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

Mapping Russia’s Strategy

Russia is in a geographically vulnerable position; its core is inherently landlocked, and the choke points that its ships would have to traverse to gain access to oceans could be easily cut off. Therefore, Russia can’t be Athens. It must be Sparta, and that means it must be a land power and assume the cultural character of a Spartan nation. Russia must have tough if not sophisticated troops fighting ground wars. It must also be able to produce enough wealth to sustain its military as well as provide a reasonable standard of living for its people—but Russia will not be able to match Europe in this regard.

So it isn’t prosperity that binds the country together, but a shared idealized vision of and loyalty toward Mother Russia. And in this sense, there is a deep chasm between both Europe and the United States (which use prosperity as a justification for loyalty) and Russia (for whom loyalty derives from the power of the state and the inherent definition of being Russian). This support for the Russian nation remains powerful, despite the existence of diverse ethnic groups throughout the country.

As a land power, Russia is inherently vulnerable. It sits on the European plain with few natural barriers to stop an enemy coming from the west. East of the Carpathian Mountains, the plain pivots southward, and the door to Russia opens. In addition, Russia has few rivers, which makes internal transport difficult and further reduces economic efficiency. What agricultural output there is must be transported to markets, and that means the transport system must function well. And with so much of its economic activity located close to the border, and so few natural barriers, Russia is at risk.

It should be no surprise then that Russia’s national strategy is to move its frontier as far west as possible. The first tier of countries on the European Peninsula’s eastern edge—the Baltics, Belarus, and Ukraine—provide depth from which Russia can protect itself, and also provide additional economic opportunities.

With regard to the current battle over Ukraine, the Russians have to assume that the Euro-American interest in creating a pro-Western regime has a purpose beyond Ukraine. From the Russian point of view, not only have they lost a critical buffer zone, but Ukrainian forces hostile to Russia have moved toward the Russian border. It should be noted that the area that the Russians defend most heavily is the area just west of the Russian border, buying as much space as they can.

The fact that this scenario leaves Russia in a precarious position means that the Russians are unlikely to leave the Ukrainian question where it is. Russia does not have the option of assuming that the West’s interest in the region comes from good intentions. At the same time, the West cannot assume that Russia—if it reclaims Ukraine—will stop there. Therefore, we are in the classic case where two forces assume the worst about each other. But Russia occupies the weaker position, having lost the first tier of the European Peninsula. It is struggling to maintain the physical integrity of the Motherland.

Russia does not have the ability to project significant force because its naval force is bottled up and because you cannot support major forces from the air alone. Although it became involved in the Syrian conflict to demonstrate its military capabilities and gain leverage with the West, this operation is peripheral to Russia’s main interests. The primary issue is the western frontier and Ukraine. In the south, the focus is on the Caucasus.

It is clear that Russia’s economy, based as it is on energy exports, is in serious trouble given the plummeting price of oil in the past year and a half. But Russia has always been in serious economic trouble. Its economy was catastrophic prior to World War II, but it won the war anyway… at a cost that few other countries could bear. Russia may be a landlocked and poor country, but it can nonetheless raise an army of loyal Spartans. Europe is wealthy and sophisticated, but its soldiers have complex souls. As for the Americans, they are far away and may choose not to get involved. This gives the Russians an opportunity. However bad their economy is at the moment, the simplicity of their geographic position in all respects gives them capabilities that can surprise their opponents and perhaps even make the Russians more dangerous.

Oil Oversupply

National Commercial Bank looks at the impact of oversupply of oil.

Elevated production levels, decelerating demand, and record high inventories will suppress oil prices to an average of $50/bbl in 2016, the National Commercial Bank (NCB) said in its latest monthly “Views on Saudi Economic and Developments”.

It said growth dynamics pertaining to emerging markets, in particular China, and production factors relating to OPEC have underpinned the bearish view.

The lack of compliance among OPEC members that produced above the 30MMBD quota for the 18th month in a row will be an important drag, especially that the group lacks a unified front.

Saudi Arabia, Iraq and Iran are adamant in producing as much as they can. The Kingdom’s production peaked at 10.6 MMBD in June, while Iraq has increased output over the year by around 0.7 MMBD, reaching 4.2 MMBD in November. Additionally, lifting the sanctions imposed in July 2012 on Iran is expected to bring an additional 500 thousand barrels a day during 1H2016, which will keep OPEC’s production above the 32 MMBD mark. Even though non-OPEC members and high-cost producers will continue to be pressured this year, the anticipated decline in their production will not offset OPEC’s over quota strategy. The IEA, EIA and OPEC have forecasted a decline in non-OPEC supply between 400-600,000 barrels a day, the first annual decrease since 2008, largely due to the steeper decline in US shale production.

The EIA predicted in its latest report that companies operating in US shale formations will reduce production by a record 570,000 barrels a day, which underscores the challenging environment even after slashing capital spending, laying off workers and focusing on the most productive areas.

On the demand side, China is expected to have the weakest economic performance since 1990, with growth falling below 7% for 2015 and 2016 despite the myriad attempts to reduce interest rates, reserve requirements and devalue the yuan in order to spur business activity.

Furthermore, emerging markets are expected to expand at 4%, the slowest pace since 2010 and well below their 10-year average of 7%. Generally, the three eminent organizations are forecasting oil demand to rise between 1.2 and 1.4 MMBD in 2016, much slower than last year that saw demand grow by as much as 1.8 MMBD, a five-year high.

The record US and global crude oil inventories will also continue to weigh on oil markets. The end of year US crude oil inventory at 487.4 MMbbls is 27% more than the level recorded in 2014, which was 388 MMbbls, and is also at an 80-year high for this time of year.

Additionally, the OECD’s commercial total oil inventories rose to around 2.971 billion barrels, near a record level that is equivalent to 60 days of consumption and above the five-year average. Given these aforementioned dynamics, NCB forecast the market to remain unbalanced in 2016.

Source: Saudi Gazette

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

 

Figuring out the Value of Yuan

John Mauldin looks at the true value of Yuan and its impact.

Recent Chinese stock market volatility has had more to do with China’s currency than its stocks. Donald Trump and other politicians (yes, he is one) often assail Beijing for devaluing its currency and acquiring an unfair advantage.

First, the Chinese have actually been manipulating their currency upwards. While countries in the rest of the world have been letting their currencies devalue against the dollar, China has maintained an effective dollar peg until very recently. And then the “move” that seems to have everybody in a dither was only about 4%. To be fair, what really had the markets worried was that this move might presage an effective devaluation. And considering that China has watched the euro, the yen, and nearly every emerging-market currency drop anywhere from 30 to 50% against the yuan – a rather painful experience for its export sector – the Chinese have been quite patient.

Beijing think it can boost exports by manipulating its currency lower? I don’t think so. Remember how their business model works. Unlike, say, Saudi Arabia, China doesn’t simply extract resources from the ground and export them. Chinaimports raw materials, transforms them into finished goods in its factories, and then exports those goods. Their gain lies in the value added in the manufacturing process.

That means that China can’t grow exports without also growing imports. Pushing the yuan lower helps, but it’s a relatively inefficient tool for reducing the trade surplus.

Cheapening the currency has another consequence China doesn’t want. It makes imported products more expensive for Chinese consumers. The country’s abilities are growing fast, but it still depends on outside sources for many important goods. Making them cost more doesn’t help build the consumer-driven economy Beijing says it wants.

For those reasons and more, China Beige Book has a contrarian view on the Chinese currency. They believe Beijing wants the yuan to rise, not fall. So what is happening with all these interventions the Chinese authorities are making in the currency market?

The first point to remember is that the adjustments have all been quite small – far smaller than the hoopla suggests. For all the clamor that erupted last year, the yuan fell just over 4.5% against the dollar. That’s quite a lot if you are leveraged 10x, as currency traders often are, but for most merchants and consumers the change was hardly noticeable.

Recall all that happened in 2015. Aside from the stock market fireworks, China won acceptance of the yuan into the IMF’s reserve currency basket. It also watched the Federal Reserve finally make a first, tentative move toward higher rates and a correspondingly stronger dollar. If all that couldn’t crush the yuan, it’s not clear to me that anything will.

 

The second point is critical: China controls its currency by both central bank action and subtler tools. They have immense power to nudge the currency up or down. Tightening and loosening the controls is like turning a volume knob. They can crank the yuan up or turn it down.

Presently they are clamping down harder than usual in order to deter speculation. Much of this is happening under the radar, one business and industry at a time. Nevertheless, people are starting to feel the consequences.

Source: Mauldin Economics

 

 

 

Understanding the Chinese Transition

John Mauldin looks at the latest happenings in the Chinese Economy and their significance.

China Beige Book’s fourth-quarter report revealed a rude interruption to the positive “stable deceleration” trend. Their observers in cities all over that vast country reported weakness in every sector of the economy. Capital expenditures dropped sharply; there were signs of price deflation and labor market weakness; and both manufacturing and service activity slowed markedly.

That last point deserves some comment. China experts everywhere tell us the country is transitioning from manufacturing for export to supplying consumer-driven services. So if both manufacturing and service activity are slowing, is that transition still happening?

The answer might be “yes” if manufacturing were decelerating faster than services. For this purpose, relative growth is what counts. Unfortunately, manufacturing is slowing while service activity is not picking up all the slack. That’s not the combination we want to see.

Something else China Beige Book noticed last quarter: both business and consumer loan volume did not grow in response to lower interest rates. That’s an important change, and probably not a good one. It means monetary stimulus from Beijing can’t save the day this time. Leland thinks fiscal stimulus isn’t likely to help, either. Like other governments and their central banks, China is running out of economic ammunition.

One quarter doesn’t constitute a trend. Possibly some transitory factors depressed the Chinese economy the last few months, and it will soon resume its “stable deceleration” course. It is hard to imagine what those factors might have been, though. The data is so uniformly negative that it sure looks like something big must have changed.

What does this economic weakness say for Chinese stocks? Probably nothing. It should be clear to all that the Chinese stock market is completely unrelated to the Chinese economy. They don’t move together, nor do they move opposite each other. They have no consistent connection at all – or at least not one we can use to invest confidently. I went to Macau when I was in Hong Kong a few weeks ago, just to observe the fabled fervor with which the Chinese gamble. The place did indeed have a different “feel” than Las Vegas does. I’m not the only one to think that the Chinese stock market is just an outpost of Macau, but one in which leverage and monetary stimulus can overload the system.

Let me say that there are real companies with real value in China. But the rules on the ground, not to mention the accounting, make it a particularly treacherous market to invest more than your own “gambling money.”

Source: Mauldin Economics

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

Chinese Economy braced for a Reality Check

Valentin Schmid evaluates the Bank of America Report on the Chinese Economy.

The Chinese regime still has considerable power over the markets. After a 7 percent crash of the Shanghai Composite on January 4, it managed to reverseanother 3 percent drop on January 5.

So, in the very short term, all is well. In the long term and even in 2016, Bank of America sees big problems ahead for the Chinese economy. According to their analysts, the regime has to fight multiple battles at once and will ultimately lose to market forces.

“We judge that China’s debt situation has probably passed the point of no-return and it will be difficult to grow out of the problem,” states a report by Bank of America’s chief strategist David Cui.

The report points out that a spike in private sector debt almost inevitably leads to a financial crisis. China’s private debt to GDP ratio went up 75 percent between 2009 and 2014, bringing total debt-to-GDP to about 300 percent. Too much to sustain.

This is “a classic case of short-term stability breeding long-term instability. It’s our assessment that the longer this practice drags on, the higher the risk of financial system instability, and the more painful the ultimate fallout will be,” Cui writes.

For the coming crisis, Cui believes China will probably have to devalue its currency, write off bad debts, recapitalize the banks, and reduce the debt burden with high inflation.

After the events of last August, and after the International Monetary Fund finally included China in its reserve currency basket, the regime completely abandoned the stable currency objective and let the yuan drift lower. The regime promises reform, and even follows through in some cases. But if push comes to shove, it resorts to central planning to mould the market according to its needs, with less and less success.

“It seems to us that the government’s policy options are rapidly narrowing-one only needs to look at how difficult it has been for the government to hold up GDP growth since mid-2014. A slowdown in economic growth is typically a prelude to financial sector instability,” writes Cui, and predicts the Shanghai Composite to drop by 27 percent in 2016.

Source: Bank of America Report

 

A quarter of the world’s population will live in Africa by 2050

Lily Kuo writing for Quartz Africa

As of mid-2015, the world’s population stands at 7.3 billion (pdf), according to a new estimate by the United Nations. Over half of the world lives in Asia and a little under a fifth live in Africa.

But in 35 years, that picture will look radically different. Between now and 2050, over half of the global population growth will take place in Africa, with the continent adding 1.3 billion people, compared with Asia’s 0.9 billion. Thus, by 2050, Africa’s share of the global population will reach 25%, as Asia’s share falls to 54%.

atlas_V1Hn0kX5@2x

Here’s where most of global growth came from so far this decade:

atlas_EJpF_1Xq@2x

 And this is where the majority of growth will come from in a similar period 30 years from now:
atlas_VJCe51Qc@2x(3)
As you can see, Nigeria is expected to top the list. The West African country is expected to surpass the size of the United States by 2050 with its population more than doubling from today to reach almost 400 million.

As a result, Nigeria could enjoy the so-called “demographic dividend,” provided that there are enough jobs to absorb the working-age population and sufficient investment in young people’s development, the UN notes. According to the last poverty survey released in 2012 by the government, some 61% of Nigerians lived on less than a dollar a day in 2010.

Sub-Sahara Africa’s population boom is one of the main reasons for optimism about the continent’s economic growth potential. But that doesn’t come without major challenges. Forty-eight countries classified by the UN as “least developed countries” are expected to double in population size by 2050; 33 countries, most of them falling within this category, will triple in size by 2100. The UN details a long list of challenges governments will face as populations expand:

The concentration of population growth in the poorest countries will make it harder for those governments to eradicate poverty and inequality, combat hunger and malnutrition, expand education enrollment and health systems… and implement other elements of a sustainable development agenda to ensure that no-one is left behind.

Source: http://qz.com/467755/a-quarter-of-the-worlds-population-will-live-in-africa-by-2050/

Middle East Turning Net Borrowers?

By Martin Armstrong of Armstrong Economics:

SovTimeBomb

Further evidence that 2015.75 is really the peak in a Massive Debt Bubble: The Middle East has always been on a cash basis as their revenues from oil exempted them from ever borrowing money – that is not the case today.

As oil prices rose, spending programs also anticipated no end in sight. So as oil peaked and has begun a technology-shift bear market, those spending programs are causing budget deficits to appear in the Middle East for the first time. Not only has Saudi Arabia issued its first bond issue of $4 billion to cover budget deficits, other countries may follow in the region.

The May turning point has indeed been a profound turn on the long-term setting the stage for the reversal in the short-term come 2015.75. If you can comprehend how everything is connected, you can see these events coming. Since May, Saudi Arabia’s foreign assets have entered crash mode. In May, foreign asset holdings fell over $672 billion. Saudi Arabia sold assets drawing down its reserves to cover the budget deficit.

Source: http://www.armstrongeconomics.com/archives/34916

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/

 

 

6 Key Investment Themes For The Next Decade

Reported by Zerohedge for Asia Confidential:Thematic investing, or investing based on emerging themes, is fraught with some danger. Many people invest in the latest hot theme and get burned soon enough. Others mindlessly put their money into a company based on a theme without regard to valuation or quality of management – another sure-fire way to end up in the red.And let’s face it: the future is inherently uncertain. If picking future investment themes was easy, everyone would be sipping pina coladas in Bora Bora. The best investors know this and place their bets according to probabilities. That is, they invest when the odds are in their favour and invest large amounts when those odds offer significant upside with minimal risk.The question then becomes this: which investment themes might give you the best odds of success over the next decade? It’s a tough question. If there’s one thing for which I have a high degree of conviction, it’s that the world is currently drowning in debt and that debt will need to be cut, one way or another. If that’s right, you’ll want to avoid sectors which have benefited most from the three decade long expansion in credit. The finance sector is an obvious one and the bear market here is likely to last decades. The tech sector is another – think of all the tech start-ups and others which will evaporate when the silly venture capitalists funding them don’t have access to cheap and abundant money. There are many other sectors which will suffer too.In other words, you’ll probably want investment exposure to themes which may still thrive in a world of shrinking credit. There won’t be many of them but Asia Confidential has a few ideas. Asian outbound tourism has been, and should continue to be, a strong theme which transforms the global tourism sector. Privatisation of state-owned assets appears a sure thing – in the developed world as well as China – given bloated government balance sheets. Acquirers with deep pockets should benefit. Low to mid-end consumption should do well as developed world consumers tighten their belts while Asian ones start to spend more with increased wages. Finally, gold is likely to thrive as the credit boom turns to bust and faith in government policies and currencies is shaken.

Asia outbound tourism

I remember doing a research report as a sell-side analyst in Indonesia in early 2006 looking at the potential boom in visitors to the beautiful beaches of Bali due to a growing influx of Chinese tourists. It was considered then a far-flung theory as Bali was still suffering from a series of terrorist bombings and Chinese tourists only accounted for about 6% of total visitors to the island. Since then though, Balinese tourism has surged and the Chinese have played a significant part in that. China now tops Japan as the country with the second-largest number of visitors to Bali behind Australia. And Chinese tourists account for nearly 12% of total visitors to the island, double that of 2006.

Back then, there were no airlines offering direct flights from China to Bali. Now there are several. That’s not counting the many charter flights which the Chinese take to the island. In Bali today, there are also slews of foot massage shops, jewellers, status artwork and other items catering to Chinese consumers, Chinese restaurants and Chinese speaking guides.

These trends are not only happening in Bali, but in every tourist destination across the world. Chinese tourists are driving growth and their needs are being increasingly catered too. And those needs are very different to tourists from the U.S., Europe or Japan. For instance, Chinese tourists spend much more money on shopping vis-a-vis hotels. Various studies suggest two-thirds of Chinese overseas tourists spend more than 20% of their budgets on shopping with 25% spending greater than 50% of their budgets on shopping.

The trend of increasing Chinese outbound tourism looks set to continue. In 2012, the Chinese outbound tourism market became the world’s largest, moving ahead of the U.S. and Germany. The number of annual Chinese outbound tourists now totals 83 million, up almost 8x since 2000.

 

The great thing about this trend is that it appears to be in its infancy. Think about how the Japanese, having fully recovered from the ravages of World War Two, took to the skies from the 1970s and transformed tourism destinations such as Hawaii and Australia’s Gold Coast. They also transformed the airlines, hotels, amusement parks, travel agents, restaurant chains, spa and beach resorts as well as duty free stores which catered to them.

The same thing is likely to happen as China and other Asian countries catch the travel bug. The companies which best fulfil their needs will be big winners.

I like the Macau casino operators in the long-term even though valuations are somewhat stretched at present. Macau accounts for almost 30% of Chinese outbound tourism and that number should increase as transport infrastructure to the territory improves. Among the casino companies, U.S.-headquartered Las Vegas Sands (NYSE:LVS) is probably the pick of the bunch.

I also like Hong Kong retailers as a play on Chinese tourism. Hong Kong is still the dominant destination for Chinese tourists and is likely to remain so. Though be wary of some of the high-end retailers who’ve benefited from the lavish spending habits of corrupt Communist Party officials. That may not last.

Finally, hotel operators with significant Asian exposure should do well. Thailand conglomerate, Minor International (SET:MINT), is my preferred stock in this space.

Privatisation of state-owned assets

In 2011, the world’s biggest private equity firms were busy raising money to take advantage of over-indebted European countries needing to shed state-owned assets to stay afloat. Wholesale asset sales never really happened though as these countries papered over cracks, with the help of a few trillion dollars from the European Central Bank.

Europe’s problems haven’t gone away though. And the problems aren’t limited to Europe, as governments in the U.S., U.K, Japan and China have similar issues. Put simply, all of them have too much government debt. And one way or another, that debt will need to be cut back. Whether through write-downs, austerity, inflation or a combination of all of them, the debt will be reduced.

One way to cut debt is through the privatisation of state-owned assets. I think that this will be one of the enduring investment themes of the next decade. Ironically, it seems probable that the paragon of communism, China, will be the first to accelerate the sale of government-owned assets in an effort to reduce the influence of state-owned enterprises (SOEs) and encourage competition.

Which companies will benefit from the broad-based sale of state-owned assets? Well, most would point to private equity firms such as Blackstone and TPG. But I’d suggest otherwise as these firms rely on outside funds and in a credit-deprived world, these funds will dry up.

Instead, I’d look to conglomerates with deep pockets and minimal debt to take advantage of asset sales. Some of the large North American companies such as Berkshire Hathaway (NYSE:BRK-A) and Brookfield Asset Management (NYSE:BAM) should be in poll position.

In Asia, it’s a bit trickier as the private companies bidding on state-owned assets will need high-level government connections to be successful. Particularly in Japan and China.

Low to mid-end consumption

In the West, excess debt and declining real wages have resulted in consumers cutting back on spending since 2008. That’s been bad for high-end retailers but good for businesses such as dollar stores. It’s a trend which is likely to continue for many years to come.

In Asia, the situation is very different. Consumer balance sheets are in great shape, barring South Korea. Savings are abundant while debt is minimal. Better yet, wages are growing rapidly, even in slowing economies such as China, India and Indonesia. Excess savings and rising wages augur well for future spending.

Moreover, you have countries such as China which are encouraging people to spend more. It’s part of China’s strategy to re-balance its economy away from being over-reliant on investment for economic growth.

As a consequence, low to mid-end consumer companies across the globe are likely to do well going forward. In the developed world, consumers will continue to trade down. In the developing world, you should have people spending more, albeit still at the lower end given most of the region, including China and India, remains poor.

I’m not an expert on consumer companies in the developed world but discount operators should outperform from here. Dollar store companies in the U.S., U.K. and Australia have recently underperformed on hopes of economic recovery, which may provide some interesting potential entry points.

In my neighbourhood of Asia, Hong Kong headquartered, Giordano (HKSE:709), is one of the best low-end clothing retailers in the region and is inexpensive at current levels. Other exceptional consumer brands worth looking at include Chinese beer giant, Tsingtao Brewery (HKSE:168), and Thailand television operator, BEC World (BSE: BEC).

Gold

Long-time readers will know my preference for having gold in an investment portfolio. Gold has two things going for it. First, if you think that debt contraction is probable in future as I do, that brings risks to the world’s financial system. After all, the still thinly-capitalised banks own much of the debt which will need to be restructured/written down. Therefore, it’s be wise to own assets which sit outside the financial system. That’s where gold comes into play.

Secondly, the current policies of the world’s central banks may be preventing the contraction in debt which needs to occur to cleanse the financial system. In my view, central bank moves to reflate the credit bubble are likely to lead to a larger credit bust down the track. In many ways, gold is the anti-central bank. The less faith that you have in central banks, the more gold that you should own.

As for the best ways to play gold, exchange-traded funds (ETFs) and stocks both have counterparty risks, though I do find the latter attractive given they’re arguably the most hated assets on the planet. Physical gold is my preferred way to play this theme though as it’s the least risky of these options.

Agriculture

If a prudent investment strategy involves holding physical assets outside of the financial system, then agriculture should also be considered. Unlike many of the hard commodities, agriculture has a serious supply-demand imbalance which should result in prices remaining elevated for years to come.

Agriculture inventories are at multi-decade lows. That means inventories are being drawn down as consumption exceeds production. Global agricultural production has only increased by 2.1% per annum over the past decade and the OECD forecasts that growth rate will decline to 1.5% over the next ten years.

The principle reasons behind the lack of supply are limited expansion of agricultural land, increasing environmental pressures, rising production costs and growing resource constraints.

Meanwhile, demand continues to grow solidly primarily due to growing populations, higher incomes and changing diets (higher calorific intakes) in developing markets. On the latter, for example, it’s well known that meat consumption increases as a country becomes wealthier. The OECD predicts that the developing world will account for 80% of the growth in meat consumption over the next decade.

 

While droughts in recent years and subsequent surges in agricultural prices have grabbed television headlines, it’s worth remembering that these events merely exacerbated the already tight supply in soft commodities. And it seems that tight supply will only worsen unless there are major technological breakthroughs to improve agricultural productivity.

As for where best to get investment exposure to agriculture, I’d suggest you look at commodities where supply-demand imbalances may further deteriorate, such as sugar, coffee and potash.

Infrastructure

In the U.S., good arguments have been made for an urgent upgrade of creaking infrastructure. Increased spend on infrastructure could create jobs, improve security at ports and electricity grids as well as keep the U.S. competitive with China – all of which could be financed at exceedingly low interest rates thanks to Mr Bernanke’s quackery. But political gridlock means it probably won’t happen.

In the developing world, the problem is not of repairing infrastructure, but building it. Some countries such as Singapore and China are host to some of the world’s best highways, airports and ports. Others such as India and Indonesia remain in the dark ages.

For instance, Indonesia spends just 1.7% of GDP on infrastructure, compared to China’s 8%. More than 40% of Indonesia’s roads remain unpaved. The country has only 11 miles of railway line per person, less than half that of Thailand, India or China.

Anyone who’s been in a traffic jam in Jakarta can attest to the underspend. Are traffic jams in Jakarta the worst of any capital city in the world, I wonder?

The likes of Indonesia don’t have any choice but to improve infrastructure, and fast. Otherwise, supply bottlenecks will choke economic growth. The cement sector in Indonesia is an oligopoly and a great way to play to the increased infrastructure spend to come. Indocement (JSE: INTP) is the pick of the bunch.

This post was originally published at Asia Confidential: http://asiaconf.com/2013/10/06/6-key-investment-themes/

More private property being confiscated… Get ready – its coming to a government near you!

Simon Black writing for SovereignMan:

…….. speaking of pensioners, you’ve undoubtedly heard by now that Poland has ‘overhauled’ its pension system by making a grab for private pension fund assets.

In nationalizing pension funds, the government of Poland gets to count those assets on its balance sheet, thus ‘reducing’ net public debt by roughly 8% of GDP.

This is a criminal enterprise, plain and simple. And anyone else would get thrown in jail for such a move.

Of course, the government claims that it’s for everyone’s safety and security.

By nationalizing pension funds, the government plans to gradually ‘adjust’ people’s portfolios away from stocks and into… what else? Government bonds.

Naturally, this is for people’s benefit, since government bonds are so safe and secure.

Prime Minister Donald Tusk: “We believe that, apart from the positive consequence of this decision for public debt, pensions will also be safer.”

And there you have it– confiscation of private property = Safety.

We’ve been talking about this trend for four years now. This is no longer theory. It’s real. It’s happening. And it’s coming soon to a bankrupt, insolvent nation near you.

Have you hit your breaking point yet?

Source: http://www.sovereignman.com/trends/how-has-this-not-led-to-outright-revolution-yet-12679/

Israel Palestinian Peace Talks Show the Way

Peace talks are currently underway between Israel and Palestine and sponsored by the USA. It is more a reflection of global social mood. The fact they are engaged in talks reflects the positive mood emerging as the so called economic recovery continues. At this time the chances of breakthrough and success is higher than at other times. It also indicates where we are in the current business cycle.

This event taken in conjunction with other evidence (eg skyskyscraper theory) shows we are late in the cycle of waxing positive social mood and the resultant economic expansion that follows.

How mobile phones are making cash obsolete in Africa

By GEOFFREY YORK

HARGEISA, SOMALIA — The Globe and Mail

When he rolls into a gas station to fill his tank, Barkhad Dahir doesn’t get out of his car. He punches a few buttons on his cellphone and within seconds he has paid for the fuel. No cash needed.

With the same quick keystrokes on his phone, he pays for virtually everything he needs: groceries at the supermarket, a few oranges from a market stall, a shoeshine on the street, a cup of sweet milky tea from a café, and even, if he wants, an afternoon’s worth of khat, a mild drug favoured by many Somalis.

“Everyone here has his own bank, with easy access and no restrictions,” boasts Mr. Dahir, a local journalist. “Even lying in bed, you can be paying your bills.

Here in one of Africa’s poorest countries, where illiteracy is high and traditional banks are almost non-existent, a mobile revolution has created an informal electronic banking system with more efficiency and convenience than anything in Canada.

In the cities of Somaliland, the future has arrived: cash is disappearing, credit cards are unnecessary, and daily shopping is speedy and digital. Almost every merchant, even hawkers on the street, accepts payment by cellphone.

It’s an innovation that could transform the continent. Africa is already leading the world in the use of mobile money, and its growth is accelerating. In countries such as Kenya, Tanzania and Uganda, mobile-money accounts have become much more widespread than bank accounts. More than 17 million Kenyans (two-thirds of the adult population) are using mobile-money services, mainly to transfer money to family members or business partners in distant locations, but increasingly for bill payments and small loans.

Somaliland, a region in northwestern Somalia that has broken away and declared independence from Mogadishu, has one of the world’s highest rates of digital transactions. Most transactions are on Zaad, a service of the biggest mobile-phone company, Telesom. A survey last year found that the average customer made 34 transactions per month – a higher rate than almost anywhere else in the world.

“I don’t even carry money any more,” says Adan Abokor, a scholar and democracy activist in Somaliland.

“I haven’t seen cash for a long time. Even small payments, like a bus ticket, can be made with Zaad. When my kids are at school and they want a sandwich, I send them the payment by Zaad. It’s immediate – there’s no waiting for it, no counting of cash.

The system is impressively simple and secure. Subscribers give an occasional lump-sum payment to Telesom and then use this balance to pay merchants digitally. To make a purchase, they dial a three-digit number, enter a four-digit PIN and then enter the merchant’s Zaad number and the amount of the payment. Every merchant – even street vendors – keeps their Zaad numbers prominently displayed. Within moments, the customer and the merchant both receive text messages to confirm the payment and the transaction is done.

Mobile money has also drastically reduced the cost of crime and security for consumers, private companies and government offices. The Coca-Cola branch in Somaliland, for example, is the only cashless Coca-Cola company in Africa. About 80 per cent of its sales to its retail distributors are done through Zaad, while the remainder are done by electronic bank transfers.

“We never handle a single dollar in cash,” says Moustapha Osman Guelleh, chief operating officer of Coca-Cola’s licensed bottler in Somaliland. “We don’t have any issues of having to keep cash in a safe.

Many companies use Zaad for all of their salary payments to their employees. “It has made life easier for our people,” says Khader Aden Hussein, general manager of the Ambassador Hotel in Hargeisa, who uses Zaad to pay all of his 300 employees and almost half of his suppliers. “What amazes me is that even illiterate people have learned how to use it.

Of the 3.5 million people in Somaliland, more than 500,000 subscribe to Telesom, and more than half of these subscribers are using Zaad.

The mobile-money system grew out of Somaliland’s heavy dependence on remittances from Somalis who work abroad – an estimated $1-billion annually. Remittances are increasingly sent home electronically and mobile money became a natural outgrowth.

There are other key reasons for the dramatic rise of mobile money here: the lax regulation of the telecommunications sector, which has had the unintentional effect of encouraging innovation; the weak local currency, which has created a dollarized economy (since Zaad is denominated in dollars); and even Somali cultural factors. “Somali society is an oral culture, so everyone needs a mobile phone,” Mr. Abokor says.

The biggest African user of mobile money is Kenya, where the most popular service, M-Pesa, has 15 million subscribers through the leading cellphone company, Safaricom. It was originally used mainly by migrant workers to transfer money home to their families. But now it is widely used to receive salaries and pay bills and school fees.

That was just the beginning. More than 1.2 million Kenyans are now using M-Shwari, a mobile-banking system created last November, which allows them to set up their own savings accounts, earn interest and borrow money with their cellphones.

Often they use the service to borrow a few dollars for their cash needs, repaying it a month later for a single fee of 7.5 per cent (less than the interest rates of street lenders).

Loans are usually approved immediately and customers can collect their cash from the nearest M-Pesa merchant, usually in the same neighbourhood.

somalia-money22nw1“I use it often, especially when I’m broke,” says Doris Obondo, a 21-year-old employee at a cyber café in Nairobi.

“You don’t have to go into the long queues at the bank. Near the end of the month, when my salary is getting finished, I just borrow from M-Shwari. One evening I had nothing to eat, so I borrowed 200 shillings (just over $2) and then I repaid 215 shillings a month later.

Source:  http://www.theglobeandmail.com/news/world/how-mobile-phones-are-making-cash-obsolete-in-africa/article12756675/

Europe is Fixed? Just Like Wall Street Was “Fixed” in May 2008, How’d That Turn Out?

Graham Summers writing for GainsPainsCapital:
In 2008, as the financial crisis picked up steam, one by one the big bank Wall Street CEOs came forward to assure everyone that “everything is fine” and that their banks were “well capitalized.”

Anyone who did a bit of actual research knew this was not the case. But a large component of corporate (and political) leadership is to maintain confidence and calm no matter how bad things get.

As a result of this, in May 2008 alone, executives at Citigroup, Goldman Sachs, JP Morgan, Lehman Brothers, and Merrill Lynch all stated that the worst was over for financials.  That’s right, in just one month executives at ALL of these firms issued proclamations that everything was just dandy for the banks.

The market took about five months to realize the truth, at which point these firms imploded taking the market with them.

I bring this up because we’re seeing this same game played out on a much larger scale in Europe today. Starting in November, various political bigwigs from the EU, whether it be Germany’s Finance Minister Wolfgang Schauble, France’s Prime Minister Francois Hollande, of Spain’s Prime Minister Mariano Rajoy have all stated that the EU Crisis is either over… or that at least the worst of it is over.

It’s rather incredible when you consider the complete and utter failure of these folks to solve the debt problems for a country as small as Greece (which makes up only 2% of the EU’s GDP).

Greece entered a crisis in 2010. Three years later, its major banks are STILL insolvent, the Greece economy has contracted over 20% (the sort of collapse Argentina saw in 2001 when its entire financial system failed), and nothing has been fixed.

So… the EU, with the help of the ECB, IMF, and the US Fed (QE 2 and 4 were basically EU bank bailouts in disguise), COULDN’T SOLVE GREECE’S PROBLEMS. And we’re supposed to believe that these folks can solve Spain, Italy or even France’s!?!

Let’s cut through the crap here.

The European banking system is a complete and total disaster. Remember how bad Wall Street was in 2008? Europe’s banks are many multiples worse than that. The US at least recapitalized its banking system after the Crisis.

Europe hasn’t. At all. That’s right, the banks in Europe have not raised capital to bring down their leverage rations, which is why the ENTIRE EU BANKING SYSTEM IS LEVERAGED AT 26 TO 1.

Lehman, which was a total sewer of garbage debt, was leveraged at 30 to 1. Europe’s ENTIRE SYSTEM is leveraged at 26 to 1.