The purpose of keeping accurate accounts is to quantify net worth at any given point in time – as well as the change from a prior date. It goes without saying that the measure used, money, should be constant if comparisons over time are to mean anything. Only then do prices of capital goods, consumer goods and services truly reflect their changing values, giving important signals to businessmen. With unstable fiat money market signals lose much of their meaning. But those of us who understand that currency devaluation only serves to defraud the majority of society must be alarmed that the governments of nearly all the advanced economies are racing each other to rob their citizens in this way. Instead of bringing about a Lazarene recovery in the economy, this approach is already failing, because the very basis of economic calculation is being destroyed. Who knows the value of anything anymore? We do however know the inevitable outcome of this lunacy, and it is not good.
Update: this just in - Authorities offer $1 million reward for information leading to arrest of ex-LAPD officer Christopher Dorner
We were hoping to evade coverage of the latest mass distraction du jour, that of the former LAPD officer Chris Dorner who recently went rogue following a three man murder spree and who has vowed to kill again as per his 6,000 word manifesto, but the US government had made it impossible following confirmation that the search for Dorner is now the first official drone-hunt in US history.
The baby boomers now retiring grew up in a high returns world. So did their children. But, as Credit Suisse notes in their 2013 Yearbook, everyone now faces a world of low real interest rates. Baby boomers may find it hard to adjust. However, McKinsey (2012) predicts they will control 70% of retail investor assets by 2017. So our sympathy should go to their grandchildren, who cannot expect the high returns their grandparents enjoyed. From 1950 to date, the annualized real return on world equities was 6.8%; from 1980, it was 6.4%. The corresponding world bond returns were 3.7% and 6.4%, respectively. Equity investors were brought down to earth over the first 13 years of the 21st century, when the annualized real return on the world equity index was just 0.1%. But real bond returns stayed high at 6.1% per year. We have transitioned to a world of low real interest rates. The question is, does this mean equity returns are also likely to remain lower. In this compendium-like article, CS addresses prospective bond returns and interest rate impacts on equity valuations, inflation and its impact on equity beta, VIX reversions, and profiles 22 countries across three regions. Chart pr0n at its best for bulls and bears.
Sometimes, it feels good to hope. But since last September, nothing has really changed. At least not fundamentally. The zero-interest rate policies were going to encourage share buybacks, dividend payments and any method to allow the extraction of whatever real value is still available to extract from corporations/businesses by their owners. This meant leverage was going to increase, unemployment would remain high, capital expenditures were going to decrease and the risk of defaults was to going to rise. A year later, all these symptoms are starting to surface. One more reason to avoid stocks and be long gold. But in my view, it will take longer than many believe, for these imbalances to burst "...As long as the people of the EU put up with this situation and the EU Council (…) effectively kills democracy at the national level AND as long as the Fed continues to extend US dollar swaps, this status quo will remain… Whenever the political sustainability of the EU is challenged, we will see a run for liquidity... The trend is for asset inflation, and will last as long as the people of the EU and the US do not challenge the political status quo..." Unemployment and the tolerance of those unemployed will tell us when the time has come.
Back in November 2011, when the ECB did its damnedest to make sure Silvio Berlusconi resigned and never came back (it succeeded in the first, but is failing in the second as the Berlusconi block is rapidly rising in the polls two weeks ahead of the Italian elections and is now one margin of error away from the frontrunning Democratic Party) the central bank knew the Bunga Bunga PM would be bad news for the status quo - a fixed exchange status quo which as we showed in an earlier post, is there merely to enrich the rich, and impoverish the poor. The reason is that Sylvio has always refused to play ball with the banker oligarchy, whose survival depends first and foremost on the perpetuation of the EUR (as a collapse of the Eurozone means all reflation and DJIA 36,000 bets are off), and where every hint of a weakening of the Eurozone is to be eliminated at inception. Which is why news that Belusconi's coalition ally in the parliamentary election - Roberto Maroni, head of the Northern League, has suggested the creation and use of a local currency in northern Italy as an "alternative" to the Euro will hardly be seen as favorable by Europe's technocratic overlords for whom any initiative to structurally destabilize and weaken the European currency has to be crushed at the roots.
Late on Friday Venezuela shocked the world when instead of reporting an update on the ailing health of its leader, as many expected it would, it announced the official devaluation of its currency, the Bolivar by nearly 50% against the dollar yet still well below the unofficial black market exchange rate. By doing so, it may have set off a chain reaction among the secondary sovereigns in the world, those who have so far stayed away from the "big boys" currency wars, or those waged by the Big 6 "developed world" central banks, in an attempt to also "devalue their way to prosperity" and boost their economies by encouraging exports even as the local population sees a major drop in its purchasing power and living standards. So in the game, where the last player to crush their currency inevitably loses, the question is who is next. The answer may well be America's latest best north African friend, and custodian of the Suez Canal: Egypt.
Let’s be very clear here: this is what the euro has wrought. This destruction of the non-German industrial bases has taken place with the active complicity of the European technocrats. They did not even realize that France, the EMU’s second largest economy, for example was becoming hopelessly uncompetitive. This is a zero sum game if there ever was one, with Germany being the main winner and the other three economies massive losers. Instead of leading to convergence in euroland economies, the euro project has led to massive divergences, with the strong getting stronger, and the weak getting weaker... The ECB has thrown enough money at the market to, for now, reduce borrowing costs and allow equity prices to rise (unfortunately so is the euro, threatening exports). This buys time—but these actions are not enough to solve the structural problems created by the euro. The private sector has shriveled in Southern Europe, as government spending and debt has soared. If we have France, Italy and Spain together enter a debt deflation/debt trap, the crisis will be far too big for Germany to handle: and if this happens before German federal elections are held (no later than October) we could see the European political crisis revive in full force.
Typically, we humans will anchor on the most recent patterns - especially if they conform to our anchored inherently optimistic bias. It seems, once again, that just as in previous euphoric stages of equity market cycles, we are doing the same again. There are plenty of market movements that remove any hope for the 'who could have seen it coming?' herd: European stock and bond markets 'breaking' their positive contagion trends (core and periphery); US credit markets seeing very disturbing trends of selling pressure and technical outflows; and US equity valuations reaching multi-month highs in the face of declining earning, declining macro fundamentals, and declining GDP expectations. With US stocks at highs against a plunging US macro background and EU stocks slumping against a rising EU macro background, it appears good is bad and bad is good and while we do not know what catalyst stalls the can-kicking hope in the short-term, the longer the divergence from reality lasts, the bigger the fall to come.
U.S. exports and imports last year totaled $3.82 trillion, the U.S. Commerce Department said last week. China’s customs administration reported last month that the country’s total trade in 2012 amounted to $3.87 trillion. China had a $231.1 billion annual trade surplus while the U.S. had a trade deficit of $727.9 billion. For those who are still not aware of why this is such a big deal, it is essentially a turning point moment in global trade. There is no doubt that China will now be inducted into the SDR, and that their importance as a trade and consumption center will quickly lead to a move away from the dollar. To put it simply, the dollar is going to lose its world reserve status VERY soon. Many will cheer this change as necessary progress towards a more “globally conscious” economic system. However, it’s not that simple. Total centralization is first and foremost the dream of idiots, and in any mutation (or amputation) there is always considerable pain involved. The proponents of this “New World Order” (their words, not mine) seem to have placed the U.S. squarely in their crosshairs as the primary recipient of this fiscal pain.
We don't know if it merely a coincidence that a story has emerged discussing a Chinese mobilization in response to the ongoing territorial feud with Japan over the Diaoyu/Senkaku islands (and the proximal massive gas field) the very week that China celebrates its new year. We don't know how much of the story is based in reality, and how much may be propaganda or furthering someone's agenda. What we do know is that the source of the story: offshore-based, Falun Gong-affiliated NTDTV has historically been a credible source of information that the China communist party desperately tries to censor, such as breaking the news of the SARS epidemic in 2003 some three weeks before China publicly admitted it. Its motto is "to bring truthful and uncensored information into and out of China." If that is indeed the case, and its story of major troop movements and mobilization of various types of military vehicles and artillery into the Fujian and Zhejian provinces, bordering the East China Sea and closest to the Diaoyu islands, is accurate, then hostilities between China and Japan may be about to take a major turn for the worse.
Goodbye Fourth Amendment: Homeland Security Affirms "Suspicionless" Confiscation Of Devices Along BorderSubmitted by Tyler Durden on 02/09/2013 - 21:20
Slowly but surely the administration is making sure that both the US constitution, and its various amendments, become a thing of the past. In the name of national security, of course. And while until now it was the First and Second amendments that were the target of the administration's ongoing efforts to eavesdrop on anyone, all the time, in order to decide who may be a domestic terrorist and thus fit for 'droning', coupled with an aggressive push to disarm and curtail the propagation of weapons in what some perceive is nothing more than an attempt to take away a population's one recourse to defend itself against a tyrannical government, the time may be coming to say goodbye to the Fourth amendment - the right to be free from unreasonable searches and seizures - next. But only in close proximity to the border at first. According to Wired, "the Department of Homeland Security’s civil rights watchdog has concluded that travelers along the nation’s borders may have their electronics seized and the contents of those devices examined for any reason whatsoever — all in the name of national security."
How A Previously Secret Collateral Transformation With The Bank Of Italy Prevented Monte Paschi's NationalizationSubmitted by Tyler Durden on 02/09/2013 - 19:47
The endless Italian bailout story that keeps on giving, has just given some more. It turns out Italy's insolvent Banca dei Monte Paschi, which has been in the headlines for the past month due to its role as political leverage against the frontrunning Bersani bloc, and which has been bailed out openly so many times in the past 4 years we have lost track, and whose cesspool of a balance sheet disclose one after another previously secret derivative deal on an almost daily basis, can now add a previously unannounced bailout by the Bank of Italy to its list of recent historical escapades.
We now live in an entirely fabricated fiscal environment. Every aspect of it is filtered, muddled, molded, and manipulated before our eyes ever get to study the stats. The metaphor may be overused, but our economic system has become an absolute “matrix”. All that we see and hear has been homogenized and all truth has been sterilized away. There is nothing to investigate anymore. It is like awaking in the middle of a vast and hallucinatory live action theater production, complete with performers, props, and sound effects, all designed to confuse us and do us harm. In the end, trying to make sense of the illusion is a waste of time. All we can do is look for the exits…
The Fed's Bailout Of Europe Continues With Record $237 Billion Injected Into Foreign Banks In Past MonthSubmitted by Tyler Durden on 02/09/2013 - 15:20
Last weekend Zero Hedge once again broke the news that just like back in June 2011, when as part of the launch of QE2 we demonstrated that all the incremental cash resulting form the $600 billion surge in the Fed's excess reserves, had gone not to domestically-chartered US banks, but to subsidiaries of foreign banks operating on US soil. To be sure, various other secondary outlets picked up on the story without proper attribution, most notably the WSJ, which cited a Stone McCarthy report adding the caveat that "interpreting the data released by the Federal Reserve is a bit challenging" and also adding the usual incorrect attempts at interpretation for why this is happening. To the contrary: interpreting the data is quite simple, which is why we made an explicit prediction: 'We urge readers to check the weekly status of the H.8 when it comes out every Friday night, and specifically line item 25 on page 18, as we have a sinking feeling that as the Fed creates $85 billion in reserves every month... it will do just one thing: hand the cash right over straight to still hopelessly insolvent European banks." So with Friday having come and gone, we did just the check we suggested. As the chart below shows, we were right.