en Gold, Global Growth, & The Schism In The High Church Of Bernanke <p><a href=""><em>Submitted by Ben Hunt via Salient Partners&#39; Epsilon Theory blog,</em></a></p> <div><span><img height="434" src="" style="display: block; margin-left: auto; margin-right: auto;" width="313" /></span></div> <p>&nbsp;</p> <div style="margin-bottom: 14px; border: dashed 1px #858585; padding: 20px 20px 5px 20px; background-color: #fbfbfb;"> <p><span><strong>Everything under the sun is in chaos. The situation is excellent.</strong><br /><em>&ndash; Mao Zedong (1893 &ndash; 1976) </em></span></p> </div> <div style="margin-bottom: 14px; border: dashed 1px #858585; padding: 20px 20px 5px 20px; background-color: #fbfbfb;"> <p><span><strong>Forget it, Jake. It&rsquo;s Chinatown.</strong><br /><em>&ndash; Chinatown (1974) </em></span></p> </div> <div style="margin-bottom: 14px; border: dashed 1px #858585; padding: 20px 20px 5px 20px; background-color: #fbfbfb;"> <p><span><strong>Language is conceived in sin and science is its redemption.</strong><br /><em>&ndash; W.V.O. Quine (1908 &ndash; 2000) </em></span></p> </div> <div style="margin-bottom: 14px; border: dashed 1px #858585; padding: 20px 20px 5px 20px; background-color: #fbfbfb;"> <p><span><strong>I am, as I am; whether hideous, or handsome, depends upon who is made judge.</strong><br /><em>&ndash; Herman Melville (1819 &ndash; 1891) </em></span></p> </div> <div style="margin-bottom: 14px; border: dashed 1px #858585; padding: 20px 20px 5px 20px; background-color: #fbfbfb;"> <p><span><strong>All -ism&rsquo;s end up in schisms.</strong><br /><em>&ndash; Huston Smith (b. 1919) </em></span></p> </div> <div style="margin-bottom: 14px; border: dashed 1px #858585; padding: 20px 20px 5px 20px; background-color: #fbfbfb;"> <p><span><strong>What Asians value may not necessarily be what Americans or Europeans value. Westerners value the freedoms and liberties of the individual. As an Asian of Chinese cultural background, my values are for a government which is honest, effective and efficient.</strong><br /><em>&ndash; Lee Kuan Yew (b. 1923)</em></span></p> </div> <p><span>Two years ago, the new seven-member Standing Committee of the Chinese Communist Party Politburo &ndash; the most powerful political entity in the country &ndash; was introduced to great fanfare. All seven men walked on stage wearing a dark suit and a red tie, but to me the most striking aspect of their appearance was their hair. Yes, their hair. Their dark, immaculately coifed, powerful hair. Despite an average age of 65, not one of these men has EVER been seen in public without sporting a mane that would make their grandsons proud.</span></p> <p>On the other hand, consider this handsome man, Bo Xilai. Once the princeling of princelings, the son of a Long March vet, Bo was enormously popular for his Redder-than-Thou politics and enormously rich from his mayoral &ldquo;crackdown&rdquo; on organized crime in Chongqing, a municipality with about the same urban population as New York City. <strong>To put Bo Xilai in a US context, he was richer than Michael Bloomberg and more politically ambitious than Rudy Giuliani, if either of those two qualities can be imagined.</strong> And of course, this 65 year old politician had the luxurious jet-black hair as befits a man of his position.</p> <div style="text-align: center;"><span><img src="" /></span></div> <p><span>But alas, Bo&rsquo;s political reach exceeded his political grasp. Undone publicly for abuse of office and a murder conspiracy, privately for his creation of a top-notch intelligence operation that spied on his fellow Politburo princelings (again to put in a US context, imagine if a mega-billionaire mayor of New York City created his own electronic FBI that could monitor everyone&rsquo;s market activities &hellip; crazy, right?), Bo found himself on the wrong end of a show trial and is currently living out the rest of his days in a Madoff-style cell. How do we know that Bo is gone for good, that he has lost whatever political support he formerly commanded? <strong>Because they took away his hair dye.</strong> He&rsquo;s &ldquo;gone gray&rdquo;, as they say in the Chinese political lingo, portrayed to the world as a frail old man who not only lost his freedom but <em>much</em> more importantly lost his mojo.</span><br />&nbsp;</p> <div style="text-align: center;"><span><img src="" /></span></div> <p>&nbsp;</p> <p><span>Patrick Henry famously said, &ldquo;Give me liberty or give me death!&rdquo;, a sentiment that makes sense in Western political culture but is met with puzzled looks in the East. Personal liberty is, in an important sense, <em>everything</em> in Western political culture. In Chinese political culture &hellip; not so much.&nbsp; On the other hand, signifiers of personal potency &ndash; like maintaining dark hair &ndash; have enormous meaning in China and, at times, a diametrically opposed meaning in the West.&nbsp; </span><br />&nbsp;</p> <div style="text-align: center;"><span><img height="175" src="" width="293" /></span><img height="176" src="" width="262" /></div> <div style="text-align: center;">&nbsp;</div> <div style="text-align: center;">&nbsp;</div> <div style="text-align: center;"><strong>*********************************************************************</strong></div> <div style="text-align: center;">&nbsp;</div> <p><span><span style="text-decoration: underline;"><strong>Okay, Ben, kinda interesting in a cultural anthropology sort of way, but what in the world does this have to do with investing?</strong></span> </span></p> <p><span>Simply this, and it&rsquo;s a <a href="">core Epsilon Theory tenet</a>: <strong>the meaning of events and market signals differ hugely from country to country, tribe to tribe, generation to generation.</strong> Ferguson does not <em>mean</em> the same thing as Hong Kong. Hong Kong does not <em>mean</em> the same thing as Tahrir Square or even Tiananmen Square. Monetary policy does not <em>mean</em> the same thing in Beijing as monetary policy <em>means</em> in Washington, which in turn does not <em>mean</em> the same thing as monetary policy in Paris or Rome. <strong>But we have an innate tendency to act as if these signals DO mean the same thing, and we can totally wrong-foot our investments as a result. </strong></span></p> <p><strong>The biggest thing happening in the world today is the growing divergence between US monetary policy and everyone else&rsquo;s monetary policy.</strong> There is a schism in the High Church of Bernanke, with His US acolytes ending the QE experiment in no uncertain terms, and His European and Japanese prelates looking to keep the faith by continued balance sheet expansion.</p> <p><span>That divergence plays out mostly in exchange rates, and it has <span style="text-decoration: underline;"><strong>three HUGE implications, one for investment strategy selection, one for global growth, and one for &hellip; (gulp!) gold.</strong></span></span></p> <p><span style="text-decoration: underline;"><strong>First, this is great news for global macro strategies and their low-cost, populist cousins, so-called &ldquo;alternative beta&rdquo; strategies.</strong></span> Global macro performance has been absolutely atrocious over the past five years, driven primarily by a coordinated global monetary policy regime that squeezed out the historical patterns of difference between geographies and asset classes. Now that monetary policy is uncoordinated, with every major economic region essentially fending for itself, global macro and alternative beta strategies have &ldquo;room&rdquo; to work. To be sure, some of these strategies will still be confounded by an investment regime where monetary policy trumps economic fundamentals at every turn, but the sine qua non for ANY active investment strategy is distinction and dispersion. For the first time in more than five years, we can see this sort of distinction and dispersion in regional macroeconomic policies, giving traditional global macro strategies at least a chance of success. Vive la difference!</p> <p><span style="text-decoration: underline;"><strong>Second, this divergence in regional monetary policy creates enormous strains on the tectonic plates of modern international trade &ndash; currency exchange rates.</strong></span> In the absence of a re-convergence of monetary policy I don&rsquo;t see any compelling reason why recent dollar appreciation should slow down, much less reverse itself, with the obvious consequences for US S&amp;P 500 earnings (negative), commodity prices and commodity-related securities (negative), most EM markets (negative), and European and Japanese earnings (positive). But the greatest risk for global economic stability from a dollar on steroids is, for my money, China. Why? Because as I&rsquo;ve tried to point out in prior Epsilon Theory notes (<a href="">here</a>, <a href="">here</a>, and <a href="">here</a>), <strong>China&rsquo;s political stability depends on economic growth &ndash; it&rsquo;s the mojo of the Party just as surely as jet-black hair is the mojo of Party leaders &ndash; and Chinese growth depends on exports.</strong> So long as the yuan is effectively tethered to the dollar, a stronger dollar means a stronger yuan, which means weaker exports to Europe, Japan, and EM&rsquo;s. Sure, it&rsquo;s cheaper now to buy more iron ore and copper, so I suppose you could build another ghost city or two to keep the growth train on track, but the Politburo&rsquo;s only serious answer to the politically existential question of growth is to sell more advanced products to more people, most of whom don&rsquo;t live in China. That means selling medical devices to Japan and telecom equipment to Germany, tasks made much more difficult by a stronger dollar/yuan. To be clear, I do NOT see some imminent economic collapse in China. <strong>But growth is much less <em>certain</em> in China today, and that&rsquo;s a <em>political</em> problem that the Politburo will stop at nothing to fix.</strong> I expect the 180-degree shift in Chinese monetary policy that began this January and paused this summer to accelerate again, which in turn will accelerate political tensions abroad with the US and Japan, as well as political tensions domestically with the mega-rich princeling families. And speaking of domestic political tensions &hellip;</p> <p>Look, I don&rsquo;t think the <em>meaning</em> of Hong Kong &ndash; even to the participants &ndash; is some pro-democracy uprising a la the Arab Spring or any of the &ldquo;color revolutions&rdquo; our media is so quick to christen. Maybe if we start to see fewer English-language signs and fewer teenagers lifting their smartphone &ldquo;candles&rdquo; I&rsquo;ll change my mind, but right now it seems a lot more like a <a href="">tepid expression of political identity</a> than a determined effort by determined citizens to change the political system at a fundamental level. This isn&rsquo;t a release-the-hounds moment like Deng believed Tiananmen Square to be, and it looks like the Gang of Seven in Beijing have decided as much with new orders to pull the police back and let the protesters block traffic and annoy everyone in the city who just wants to get back to business.</p> <div style="text-align: center;"><span><img src="" /></span></div> <div style="text-align: center;"><span><img src="" /></span></div> <p><span><strong>But I do think there&rsquo;s a deeper implication of the Hong Kong protests, one likely to be missed by Western investors who want to project a Western meaning on the events taking place.</strong> I think the most important lesson that mainland leaders in the CCP and PLA will take away from the Hong Kong protests is not that the population must be brought to heel, but that they can&rsquo;t be trusted, that they&rsquo;re not really one of us. And that&rsquo;s okay to a certain degree &hellip; the potential of &ldquo;contagion&rdquo; from Hong Kong to, say, Chongqing seems really remote given the State&rsquo;s control over media and information flow &hellip; but it&rsquo;s not okay if the &ldquo;transmission wires&rdquo; of Hong Kong&rsquo;s financial system can&rsquo;t be trusted. Hong Kong is an indispensable financial intermediary for the Chinese State, and I have zero doubt that Beijing will move to cement their control over the sinews of real power here, by any means necessary. One of those sinews of real power is the Hong Kong dollar, which means that Hong Kong monetary policy and the Hong Kong Currency Board &ndash; already reduced to a semi-independent satrap &ndash; is about to make the transition to full-fledged puppet. This lesson won&rsquo;t be lost on the mega-rich Chinese princelings, either. <strong>The days of parking your mainland wealth in Hong Kong are now over, as it&rsquo;s no longer a safe haven from the long arm of the CCP.</strong> <a href="">Let the capital flight begin, and watch out below for the Hong Kong dollar.</a></span></p> <p><span style="text-decoration: underline;"><strong>As for my third point &ndash; the implications of monetary policy divergence on gold</strong></span> &ndash; I&rsquo;m always reticent to write about gold because it incites such passion (and I don&rsquo;t just mean the gold bug camp &hellip; poke pretty much any academically-trained economist and you will unleash a furious anti-gold tirade). To be clear, I believe that <a href="">the meaning of gold today is NOT as a store of value</a> but as an insurance policy against central banks losing control. <a href="">With market faith in the Narrative of Central Bank Omnipotence at an asymptotic top</a>, the price of that insurance policy &ndash; call it $1,200/oz &ndash; is as low as it&rsquo;s going to go. <strong>And now with a schism in the High Church of Bernanke, monetary policy divergence, and growing pressures on the tectonic plates of exchange rates we have catalysts for both a generic and geographically specific central bank loss of control.</strong></p> <p><u><em><strong><span>Now I understand that gold means different things to different people, and to the degree that gold trades as a commodity or a dollar-denominated store of value it can trade cheaper as the dollar advances. I get that. But I don&rsquo;t think that&rsquo;s been the principal meaning of gold for the past 5+ years, and if you think as I do that this is the beginning of the end for the Golden Age of the Central Banker (or at least the end of the beginning), gold is pretty interesting here.</span></strong></em></u></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="559" height="548" alt="" src="" /> </div> </div> </div> B+ Central Banks China Copper Epsilon FBI Germany Hong Kong Japan Monetary Policy New York City Third Point Yuan Wed, 01 Oct 2014 23:42:05 +0000 Tyler Durden 495080 at "Not A Good Sign" Argentine Stocks, Bonds Crash As Central Bank Chief Resigns <p>Just a day after Argentine President Cristina Kirchner, in a televised speech, <strong>accused central bank employees of helping local bankers to speculate against the Argentine peso in hopes of forcing the government to devalue the currency, Juan Carlos Fabrega - the head of Argentina's Central Bank - has quit</strong>. <a href="">As WSJ reports</a>, unable to borrow abroad due to a legal dispute with creditors, Mrs. Kirchner has relied on money printing to cover spending deficits at the expense of inflation that is thought to be around 40%; and it appears the sanity of Mr. Fabrega was too much to bear for Kirchner (and Kiciloff - who had reportedly clashed with the Central Banker also). The reaction - not good - the <strong>stock index collapsed over 8%, bond yields spiked and the black-market peso dumped to record lows at 15.65</strong> to the USD (drastically worse than the 8.51 official peso rate).</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><strong>Fabrega’s departure is "Not a good sign," </strong>said Alberto Ramos, a Goldman Sachs analyst Alberto Ramos, Reuters reports.<strong>&nbsp;</strong></p> <p>&nbsp;</p> <p><strong>"Fabrega was perceived to be a moderating voice and someone that really understood financial market dynamics." </strong></p> </blockquote> <p><a href=""><em>As The Wall Street Journal reports,</em></a></p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><strong>Argentine President Cristina Kirchner replaced the head of the central bank Wednesday, marking the second overhaul of her economic team in less than a year. </strong></p> <p>&nbsp;</p> <p>Mrs. Kirchner named her <strong>top securities and exchange regulator, Alejandro Vanoli, as central bank governor</strong> after she accepted Juan Carlos Fabrega's resignation, according to a statement posted on the presidency's press website. </p> <p>&nbsp;</p> <p><strong>Mr. Fabrega's resignation came a day after Mrs. Kirchner in a televised speech accused central bank employees of helping local bankers to speculate against the Argentine peso in hopes of forcing the government to devalue the currency.</strong> Argentina's central bank has little autonomy from the federal government and the president in practice can hire and fire its senior executives at whim. </p> <p>&nbsp;</p> <p><span style="text-decoration: underline;"><strong>"You blame me for the flight of capital and the rising dollar, that's fine," said Kirchner speaking to Fabrega in the front row of her public speech. "I feel for the dollar losses and not another one should leave the country. Besides that, you continue to have a problem with the economy that I don't have to solve. Just be sure another dollar does not leave the country."</strong></span></p> <p>&nbsp;</p> <p>Mr. Vanoli, who had served as head of the National Securities Commission since November 2009, takes the helm of a central bank whose main task is financing the federal government. Unable to borrow abroad due to a legal dispute with creditors,<strong> Mrs. Kirchner has relied on money printing to cover spending deficits </strong>at the expense of inflation that is thought to be around 40%. </p> <p>&nbsp;</p> <p>Since 2010, the Kirchner administration has also borrowed tens of billions of U.S. dollars from the central bank's reserves to pay creditors. High inflation and declining reserves, now at $27.9 billion, have undermined faith in the currency and spurred some Argentines to seek the safe haven of the U.S. dollar. </p> <p>&nbsp;</p> <p><strong>Mr. Fabrega was widely respected among the country's bankers</strong> thanks to a career of more than 40 years at the country's largest bank, state-run Banco de la Nacion. </p> </blockquote> <p>*&nbsp; *&nbsp; *</p> <p>Stocks crashed...</p> <p><a href=""><img src="" width="600" height="313" /></a></p> <p>&nbsp;</p> <p>Bonds tumbled...</p> <p><a href=""><img src="" width="600" height="315" /></a></p> <p>&nbsp;</p> <p>and the Dolar Blue collapsed...</p> <p><a href=""><img src="" width="600" height="338" /></a></p> <p>&nbsp;</p> <p>*&nbsp; *&nbsp; *</p> <p>Good luck Mr. Vanoli...</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="952" height="496" alt="" src="" /> </div> </div> </div> Bond Creditors Goldman Sachs goldman sachs Reuters Wall Street Journal Wed, 01 Oct 2014 23:15:16 +0000 Tyler Durden 495079 at Ebola-Stricken West African Economies Are Crashing <p>We <a href=""><strong>warned five weeks ago of the potential economic damage</strong> that the Ebola virus could do to West African economies</a>, and now it appears The IMF, The World Bank, and the United Nations Food and Agricultural Organization have warned that Liberia and other West African economies, <a href="">as WaPo reports</a>, <strong>begun a frightening descent into economic hell</strong>. Fear that <em>&quot;that people would abandon the fields and factories, that food and fuel would become scarce and unaffordable, and that the government&rsquo;s already meager capacity to help, along with the nation&rsquo;s prospects for a better future, would be severely compromised&quot;</em> are no longer scenarios - they are real! <strong>Annual inflation rates have doubled, fuel sales are down 35%, Liberia&#39;s productivity is down 50-75%, and &quot;micro-trade&quot; financing is &quot;completely depleted.&quot;</strong></p> <p>The IMF warns <strong><em>&ldquo;In addition to exacting a heavy human toll, the Ebola outbreak is having a severe economic and social impact, and could jeopardize the gains from a decade of peace.&rdquo; </em></strong></p> <p>With WHO and CDC expecting a worst case scenario now, the $809 million collapse in GDP across Sierra Leone, Guinea, and Liberia is stunning...</p> <p><a href=""><img height="565" src="" width="611" /></a></p> <p>&nbsp;</p> <p><a href=""><em>As The Washington Post reports,</em></a></p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>Three recent reports from international organizations that seem to bear out the worst-case scenarios of months ago: <span style="text-decoration: underline;"><strong>that people would abandon the fields and factories, that food and fuel would become scarce and unaffordable, and that the government&rsquo;s already meager capacity to help, along with the nation&rsquo;s prospects for a better future, would be severely compromised.</strong></span></p> <p>&nbsp;</p> <p>They are no longer scenarios. They are real. While these trends have been noted anecdotally, the cumulative toll is horrific.</p> <p>&nbsp;</p> <p><strong>The basic necessities of survival in Liberia &mdash; food, transportation, work, money, help from the government &mdash; are rapidly being depleted,</strong> according to recent reports by the United Nations Food and Agricultural Organization, the International Monetary Fund and the World Bank.</p> <p>&nbsp;</p> <p>...</p> <p>&nbsp;</p> <p>The International Monetary Fund said in a separate report that restrictions on public transport, internal travel and trade are burdening the country&rsquo;s ability to distribute the food that is available.</p> <p>&nbsp;</p> <p><strong>The combination is driving up food prices rapidly</strong>, said the IMF even as &ldquo;panic buying&rdquo; is boosting demand, according to the World Bank. The IMF is projecting an <strong>inflation rate of 13.1 percent by year&rsquo;s end, compared with 7.7 percent before</strong> the Ebola epidemic started taking its toll.</p> <p>&nbsp;</p> <p>Transportation has been badly disrupted, one indicator being a <strong>drop of between 20 and 35 percent in fuel sales.</strong></p> <p>&nbsp;</p> <p>The services sector, about half of Liberia&rsquo;s economy, employing about 45 percent of the work force, has experienced a <strong>drop in turnover of 50 to 75 percent</strong>, the World Bank says.</p> <p>&nbsp;</p> <p><strong>Savings and loan programs, called &ldquo;susu,&rdquo; that finance &ldquo;micro-trade&rdquo; and small businesses &mdash; especially those run by women &mdash; have been &ldquo;completely depleted,&rdquo; </strong>with participants no longer able to pay their debts, said the FAO.</p> <p>&nbsp;</p> <p><strong>Projections for short-term and long-term economic growth are getting ratcheted downward, </strong>with the worst-case estimates nothing short of catastrophic. The World Bank, looking at 2014 alone, projected a reduction in growth in Liberia from 5.9 percent to 2.5 percent, a plunge that would be considered calamitous in any country. In 2015, under its most dire but altogether realistic scenario, Liberia&rsquo;s output could decrease by nearly 12 percent in 2015.</p> <p>&nbsp;</p> <p><strong>Projections for inflation are moving upward,</strong> with the IMF estimating an inflation rate of 13.1 percent by year&rsquo;s end, compared with 7.7 percent the year before.</p> <p>&nbsp;</p> <p>On top of it all, <strong>the revenue coming in to the Liberian government has dropped sharply, by 20 percent</strong>, Liberia&rsquo;s foreign minister Augustine Kpehe Ngafuan told the United Nations earlier this week. &ldquo;Consequently, our <strong>ability to provide for basic social services and continue to fund key development projects are significantly diminished.</strong>&rdquo;</p> </blockquote> <p>*&nbsp; *&nbsp; *<br /><strong>&ldquo;The Ebola epidemic is washing away years of progress and hard work,&rdquo;</strong> said the FAO in its Sept. 23 report.</p> <p><a href=""><img alt="" src="" style="width: 600px; height: 330px;" /></a></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="611" height="565" alt="" src="" /> </div> </div> </div> International Monetary Fund Savings And Loan World Bank Wed, 01 Oct 2014 22:44:53 +0000 Tyler Durden 495078 at Former Czech President Blasts "The West's Lies About Russia Are Monstrous" <p><em>Authored by <a href="">Neil Clark, originally posted at The Spectator</a>,</em></p> <p><strong>Václav Klaus has made a habit of saying things others shy away from saying, but it doesn’t seem to have done him much harm in the popularity stakes. </strong>Quite the opposite: the 73-year-old ardently Eurosceptic free-marketeer has legitimate claims to be regarded as the most successful ‘true blue’ conservative politician in Europe over the past 25 years. He was, after all, <strong>prime minister of the Czech Republic from 1992 to 1998 and then his country’s president for a further ten years, from 2003 to 2013.</strong></p> <p>So when we meet after a typically hearty Serbian lunch — at the International Science and Public Conference in Belgrade — I am keen to ask if he has any advice for David Cameron and the British Conservative party.</p> <p>‘I was invited to a conference last year in Windsor which was called the Conservative Renewal Conference,’ he says. ‘I made a speech in which I asked the question: “Do you really need a renewal — or don’t you think it would be sufficient to have a return?” My speech stressed the need to return to standard conservative ideas and approaches. I am afraid the current leadership of the Conservative party are not exactly doing that.’</p> <p>Klaus’s message clearly resonates more with activists than with the serial ‘modernisers’ at the top of the party. ‘After I had finished my speech, two or three older ladies came up to me and said, “It was like Maggie’s speech!” So I find the Conservative party now rather confused in its ideas. The party is playing with the green ideas in a way I can’t accept.’</p> <p>Klaus is not too keen — to say the least — about another element of the ‘modernising’ agenda. ‘The same-sex marriages and all that stuff about family, to put it broadly, is for me another tragic misunderstanding by the current leaders of the party and I am very sorry about that.’</p> <p><span style="text-decoration: underline;"><strong>We move on, inevitably, to Europe. </strong></span><strong>What effect does Klaus think a British referendum on EU membership — and the prospect of a UK withdrawal — might have for the Continent? ‘It would send a strong signal.</strong> I was very angry, even in the communist era, looking at Britain from the outside, from behind the Iron Curtain, that Britain decided to leave EFTA to join the EEC in the early 1970s.’</p> <p>It was a Conservative prime minister, Edward Heath, who took that momentous step. What, I wonder, does Klaus think of the present Conservative leader’s line on Europe? <strong>‘I have met Mr Cameron several times and I am not so sure about his credentials on the EU. I understand he must somehow reflect the division in the whole country and in his party, but nevertheless I don’t think that in a secret ballot in a referendum that he would vote yes [for Britain to remain in the EU] — but this is only my guesstimate.’</strong></p> <p><span style="text-decoration: underline;"><strong>Listen to Klaus in full flow on the absurdities of the EU and it’s hard to think why any sane individual — on left or right — would want their country to stay in it.</strong></span> ‘A few days ago I studied the names of the EU commissioners under Mr Juncker, and their portfolios. We in my country say that 16 is already too high for having meaningful portfolios. But the EU now has 28, more than in any country in our part of the world. If you look at the names of those portfolios, I really don’t believe my eyes. The former Estonian prime minister is a commissioner for digital markets. As an economist I really don’t know what the term “digital markets” means. Plus there is another, a German politician, Günther Oettinger, who is the commissioner for “digital economy and society”. We would laugh in the communist era to have such names for the members of our cabinet.<strong> I can’t imagine what these commissioners are doing</strong>.’</p> <p>I put it to Klaus that in the bloated and bureaucratic EU economic model, we have the worst of all worlds — one which pleases neither genuine socialists, nor Thatcherite free-marketers, and he readily agrees. <strong>‘What we have in Europe now is not the German Soziale Marktwirtschaft — the social market economy — but the German model deteriorated by another adjective, “ecological”.’</strong></p> <p>‘I started my political career after the fall of communism with a well-known slogan: “I want to introduce markets without adjectives.” There was a big fight in the country about this phrase. They said, “Klaus wants to introduce markets without social policy.” “No,” I said. “There can be a social policy, but the slogan means a market economy with an additional social policy and not a social market.”The sequence of the words is all important. At present we are going deeper and deeper and deeper into the ecological and social market economy.’</p> <p>Whatever we decide to call the current system, he adds, it clearly isn’t working for Europe.<strong> ‘I am really shocked to see leading EU and European politicians pretending that everything is OK, which is ridiculous and funny,’ </strong>Klaus says. ‘I recently read an article by a well-known German economist, Professor Sinn, who has studied the situation in Italy. He presented statistical data which showed that GDP in Italy has declined by 9 per cent since 2000. It’s unimaginable! I don’t think communist Czechoslovakia would have survived such a long-term decline. At the same time, industrial output declined in the same period by 25 per cent! One quarter of the economy simply disappeared.’</p> <p><span style="text-decoration: underline;"><strong>Klaus believes the EU is beyond reform and has called for it to be replaced with an ‘Organisation of European States’ — a simple free trade association which would not pursue political integration.</strong></span> He recalls his own experience at the forefront of Czechoslovakia’s Velvet Revolution in 1989. ‘When we started to change my country we quite deliberately did not use the term “reform” — we used the word “transformation”, because we wanted a systemic change. Such a systemic change is needed in Europe today.’</p> <p>It’s not just on the economy that Europe has got it wrong, says Klaus.<strong> He doesn’t agree with the western elite’s current hostility towards Russia, which he believes is based on a false and outdated view of the country.</strong> ‘I remember one person in our country who at one moment was minister of foreign affairs, telling me that he hated communism so much that he was not even able to read Dostoevsky. I have remembered that statement for decades and I am afraid that the current propaganda against Russia is based on a similar argument and way of thinking. I spent most of my life in a communist Czechoslovakia under Soviet domination. <strong>But I differentiate between the Soviet Union and Russia. Those who are not able to understand the difference are simply not looking with open eyes. I always argue with my American and British friends that although the political system in Russia is different from the system in our countries and we wouldn’t be happy to live in such a system, to compare the current Russia with Leonid Brezhnev’s Soviet Union is stupid.’</strong></p> <p><span style="text-decoration: underline;"><strong>He says, with finality: ‘The US/EU propaganda against Russia is really ridiculous and I can’t accept it.’</strong></span></p> <p><strong>Klaus wants to transfer other democratic decision-making powers back to the nation states.</strong> ‘I’m not just criticising the EU arrangements — at the same time I’m very critical of global governance and the shift to transnationalism. A week ago I was in Hong Kong and I criticised the naive opening up of countries without keeping or maintaining the anchoring of the nation state. Doing this leads either to anarchy, or to global governance. <strong>My vision for Europe is a Europe of sovereign nation states</strong>, definitely. <strong>But we have already gone well beyond simply economic integration. The EU is a post-democratic and post-political system</strong>.’</p> <p>Klaus has spent his political career standing up for sovereignty and rejecting the dominant orthodoxies of the day. Unlike other leaders in the former Soviet bloc countries, he did not feel inhibited about criticising western policies when the Berlin Wall came down. He was one of the few to oppose the Clinton/Blair ‘humanitarian’ bombardment of Yugoslavia in 1999 (he was also strongly critical of the Iraq war).</p> <p><span style="text-decoration: underline;"><strong>Yet he feels the freedom to hold — and express — ‘unfashionable’ views in the West is now under increasing threat.</strong></span> </p> <p><span style="text-decoration: underline;"><strong>‘If you ask me whether I think liberty is under huge attack in Europe now, I would say yes. I feel repressed by not being allowed to express my views.</strong></span> I have permanent troubles with this. Suddenly I have discovered, for the first time in 20 years, having been invited to be a keynote speaker at a conference, that the organisers find out I have reservations about the EU, about same-sex marriages, about the Ukraine crisis, and they say, “We are very sorry, we have already found a different keynote speaker, thank you very much.” This is something I had experienced in the communist era but not in so-called free Europe. <span style="text-decoration: underline;"><strong>Only a very narrow range of opinions is now considered politically correct.’</strong></span></p> <p><strong>It’s to fight this worrying trend that Klaus has decided to launch a new project.</strong> ‘I am planning, if we can get the money and people together, to start a new quarterly journal in 2015 called Europe and Liberty.’</p> <p><em>It’s hard not to wish him well. In the not too distant past, Europe did have leaders who had clear and distinct visions: on the left, the likes of Sweden’s Olof Palme and Austria’s Bruno Kreisky; on the right, de Gaulle and Margaret Thatcher. You could agree or disagree but you could never say you didn’t know what they believed in, or that the views they held were not sincere. But they’ve been replaced by a generation of bland, uninspiring, consistently ‘on-message’ politicians.</em></p> <p><em>Václav Klaus is different, a throwback to the days when our leaders did stand for something and weren’t afraid to speak their minds. Let’s hope he does not turn out to be Europe’s last conviction politician.</em></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="262" height="338" alt="" src="" /> </div> </div> </div> Czech Hong Kong Iraq Italy Ukraine Wed, 01 Oct 2014 22:32:20 +0000 Tyler Durden 495077 at How New Jersey's Creeping Wage Hikes Are Crippling Mom-And-Pop Restaurants <p>Another day, another unintended consequence of the socialist state's eagerness to "make things better" for everyone, blowing up in its face. </p> <p>For today's anecdote we go to New Jersey where legislation introduced by Assemblywoman Shavonda Sumter, D-Paterson which passed in the Assembly’s Labor Committee on a party-line vote last March, calls for an increase in the minimum wage for tipped workers. It would increase the federal minimum of $2.13 per hour to $3.39 by the end of this year and $5.93 by 2016.</p> <p><a href=""><img src="" width="500" height="700" /></a></p> <p><em>Assemblywoman Shavonda Sumter wants an increase in the </em><br /><em>minimum wage for tipped workers from the federal minimum of </em><br /><em>$2.13 per hour to $3.39 by the end of this year. (Photo: </em><br /><em>New Jersey Assembly Majority Office)</em></p> <p>So far so good: after all, in isolation, it's a tiny amount, and will hardly impact the employer, while it should boost the bottom line of minimum wage employees, leading to a win-win for everyone right? </p> <p>Well, no, because nothing is ever "<em>in isolation.</em>" However, to grasp the practical implications of how minimum wage hikes flow through the system one needs to actually be a small business owner - the person paying the wage - not a politician, who may have the best intentions in mind (if only for one's own bank account and delusions of grandeur) yet have zero practical understanding that such centrally-planned meddling in the free market always does more bad than good. </p> <p>Case in point, the following story of Rob Pluta who owns and operates Leonardo’s II, an Italian eatery in Lawrenceville, New Jersey as recounted by <a href="">The Daily Signal</a>.&nbsp; </p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>Pluta wasn’t wild about the constitutional amendment New Jersey voters approved last year that raised the state’s overall minimum wage from $7.25 to $8.25 and linked annual increases to the Consumer Price Index. But he’s even more concerned about legislation introduced by Assemblywoman Shavonda Sumter, D-Paterson. Sumter’s bill, A857, which passed in the Assembly’s Labor Committee on a party-line vote last March, calls for an increase in the minimum wage for tipped workers. It would increase the federal minimum of $2.13 per hour to $3.39 by the end of this year and $5.93 by 2016.</p> <p>&nbsp;</p> <p>For restaurant owners, that’s even worse than it sounds, Pluta says. Under current law, if employees don’t make $8.25 counting tips and base, the employer makes up the rest. Pluta says he’s never had to pay—his employees routinely make $15 to $20 per hour or more.</p> <p>&nbsp;</p> <p>If this legislation passes—a companion bill in the state Senate has not moved, and it’s unclear if Republican Gov. Chris Christie would sign it if it did reach his desk—<strong>Pluta would have to pay out up to $24,000 more per year, plus payroll taxes</strong>. His employees, however, would see little difference in their paychecks.</p> </blockquote> <p>In short, "<strong>This is not a logical proposal</strong>,” he says. “<strong>It’s an additional cost and an additional burden</strong>." However, there is no populism in being logical: one wins relection by pandering to the lowest common denominator even if it means a wholesale increase in food prices which has a ripple effect on demand, and ultimately, may likely lead to the evisceration of the mom and pop restaurant industry of New Jersey. </p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>Pluta’s customers understand what this will mean. Kevin and Eve Connelly are regulars. They like to order a shrimp platter with cocktail sauce. It’s not on the menu and is supplied only by request. </p> <p>&nbsp;</p> <p>“If the restaurant suddenly has to pay for something it didn’t have to pay before, one way to cover that cost is to raise menu prices,” Kevin Connelly says. “So we are probably going to have to pay more for that shrimp.” </p> <p>&nbsp;</p> <p>And that, says Eve Connelly, will have a ripple effect. Higher prices mean people go out less often, which means less in tips for the wait staff at Leonardo’s II. “<strong>I wonder if this is something the politicians understand,</strong>” she says.</p> </blockquote> <p>No, they don't. But they are not paid to understand. If they were, they would grasp that corporations will pass on costs first, middle and last, to the point where the business crosses its viability point and competitors come and, pardon the pun, eat its lunch.&nbsp; </p> <p>“What I keep trying to drive home is that we are forced into paying costs we never had to cover before in addition to the minimum wage increase that is already in motion,” he says. “<strong>This will cripple the restaurant industry. </strong>This is especially true for start-ups and other borderline businesses operating at the margins.”</p> <p>Ironically, in pursuing this kind of wealth redistribution, politicians are crushing the small and medium businesses, those which traditionally are the biggest sources of new jobs, and handing over their business to established, franchised mega corporations, which have the economy of scale to offset such cost hikes.</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>T.C. Nelson, who owns the Trenton Social on South Broad Street in Trenton, told The Daily Signal <strong>the winners will be chain restaurants, which “have the economy of scale to absorb these costs</strong>.” <strong>The losers, Nelson says, will be neighborhood bars that can’t survive the extra expense. </strong></p> <p>&nbsp;</p> <p><strong>“What this proposal does is take the art of service and hospitality out of the hands of the small business,” </strong>he says. “Right now, it’s hard to know how much this will cost. But you can be sure some of the smaller, local neighborhood places will go under.” </p> <p>&nbsp;</p> <p>Pluta is not optimistic. </p> <p>&nbsp;</p> <p>“This is an easy issue to demagogue,” he says. “<strong>If this bill does go through it will mean higher consumer costs and less business in restaurants, which works to the disadvantage of the very workers the politicians say they are trying to help</strong>.”</p> </blockquote> <p>Well yes, but it will also help the major restaurant chains, most of which are subsidiaries of publicly owned holding companies (which most likely have been buying back their shares hand over fist courtesy of Bernanke's policies and rewarding management for doing... nothing at all) and which have also spent countless dollars lobbying the Shavonda Sumters of the world to do their bidding, while masking this corporatist hypocrisy with the pleasant face of <em>"we are just trying to make lives better for the minimum wage earners"</em> populism. </p> <p>That, like the stock market, only works until it doesn't, until all small businesses are ultimately crushed or simply decide to go away, and there is no marginal creator of any jobs left, period. Which, needless to say, leads to a far worse outcome for everyone. </p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="939" height="637" alt="" src="" /> </div> </div> </div> Wed, 01 Oct 2014 22:01:26 +0000 Tyler Durden 495076 at US Government Promises To Forgive Student Debt... If You Work For Them <p><a href=""><em>Submitted by Simon Black via Sovereign Man blog,</em></a></p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>He had a vision for what the state could be.</p> <p>&nbsp;</p> <p>His vision was a state that was intricately involved in every person’s life from cradle to the grave.</p> <p>&nbsp;</p> <p>It was responsible for their education, it was their place of work and source of income, and it would monitor and guide the entertainment for all of the society.</p> <p>&nbsp;</p> <p>Life would be characterized by the government provision of care and support throughout. People would grow to rely upon the state in every aspect of their lives, and they would have no reason to seek out alternatives.</p> <p>&nbsp;</p> <p>Eventually people would become dependent on the state’s survival for their survival. Thus their lives would then be dedicated to the ‘greater good’, with the individual existing simply for the state.</p> </blockquote> <p><strong>This terrifying vision of a dystopian society could only be the construct of an author like George Orwell or Ayn Rand, right?</strong> Something you would only see elaborated on the pages of fiction.</p> <p><span style="text-decoration: underline;"><strong>In fact, this was the vision of Otto von Bismarck, Chancellor of Imperial Germany in the 19th century.</strong></span></p> <p>And this wasn’t just a dream. It was a strategy.</p> <p>From government healthcare at birth to education in a government school, followed by a career in civil service, and a government pension in old age, the state was with you from beginning to end.</p> <p>One of the most important stages in the life-long relationship between the state and the individual in Bismarck’s mind was through employment.</p> <p>There you were directly working to support the government’s aims (for the greater good of course), while at the same time being wholly dependent on them for your survival.</p> <p>This was the cornerstone of his plan for the strength of the empire—having a populace entirely dependent on (and thus committed to) the state.</p> <p><strong>“My idea was to bribe the working classes, or shall I say, to win them over, to regard the state as a social institution existing for their sake and interested in their welfare,” Bismarck explained.</strong></p> <p><span style="text-decoration: underline;"><strong>You can be sure that Bismarck would approve of modern society.</strong></span></p> <p>Today in the Land of the Free, everyone is required to pay into the Social Security system, and over 90% of students go to public schools.</p> <p>With the passage of the Affordable Care Act, the state is exerting its control over your medical care. And now with a new bill comes the crown jewel of state employment.</p> <p><span style="text-decoration: underline;"><strong>Presenting Senate Bill 2726: the Strengthening Forgiveness for Public Servants Act.</strong></span></p> <p>If passed, the bill aims to get young people into government employment by promising to forgive their student loan debt.</p> <p>Could they be any more devious?</p> <p>First they’ve managed to let inflation absolutely explode, especially when it comes to the cost of university education.</p> <p>Then they actively encourage students to pay for said education by going deeply into debt, often with government loans funded by the [Chinese] taxpayer.</p> <p>This created a massive class of young people who are now deeply enslaved by their state debt as they vie for jobs as assistant manager at the Gap.</p> <p><strong>And now the government has created a way out. Young people need only become public servants. Emphasis on ‘servants’.</strong></p> <p><span style="text-decoration: underline;"><strong>Somewhere Otto von Bismarck is smiling.</strong></span></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="560" height="404" alt="" src="" /> </div> </div> </div> George Orwell Germany Wed, 01 Oct 2014 21:33:24 +0000 Tyler Durden 495075 at David Tepper: Bill Gross "Who Cares?", Regrets FNMA, Economy "Good", Stocks Not Expensive <p><em>He&#39;s back.</em> <a href="">A month after Appaloosa&#39;s David Tepper explained the end of the bond bull market was here</a> (and 10Y rates are now 5bps lower), the trend-following master-of-the-universe explained to Bloomberg TV&#39;s Stephanie Ruhle and Erik Schatzker how the <strong>departure of Bill Gross from PIMCO was &quot;nothing... who cares?&quot;</strong>; why &quot;the US economy is pretty good&quot;, how junk bonds are at &quot;fair value&quot; and <strong>stocks are cheap</strong> as &quot;multiples are not high.&quot; Finally he explains how he &quot;wished he didn&#39;t have any investment&quot; in Fannie Mae and Freddie Mac and <strong>clarifies in his billionaire-all-knowing-ness how he is sure the United States can contain Ebola</strong>.</p> <p>&nbsp;</p> <p>Headlines:</p> <ul> <li><strong>*APPALOOSA&#39;S TEPPER COMMENTS ON ECB ACTIONS IMPACTING BONDS</strong></li> <li><strong>*TEPPER SAYS DRAGHI HASN&#39;T DONE ANYTHING YET</strong></li> <li><strong>*TEPPER SAYS DRAGHI HAS TO STOP THE NONSENSE</strong></li> <li><strong>*TEPPER SAYS BILL GROSS EXIT MEANS NOTHING FOR MARKETS</strong></li> <li><strong>*TEPPER SAYS BILL GROSS EXIT LONG-TERM NOT RELEVANT</strong></li> <li><strong>*TEPPER SAYS U.S. EQUITIES INTERESTING ON MULTIPLES BASIS</strong></li> <li><strong>*TEPPER SAYS U.S. ECONOMY PRETTY GOOD, STOCKS NOT HIGH MULTIPLES</strong></li> <li><strong>*TEPPER SAYS HIGH YIELD IS AT MID-POINT OF FAIR VALUE</strong></li> <li><strong>*TEPPER SAYS HE WISHES HE DIDN&#39;T HAVE FANNIE, FREDDIE INVESTMENT</strong></li> <li><strong>*TEPPER SAYS APPEAL FOR FANNIE, FREDDIE POSSIBLE</strong></li> </ul> <p>Full clip:</p> <p><object data=";width=640" height="430" style="overflow:hidden;" width="640"></object></p> <p>&nbsp;</p> <p>Excerpted Transcript:</p> <p><u><strong>On Bill Gross:</strong></u></p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>RUHLE: What does this Bill Gross exit mean for the market?</p> <p>&nbsp;</p> <p>TEPPER: <strong>Nothing. Who cares?</strong></p> </blockquote> <p><u><strong>On Draghi:</strong></u></p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>TEPPER: <strong>They haven&#39;t done any QE yet. So let them start some QE</strong>. But the beginning of the end was basically saying that when you create inflation and some inflation in the eurozone, then the bond market is going to start going down. If you don&#39;t create inflation in the eurozone of some sort or you don&#39;t stop the deflation, then that might not happen. <strong>But I do think that if they go in action, if they get in action, if they really get in action you will start creating inflation at some point in time. Until you do that, things will go where they go.</strong> And you can look at the curves over there.</p> <p>&nbsp;</p> <p>TEPPER: Yeah, I think that&#39;s probably right to a certain extent. I don&#39;t think you want to fight it, but you&#39;ve got to understand what it&#39;s going to mean. So the extent that if he&#39;s really in action then you don&#39;t want to fight him, but <strong>he has to really get in action. You have to start QE. </strong>This negative interest rates doesn&#39;t necessarily have the effect of creating money. It doesn&#39;t necessarily have the effect of creating inflation. So if you want to do that, do that. But right now he&#39;s done nothing. <strong>So let him start.</strong></p> </blockquote> <p><u><strong>On Stock Valuations:</strong></u></p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>TEPPER: Look, <strong>the US economy&#39;s pretty good. That&#39;s all. But with the stock markets, I think that you really aren&#39;t at &ndash; at high multiples right now.</strong></p> <p>&nbsp;</p> <p>TEPPER: Well I don&#39;t think it&#39;s high because if you &ndash; <strong>if you believe interest rates are 4 or 4.5 percent, 16.5 seems like about the right multiple</strong>. But I don&#39;t think we&#39;re at the 4.5 percent 10-years. We&#39;re at 2.5 percent 10-years or unfortunately 2.43 or something like that right now. And next year at 14</p> </blockquote> <p><u><strong>On Bonds:</strong></u></p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p><strong>One big employment print and you will go down to &ndash; these yields here will come down in the US</strong>, okay?</p> <p>&nbsp;</p> <p>However, you&rsquo;re so close to go the other way.</p> <p>&nbsp;</p> <p><strong>That&#39;s what makes this a very tricky market. </strong>So if you have &ndash; listen, if you have big employment numbers that take you into the 5s, it&#39;s going to start worrying the Fed about labor push (ph) inflation at some point. And if you do get inflation in Europe to start &ndash; stop going down, inflation to stop going down or deflation looks like it&#39;ll start taking over, at the same time you&#39;ll have the market&#39;s yields turn up here. So it&#39;s tricky. And until that happens, you could have pressure on yields down.</p> <p>&nbsp;</p> <p>So the question is is there enough &ndash; are you getting paid enough for the risks in any kind of place in the yields? Because there&#39;s a lot of chances to lose money.</p> </blockquote> <p><u><strong>On US Equities:</strong></u></p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>TEPPER: Well I kind of told you. Listen, it&#39;s &ndash; it&#39;s interesting on a multiple basis and &ndash; but you have to have certain things happening. You&rsquo;ve got to have Europe stop &ndash; stop the nonsense, so to speak, Draghi stop the nonsense. So that&#39;s kind of it.</p> </blockquote> <p><u><strong>On Warren Buffett:</strong></u></p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>TEPPER: Warren Buffett? He&#39;s an interesting guy. I&#39;ll say that.</p> </blockquote> <p><u><strong>On Ebola:</strong></u></p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>TEPPER: I think the United States, if any country can contain the risk, the United States can contain the risk.</p> </blockquote> <p>*&nbsp; *&nbsp; *</p> <p>SCHATZKER: <u><strong>Summing Up:</strong></u> the high-yield market in the mid-point of fair value. The bond bubble if Draghi undertakes QE is going to blow up. Equities okay with next year&#39;s earnings.</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="321" height="305" alt="" src="" /> </div> </div> </div> Bill Gross Bond Eurozone Fannie Mae Freddie Mac headlines High Yield PIMCO Warren Buffett Wed, 01 Oct 2014 20:59:54 +0000 Tyler Durden 495074 at Deflation As A Precursor Of A Weimar-like Inflation <p>Most people consider deflation the biggest enemy of the gold price, as gold is generally seen as an excellent hedge against inflation. Whilst this is generally correct, it doesn’t mean that a (short) period of deflation is a prelude of a crashing gold price.</p> <p>As the very low inflation rate (and as there’s even official deflation in Italy and Belgium at this point in time), the European Central Bank is taking additional measures to pump several hundreds of billions of euros into the financial system which should theoretically boost the consumption pattern of the Eurozone citizens. It’s no secret the ECB wants the inflation rate to be ‘close to but not exceeding’ 2%, which is deemed to be the most sustainable number by several economists. At an inflation rate of 2% companies can increase their revenues fast enough, without the consumers being hit too hard.</p> <p>The ECB has no problem to expand its balance sheet to the level of 2012, when the total balance was approximately 1000 billion euros higher than where it is today. On top of purchases of asset-backed securities, the ECB will directly pump cash in the banking system by making 400B EUR in 4-year loans available for the banks of the Eurozone at a cost of 0.15% per year. This should lead to an increased spending and increase the inflation rate as well, until the inflation rate is out of the danger zone and is hovering around the 2% mark again.</p> <p>Not everybody in the board of the ECB is happy with this, and the president of the Bundesbank has openly criticized the ECB for causing inflation. In several interviews, president Jens Weidmann has stated that the ECB shouldn’t really intervene to actually create inflation. One would think that the governing council of the ECB would listen to a man whose country has experienced the worst inflation nightmare of all industrialized countries, less than 100 years ago.</p> <p>If you look back at the official statistics of the horror-inflation during the Weimar-republic, it’s clearly visible that after a first bump of inflation there was actually a period of deflation before the snowball effect started to work. In a working paper, Steven Webb was able to gather all data from the period 1919-1923, and as you can see on the next image, the period of inflation was paused for a few months when there was deflation. Thereafter, the inflation rate picked up again and actually accelerated to a level of 7100% (yes, more than seven thousand percent) in October 1923.</p> <p><a href=""><img src="" alt="Weimar Inflation Rate 1" width="551" height="525" style="display: block; margin-left: auto; margin-right: auto;" class="size-full wp-image-8722 aligncenter" /></a></p> <p><a href=""><img src="" alt="Weimar Inflation Rate 2" width="542" height="315" style="display: block; margin-left: auto; margin-right: auto;" class="size-full wp-image-8723 aligncenter" /></a></p> <p><a href=""><img src="" alt="Weimar Inflation Rate 3" width="540" height="157" style="display: block; margin-left: auto; margin-right: auto;" class="size-full wp-image-8724 aligncenter" /></a></p> <p><a href="" target="_blank"><em> Source</em></a></p> <p>Granted, the velocity of money, which is one of the key drivers to induce inflation, was much higher back then. But this is also the main reason why we think the ECB is pushing too hard to create inflation and will very likely overshoot its target the moment the velocity of money returns to more normal levels.</p> <p>Allow us to explain this. The inflation rate is mainly determined by two parameters, the amount of money (‘money supply’) and the velocity of the money. There’s absolutely no disagreement that with the recent rounds of Quantitative Easing all over the world, the money supply has increased by a large factor. The only reason why this money-printing tactic hasn’t showed up in our ‘official’ inflation estimates is because the velocity of the money has been decreasing, which has more or less neutralized the danger of the money-printing. Because the velocity is lower, it will take the ‘new’ money longer to get fully in circulation. And this velocity is still decreasing. There are no official numbers from the ECB, but the following chart from the Fed clearly shows a continuously declining velocity of money.</p> <p><img src="" alt="Velocity of money M2" width="584" height="387" style="display: block; margin-left: auto; margin-right: auto;" class="alignnone wp-image-8753" /></p> <p><a href="" target="_blank"><em>Source</em></a><a href=""><br /> </a></p> <p>So the ECB is trying to counter this decreasing velocity rate by printing more money. This is theoretically the correct measure to create the inflation, however, this is a short-term measure. If you look at the longer term picture, the average velocity of money supply is much higher than the current velocity. So even if the velocity would return to normal levels, the ECB and its counterparts all over the world will have printed too much money, and even if the money supply would gradually decline again, this won’t be sufficient to counter the effect of a much higher velocity. This is the main reason why we believe the ECB is on its way to overshoot its target as the velocity of the money supply will return to normalized levels sooner rather than later.</p> <p>One would think the ECB would listen to Jens Weidmann, that it’s dangerous to create inflation as there are more parameters involved in inflation than just the money supply. As it’s very clear that during the Weimar republic there has been a period of deflation before the inflation rate shot up with triple and even quadruple figure inflation rates, we are afraid the ECB is making the same mistake all over again by increasing the money supply even further.</p> <p>This case study shows that investors in the precious metals sector shouldn’t dump their holdings in a (short) period of deflation, as historically, deflation has been preceding a period of higher-than-normal inflation. As the velocity of money can’t really be influenced by the ECB, its only possibility is to increase the money supply. However, if the velocity returns to the historical average, the ECB and other central banks will have created a ‘perfect storm’ which could lead to the next Weimar-like inflation in Europe. This means that even in a deflationary period, gold and gold-related assets should continue to be a part of any investment portfolio.</p> <p><a href=""><img src="" alt="Exchange rate Reichsmarken - Goldmarken" width="452" height="328" style="display: block; margin-left: auto; margin-right: auto;" class="size-full wp-image-8726 aligncenter" /></a><a href=" " target="_blank"><em></em></a></p> <p><a href=" " target="_blank"><em>Source</em></a></p> <p>As is evidenced on the previous image, the price of gold in Weimar-marken increased faster than the inflation rate, and in just 5 years time, the value of a gold mark expressed in Reichsmarken increased by almost 1,000,000,000%. Yes, that’s 1 billion percent. It’s also clear that the exchange rate decreased during the deflation period in 1920, which might be exactly what we’re experiencing now. Don’t be scared of gold during short periods of deflation. If the ECB really overshoots its inflation target, your gold-related investments will definitely have an increasing value. </p> <p><strong><a href="" target="_blank">** Check out our latest Gold Report!</a></strong></p> <p><em>Sprout Money offers a fresh look at investing. We analyze long lasting cycles, coupled with a collection of strategic investments and concrete tips for different types of assets. The methods and strategies from Sprout Money are transformed into the <a href="">Gold &amp; Silver Report</a> and the <a href="">Technology Report</a>.</em></p> <p><em>Follow us on Twitter <a href=""><strong>@SproutMoney</strong></a></em></p> Asset-Backed Securities Belgium Central Banks European Central Bank Eurozone Italy Money Supply Precious Metals Quantitative Easing Twitter Twitter Wed, 01 Oct 2014 20:30:55 +0000 Sprout Money 495073 at Humpday Humor: Zimbabwe's Unemployment Rate Is 4%, 10.7%, 60% Or 95% <p>While all the western banks are clearly envious at the facility with which Zimbabwe managed to hyperinflate away its debt mountain after simply printing a few trillion in fiat monetary equivalents, which instead of the stock market hit the broader economy, there is much more the "developed" world can learn and is learning from Robert Mugabe domain of experimental yet practical monetarism. On one hand, we find that it was former Goldmanite Mario Draghi, whose recent idea of a "Bad ECB Bank" was taken from <a href="">none other than Zimbabwe</a>: </p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>The Reserve Bank of Zimbabwe created a company that will buy non-performing debt from banks. The Zimbabwe Asset Management Corp. <strong>will purchase the loans under commercial terms, and assign collateral and all other rights, the central bank said in its monetary policy statement yesterday.</strong> </p> <p>&nbsp;</p> <p>The company will seek “to clean up and strengthen banks’ balance sheets and provide them with the liquidity to fund valuable projects for the economy to rebound and to mitigate loss of confidence,” the central bank said. </p> <p>&nbsp;</p> <p>Non-performing loans at Zimbabwean banks swelled to 18.5 percent of total loans, or $705 million, in June from 1.6 percent in 2009, the central bank said. The high level of bad debt is the key threat to the country’s banking industry, Harare-based IH Securities said in May. </p> </blockquote> <p>Why is Zimbabwe doing this? Simple: because as the Central Bank reports, <strong>Zimbabwe's NPL ratio at various banks is as high as 91%, </strong>or roughly where it is in Europe if all the optical illusions, and Copperfieldian distractions were taken away (in addition to Cypriot deposits of course). </p> <p>But that is nothing compared to the lessons none other than the US Department of Labor is about to learn from Zimbabwe's own Bureau <span style="text-decoration: line-through;">of Lies and Seasonality</span> of Labor Statistics. Because in Zimbabwe <strong>the unemployment rate is either 4% or 95%. </strong>Depending on the "data" source. </p> <p><a href=""><em>Africa Check explains:</em></a></p> <p>Zimbabwe’s unemployment rate “of 85%” is a ticking time bomb Morgan Tsvangirai, the leader of the country’s opposition Movement for Democratic Change (MDC), recently said.</p> <p>But how accurate is the 85% figure? <strong>Depending on the source, <span style="text-decoration: underline;">Zimbabwe’s unemployment rate has been estimated at as low as 4% and as high as 95%</span>.</strong></p> <p><strong>In its 2013 election manifesto, President Robert Mugabe’s Zanu-PF party claimed unemployment levels stood at 60%. The secretary-general of the Zimbabwe Congress of Trade Union, Japhet Moyo, told a newspaper late in 2012 that the unemployment rate was between 80% and 90%. <span style="text-decoration: underline;">The country’s National Association of Non-Governmental Organisations (NANGO) suggested that overall unemployment in 2011 stood at 95%.</span></strong></p> <p>The MDC say that the figure cited by Tsvangirai was drawn from a study carried out by the party in October 2013 and “updated” in April 2014. Spokesman Douglas Mwonzora told Africa Check that it showed that “formal unemployment has risen to over 85%”. He however failed to produce a copy of the research report despite numerous requests. </p> <p><strong>Zanu-PF spokesman Rugare Gumbo said the 60% estimate referred to in the party’s election manifesto “might have been accurate then, but things have changed</strong>”. “<strong>You just have to come and do research yourself,” he added before abruptly ending the call.</strong></p> <p>Documents provided to Africa Check by the Zimbabwe Congress of Trade Unions as evidence of their 80% to 90% claim contained no data to support it.</p> <p>Christopher Mweembe from NANGO said the organisation had taken the 95% estimate from the CIA World Factbook, an online database of country information and statistics published by the US Central Intelligence Agency.</p> <p>The website lists unemployment estimates of 80% (2005) and 95% (2009) for Zimbabwe, but does not provide references for the data. The site also cautions readers that: “[T]rue unemployment is unknown and, under current economic conditions, unknowable”.</p> <p>In stark contrast, <strong>the World Bank website lists Zimbabwe’s unemployment rate at only 4%. </strong>It bases the figure on data compiled by the International Labour Organisation (ILO). But closer examination reveals that this “modelled estimate” draws on data that is a decade old.</p> <p>A labour survey published in June 2011 by Zimbabwe’s agency for national statistics, <strong>Zimstat, put unemployment at 10.7%. </strong>This figure was based on an “expanded” definition of unemployment that included people who had given up looking for work.</p> <p><strong>Figures based on a narrower “strict definition” of unemployment, which only counted people who were out of work but actively looking for a job, put unemployment at just 5.4</strong>%.</p> <p>The 2011 survey provides the most recent official data on unemployment and was based on interviews conducted with Zimbabweans from 9,359 households. The Zimstat survey concluded that 6.1-million people aged 15 and older were “economically active”. (Zimbabwe’s population was estimated to be around 12-million at the time.)</p> <p>As is the norm worldwide, the survey classified anyone who had worked for at least an hour – for cash or in kind – in the week preceding the survey as employed. As a result, around 5.4-million people fell into the “employed” category.</p> <p>According to the survey, most of the 5.4-million Zimbabweans worked in the informal sector (84%), with only 11% (606,000) in formal employment. But only about a quarter of all those counted as employed received some form of financial compensation for their work.</p> <p>Like many African countries, Zimbabwe classifies subsistence farming as “employment”, the manager for labour statistics at Statistics South Africa, Peter Buwembo, told Africa Check.</p> <p>“This is reflected in the Zimbabwe figures where agriculture [both formal and subsistence] contributes 66% of total employment, while in South Africa [which does not class subsistence farming as employment]&nbsp; it contributes 4.4%,” Buwembo said.</p> <p>When the 2011 Zimstat labour survey was conducted it was still an internationally accepted survey practice that people who “worked for their own consumption” could be classed as employed. But this changed last year, when the international body of labour statisticians decided that work “for own final use” should not be counted as employment.</p> <p><strong>“If all countries implement this, these unrealistically low unemployment rate figures in African countries will stop,”</strong> Buwembo said.</p> <p>The high informal sector component adds to the “gross underestimate” of unemployment. Tina Koziol, an economist from the South African consultant group Econometrix, explained that methods used to measure informal employment are “problematic” and that the official rate of 10.7% can be regarded “as dubious”.</p> <p><strong>“Overall, the conclusion remains that there is an absence of reliable data on Zimbabwe’s employment statistics.”</strong></p> <p><span style="text-decoration: underline;"><strong>Conclusion: The data is unreliable</strong></span></p> <p>Very little primary data exists on unemployment in Zimbabwe. Claims that the unemployment rate is 60%, 85%, 95% or even as low as 4% – as stated by the World Bank – are not supported by reliable, current data.</p> <p>The most recent labour survey conducted by the country’s agency for national statistics – <strong>which pegged unemployment at 10.7% </strong>– is three years old and has been criticised as a “gross underestimate” of the problem. <strong>The vast majority of the Zimbabweans it classified as “employed” were in fact eking out a living as subsistence farmers.</strong></p> <p><strong>Neither the Zimstats estimate, nor the much higher unemployment estimates of 60% or 85% or 95%, can be considered reliable</strong>. Given the perilous state of Zimbabwe’s economy, unemployment levels are certainly extremely high. But to understand the scope of a problem and implement policies to help solve it you need to be able to quantify it. The first step would be a regular survey of employment and unemployment levels in the country, conducted according to the latest accepted international practices. It is something that is urgently needed.</p> <p>* * * </p> <p>And below is an artist's impression of America's own BLS as it was reading this article.</p> <p><img src="" width="255" height="198" /></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="768" height="431" alt="" src="" /> </div> </div> </div> BLS HIGHER UNEMPLOYMENT Monetary Policy Monetary Policy Statement Newspaper non-performing loans None Unemployment World Bank Wed, 01 Oct 2014 20:26:33 +0000 Tyler Durden 495072 at Trannies Trounced, Credit Clobbered, Bonds Bid With Both Hands & Feet <p><strong>Well that escalated quickly.</strong> It appears &quot;bad-news-is-bad-news&quot; once again as ADP was the only saving grace and was just not bad enough to be good (or good enough to comfort escape-velocity-believers). For the 3rd day in a row, stocks saw an opening dump, European close pump, afternoon slump - this time led lower by <strong>Trannies (dragged lower by Ebola-scared airlines) down 2.5% (worst in 8 months)</strong>. The Dow is rapidly approaching unch for the year. <strong>Treasury yields collapsed</strong> today (2Y -4bps, 30Y -9bps) with 7Y -13bps on the week. <strong>10Y Yield closed at 2.43% with its biggest day move in 13 months</strong>. Gold rose modestly as <strong>silver and WTI crude plunged</strong> once again post-EU close. The <strong>USDdollar flatlined</strong> amid the carnage in bonds, stocks, and commodities. Lots of potential catalysts for today&#39;s weakness but desk chatter about Goldman questioning US growth was notable (as they closed out their growth basket). <strong>The Russell 2000 &#39;closed&#39; in 10% correction.</strong></p> <p>&nbsp;</p> <p><iframe allowfullscreen="" frameborder="0" height="315" src="//" width="560"></iframe></p> <p>&nbsp;</p> <p>3rd day in a row of opening dump, European close pump, afternoon slump</p> <p><a href=""><img alt="" src="" style="width: 600px; height: 436px;" /></a></p> <p>&nbsp;</p> <p>Once again post EU Close - Silver, Crude and stocks tumbled in sync...</p> <p><a href=""><img height="647" src="" width="600" /></a></p> <p>&nbsp;</p> <p>This was Trannies biggest single-day drop in 8 months...</p> <p><a href=""><img alt="" src="" style="width: 600px; height: 291px;" /></a></p> <p>&nbsp;</p> <p>&quot;Sell In May&quot; is starting to look like a good strategy...</p> <p><a href=""><img alt="" src="" style="width: 600px; height: 380px;" /></a></p> <p>&nbsp;</p> <p>&nbsp;</p> <p>VIX slamdown into the close kept stocks off the lows (thanksa to HFTs breaking the CFE)</p> <p><a href=""><img height="329" src="" width="600" /></a></p> <p>&nbsp;</p> <p>Leaving the index to blow lower all on its own...</p> <p><a href=""><img height="612" src="" width="600" /></a></p> <p>&nbsp;</p> <p>Treasuries, JPY, and Stocks were a one way street today...</p> <p><a href=""><img alt="" src="" style="width: 600px; height: 315px;" /></a></p> <p>&nbsp;</p> <p>as was credit... with a VIX driven bouince into the close</p> <p><a href=""><img alt="" src="" style="width: 600px; height: 320px;" /></a></p> <p>&nbsp;</p> <p>As Treasury Yields collapsed&nbsp; to 10-13bps lower on the week... <strong>biggest 10Y move in 13 months</strong></p> <p><a href=""><img alt="" src="" style="width: 600px; height: 315px;" /></a></p> <p>&nbsp;</p> <p><strong>NOTE: Credit protection rallied modestly into the close and Treasury yields accelerated lower - smells a lot like a corporate-bond spread focused liquidation (lift protection as unwind underlyings - which means sell corp bonds, buy TSYs)</strong></p> <p><a href=""><strong><img alt="" src="" style="width: 600px; height: 316px;" /></strong></a></p> <p><strong>and sure enough Huge volume flushed through the HYG ETF as TSYs and hedges decoupled...</strong></p> <p><a href=""><img alt="" src="" style="width: 600px; height: 557px;" /></a></p> <p>&nbsp;</p> <p><strong>Don&#39;t tell Financial stocks but Financial credit just hit an 8-month low (wides)...</strong></p> <p><a href=""><strong><img alt="" src="" style="width: 600px; height: 314px;" /></strong></a></p> <p>&nbsp;</p> <p><strong>as all the majors get hammered wider...</strong></p> <p><a href=""><strong><img alt="" src="" style="width: 600px; height: 331px;" /></strong></a></p> <p>&nbsp;</p> <p>The Dollar went nowhere today - JPY strengthened modestly - amid all the craziness...</p> <p><a href=""><img alt="" src="" style="width: 600px; height: 315px;" /></a></p> <p>&nbsp;</p> <p>Gold rose modestly as silver and crude crashed once again...</p> <p><a href=""><img alt="" src="" style="width: 600px; height: 317px;" /></a></p> <p>&nbsp;</p> <p>And a gentle reminder to those that were absent today... (FYI - this is a 2014 updated version of the original) - so Buy The F##king Dip... If You Don&#39;t You&#39;re a F##king Idiot!</p> <p><iframe allowfullscreen="" frameborder="0" height="360" src="//" width="480"></iframe></p> <p>&nbsp;</p> <p><em>Charts: Bloomberg</em></p> <p><strong>Bonus Chart: The Gold-Silver ratio is back at 71 - the same level when Lehman failed...</strong></p> <p><a href=""><img height="301" src="" width="600" /></a></p> <p>&nbsp;</p> <p><strong>Bonus Bonus Chart: Japanese stocks crashed today... totally decoupled from USDJPY...</strong></p> <p><a href=""><img alt="" src="" style="width: 600px; height: 316px;" /></a></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="1376" height="1000" alt="" src="" /> </div> </div> </div> Crude Lehman Russell 2000 Wed, 01 Oct 2014 20:09:54 +0000 Tyler Durden 495071 at