregate’ numbers.

Thailand’s Parallel Universe: Record Stock Market Volume in the face of a Stagnating Economy

The consensus holds that stock markets have been about G-R-O-W-T-H.

Let us see how this applies to Thailand’s case.

From Nikkei Asia: (bold mine)

Despite political unrest and other woes, the Stock Exchange of Thailand (SET) in 2014 recorded the highest average daily trading value among ASEAN bourses for a third consecutive year.

Trading rallied on the SET and its benchmark index shot up after the military staged a coup d'etat on May 22, bolstering hopes that the economy would revive. However, some analysts believe the market may have overheated…

In 2014, average daily trading value was 45.47 billion baht ($1.38 billion), down 9% from the previous year. Although second place Singapore closed in at $1.3 billion, the SET managed to retain its top slot in ASEAN. The benchmark index gained 15% over the year.

The country had been in a political deadlock since late 2013 when anti-government protesters took to the streets in Bangkok. The economy shrank in the first quarter of 2014 sending the SET index to an 18-month low.

Thailand’s SET has indeed ballooned by 15% in 2014. This would have been much higher except for the December shakeout highlighted by an intraday 9% crash in the middle of that month as shown in the chart from stockcharts.com

Despite recent signs of recovery, the SET appears to remain under pressure.

The article suggest of a cognitive dissonance, a rally based on hope (of an economic recovery) and a denial (Thailand’s statistical economy hardly recovered through the 3Q).

The SET has risen 15% in  the face of stagnating economic performance which could have even been negative in real terms. 

Since government makes the statistics, so they can show whatever they want.

The important question is how has the stock market rally been funded?

The most likely answer has been by credit.

Loans to the private sector soared to a record before the third quarter slowdown. Consumer loans has also bulged to a record last September 2014. 

Ironically record consumer loans hasn’t translated to retail spending which on a year on year basis has remained negative in 2014 through October (albeit signs of improvements from the previous rates of deep declines).

Those issued loans haven’t been circulating to bid up consumer prices either, statistical inflation rate slumped to .6% last December! The oil price collapse may have compounded on this trend.

Yet on a month to month basis, December marks the largest contraction of consumer spending.  So even if we  go by the September-October data where consumer spending was last  reported, the same story can be derived: Thai consumers withheld spending. 

But those record loans has ballooned Thai’s banking system balance sheet and money supply M3. The latter possibly from the 364 billion baht stimulus announced last October.

Yet this coincides with the reports of swelling of non-performing loans.

So where has all these money issued been funneled to? 

The most likely answer is on the speculative markets.

Even as the economy stagnates, Thailand’s property markets has sizzled. As of the 3Q 2014 housing y-o-y gains has increased to 3.29% according to Global Property Guide. In nominal terms based 2009 baht, housing prices have been spiraling to the upside (right)!

It looks as if the average citizenry has been borrowing money to speculate on stocks and real estate based on a rationalized “hope” rather than engage in productive investments.

And the increasing use of leverage for speculation has hardly even spilled over to retail consumption.

Such developments seems like deepening signs of a massive accretion of malinvestments where more and more resources have been channeled into unproductive activities. Incipient signs of rising NPLs have been symptoms of these.

And the surge in the US dollar-Thai baht has only been exposing on the vulnerabilities of the system which recently has been vented through strains in the speculative markets.

As one can see from Thai example, it has been liquidity and credit and the subsequent confidence that drives pricing of financial markets rather than real economy. 

Take away credit and liquidity, so goes fickle confidence.  

And it would seem that the identical twins in the form of chart pattern between the Philippine Phisix and the Thai SET has diverged: temporary or new trend?

Phisix: Another Panic Buying Day amidst Global Stock Market Meltdown January 6th Edition

Well, this would mark the third time where, in the face of a global stock market meltdown, team OPLAN 7,400 or the index managers have pumped the index to close the trading day unchanged. 

The first was in October 16 and the second in December 15th. The operations come with the same features, pumping of select issues to buoy the index as global markets fizzled.

Across East Asia (table from Bloomberg), except for bourses of China, Vietnam and the Philippines, the region had mostly been bloodied from a contagion by the sharp selloff in Europe and in Wall Street. 

The Phisix opened today with modest losses which accrued early in the session. But apparently corrections are considered impermissible for the establishment who sees domestic stocks as a one way street. So the cabal of index manipulators went into action. They pumped up or engaged in manic bidding up of prices of exceedingly overpriced key index issues in order to ensure that confidence in the Philippine stock exchange will be maintained. 

The pumping actions lifted the index to erase about more than half of the early day’s losses going through the lunch recess. (charts from technistock.net and colfinancial) 

The ‘afternoon delight’ scheme went into operations but apparently wasn’t successful enough to lift the index significantly into positive territory as momentum faded during the near close as in the previous days. 

Nonetheless index managers secured the day with a “marking the close” for an unchanged Phisix.

Today’s pump had been centered on mainly three sectors, finance (left), commercial industrial  (middle) and holding (right). The most apparent use of the marking the close can be seen in the holding sector.

Combined these four issues from the aforementioned sectors constitute 18.63% of the Phisix market cap as of today’s closing. As I have been pointing out here, all it takes has been to move 3-4 issues with about 20% of market cap to manage the index.

Peso volume was moderate at Php 9.95 billion which with special block sales totaled Php 10.431 billion. Decliners led advancers 98 to 84 as foreign selling hit Php 1.144 billion (PSE Quote) partly revealing of the profit taking mode divergent from the index outcome.

It’s interesting to see the need for an artificial prop in order to achieve its bullmarket stature. Yet this has been more of a sign of desperation. 

Nevertheless, the obverse side of every mania is a crash.

Growing Number of US Dead Malls a Blueprint for the Philippines

The New York Times presents America’s growing number of “Dead Malls”.

Sample pictures from their slideshow:

From the New York Times: (bold mine)

Inside the gleaming mall here on the Sunday before Christmas, just one thing was missing: shoppers.

The upbeat music of “Jingle Bell Rock” bounced off the tiles, and the smell of teriyaki chicken drifted from the food court, but only a handful of stores were open at the sprawling enclosed shopping center. A few visitors walked down the long hallways and peered through locked metal gates into vacant spaces once home to retailers like H&M, Wet Seal and Kay Jewelers.

“It’s depressing,” Jill Kalata, 46, said as she tried on a few of the last sneakers for sale at the Athlete’s Foot, scheduled to close in a few weeks. “This place used to be packed. And Christmas, the lines were out the door. Now I’m surprised anything is still open.”

The Owings Mills Mall is poised to join a growing number of what real estate professionals, architects, urban planners and Internet enthusiasts term “dead malls.” Since 2010, more than two dozen enclosed shopping malls have been closed, and an additional 60 are on the brink, according to Green Street Advisors, which tracks the mall industry.

Premature obituaries for the shopping mall have been appearing since the late 1990s, but the reality today is more nuanced, reflecting broader trends remaking the American economy. With income inequality continuing to widen, high-end malls are thriving, even as stolid retail chains like Sears, Kmart and J. C. Penney falter, taking the middle- and working-class malls they anchored with them.

“It is very much a haves and have-nots situation,” said D. J. Busch, a senior analyst at Green Street. Affluent Americans “will keep going to Short Hills Mall in New Jersey or other properties aimed at the top 5 or 10 percent of consumers. But there’s been very little income growth in the belly of the economy.”

Excess capacity as main culprit…

One factor many shoppers blame for the decline of malls — online shopping — is having only a small effect, experts say. Less than 10 percent of retail sales take place online, and those sales tend to hit big-box stores harder, rather than the fashion chains and other specialty retailers in enclosed malls.

Instead, the fundamental problem for malls is a glut of stores in many parts of the country, the result of a long boom in building retail space of all kinds.

“We are extremely over-retailed,” said Christopher Zahas, a real estate economist and urban planner in Portland, Ore. “Filling a million square feet is a tall order.”

Like beached whales, dead malls draw fascination as well as dismay. There is a popular website devoted to the phenomenon — deadmalls.com — and it has also become something of a cultural meme, with one particularly spooky scene in the movie “Gone Girl” set in a dead mall.

The numbers…

About 80 percent of the country’s 1,200 malls are considered healthy, reporting vacancy rates of 10 percent or less. But that compares with 94 percent in 2006, according to CoStar Group, a leading provider of data for the real estate industry. 

Nearly 15 percent are 10 to 40 percent vacant, up from 5 percent in 2006. And 3.4 percent — representing more than 30 million square feet — are more than 40 percent empty, a threshold that signals the beginning of what Mr. Busch of Green Street calls “the death spiral.”

Industry executives freely admit that the mall business has undergone a profound bifurcation since the recession.

See the slideshow and the complete article here.

The Philippine counterpart has been been in a frenetic race to build all sorts of malls (major malls, strip malls, integrated resorts) to become possibly the shopping mecca of the world.

For a country that has a per capita GDP of $6,597 (IMF, 2013), the industry has been erecting capacity more than the US whose per capita is $53,001 as I wrote back of the Philippine shopping mall bubble in 2013.

It is as if Philippine consumers have limitless pockets to spend, for the mainstream to lavishly speculate and channel enormous amount of resources on them.

Yet the feverish race to build capacity comes in the face of declining statistical household consumption growth (based on 3Q 2014 NSCB data).

The decline in household spending comes even before the surge in statistical inflation rates in the first half of 2014. 

Interestingly, inflation rates have been down 2.7% in December with month on month changes at –.2% based on tradingeconomics data; NEDA data

Consumer prices even declined 0.2 percent in December from 0.1 percent drop in November notes the Tradingeconomics Blog. CPI Deflation! Spending by domestic consumers have been contracting!!! Why???

Yet the recent mall spending may have become reliant on the few that has access to the banking system where consumer loan growth rate continues to balloon (based on BSP November data).

Meanwhile, the growth contribution of the industry to the statistical economy has flat-lined, with a likely seasonal spike in wholesale trade in 2Q that petered out in the 3Q 2014. (data from NSCB) 

Curiously the frantic supply side build up has been financed by surging growth of bank loans.

And interestingly too, soaring systemic banking loan growth rates comes in the face of collapsing money supply growth (data from BSP)! This has been consistent with the output of the December statistical consumer inflation data.

Where has all the money from credit growth been funneled to? Debt IN-debt OUT? What happened to the Philippine consumption boom story?!

So slowing consumption by Philippine households in the face of sustained bank financed shopping mall capacity buildup translates to excess capacity.

When the economic slowdown becomes pronounced or when the recession arrives (it will), the US version of “dead malls” will also emerge in the Philippines. 

People hardly learn from either history or from developments in other nations.

As Oil Prices Collapse Anew, Tremors Hit Global Stock Markets

Financial market crashes have become real time.

Well, last night oil prices plummeted again. The European Brent crashed 5.87% to 53.11 per bbl while the US counterpart the WTIC dived 5.42% to close BELOW $50 or $49.95 a bbl.

The chart above from chartrus.com reveals that the present levels of US WTIC have reached 2009 post Lehman crisis levels.

Then, oil prices responded to deteriorating economic and financial conditions. Today, oil prices seem to lead the way.

Collapsing oil prices hit key stock markets of major oil producers, such as the Gulf Cooperation Council, quite hard.

The recent sharp bounce that partly negated losses from the harrowing crash that began last September seem to have been truncated as Dubai Financial, Saudi’s Tadawul, and Qatar’s DSM suffered 3.35%, 2.99% and 1.91% respectively (charts from Asmainfo.com) last night.

In short, bear market forces seem as reinforcing its presence in these stock markets.

Yesterday’s oil price meltdown affected least Oman’s Muscat and Bahrain Bourse. Nonetheless, again bear markets have become a dominant feature for GCC bourses.

A prolonged below cost of production oil prices will translate to heavy economic losses for Arab oil producing states. Such will also entail political repercussions as welfare programs of these nations depend on elevated oil prices as discussed here.  This will also have geopolitical ramifications.

Incidentally, as I previously pointed these nations play host to a majority of Philippine OFWs. 

More than half or about 56% of OFWs according to the Philippine Overseas Employment Administration (POEA) have been deployed to this region. Will OFWs (and their employers) be immune from an economic or financial crisis? This isn’t 2008 where the epicenter of the crisis was in the US, hence remittances had been spared from retrenchment. For this crisis, there will be multiple hotbeds.

So a financial-economic collapse (possibly compounded by political mayhem) in GCC nations may impede any remittance growth that could compound on the travails of the Philippine bubble economy.

It’s not just in emerging markets, though, last night Europe’s stock markets likewise convulsed.

Part of the concerns had not only been about oil but about a GREXIT or Greek default from tumultuous Greek politics based on the failure to muster majority support for a presidential candidate.

Incredibly German’s DAX was slammed 3% (table above from Bloomberg).

Crashing Greek stocks lost another 5.63% yesterday.

Apparently broad based selling also buffetted near record US stock markets.

The XLE Energy Sector endured another tailspin down by 4.19%. Yesterday’s clobbering only fortified the bear market forces affecting the US energy sector which has diverged from her peers.

I propounded that the slumping energy sector will eventually impact the rest of the markets. Divergence will become convergence; periphery to the core.

Remember, the reemergence of heightened financial volatility comes in the face of October’s stock market bailout via stimulus implemented by ECB, BoJ-GPIF, and the PBOC.

This implies that the soothing or opiate effects, which had a 3 month window, has been losing traction. 

Will Ms. Yellen come to the rescue???

The Canary in the Coal Mine for the Casino Bubble: Macau’s Casino Woes Deepens

2014 has not been a good year for Macau’s casinos.

From Bloomberg:

Macau’s casinos recorded their worst year, ending a decade of expansion that turned the former Portuguese enclave into the world’s biggest gambling hub. More tough times are ahead.

Casino revenue in the city fell 2.6 percent to 351.5 billion patacas ($44 billion) in 2014, after a record 30.4 percent monthly drop in December, according to figures from Macau’s Gaming Inspection and Coordination Bureau today.

That sharp 40.3% February 2014 monthly gross revenue growth served as the peak, from which rapidly deteriorated through the year. Chart from Macau’s Gaming Inspection and Coordination Bureau

Media blames this on anti-corruption crackdown. Again from the same article.

Chinese President Xi Jinping’s bid to catch “tigers and flies” in an anti-corruption drive and weaker economic growth means Macau may face shrinking revenue until at least mid-2015, when new resorts open. The crackdown has deterred high rollers who account for two-thirds of Macau’s casino receipts, and wiped out about $73 billion in market value of companies including Wynn Macau Ltd. (1128) and SJM Holdings Ltd. last year…

Also on money flows to stealth money flows…

Macau’s government has been curbing money flows to the territory over concern that illegal funds are being taken out of the mainland. It is restricting the use of China UnionPay Co.’s debit cards and its hand-held card swipers at casinos. Further clampdowns are expected with the help of banks.

Let us put this in perspective. If indeed Macau’s casinos have only served as conduits for stealth transfers or 'capital flight' then only part of that money would have been funneled to the casinos, the rest would have moved elsewhere. This means Macau’s casinos should hardly have boomed. 

But Macau’s previous boom most likely highlights easy money debt financed spending activities with capital flight as a subordinate cause.

Some have even suggested that such money flows has funded record high inflows to US real estate and perhaps rechanneled gambling activities to the US. 

But actions of stocks of the US gaming industry suggests otherwise.

The 47 component Dow Jones Gambling index has swiftly capsized into a bear market since its peak in March. This would mark a real time example of how mania morphs into a collapse.

Since part of the US gambling index incorporates Macau exposure by US firms, then part of the decline may be attributed to Macau’s morose fate.

Apparently domestic (US) operations have failed to offset external conditions which explains the accentuated contagion effect.

But gambling industry woes hasn’t been just about Macau. 

Singapore’s Genting’s G13.SI stocks has halved, since its October 2011 peak. This year’s decline has only punctuated the ongoing hemorrhage.

And when considering Genting’s competition, the Marina Bay Sands operated by Las Vegas Sands whose stocks has been shaved by a third, there seems hardly any difference.

Singapore’s casinos compete with Macau’s rivals for Chinese visitors.

So has the Chinese government’s crackdown on the political opposition bannered as ‘anti-corruption’ also spread to Singapore?

Interestingly, Macau’s casino operators seem to be focusing diverting expansion towards the leisure industry. Back to the Bloomberg report: 

Casino companies including Sands China and Galaxy are shifting resources from high rollers to lure more vacationing Chinese and other mass-market gamblers by building malls, theaters, restaurants and hotels.

New project openings starting in mid-2015 with Galaxy’s second-phase expansion of its resort on the Cotai Strip may help underscore a market revival, by targeting tourists who’re seeking a broader holiday experience in addition to gambling, according to CLSA’s Fischer.

In Asia, there seems to be an intensive race to build capacity to chase after the Chinese consumers/gamblers as seen by grand projects casino-leisure integrated resorts, not only in Macau but also in Vietnam, South Korea and the Philippines.

These operators hardly realize of the rapidly faltering conditions of the Chinese economy as shown by the 21 charts from zero hedge.

But the real reason for the casino industry’s weakness as I previously wrote:

The reality is that China’s sputtering economy has been reducing demand for the region's casinos. Political persecution of the opposition (via crackdown on graft) represents only the icing on the cake. Add to this the slowing regional economic growth which should exacerbate demand sluggishness.

On the supply side, zero bound has led to casino operators to overestimate on demand, thus the region's overcapacity which has most likely having been funded by cheap debt.

Now the chicken comes home to roost.

And as I also pointed out earlier, the Philippine counterparts has racked up a colossal Php 45-50 billion of debts to finance grand projects. 

If those Chinese gamblers don’t come this year, if the domestic economy continues with its downshifting momentum and if political financial elites don’t patronize these entities enough to provide them financial viability, those humongous debts will come into the spotlight. This should make 2015 very interesting!

Anyway Macau’s stocks as the canary in the coal mine

MGM China Holdings (HK:2282)

Galaxy Entertainment Group (HK:27)

Melco Crown Entertainment (HK: 6883)

Sands China Ltd. (HK: 1928)

Wynn Macau Ltd. (HK: 1128)

SJM Holdings Ltd. (HK:880) owner of Grand Lisboa

The obverse side of every mania is a crash.

Or has it been that gambling has turned into household activity where Chinese punters bid up frenetically stocks prices!

The week prior to the 2014's end, the Zero Hedge reports (bold and italics original) “a stunning 900,000 new stock trading accounts opened - the most since October 2007 (right before the Shanghai Composite collapsed 70% in the following 9 months)

As revealed above, market crashes have become real time events.

Caveat emptor.