China is similar to Japan in the 1980s in terms of financial imbalances and challenges for the real economy, but, as JPMorgan notes, China differs in terms of its stage of economic development. Turning possibility into reality is not an easy task, especially as China’s structural slowdown is accompanied by mounting financial imbalances. In the near term, overcapacity and decline in the rate of return on investment are the major challenges to be addressed by policymakers, and rising debt in the corporate sector and local governments needs to be contained and gradually reduced. In our view, this would require reform not only on the economic front (e.g., fiscal reform, land reform, financial reform, and SOE reform), but also social reform (e.g., hukou reform) and governmental reform (e.g., changing the role of the government and de-monopolizing). The list of tasks is daunting, but policy inaction could be even more dangerous - a delay in economic restructuring in China could lead to a repeat of Japan’s experience.
It is so sad to watch one of America's greatest cities die a horrible death. Once upon a time, the city of Detroit was a teeming metropolis of 1.8 million people and it had the highest per capita income in the United States. Now it is a rotting, decaying hellhole of about 700,000 people that the rest of the world makes jokes about. Detroit is only just the beginning. When the next major financial crisis strikes, we are going to see a wave of municipal bankruptcies unlike anything we have ever seen before. All over the nation, our economic infrastructure is being gutted, debt levels are exploding and poverty is spreading. We are consuming far more wealth than we are producing, and our share of global GDP has been declining dramatically. We have been living way above our means for so long that we think it is "normal", but an extremely painful "adjustment" is coming and most Americans are not going to know how to handle it. So don't laugh at Detroit. The economic pain that Detroit is experiencing will be coming to your area of the country soon enough.
The following brief video created by TheRules.org, using data sourced from this website, is the latest vivid demonstration of the most adverse (and dangerous) side effect of nearly five years, and counting, of global monetary intervention by central banks: a world in which the poor get poorer, the rich get richer, and the middle class disappears. The video's punchline "The richest 300 people on earth have as much wealth as the poorest 3 billion" is not exactly correct: in truth the situation is even worse: the richest 200 people have about $2.7 trillion, which is more than the poorest 3.5 billion people, who have only $2.2 trillion combined.
Amid the furore of Sunday morning political programming, Detroit Mayor Bing and Michigan Governor Snyder have been quite vocal. Bing made it clear that "a lot of negotiations will go into fixing our city," and when asked whether he will seek a Federal bailout, he responded, "not yet." The decisions following this huge bankruptcy are likely to be precedent-setting as Bing noted that more than 100 urban US cities "are having the same problems we're having." As the WSJ reports, Bing warned, "We may be one of the first. We are the largest. But we absolutely will not be the last. And so we have got to set a benchmark in terms how to fix our cities." Snyder was a little more hopeful that salvation will come from above as he stated that while "I don't view that as the right answer... if the federal government wants to [bail us out], that’s their option."
One of the catalysts driving the Friday rally in stocks was news from the PBOC that China was pushing forward with liberalization of its "interest rate controls" by removing the lending rate floor. Back then we asked, rhetorically, that "besides optics, because China does not have a market clearing interest rate so this announcement is largely moot, will this announcement have an actual impact on Chinese lending or transmission mechanisms? Hardly." As SocGen lays out today, "Hardly" was indeed the accurate answer: "Although the step is of great significance, the near term impact is likely to be very limited."
Late on Friday, with little fanfare, the government's Office of the Director of National Intelligence (ODNI) reported that the secret FISA court - the "legal" administrators of the NSA's assorted domestic espionage programs - would be granted an extension of its telephone surveillance program. And while so far the US public has shown a stoic resolve in its response to learning more details about how the US government spies on its day after day, things may soon be changing. As McClatchy reports, "Congress is growing increasingly wary of controversial National Security Agency domestic surveillance programs, a concern likely to erupt during legislative debate - and perhaps prod legislative action - as early as next week." Among the measures considered are legislation to make those programs less secret, and talk of denying funding and refusing to continue authority for the snooping.
As expected, Prime Minister Shinzo Abe's ruling bloc won a decisive victory in an upper house election on Sunday, setting the stage for Japan's first stable government since Koizumi left office in 2006. The Japanese people voted for moar of the same irresponsible monetary policy and this provides a three-year window without a national election and strengthens PM Abe’s hand to supposedly deliver on the promised reforms. As Reuters reports, "people wanted politics that can make decisions", and, "'Abenomics' is proceeding smoothly and people want us to ensure the benefits reach them too." So moar trickle-down wealth-creation for the Japanese, moar surging energy prices, moar currency wars, and moar leverage. There will now be a significant tradeoff among his 'three-arrows' strategy - between monetary and fiscal/reform policy - as the reform agenda may actually enable less monetary policy, increasing the chances of higher inflation in Japan without additional monetary stimulus. This may be just what Kuroda needs to save the JGB market from failure (at least in terms of jawboning if not actuality).
Overnight there has been a flood of viral reports that 'there was a fire at JPM's gold vault' based on a self-made video showing a barrage of fire trucks located on Broad Street between Wall Street and Exchange Place, further subsantiated additionally by a @FDNY tweet around 6:30 pm on Saturday which indeed confirmed there had been a "commercial fire in a vault." So did a sweeping fire "take place" (in broad daylight and in front of video camera armed streetwalkers) provide the fire brigade a pretext to abscond with JPM's gold, or merely give JPM an alibi to say it's gold is "gone... all gone" or rather "burned... all burned" (leaving aside the propensity of a fire to propagate in the confined oxygen constraints to be found on top of the Manhattan bedrock and far below street level)? No.
Detroit’s bankruptcy filing is one depressing read. Poverty, crime, blight – you name the malady and there’s plenty of data to back it up. And unfortunately, Detroit’s not alone. You may be wondering which city hits the wall next...
In a wide-ranging interview with Xinhua, the Chinese finance minister Lou Jiwei started from the normal fantasy-land of central-planners by noting that the topic of a Chinese hard-landing "was not discussed at the G-20," because "no participant believes in the existence of that risk." Commenting on calls for the Chinese to launch new stimulus (to save the world's economy), Lou admonished the other nations, adding "I suggest they fulfill their own due work rather than counting mainly on others." He remained adamant that China is still growing and creating jobs but fears what everyone else fears: "The global market will sustain negative impact should the Fed fail to interact properly with other components of the market." In other words, "get to work, Mr. Bernanke, and don't remove the punchbowl," because as Lou notes, "some countries are overly optimistic on their outlooks."
Ron Paul wrote this scathing assessment and prediction about the newly created DHS eleven years ago. He was outraged by the $3 billion price tag. The DHS 2014 budget is $60 billion. Were his warnings about the American people being spied on by our government accurate? Are you safer today than you were in 2002? Do you have more or less liberty and freedom than you had in 2002? Was it worth it?
Based on eight years of continued prosperity, presidents and economists alike confidently predicted that America would soon enter a time when there would be no more poverty, no more depressions - a "New Era" when everyone could be rich. Then 1929 began - a time when the stock market epitomized the false promise of permanent prosperity... it's only when we learn the lessons of the past can we avoid the mistakes of the future - or this time it's really different.
Are we likely forming a market top? It is very possible. We saw the same type of market action towards the last two market peaks. However, it will only be known for sure in hindsight. The many similarities between the last cyclical bull market cycle and what we are currently experiencing should be at least raising some warning flags for investors. The levels of speculation, leverage, price extensions, duration of the rally, earnings trends and valuations are all at levels that have historically led to not so pleasant outcomes. The reality, however, is that the current "liquidity driven exuberance" could keep the markets "irrational" longer than logic, technicals or fundamentals would dictate.
A month ago we showed the chart that we suspect scared Bernanke straight and required his verbal intervention to de-froth the US Treasury market. The huge surge in 'fails-to-deliver' in the US Treasury market meant something was very wrong as this critical indicator of both collateral shortages and technical carry trade unwinds was flashing a very angry red (and as Barclays notes "was ready to feed upon itself"). Bernanke's jawboning provided just the right amount of concern at the Taper that the market began to clear a little and 'fails' have been reduced (though we note are rising once again as un-Taper exuberance returns). The problem is - exactly the same critical dilemma is now hitting the JGB market and as JPMorgan warns, the sharp rise in fails in June suggests that there is perhaps more stress in the JGB market than that conveyed by the recent stability of JGB yields.
"Things are different now. I’ve turned my savings into spending, rung up thousands of dollars’ worth of purchases on my credit cards and in the process paid a lot more in taxes. And I’ll probably keep spending like this until I nearly run out of money. In other words, I’ve bought a house. Since the recession materialized in 2008, policymakers in Washington have been urging Americans to buy homes, because no single purchase does more to generate economic activity. The housing market and everything associated with it accounts for around one-sixth of the entire economy, which is why a housing bust can drag the whole nation into a recession (basically what happened starting in 2007) while a housing boom can make nearly everyone better off, including people who don’t even own homes."