Political Risk in 2017-2018

In the UK, the conservatives it appears, will win a reduced majority to govern the UK and Brexit process. It is also clear that a loss or hung parliament  for the Conservatives will set the UK back a hundred years politically and economically in the confusion and discord it would sew.

There is a minor risk of a hung parliament where, like 2010, the new government may have to collaborate to hold office. This would make managing the Brexit process untenable. The loss of political and economic confidence that would ensue would bring chaos to the UK. Should there be an outright victory to Labor, we would see a reversion to the 1950/70’s style politics that would also be a disaster.

So, the stakes are just as high as they were in June 2016. What was a ‘sure thing’ bet at the start of the election process has become marginal at a time when the consequences are high. The spontaneous ordering of the voting process may check politicians from being able to achieve their agenda at the expense of the national interest. What hubris by PM May who put personal agenda ahead of the national political interest.

This is typical of the problems found in liberal democracies. Liberal democracies around the world are dying. Voters are cynical of the promises and ability of politicians to achieve anything.

Flag - EU 12Ironically, the EU have hailed Macron’s victory as a sign that right wing populism has peaked and in remission. With no mirror for self reflection the EU elite are back at ‘business as usual’. “Nothing to look at here – move on”! They needed a Le Pen win to shock them into making real change. Macron’s victory has only deferred the inevitable by a year. Meanwhile, the political change that is sweeping the world at present will continue with German elections in October this year. Merkel it appears is set for a heavy defeat.

And in the USA the left wing is continuing its attempt to undermine President Trump and effectively ignore the rule of law. Left wing forces operating at every level of US media, government and politics are moving to impeach Trump. Meanwhile the silent majority that elected Trump are watching and waiting and growing angry.

The last time we saw his level of scale of political unrest was 1740 – 1785 culminating in the French Revolution. The rising tide of political unrest in the USA, UK and EU is polarized by left vs right as well as the elite vs the people. Remember, when political confidence falters, economic confidence falls soon after. This is what is happening now. As pressures continue to mount in the USA and EU there is increasing risk of civil strife breaking out.

The phase June 2017 to December 2018 remains a time of escalating risk. Over this 18 month time frame, what transpires will shape the world and its history for the next 12 years and set up the circumstances that will shape the rest of this century.

Contrary Opinion and the French Elections

Going into the final round of the French Presidential election we see heavy media bias for Macron to win over Le Pen. Polls indicate Macron  should win by a comfortable margin. The Law of Contrary Opinion in 2016 had indicated another upset due.

There are mitigating factors at play however. Having correctly picked the Australian, Brexit and US Presidential elections, we point out that the shock results shown in those elections all occurred after lengthy social and political trends had been underway for sometime. We see there is a lower probability that contrary opinion may affect the outcome. We had predicted in 2016 that Le Pen would receive the presidential mandate. We still hold to that view which would have an immediate negative impact on financial markets whichever candidate wins. Markets appear poised for a fast corrective move to the downside before resuming their longer term trends.

Longer term, if Le Pen happened to win, there would be a soft EU awakening and resolution. Macron’s win will have the effect of bringing on a hard EU awakening and resolution.

Pendulum of Government Overreach has Peaked

The pendulum of government overreach has peaked in most liberal democratic countries around the world (for now). The major political events of 2016 have shown increasing resistance to government given the rising number of breaches in civil liberties and failure of government to identify and respond to the disenfranchised members of their societies.

Many segments of society have felt themselves becoming impoverishment. At the same time they have watched the hubris, greed and failure of politicians to deliver solutions to resolve the various politically made crises. One of the recurring questions that will emerge is the role of government in the lives of people.

By the time politicians’ hubris has completely evaporated, the nature of liberal democratic countries will have changed. We see major risk of political, economic and social upheaval occurring between now and 2028-2033 This phase may extend before social, political and economic stability becomes the norm. As always the pendulum will one day swing again towards increasing government involvement in the lives and affairs of ordinary people.

Brexit Impact 2016

Should the “leave” vote win the coming UK referendum you can expect the impact to have global consequences. It will challenge the survivability of the EU. At the same time it will create massive flights of capital around the world as investors seek refuge for their money. Anticipate the USD being strongly bid. This will have a huge impact on US stock markets at the expense of peripheral markets and their currencies. The nature of global economics has been apparent for some time, though not obvious.  Brexit will cause this to accelerate.

What is clear is the counter-intuitive nature of the Brexit situation. The narrative being promoted by the “in” vote is not what it seems. Democratic processes to do with EU politics have earned a reputation for not being so straight forward with several countries having the “will of the people” overturned in the last decade or so.

Should the UK decide to remain in the EU, we anticipate this will only serve to delay the inevitably. Namely the demise of the EU itself. A reading of history itself should remind that all political systems fail and a political system built on faulty premises to begin with, fail sooner. Thus, human nature expresses itself in a cyclical manner again and again.

The Structure of Collapse: 2016-2019

Charles Hugh Smith writing on his blog Of Two Minds:

The end-state of unsustainable systems is collapse. Though collapse may appear to be sudden and chaotic, we can discern key structures that guide the processes of collapse.

Though the subject is complex enough to justify an entire shelf of books, these six dynamics are sufficient to illuminate the inevitable collapse of the status quo.

1. Doing more of what has failed spectacularly. The leaders of the status quo inevitably keep doing more of what worked in the past, even when it no longer works. Indeed, the failure only increases the leadership’s push to new extremes of what has failed spectacularly. At some point, this single-minded pursuit of failed policies speeds the system’s collapse.

2. Emergency measures become permanent policies. The status quo’s leaders expect the system to right itself once emergency measures stabilize a crisis. But broken systems cannot right themselves, and so the leadership is forced to make temporary emergency measures (such as lowering interest rates to zero) permanent policy. This increases the fragility of the system, as any attempt to end the emergency measures triggers a system-threatening crisis.

3. Diminishing returns on status quo solutions. Back when the economic tree was loaded with low-hanging fruit, solutions such as lowering interest rates had a large multiplier effect. But as the tree is stripped of fruit, the returns on these solutions diminish to zero.

4. Declining social mobility. As the economic pie shrinks, the privileged maintain or increase their share, and the slice left to the disenfranchised shrinks. As the privileged take care of their own class, there are fewer slots open for talented outsiders. The status quo is slowly starved of talent and the ranks of those opposed to the status quo swell with those denied access to the top rungs of the social mobility ladder.

5. The social order loses cohesion and shared purpose as the social-economic classes pull apart. The top of the wealth/power pyramid no longer serves in the armed forces, and withdraws from contact with the lower classes. Lacking a unifying social purpose, each class pursues its self-interests to the detriment of the nation and society as a whole.

6. Strapped for cash as tax revenues decline, the state borrows more money and devalues its currency as a means of maintaining the illusion that it can fulfill all its promises. As the purchasing power of the currency declines, people lose faith in the state’s currency. Once faith is lost, the value of the currency declines rapidly and the state’s insolvency is revealed.

Each of these dynamics is easily visible in the global status quo.

As an example of doing more of what has failed spectacularly, consider how financialization inevitably inflates speculative bubbles, which eventually crash with devastating consequences. But since the status quo is dependent on financialization for its income, the only possible response is to increase debt and speculation—the causes of the bubble and its collapse—to inflate another bubble. In other words, do more of what failed spectacularly.

This process of doing more of what failed spectacularly appears sustainable for a time, but this superficial success masks the underlying dynamic of diminishing returns: each reflation of the failed system requires greater commitments of capital and debt. Financialization is pushed to new unprecedented extremes, as nothing less will generate the desired bubble.

 Rising costs narrow the maneuvering room left to system managers. The central bank’s suppression of interest rates is an example. As the economy falters, central banks lower interest rates and increase the credit available to the financial system.

This stimulus works well in the first downturn, but less well in the second and not at all in the third, for the simple reason that interest rates have been dropped to zero and credit has been increased to near-infinite.

The last desperate push to do more of what failed spectacularly is for central banks to lower interest rates to below-zero: it costs depositors money to leave their cash in the bank. This last-ditch policy is now firmly entrenched in Europe, and many expect it to spread around the world as central banks have exhausted less extreme policies.

The status quo’s primary imperative is self-preservation, and this imperative drives the falsification of data to sell the public on the idea that prosperity is still rising and the elites are doing an excellent job of managing the economy.

Since real reform would threaten those at the top of the wealth/power pyramid, fake reforms and fake economic data become the order of the day.

Leaders face a no-win dilemma: any change of course will crash the system, but maintaining the current course will also crash the system.

Welcome to 2016-2019.

Source: http://www.oftwominds.com/blogjune16/collapse6-16.html

European Inflation

Analysis of European inflation by Ophelie Gilbert.

The sovereign debt crisis in 2011-12 accentuated the downward trend in inflation for the Eurozone. In the aftermath, the core inflation of the Eurozone, which mostly reflects domestic inflation pressures, has declined as slack in the labour market jumped higher. Since 2013, the ongoing fall in international commodity prices has also caused the headline inflation rate to collapse, since this measure includes what economists call the volatile components: commodities and food. So the inflation rate that is prevailing today is not only about oil, but the result both of internal factors and the diffusion of global factors with many transmission channels. In 2015, core inflation even passed below 1%, which is a strong warning level for any central banker.
Why is a low inflation rate so critical? First, low inflation makes for less efficient central bank policy, as its means higher real interest rates. Second, low inflation becomes more troublesome if it is too low for too long, as it could result in a change in people’s expectations of future inflation. This could trigger a dangerous self-fulfilling loop if expectations are de-anchored, and it is very difficult to reverse disinflationary shocks – as shown in Japan
The European Central Bank (ECB) has – finally – implemented strong action to reflate the economy and stop the persistent decline in inflation, and seems to have had a particular focus on increasing the core rate. The ECB’s objective is for Consumer Price Index (CPI) inflation to be close to but below 2%, which was challenging throughout 2015.

2016 was supposed to be the year of the rebound for the headline inflation after the huge impact of the oil collapse on the 2015 inflation rate. The theory was that the negative base effects on energy prices would be removed from December onwards, and support a higher inflation rate next year. This remains true to an extent, however, once again, the oil price is playing the fool. The oil market is suffering from excess supply, and these imbalances need to be absorbed. Oil prices will remain the most important driving force for inflation, in both directions. The market is expecting a slight rebound of the oil price over next year, but if oil remains below $40 it will keep the headline inflation far from the ECB’s projection for 2016, and clearly it will again complicate the ECB’s job.

The ECB’s job is further complicated by the fact that economic growth in the Eurozone is actually on-going, firm and broad-based, and the fall in the oil price is very good news for consumer purchasing power. Nevertheless, consumer price inflation dynamics will be key to the ECB’s reaction function in 2016 in the Euro area.

Source: Allianz Global Investors

 

JP Morgan to Leave UK if it Quits EU

JP Morgan, one of the leading banks in the world has threatened to quit UK if it decides to leave EU after the proposed referendum on the matter.

Jamie Dimon, the chairman and chief executive of JP Morgan, says his bank might quit the UK if Britain exits the European Union. “Britain’s been a great home for financial companies and it’s benefited London quite a bit. We’d like to stay there but if we can’t, we can’t,” he said in Davos, Switzerland and the World Economic Forum meetings.

The bank employs 19,000 people in Britain.

For JPMorgan, British membership in the EU is important since it provides the bank with “passporting” rules that allow it to do business across the 28-member bloc.

For the UK, membership is not as important. Overall trade does not require EU membership. Non-members such as Norway or Switzerland, trade with the EU makes up a bigger share of the total than it does for Britain.

Britain’s Prime Minister’s David Cameron hopes to  hold an EU referendum in June.

Source: EconomicPolicyJournal.com

The Great Sovereign Debt Crisis Coming Soon

Starting in Europe and reaching public consciousness when Japan implodes before engulfing the USA and remaining Liberal-Democratic nations.

The Great Sovereign Debt Crisis of the 21st Century is steadily gaining momentum. The forces of deflation have been steadily building since 2000 and the stage is set over the next 6-12 months where the reality of public plundering of the means of production comes home to roost. The weight of public and private debt, government regulation and leverage, fraudulent economics and fallacious political thinking that assumes that if you keep taking and spending other people’s money you will never ever run out!

Yet this is exactly what is happening. The politicians have borrowed to deliver on promises they were never going to be around to see delivered. They’ve debased the their currency and now we have reached the problem that there is so much debt in the world that the world does not have enough income to service that debt.

Historically its happened many times before of course and yet we never seem to learn. Empires grow and prosper, politicians make promises, governments and people borrow and everyone takes for granted the wealth that has been achieved until finally, it all collapses. History records the rise and fall of civilizations on exactly this premise. It’s always government and the self-seeking of leaders that cause civilizations to self-destruct.

While we observe the rise and fall of empires due to reasons of currency debasement or war, we can also observe that these are merely the mechanisms that cause the problems. Behind them lies the cyclic nature of humanity. Deep in the limbic system of the human brain reside deep impulses that play out at individual and aggregate levels.

We might look back at the Tulip Mania Bubble of the Dutch Golden Age (1634-1637) and wonder how people might have been so crazy as to invest in tulips. The Tulip Mania occurred on the back of a Europe-wide debasement of coins (1619-1622) used to finance war. Yet they did and future historians will look back at early 21st century share, commodity, real estate prices and wonder “how could they have been so blind?”TulipPricesDebasement of the currency has occurred this time by closing the link between gold and paper money and the massive printing of money that subsequently occurred. Each era brings the usual excuse “this time its different”. But the same debasing of money, the same political hubris, the same grasp for political power create the same drivers that cause the boom and the bust.

We watch at the moment the European debt drama playing out in Greece. Other nations sit on the edge of potential debt crises including Spain, Portugal, Italy, Puerto Rica and various cities of the US. This is just the beginning. Soon we shall see the debt crisis spreading to northern Europe, Japan, China and the US. Its about sovereign debt of course, the debt accumulated by generations of politicians spending other people’s money.SouthSeaIn Japan they experienced this in the early 1930’s when massive money printing operations inflated their economy. It resulted in the assassination of the Finance Minister and Prime Minister, the establishment of the military as the power brokers of Japanese politics and the beginnings of the build up for for WWII. That didn’t end well for the Japanese people.

Between 1740 and 1783, the French experienced it with the massive indebtedness of the monarchy, high taxes, high levels of regulation and cronyism led to the French Revolution, Napoleon and a final defeat in 1815.

Pax Romana followed a similar path where eventually the debasement of the currency and accumulated debt caused the empire to implode. To look at Pax Americana is to see an identical script unfolding. Massively unsustainable debt levels, vast militarization, endless monetary debasement, constitutional decay and subjugation of citizens by taxation, regulation and blatant spying signal, as it has in many previous civilizations, the demise of this short lived empire.

Using financial markets as a barometer we observe markets in major topping patterns, working out of main trends. The next 3-6 months will prove critical in determining if the Great Sovereign Debt Crisis has truly arrived or if there is still enough gas in the tank for one last sprint before the weight of debt, regulation and political hubris bring down the liberal – democratic nations of the world. dow-jones-100-year-historical-chart-2015-08-07Once again the cyclic nature of human egress and regress is playing out at individual and aggregate levels and from where we stand, major and minor cycles of human endeavor are changing direction. Crisis bring danger and opportunity for those so prepared.

Yanis Reveals EU Denial of Any Right of the People to Vote

Varoufakis Yanis

Greece’s Finance Minister Yanis Varoufakis has come out to reveal the quite shocking and anti-democratic events that took place during the last Eurogroup meeting. First, they do hate Yanis’ guts, for he understands far more about the economy than anyone in Brussels. At their demand, any further discussions will be without him. What led to the EU breaking off was exactly what we reported previously — they do not want any member state to EVER allow the people to vote on the euro. Brussels has become a DICTATORSHIP and is so arrogant without any just cause, believing that they know better than the people.

We are watching the total collapse of Democracy and the birth of a new era — Economic Totalitarianism from arrogant people who are totally clueless beyond their own greed for power and money.

Source: http://www.armstrongeconomics.com/archives/34115

Editor Note: Greece is the end of the beginning for the EZ and the beginning of a long period of political, social and economic instability that co-incides with the topping phase of the upward phase of the Industrial Revolution cycle that began in 1783-85.

Brussels to Take Over Tax Collection in Europe – End of Democracy

Germany and France have called for the establishment of a central EU authority for the eurozone to raise taxes independently. This plan is part of a package of proposals for far-reaching integration of the single currency zone: the federalization of Europe. Currently, only national governments may levy taxes. This is part of the step to save Europe and then consolidate the debts. This will become a war against the people, shaking them down to save a failed system design from the outset. This is a significant change and the final straw in the Death of Democracy. If such a power is handed to Brussels, they see it as their way to shakedown the Greeks, and the Greeks will see this as their government betraying their own people.

Transferring the power to tax the people to Brussels is significant, for those on the appointed (not elected) commission are not required to follow any vote in the European Parliament. This will remove all representation for taxation of the people’s rights. This is the ultimate power play – taxation without representation. Welcome the coming age of Economic Totalitarianism.

Source: http://armstrongeconomics.com/archives/31353

The Coming Cashless Society

Electronic-EuroYou are now watching newspapers, TV shows, and other forms of media preparing for the coming cashless society. This is a marketing campaign, and may indeed be what October 1, 2015 is all about – 2015.75. I doubt that the USA will be able to move to a cashless society as easily as Europe. The dollar is used around the world and cancelling that outstanding money supply would bring tremendous international unrest. Additionally, the USA is not in crisis financially, as is the case in Europe.

Europe, on the other hand, has an entirely different problem. The failure to have consolidated the debts of member states meant that the reserves of the banks were constituted from a politically correct mixture of debt. Instead of fixing the problem, politicians who are lawyers always move one-step forward with laws. To them the logical solution is to eliminate cash to protect banks from a panic run that would collapse Europe and take Brussels with it.

This is now a deliberate marketing campaign. I know how these things work and pay attention. They are selling this idea everywhere and that is the preparation for the inevitable action. With the speed at which they are moving, it certainly appears they are gearing up for October 1 on our model. It is also interesting that some German press misquoted our date as October 17. I was not sure why they would do that, but perhaps that was intentional as well. This is very curious, for when they take that final step, it will most likely be sudden and overnight. They would announce it and give everyone some time frame to take their paper currency and deposit it into their bank accounts.

For European readers, swap to dollars for hoarding and you can open accounts in the U.S., which for now is a safety valve. While gold makes sense for local hoarding, it may have lost its movability.

Source: http://armstrongeconomics.com/archives/31028

At $200 Trillion The World’s Debt Cup Overfloweth

by Bloomberg Business

The world economy is still built on debt.

That’s the warning today from McKinsey & Co.’s research division which estimates that since 2007, the IOUs of governments, companies, households and financial firms in 47 countries has grown by $57 trillion to $199 trillion, a rise equivalent to 17 percentage points of gross domestic product.

While not as big a gain as the 23 point surge in debt witnessed in the seven years before the financial crisis, the new data make a mockery of the hope that the turmoil and subsequent global recession would put the globe on a more sustainable path. Government debt alone has swelled by $25 trillion over the past seven years and developing economies are responsible for almost half of the overall gain.

McKinsey sees little reason to think the trajectory of rising leverage will change any time soon.

Source: McKinsey

 Here are three areas of particular concern:

1. Debt is too high for either austerity or growth to cure

Politicians will instead need to consider more unorthodox measures such as asset sales, one-off tax hikes and perhaps debt restructuring programs.

 Source: McKinsey

2. Households in some nations are still boosting debts

Eighty percent of households have a higher debt than in 2007 including some in northern Europe as well as Canada and Australia.

Source: McKinsey

 3. China’s debt is rising rapidly

Thanks to real estate and shadow banking, debt in the world’s second-largest economy has quadrupled from $7 trillion in 2007 to $28 trillion in the middle of last year. At 282 percent of GDP, the debt burden is now larger than that of the U.S. or Germany. Especially worrisome to McKinsey is that half the loans are linked to the cooling property sector.

Source: McKinsey

via A World Overflowing With Debt – Bloomberg Business.

Source: http://davidstockmanscontracorner.com/at-200-trillion-the-worlds-debt-cup-overfloweth/

 

 

ECB Policy Shift & Unintended Consequences

Last week’s European Central Bank decision to lower their interest rate to -0.1% has the effect of forcing banks to lend funds or be penalized for holding cash. This is another attempt to stimulate economic activity and alleviate the fear held in the Euro Zone that the EU was at risk of slipping into a deflationary spiral.

At the same time the ECB also announced it will cease sterilizing it’s security asset purchases in managing liquidity. Until now, when the ECB issued cash by buying government bonds in the market it would, at the same time, make a corresponding sale of bond securities in a process that effectively had a net nil effect on liquidity to the economy. The ECB at the same time however was able to sterilize it’s bond purchases and secure the quality of its portfolio.

The impact of these two decisions is to release the ECB in order that it can now issue new money (read print money) to the economy. It has embarked on the same money printing process used by all other major central banks.

The consequence of this is to bring the risk of price inflation to the EU and engage the EU in a currency war with all other major economies as their central banks duel to depreciate their currency against the others. What can possibly go wrong?

 

 

 

 

 

 

Guess which empire came to an end today?

 Spanish Hapsburgs

In the early 16th century, a priest by the name of Fray Francisco de Ugalde remarked to his king that Spain was “el imperio en el que nunca se pone el sol”.

In other words, the sun never set on the Spanish Empire.

And by the 1500s with its vast lands across the Americas, Africa, Europe, Asia, and even the South Pacific, Spain (technically the House of Habsburg) had become the first truly global superpower.

The Empire’s status was so great that its silver coin (the real de ocho or piece of 8) was used around the world as a global reserve standard… including in the US colonies.

It didn’t last.

Like so many great empires that came before, Spain was beset by unsustainable spending, constant warfare, debilitating debt, and an inflated money supply.

By the mid 1500s, the Spanish government was spending 2/3 of its total tax revenue just to pay interest. Spain defaulted on its debt six times in the next century.

It finally came to an end on today’s date in 1643, exactly 371 years ago.

Historians can literally circle the date on a calendar that Spain ceased being Europe’s dominant superpower; it was the day that Spain lost the Battle of Rocroi, and effectively the Thirty Years War against France.

Just days before, a four-year old Louis XIV had ascended to the throne to become the King of France after the death of his father.

And during his whopping 72-year reign, France replaced Spain as the global superpower.

(To put this reign in context, the longest serving monarch alive today is King Bhumibol of Thailand, who at age 86 has served for 67 years. At age 88, Queen Elizabeth has served for 62 years.)

For more than a century, commerce, art, and technology flourished in France. And some of the greatest intellectual minds in history published their works during this period.

I remember being told as a West Point cadet that in the early days of the Academy in the 1800s, the only two classes were French and Mathematics, primarily because all of the great textbooks were written by French mathematicians.

France had public healthcare and free hospitals. Great monuments to their grandeur. Colonies around the world. An awe-inspiring military.

And their influence was so great that foreign governments from Russia to Prussia spoke French internally.

Needless to say, this didn’t last either.

And like the Spanish before them, France overspent, overexpanded, and overregulated. They waged excessive warfare, and they managed their affairs as if the good times would last forever.

By the 1780s, the French debt had grown so much that they were rapidly devaluing the currency and borrowing money just to pay interest on what they had already borrowed.

Sound familiar?

The US is in a similar position right now, along with most of the West (including… France and Spain again!)

Like an aging prize fighter, there is no nation that can permanently maintain its status as the dominant superpower. And certainly no nation that can defy universal economic truths.

Powerful nations believe they can borrow indefinitely and dilute their currencies without consequence.

This simply isn’t true. Wealth and power shift. The world’s reserve currency changes. It’s been happening for centuries, and this time is no different.

We are all witnessing this change unfold again. And this isn’t some wild assertion.

Objective data from the Bank for International Settlements and the International Monetary Fund all show a clear decline in the dollar’s share of global reserves.

chart2 1 Guess which empire came to an end today?The US government’s own data shows a net worth of minus $16.9 trillion, over 100% of GDP in the red.

And even in their most optimistic projections, the government tells us that growth in debt will outpace growth in tax revenue.

Day to day, it’s easy to ignore these trends. But from a big picture perspective, it couldn’t be more obvious.

Just like the Battle of Rocroi in 1643, or the storming of the Bastille in 1789, there will come a time when future historians circle a date on a calendar and say, “That was the day the United States ceased being the dominant superpower.”

Perhaps it’s happened already. Or perhaps it will occur in a war yet to be fought.

But if history, common sense, and truth are any guides, that reckoning is quickly approaching.

Source: http://www.sovereignman.com/expat/guess-which-empire-came-to-an-end-today-14439/

Ukraine Is Not the Crisis You Think It Is

The crisis happening in Ukraine is not the crisis you think it is. In global economics and politics, the Ukraine situation will be seen as a tiny blip in a few short years. Fears that it would escalate into a full blown crisis with serious repercussions for the western world have been blown out of proportion painful as it may be to the Ukrainian people. The social mood of the times suggest that events in Ukraine and between Russia and the US and EU will blow over. Social mood is upbeat and compromise and forbearance are the order of this time.

Unfortunately for the Ukrainian people Russia is re-establishing its boundaries. Distance  is its security. From the Ukrainian border to Moscow is only 300 kilometers. Russia simply cannot afford to own the Ukraine as it did after WW2. Having access to warm water ports and the Mediterranean and establishing a pro-Russian influence in the Ukraine satisfies  Russian imperialism on it’s western border.

We see the Ukraine situation as now having largely played out and and attention will soon divert elsewhere. Russian stock market prices are heavily discounted as well as it’s currency and are probably a good buy looking for a strong bounce.

Eating Our Seed Corn: How Much of our “Growth” Is From One-Time Cashouts?

Charles Hugh Smith of http://www.oftwominds.com/blog.html writes:

We as a nation are consuming our seed corn in great gulps, and there will be precious little left in a decade to pass down to the next generation.

Anecdotally, it seems a significant percentage of our recent economic “growth” is being funded by one-time cashouts of IRAs, 401Ks, sales of parents’ homes, etc. This is the equivalent of eating our seed corn. Once these pools of savings/equity/capital are gone, they aren’t coming back.

I personally know a number of people who have cashed out their retirement account 401Ks (and paid the taxes) to pay for their kids’ college expenses–in effect, cashing out their retirement to lower but not eliminate the debt burden of their offspring who bought the “going away to college” experience.

The cashed-out 401K delighted the government, which reaped huge penalties and income taxes, as the cashout pushed the annual income of the recipient into a high tax bracket. (“Hardship” withdrawals for medical care and education waive the penalties, but the income tax takes a big chunk of the withdrawal.)

The middle-aged person who cashed out their retirement will not work long enough to save an equivalent nestegg. Not only is time against such an accumulation of retirement savings, so is the stagnant economy: companies are slashing 401K contributions to offset rising healthcare (a.k.a. sickcare) expenses, and many workers young and old alike are finding jobs that pay them as self-employed contractors or part-time jobs with no benefits.

Another set of middle-aged people are withdrawing from IRAs (and paying the penalties) just to fill the gap between expenses and income. For a variety of reasons, many people are loathe to cut expenses or are unable to do so without drastic changes in their lifestyle. So they withdraw from the IRA (individual retirement account) to cover expenses that are left after income has been spent.

This “solution” is appealing to those whose incomes have declined in what they perceive as “temporary” hard times.

Another pool of equity that is being drained is the home equity in aging parents’ homes. The government will only pay for one set of medical expenses (long-term care, for example) if the elderly person has assets of less than $2,000 (as I recall). Given this cap, it makes sense for elderly homeowners to transfer ownership of their home to their offspring well before they need long-term care (which can cost $12,000 to $15,000 a month).

A variety of other medical expenses can arise that cause the home to be sold to raise cash–either expenses for the elderly parents or for their late-middle-age offspring who develop costly health issues. Family disagreements over sharing the equity can arise, leading to the sale of the house and the division of the equity among the offspring.

This cash is immediately hit with a variety of demands: a grandkid needs a car, somebody needs money to go back to graduate school (pursuing the fantasy that another degree will provide financial security), and so on–not to mention “we deserve a nice vacation, a new car, etc.“, the temptations in a consumerist culture that we all “deserve.

Once the family home is sold, the furnishings and other valuables are also sold off to raise cash. In many cases, the expense of transporting the items across the country to relatives exceeds the value of the furnishings.

One common thread in all these demands for liquidation of equity is the short-term need is pressing. A consumerist culture offers few incentives for long-term savings other than life insurance, IRAs and 401Ks, and all of these can be tapped once a pressing need arises.

Though people may want to hang on to their nestegg, they are faced with short-term needs: how else can I pay tuition, or this medical bill?

As incomes have stagnated and costs for big-ticket expenses such as college and healthcare have soared, the gap between income and expenditures has widened every year for the bottom 90%.

 

Even those in the top 10% are not protected from draw-downs in retirement funds and family equity in homes and other assets.

Retirement funds, home equity, family assets–these are the financial equivalent of seed corn. Once they’re cashed out and spent, they cannot be replaced.

In more prudent and prosperous times, these nesteggs of capital were conserved to be passed on to the next generation not for consumption but as a nestegg to be conserved for the following generation. That chain of capital preservation and inheritance is being broken by the ravenous need for cash to spend, not later but right now.

So how much of the recent “growth” in GDP results from our consumption of seed corn? It is difficult to find any data on this, something which is unsurprising as the data would reveal the entire “recovery” story as a grandiose illusion: we as a nation are consuming our seed corn in great gulps, and there will be precious little left in a decade to pass down to the next generation.

We face not just an impoverishment in consumption but in expectations and generational assets.

Source: http://www.oftwominds.com/blogfeb14/one-time-cashout2-14.html

 

 

The QE Experiment is Failing… Will Stocks Crash?

Graham Summers from GainsPainsCapital writes:

We’ve long maintained that Japan is ground zero for the “QE works vs QE doesn’t work” debate.

The Fed’s economic models, and 99% of the economic models employed by Central Banks in general, believe that monetary easing can bring about an economic recovery. The primary argument for this crowd if QE has thus far failed to produce a recovery is that the QE efforts have not been big enough.

And then there’s Japan. In a nation with GDP of $5.96 trillion, the Bank of Japan has launched a $1.4 trillion QE effort: a monetary move equal to 23% of Japan’s GDP.

To put this into perspective, this would be akin to the US’s Federal Reserve announcing a QE effort of over $3 trillion.

Suffice to say, Japan’s QE most certainly should be considered “enough” by even the most pro-QE supporter. But the very problem is that it does not appear to be having the intended effects.

The following is an article from the Wall Street Journal. I’ve highlighted a few choice items for your review:

At Koeido Co., a 156-year-old sweets maker based in this city in southwest Japan, chairman Shuichi Takeda says he feels the country may finally be coming out of a 20-year funk.

Sales of Koeido’s sweet millet dumplings are holding up. The company is spending around 80 million yen ($800,000) to renovate two shops—a sign of how Japan’s economy is showing signs of life, lifted in part by a flood of easy money from the central bank that has boosted stocks and helped spur growth.

But with future demand unclear, and costs for imported sugar rising, Koeido still isn’t bullish enough to take out bigger loans to replace equipment or expand its business—even though banks are begging it to borrow more.

The economy doesn’t necessarily get better just because of monetary easing,” says Mr. Takeda. “And you don’t borrow just because rates are low.”…

It is an attempt to literally crowd banks and other investors out of the market and force them to put their money to work in other ways—through loans or investments in real estate, for example—to help stimulate the economy…

“The idea that the Bank of Japan will buy bonds, and then the extra money will start flooding into corporate or retail loans—that’s just a theoretical exercise,’‘ says Chugoku’s Mr. Miyanaga. “Most important is [for the government] to hurry up and produce a concrete growth strategy, which will spur private economic activity.

http://online.wsj.com/news/articles/SB10001424052702304470504579163094082999108

I want to point out that the individuals who are expressing basic common sense views about monetary policy and the economy are businesspeople who run actual businesses, NOT academics.

This is what happens when academic monetary theory meets reality: theory proves to be just that theory.

There are some perceived benefits (the markets rally) from the easy money high. But the inevitable hangover is usually intense (see 2000-2001 and 2007-2008).

So stocks rally for now. But eventually this will end. In fact it may come sooner rather than later.

Remember 2008? Everyone said everything was just fine… right up until the Crash hit.

We’re seeing the same warnings in the markets now.

Source: http://gainspainscapital.com/2013/11/20/the-qe-experiment-is-failing-will-stocks-crash/

Surprise! Europe’s Banks Are STILL Totally Insolvent…

Graham Summers from Phoenix Capital Research writes:
While the US continues to bumble its way towards a debt ceiling crisis (somehow our President doesn’t have time to meet work on solving this, but does have time to make sandwiches with volunteers and give press statements about how we wants to work), Europe continues to make us look good by comparison.

Remember how we were told time and again that Europe was saved? Remember how repeatedly we were told that the European Central Bank (ECB) would do “whatever it takes” to fix things?

Turns out all of that was a total load of BS. Indeed, the IMF just announced the following:

Nobody knows the true scale of potential losses at Europe’s banks, but the International Monetary Fund hinted at the enormity of the problem this month, saying that Spanish and Italian banks face 230 billion euros ($310 billion) of losses alone on credit to companies in the next two years.

Yet five years after the United States demanded its big banks take on new capital to reassure investors, Europe is still struggling to impose order on its financial system, having given emergency aid to five countries.

http://www.reuters.com/article/2013/10/13/us-eurozone-banks-idUSBRE99C03Y20131013

Remember, Spain was the banking system that was great right up until it demanded a 100 billion Euro bailout. Then only six months later, one of its largest problem banks (which had taken 18 billion Euros in bailout funds) announced it still had a negative valuation.

The entire EU banking system is insolvent. Unlike the US where the banks raised capital to address their problems, EU banks have not raised capital nor have they reduced their leverage (of 26 to 1 by the way). Instead, they’ve simply swapped garbage assets as collateral to the ECB, which counts this garbage at 100 cents on the Euro, and issues liquidity to the banks.

The whole thing is one giant lie. You have banks lying about what they own to the ECB which lies about the real risk of the banks which swaps out debt from EU countries that are lying about their finances in exchange for free money so the banks can keep lying.

Honestly, this whole mess makes the US look good by comparison. The bad loans, leverage and every other negative issue is worse for EU banks than for the US.

Makes you wonder why investors are piling into EU financials, doesn’t it? In general share prices in this space have doubled since the 2012 lows. The fact they’ve doubled on a colossal lie doesn’t bode well.

I expect we’ll see the European banking crisis back with a vengeance in the first half of 2014. Now that the German elections are over and Merkel has won, the “reality” of Europe should start leaking out (it’s not coincidence that the IMF released this report about Spanish and Italian bank woes just now after the German election as though this was suddenly “news”).

For a free Special Report outlining Europe’s upcoming banking crisis and its impact on US stocks as well as two other investment reports (one regarding the inflationary impact of the Fed’s policies, the other on hedging against market risk)… visit us at:

Source: http://www.gainspainscapital.com
Best Regards

 

Meanwhile, in Europe…

Sprout Money via Zerohedge reports:For years, since the onset of the euro crisis, we have heard that the crisis is over. Every year, politicians keep on telling us that the worst is over, but that next year will be so much better. Do you really think so? Here are some hard facts & figures instead of wishful thinking of lying politicians showing that the euro crisis is not over. On the contrary, things are getting worse.Italy

La Dolce Vita, the good life, is no longer achievable for millions of Italians. Italy is the third largest Eurozone country and is in dire straits. Public debt has ballooned to well over 130 percent! Is this money ever going to be repaid? Who is going to do that? The country has one of the fastest aging populations in the world. Italian women, when having any children at all, prefer to have just one child. In order for a society to maintain a healthy demographic balance, they should have at least two. Nonetheless, unemployment, from a European perspective, is relatively low at 12 percent. But wait, youth unemployment is virtually at 40 percent. So there are no jobs in Italy, public debt is out of control and its aging population lays a heavy burden on both income taxes and Social Security payments.

Spain

Spain is one of the Eurozone’s largest countries. It is not in a recession, but in a downright depression. Do you need some figures? Unemployment stands at 26.3 percent?. That means more than one out of every four workers is idling and receiving benefits from government and waiting for better days. Even worse, youth unemployment is a staggering 57 percent. Indeed, more than one out of every two youngsters is out of work or is not expected to find one soon. Do you need more proof? Spanish government is spending billions on Social Security, money it simply does not have. Public debt has gone from a fairly modest 30 percent in 2007 to well over 90 percent this year and will soon move to 100 percent and beyond.

Portugal

Portugal is one of the smaller Eurozone countries in the Mediterranean Sea with an economy that is in shambles. The country had to be bailed out by the rest of the Eurozone to the tune of €78 billion. Public debt is around 128 percent, hardly lower than Italy’s. Unemployment hovers around 16.5 percent, which is unsustainable in the medium term. Youth unemployment stands at a depressing h 42 percent.

Although it seems that Portugal has lived up to its promises as part of the bail-out programme, the country will need a second bail-out coming 2014. Of course, it will be paid by other Eurozone members having a healthier economy.

 

Europe in shambles

Politicians babble about the worst of the crisis being behind us, or even ‘fixed.’ That is just cheap talk. The hard facts & figures prove them wrong. Europe is on the verge of a genuine collapse. On the one hand, this is because the Euro simply does not work, but makes things worse instead. On the other hand, Eurozone member states are simply unable to devaluate their currencies as they are part of the single currency bloc. As long as this flawed monetary currency, or rather political currency, is kept afloat, less well-off countries within the Eurozone will continue to suffer.

The ECB, the European equivalent of the Fed, will do ‘whatever it takes’ to keep the single currency alive. For now, markets have accepted this, but in the near term they will call their bluff. When, not if, that happens, the euro will be gone and with it billions worth of paper assets, wreaking havoc on an already damaged economy.

Does the graph below suggest the crisis has been solved?

 

Courtesy: Zerohedge… of course

Europe has run out of money

The Eurozone has close to 20 million unemployed. These are millions of people requiring need food, housing and medical care. This is simply unaffordable in the medium term. Youth unemployment is a ticking time bomb. It will not take long before young people will take to the streets, demanding jobs and a comfortable future.

Has the crisis been solved? Will the Eurozone recover any time soon? We would not bet on it. Europe is an ageing, moribund continent and the sh*t will hit the fan sooner rather than later. Europe has simply run out of money due to its overgenerous entitlements. What will it take for people to start noticing?

Source: Sprout Money

Ignore These Six ‘Events’ At Your Own Risk

Barclays via Zerohedge:

With European stocks at multi-month highs, European bond risk at multi-year lows, US equities near all-time highs, US equity volatility expectations near post-crisis lows, and credit risk volatility fading, one could be forgiven for believing it’s all gonna be ok.

 

 

 

Of course, that assumes we get through the next six weeks unscathed...

 

 

 

Source: Barclays

Link: http://www.zerohedge.com/news/2013-08-13/ignore-these-six-events-your-own-risk