While it is just as perplexing that Goldman still has clients, what is most surprising in this week's David Kostin "weekly kickstart" is that Goldman's clients have shown a surprising lack of stupidity (this time around) when it comes to the impact of QEtc. Shockingly, and quite accurately, said clients appear to be far more worried about the inflationary shock that endless easing may bring (picture that), than what level the S&P closes for the year. Incidentally with Q3 now over, and just 3 months left until the end of the year, Goldman's chief equity strategist refuses to budge on his year end S&P forecast, which has been at 1250 since the beginning of the year, and remains firmly there. From Goldman: "QE has succeeded in increasing asset prices and inflation expectations but has not convinced investors to raise their US growth expectations. Instead, equity investors have expressed concern about inflation risks while both gold prices and implied inflation rates show similar shifts."
One by one all the money-laundering loopholes in a broke world are coming to an end. First it was Swiss bank accounts, which for centuries guaranteed the depositors absolute secrecy, and as a result saw money inflows from all the wealthiest savers in the world, who felt truly safe their wealth (obtained by legal means or otherwise) would not be redistributed forcefully. In the ecosystem of finance, Switzerland was the depositor bank. Then 2008 happened, and starting with the US, shortly to be followed by every other insolvent country, demands were issued for a full list of people who had used Zurich and Geneva bank vaults to avoid the risk of asset taxation, capital controls and confiscation on their own native soil. The result was the end of the Swiss banking sector as the ultimate target of all global money laundering. In the ensuing power vacuum, others have sprung up to take its place, most notably Singapore, but its days as a tax-haven are numbered by how long it takes China to fall face first into a hard landing at which point no saving on the Pacific seaboard will be safe.
Now, it is the turn of real estate.
This is just the second time in three days that China's province of Guangdong is being discussed on Zero Hedge. On Thursday we wrote that the mega city of Dongguang, once Guangdong richest, is now on the verge of bankruptcy as China's hard landing begins to take its toll. Today, we learn that instead of the rivers running red once all hell breaks loose in China, the color will be soapy white. Specifically, following a chemical spill in Xintang, in the provine of Guandong, the result was a 50 foot tsunami of foam which was swept down a river by heavy rainfall, causing widespread panic and evacuations. It also caused the following brilliant explanation from a Chinese spokesman: "People are right to be cautious but it is harmless. It made very large bubbles when it went over a waterfall, but apart from one or two dead fish, it is harmless." We can't wait to hear Chinese justifications of mushroom clouds: "aside from one or two billion dead people, they give you a healthy green afterglow"?
In the discipline of rational economics - and even in the “economics” which has sadly taken its place - the law of diminishing returns applies to productive processes. It states that with all other factors remaining the same, the addition of more units of one factor of production will at some point result in a lower yield per unit. There is always an optimum combination of factors of production which yields the highest return per unit of production. Increase one of these units beyond that optimum and the yield provided starts to drop. This does not necessarily mean that the amount of output drops. It means that the output is now not being produced in the most efficient manner. Factors of production are being wasted.
To properly understand the events of the time (and to put them in today's context), we believe, like the FEE, that it is factually appropriate to view the Great Depression as not one, but four consecutive downturns rolled into one. These four “phases” are: I. Monetary Policy and the Business Cycle; II. The Disintegration of the World Economy; III. The New Deal; IV. The Wagner Act. The first phase covers why the crash of 1929 happened in the first place; the other three show how government intervention worsened it and kept the economy in a stupor for over a decade. The following brief clip and article shine a light on how bad things were and what was done in the name of 'helping' - there are many shocking analogies for current government-inspired acts from taxation to protectionism to money-supply 'tricks'. Everyone has heard the sage observation of philosopher George Santayana: “Those who cannot remember the past are condemned to repeat it.” It’s a warning we should not fail to heed.
Regular readers are aware that periodically, usually weekly, Zero Hedge presents critical naval updates demonstrating the positioning of key US maritime assets, primarily strategic aircraft carriers. The location of these indicates far more what US foreign policy is focused on at any moment, than propaganda distributed for general consumption via the coopted media. Today, however, instead of focusing on aircraft carriers, using Stratfor analysis, we present several broad "curious" US and French military developments.
It's the weekend so forgive us this modest sidetrack but this 'Onion-esque' story was just too good to ignore.The company at the center of the Olympics' security debacle, G4S (whose directors resigned just yesterday over the "humiliating shambles") has gone one better. As Reuters reports, Megan Rice - an 82-year-old nun - cut perimeter fences and reached the outer wall where enriched uranium was stored at the US Government's nuclear storage 'Fort Knox' in Oak Ridge, Tennessee. Can you guess who was responsible for the 'outsourced' security that enabled this SNAFU? G4S' subsidiary Babcock & Wilcox Co. (B&W). Energy Secretary Steven Chu has said the incident was an important "wake-up call" for the entire nuclear complex. An investigation last month found a security camera had been broken for about six months and was part of a backlog of repairs needed for security at the facility. Several top-ranking NNSA officials have been 'reassigned' (Gulag?) but have no fear as B&W have stated that the active union workers involved will all be employed elsewhere. One more example of the ineptitude of government oversight, the unintended consequence of crony capitalism, or simply another 'fool-me-once...'/unpunished debacle?
It appears that in the past few weeks, the number 25% is strange attractor of bad luck for Greece. First, a month ago we learned that Greek unemployment has for the first time ever reached 25%. Now we get to see the income statement and balance sheet manifestation of a society in socioeconomic collapse - Kathimerini reports that Greek bad loans, or those which haven't seen a payment made in over 3 months, have hit a record €57 billion, or 25% of all bank debt. "With one in every four loans not being repaid for more than three months, the bank system is feeling the pressure, leading to additional capital requirements that are expected to aggravate the state debt further." That was Kathimerini's spin. The reality is that just like in Spain, where between bad loans and deposit outflows, the country has become a protectorate of the ECB, which is now fully in control of its banking system, so too in Greece Mario Draghi's tentacles are now in every bank office. Should Greece repeat the festivities of this summer and threaten to pull out of the Eurozone, the ECB will merely in turn threaten to push the red button and cut off all cash to terminally insolvent Greek banks, which of course would also mean a total halt of all deposit outflow activity. So instead what will happen is the ongoing rise in unemployment, and the increase in bad loans as percent of total, until one day the economy, even with all the money in the world pumped into it from Frankfurt, will no longer move. That day is getting very close.
New York's Ultraluxury Office Vacancy Rate Jumps To Two Year High As Financial Firms Brace For ImpactSubmitted by Tyler Durden on 09/29/2012 - 12:14
Traditionally, when it comes to reading behind the manipulated media's tea leaf rhetoric and timing major inflection points in the economy, the most accurate predictor are financial firms, whose sense of true economic upside (or downside) while never infallible, is still better than most. Yet unlike employment, which is usually a lagging, or at best concurrent indicator, one aspect that has always been a tried and true leading indicator, has been real estate demand, in this case rental contracts. Due to the long-term lock up nature of commercial real estate contracts, firms are far less eager to engage in rental transactions (and bidding wars) when they expect a worsening macroeconomic environment. Which is why news that office vacancy in Manhattan's Plaza district, the area between Sixth Avenue and the East River from 47th to 65th streets, anchored by the landmark Plaza Hotel at Fifth Avenue and Central Park South which is home to some of the nation’s most expensive and prestigious office towers, and where America's largest hedge funds and PE firms have their headquarters, has just risen to 12.3%, or a two year high, is probably the most troubling news for the economy and a real indicator of what to expect of the immediate future.
Rregardless of who you vote for, you can firmly depend on being disappointed in the areas that actually count. The whole idea that the democratic system such as it is allows voters to alter a nation's course by simply voting for a different batch of politicians is profoundly mistaken. In reality, the ruling elites use the apparent differences as a slick political ploy: namely to implement whatever agenda they have already decided upon without arousing the anger of the hoi-polloi too much. One must very carefully parse everything one sees or hears on the 'approved' news media these days. More often than not things are not what they seem, and it only becomes clear after some time in what direction they are about to be taken. Often we are confronted with seemingly diametrically opposed opinions on how to tackle a burning problem. Later a 'compromise' will suddenly and 'unexpectedly' make its entrance, consisting of the very policies the elites wanted to introduce in the first place. Upon hearing of the 'compromise', everybody nods sagely and agrees that this is what should be done, not realizing that they were duped from the very beginning.
There was a time before the Fed announced it would commence sterilizing its Large Scale Asset Purchases when every day in which there was a Permanent Open Market Operation, or POMO (remember those?) was a gift from Bernanke, virtually assuring the market would ramp higher. This phenomenon had been documented extensively in Zero Hedge and elsewhere (a comprehensive analysis can be found in "POMO and Market Intervention: A Primer"). The pronounced market effect of POMO was diminished somewhat once the Fed sterilized the daily flow injection by selling short-term bonds to Primary Dealers, even though the Fed continues to buy $45 billion in long-term bonds to this day, effectively mopping up all 10 Year+ gross Treasury issuance, and keeping the stock of long bonds in the private market flat at ~$650 billion as we observed before. All of this is well known. What was not known is who were the Fed's POMO counterparties. Now we know. Yesterday, the Fed for the first time ever released Transaction level data for all of its Open Market Operations. The new data focuses on discount window transactions (completely irrelevant now that there are $1.7 trillion in excess reserves and the last thing banks need is overnight emergency lending from the Fed when there is already a liquidity tsunami floating, yet this is precisely what the WSJ focused on), on FX operations, and, our favorite, Open Market Operations, chief among them POMOs. What today's release reveals is that once again a conspiracy theory becomes fact, because we now know just which infamous bank was by fat the biggest monopolist of POMO operations in a period in which banks reported quarter after quarter of zero trading day losses. We leave it up to readers to discover just which bank we are referring to.
Whereas earlier today we presented one of the most exhaustive presentations on the state of the student debt bubble, one question that has always evaded greater scrutiny has been the very critical default rate for student borrowers: a number which few if any lenders and colleges openly disclose for fears the general public would comprehend not only the true extent of the student loan bubble, but that it has now burst. This is a question that we specifically posed a month ago when we asked "As HELOC delinquency rates hit a record, are student loans next?" Ironically in that same earlier post we showed a chart of default rates for federal loan borrowers that while rising was still not too troubling: as it turns out the reason why its was low is it was made using fudged data that drastically misrepresented the seriousness of the situation, dramatically undercutting the amount of bad debt in the system. Luckily, this is a question that has now been answered, courtesy of the Department of Education, which today for the first time ever released official three-year, or much more thorough than the heretofore standard two-year benchmark, federal student loan cohort default rates. The number, for all colleges, stood at a stunning 13.4% for the 2009 cohort. And while it is impossible using historical data to extrapolate with precision what the current consolidated federal student loan default rate is, we do know that there is now $914 billion in federal student loans (which also was mysteriously revised over 50% higher by the Fed just a month ago). Using simple inference, all else equal (and all else has certainly deteriorated), there is now at least $122 billion in federal student loan defaults. And surging every day.
Ladies and gentlemen: meet the new subprime.
Presented with little comment, but in around three minutes, this clip provides a modicum of clarity on just where all that money goes... It seems 47% is the new number to really care about - perhaps 53% should also be of note...
Ray Dalio recently described the characteristics of a “beautiful deleveraging” in which equal doses of austerity, write-downs, and inflation gradually lighten the load of impaired debt. Two things can turn beautiful inflation into ugly inflation: Wages don’t inflate along with prices and the currency depreciates as money is printed excessively. This might not matter for a nation that is a net exporter of goods and services. But for nations that import essentials such as oil and grain, this is a catastrophe, as wages are flat while the cost of imported energy and food skyrocket. Households have less money to spend, and servicing debt becomes increasingly burdensome. Welcome to the United States of Ugly Inflation. Real household income (i.e., adjusted for official inflation) has declined 8% since 2007; the cost of oil, medical care and higher education has climbed; and government revenues have stagnated even as demand for government services has increased. As a result, the entire beautiful deleveraging scenario is at risk.