en "Rough Summer" For Small Caps Set To Continue <p><strong>Small Cap stocks are in the middle of their worst summer doldrums since 2011</strong> - and in fact for many individual stocks, worst summer since the collapse in 2008/9. While talking heads proclaim these smaller (supposedly more domestically-oriented) stocks a must-own, they have underperformed significantly as the credit cycle turns (thanks to their higher sensitivity to funding costs, among other things). Judging by this week&#39;s farce, the supposedly high-beta small caps are being BTFD&#39;d aggressively either and perhaps that is because, since 1926, on average, <strong>September and October are the only months in which small-capitalization stocks have posted losses</strong>.</p> <p>&nbsp;</p> <p>Weak Summer...</p> <p><a href=""><img height="303" src="" width="600" /></a></p> <p>&nbsp;</p> <p>And Weak Bounce...</p> <p><a href=""><img height="320" src="" width="600" /></a></p> <p>&nbsp;</p> <p><em>And as Bloomberg reports, Fall may be no better...</em></p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p><span style="text-decoration: underline;"><strong>Shares of smaller U.S. companies are headed for their biggest monthly decline in almost four years, and history suggests they may not recover their losses any time soon.</strong></span></p> <p>&nbsp;</p> <p>&nbsp;</p> <p><a href=""><img height="292" src="" width="600" /></a></p> <p>&nbsp;</p> <p><strong>September and October are the only months in which small-capitalization stocks have posted losses on average since 1926,</strong> as the chart illustrates. The data was compiled by the University of Chicago&rsquo;s Center for Research in Security Prices.</p> <p>&nbsp;</p> <p>...</p> <p>&nbsp;</p> <p><strong>&ldquo;It has been a rough summer for small caps,&rdquo;</strong> Steven G. DeSanctis, an equity strategist for Bank of America Corp.&rsquo;s Merrill Lynch unit, wrote two days ago in a report that cited the chart&rsquo;s data.</p> <p>&nbsp;</p> <p><strong>The Russell 2000 Index, whose companies have a $714 million median market value, has fallen 10 percent for August. A loss of that size would be the biggest monthly decline since September 2011.</strong> Rising stock volatility and weakness in high-yield bonds indicate a rebound may not come soon, wrote DeSanctis, who is based in New York.</p> </blockquote> <p>*&nbsp; *&nbsp; *</p> <p>Credit continues to flash red...</p> <p><a href=""><img alt="" src="" style="width: 600px; height: 316px;" /></a></p> <p>&nbsp;</p> <p>A pattern we have seen before...</p> <p><a href=""><img alt="" src="" style="width: 600px; height: 313px;" /></a></p> <p>&nbsp;</p> <p>Trade Accordingly...</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="648" height="315" alt="" src="" /> </div> </div> </div> Bank of America Bank of America Merrill Merrill Lynch Russell 2000 Volatility Sat, 29 Aug 2015 17:15:00 +0000 Tyler Durden 512573 at Fischer Speaks At Jackson Hole: "Fed Should Not Wait Until 2% Inflation To Begin Tightening" <p>Today's most anticipated event at tthis year's Jackson Hole event was the panel on "Global Inflation Dynamics", not because there is any core inflation in the world (at least not in the way the CPI measures it), especially not now that China is finally in the deflation exporting business, but because the most important speaker at this year's Jackson Hole, Fed vice chairman Stanley Fischer, alongside BOE's Mark Carney, the ECB's Constancio and the RBI's Raguram Rajan, would comment. </p> <p>Moments ago he just did, and courtesy of Market News, here are the highlights:</p> <ul> <li><strong>FISCHER: SHLD NOT WAIT TIL 2% INFL TO BEGIN TIGHTENING</strong></li> <li><strong>FISCHER: NEED TO 'PROCEED CAUTIOUSLY' IN NORMALIZING POLICY</strong></li> <li><strong>FISCHER: FED FOLLOWING DEVELOPMENTS IN CHINESE ECONOMY</strong></li> <li>FISCHER: RATE PATH MATTERS MORE THAN TIMING OF FIRST HIKE</li> <li>FISCHER: RISE IN DOLLAR COULD RESTRAIN GDP GROWTH IN '16, '17</li> <li>FISCHER: $ MAY HOLD DOWN CORE INFL 'QUITE NOTICEABLY' THIS YR</li> <li>FISCHER: NEED CAUTION IN ASSESSING INFL EXPECTATIONS AS STABLE</li> <li>FISCHER: 'GOOD REASON' FOR INFL TO MOVE UP AFTER OIL/$ PASSES</li> <li>FISCHER: CORE INFL 'TO SOME EXTENT' IMPACTED BY OIL PRICES</li> <li>FISCHER: ECON SLACK IS ONE REASON CORE INFL HAS BEEN LOW</li> <li>FISCHER: OIL PRICE IMPACT 'OUGHT' TO BE LARGELY ONE-OFF EVENT</li> <li>FISCHER: LABOR MARKET 'APPROACHING' MAX EMPLOYMENT OBJECTIVE</li> </ul> <p>As AP notes, Fischer said there's "good reason to believe that inflation will move higher as the forces holding down inflation dissipate further." He says, for example, that some effects of a stronger dollar and a plunge in oil prices have already started to diminish.</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>Both in his speech Saturday and in an interview Friday with CNBC, Fischer made clear that the most recent economic data and the direction of financial markets over the next two weeks would help determine whether the Fed raises rates next month.</p> <p>&nbsp;</p> <p>In the CNBC interview, Fischer acknowledged that before the recent market volatility, "there was a pretty strong case" for a rate hike at the Sept. 16-17 meeting, though it wasn't conclusive. Now, the issue is hazier because the Fed needs to assess the economic impact of events in China and on Wall Street.</p> </blockquote> <p>More details from MNI:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>Federal Reserve Vice Chair Stanley Fischer said Saturday the U.S. central bank should not wait until it sees 2% inflation to begin tightening policy, but it should proceed cautiously in removing accommodation. </p> <p>&nbsp;</p> <p><strong>"With inflation low, we can probably remove accommodation at a gradual pace," </strong>Fischer said in remarks prepared for a panel discussion at the close of the Kansas City Fed's annual Economic Symposium here. </p> <p>&nbsp;</p> <p>Yet, he added, "because monetary policy influences real activity with a substantial lag, we should not wait until inflation is back to 2% to begin tightening." </p> <p>&nbsp;</p> <p>Fischer, who as a member of the board votes at every meeting of the Federal Open Market Committee, did not comment on a particular time for the first rate hike in more than nine years. He did say, "For the purpose of meeting our goals, the entire path of interest rates matters more than the particular timing of the first increase." </p> <p>&nbsp;</p> <p>That path will be decided by the progress on the Fed's price stability mandate as progress in the labor market continues and is "approaching our maximum employment objective," Fischer said. </p> <p>&nbsp;</p> <p>"To ensure that these goals will continue to be met as we move ahead," Fischer said, "we will most likely need to proceed cautiously in normalizing the stance of monetary policy." </p> <p>&nbsp;</p> <p>Right now though, progress on the Fed's inflation objective is being weighed down by a significant drop in oil prices and a stronger U.S. dollar since last year.&nbsp; Fischer estimates the rise in the dollar, about 17% in nominal terms since last summer, will restrain real GDP growth through 2016 "and perhaps into 2017 as well."&nbsp; <strong>It "could plausibly be holding down core inflation quite noticeably this year," he said. </strong></p> <p>&nbsp;</p> <p><strong>The lower oil prices could also put downward pressure on core inflation, even though this measure is designed to strip out the effects of the volatile prices. </strong></p> <p>&nbsp;</p> <p>"Note that core inflation does not entirely 'exclude' food and energy, because changes in energy prices affect firms' costs and so can pass into prices of non-energy items," he said. </p> <p>&nbsp;</p> <p>Overall, though, Fischer sounded optimistic these factors will prove transitory. "While some effects of the rise in the dollar may be spread over time, some of the effects on inflation are likely already starting to fade," he said. </p> <p>&nbsp;</p> <p>"The same is true for last year's sharp fall in oil prices, though the further declines we have seen this summer have yet to fully show through to the consumer level," he said. </p> <p>&nbsp;</p> <p>The <strong>transitory </strong>nature of these factors and "given the apparent stability of inflation expectations," he said, "there is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further." </p> <p>&nbsp;</p> <p>In addition, "slack in the labor market has continued to diminish, so the downward pressure on inflation from that channel should be diminishing as well," he said. </p> <p>&nbsp;</p> <p>But Fischer warned that Fed olicymakers should "be cautious in our assessment that inflation expectations are remaining stable." </p> <p>&nbsp;</p> <p><strong>One reason "is that measures of inflation compensation in the market for Treasury securities have moved down&nbsp; somewhat since last summer," he said. </strong></p> <p>&nbsp;</p> <p>He added, though, "these movements can be hard to interpret, as at times they may reflect factors other than inflation expectations, such as changes in demand for the unparalleled liquidity of nominal Treasury securities." </p> <p>&nbsp;</p> <p>Fischer didn't comment much in his prepared remarks on other recent financial market volatility, except to say "At this moment, we are following developments in the Chinese economy and their actual and potential effects on other economies even more closely than usual."</p> </blockquote> <p>In broad terms, this is a repeat of what he told CNBC's Liesman yesterday, which resulted in the market getting spooked in a "<em><strong>not dovish enough" </strong></em>reaction, if only until the last 15 minute mauling of VIX, which sent the DJIA down from -110 to almost positive. </p> <p>What is clearly missing from Fischer's speech is even the faintest grasp that China is now actively exporting deflation via active devaluation, which is a double whammy for the Fed's "financial conditions" as it means not only will US inflation remains persistently low (the way the BLS measures it), but the ongoing selloff in TSYs will force the Fed to get involved soon, especially if ongoing selling in both TSYs and stocks wreaks more havoc with 'risk parity" models, potentially forcing the world's biggest hedge fund Bridgewater to delever and/or unwind some of its massive $150+ billion in positions.</p> <p>However once again, the most important question was missing: <a href="">now that China is engaging in reverse QE </a>and selling tens if not hundreds of billions in US Treasurys every month, with the US facing a $450 billion budget deficit (hence needing to issue half a trillion in debt), the Fed balance sheet contracting by over $250 billion, just how does the Fed plan on tightening if what it should instead be doing is easing, and massively at that.</p> <p><em>Full speech here (<a href="">link</a>):</em></p> <p> <iframe src=";view_mode=scroll&amp;access_key=key-1oRgcLSB6rq72vyZOozl&amp;show_recommendations=false" width="100%" height="600" frameborder="0" scrolling="no"></iframe></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="1000" height="667" alt="" src="" /> </div> </div> </div> BLS Bridgewater Budget Deficit China CPI Federal Reserve Monetary Policy Volatility Sat, 29 Aug 2015 16:41:16 +0000 Tyler Durden 512574 at Here's Why The Markets Have Suddenly Become So Turbulent <p><a href=""><em>Submitted by Charles Hugh-Smith via</em></a>,</p> <div class="content clearfix"> <p>When stock markets are free-falling 10+% in a matter of days, it&rsquo;s natural to seek some answers to the question &ldquo;why now?&rdquo;</p> <p>Some are saying it was all the result of high-frequency trading (HFT), while others point to China&rsquo;s modest devaluation of its currency the renminbi (a.k.a. yuan) as the trigger.</p> <p>Trying to finger the proximate cause of the mini-crash is an interesting parlor game, but does it really help us identify the trends that will shape markets going forward?</p> <p>We might do better to look for trends that will eventually drag markets up or down, regardless of HFT, currency revaluations, etc.</p> <h2><u><strong>Five Interconnected Trends</strong></u></h2> <p>At the risk of stating the obvious, let&rsquo;s list the major trends that are already visible.</p> <h2>1. The China Story is Over</h2> <p>And I don&rsquo;t mean the <em>high growth forever</em> fantasy tale, I mean the entire China narrative is over:</p> <ol class="rteindent1" style="list-style-type: upper-alpha;"> <li>That export-dependent China can seamlessly transition to a self-supporting consumer economy.</li> <li>That China can become a <em>value story</em> now that the <em>growth story </em>is done.</li> <li>That central planning will ably guide the Chinese economy through every rough patch.</li> <li>That corruption is being excised from the system.</li> <li>That the asset bubbles inflated by a quadrupling of debt from $7 trillion in 2007 to $28 trillion can all be deflated without harming the wealth effect or future debt expansion.</li> <li>That development-dependent local governments will effortlessly find new funding sources when land development slows.</li> <li>That workers displaced by declining exports and automation will quickly find high-paying employment elsewhere in the economy.</li> </ol> <p>I could go on, but you get the point: the entire Story is over.&nbsp; (I explained why in a previous essay, <a href="" target="_blank">Is China&rsquo;s &ldquo;Black Box&rdquo; Economy About to Come Apart?</a> )</p> <p>This is entirely predictable. Every fast-growing economy starting with near-zero debt and huge untapped reserves of cheap labor experiences an explosive rise as the low-hanging fruit is plucked and the same abrupt stall and stagnation when the low-hanging fruit has all been harvested, leaving only the unavoidable results of debt-fueled speculation: an enormous overhang of bad debt, malinvestment (a.k.a. bridges to nowhere and ghost cities) and policies that seemed brilliant in the good old days that are now yielding negative returns.</p> <h2>2. The Emerging Market Story Is Also Done</h2> <p>Emerging currencies and markets have soared on the back of the China Story, as China&rsquo;s insatiable demand for oil, iron ore, copper, soy beans, etc. drove global demand to unparalleled heights.</p> <p>This demand pushed prices higher, which then pushed production (supply) higher, as the low cost of capital globally enabled marginal resources to be put into production with borrowed money.</p> <p>Now that China&rsquo;s demand has fallen off&mdash;by some accounts, China&rsquo;s GDP is actually in negative territory, despite official claims that it&rsquo;s still growing at 7% annually&mdash;commodity prices have crashed, taking the emerging markets&rsquo; stock and currency markets down. (<a href="" target="_blank">Source</a>)</p> <p>Here is a chart of Doctor Copper, a bellwether for industrial and construction demand:</p> <p class="rtecenter"><img src="" /></p> <p>Here is Brazil&rsquo;s stock market, which has declined 54% in the past 12 months:</p> <p class="rtecenter"><img src="" /></p> <p>These are catastrophic declines, and with China&rsquo;s growth story over, there is absolutely nothing on the global horizon to push demand back up.</p> <h2>3. Diminishing Returns on Additional Debt</h2> <p>The simple truth is that expanding debt has fueled global growth. Though people identify China as the driver of global demand for commodities, China&rsquo;s growth is debt-driven. As noted above, China quadrupled its officially tracked debt from $7 trillion in 2007 to $28 trillion as of mid-2014&mdash;an astonishing 282 percent of gross domestic product (GDP).&nbsp; If we add the estimated $5 trillion of shadow-banking system debt and another year&rsquo;s expansion of borrowing, China&rsquo;s total debt of $35+ trillion is in excess of 300% of GDP&mdash;levels associated with <em>doomed to default</em> states such as Greece and Spain.</p> <p>While China has moved to open the debt spigot in recent days by lowering interest rates and reserve requirements, this doesn&rsquo;t make over-indebted borrowers good credit risks or more empty high-rises productive investments.</p> <p>Borrowed money that poured into ramping up production in emerging nations is now stranded as prices have plummeted, rendering marginal production intensely unprofitable.</p> <p>In sum: greatly expanding debt boosted growth virtually everywhere after the Global Financial Meltdown of 2008-2009. That fix is a one-off: not even China can quadruple its $35+ trillion debt to $140 trillion to reignite growth.</p> <p>Here is a sobering chart of global debt growth:</p> <p class="rtecenter"><img src="" /></p> <h2>&nbsp;</h2> <h2>4. Limits on Deficit-Spending (Borrowed) Fiscal Stimulus</h2> <p>When the global economy rolled over into recession in 2008, governments borrowed money by selling sovereign bonds to fund increased state spending.&nbsp; In the U.S., federal borrowing soared to over $1 trillion per year as the government sought to replace declining private spending with public spending.</p> <p>Governments around the world have continued to run large deficits, piling up immense debts since 2008.&nbsp; The global move to near-zero yields has enabled governments to support these monumental debt loads, but even at near-zero yields, the interest payments are non-trivial. These enormous sovereign debts place some limits on how much governments can borrow in the next global recession&mdash;a slowdown many think has already started.</p> <p>Here is a chart of U.S. sovereign debt, which has almost doubled since 2008:</p> <p class="rtecenter"><img src="" /></p> <p>As noted on the chart: what structural inadequacies or problems did governments fix by borrowing gargantuan sums to fund state spending?&nbsp; The basic answer is: none. All the same structural problems facing governments in 2008 remain untouched in 2015. These include: over-indebtedness, bad debts that haven&rsquo;t been written down, insolvent banks, soaring social spending as the worker-retiree ratio slips below 2-to-1, externalized environmental damage that has yet to be remediated, and so on.</p> <h2>&nbsp;</h2> <h2>5. Central Bank Stimulus (Quantitative Easing) as Social Policy Has Been Discredited</h2> <p>In the wake of the Global Financial Meltdown of 2008-2009, central banks launched monetary stimulus programs aimed at pumping money into the economy via bank lending. The stated goals of these stimulus programs were 1) boost employment (i.e. lower unemployment) and 2) generate enough inflation to stave off deflation, which is generally viewed as the cause of financial depressions.</p> <p>While it can be argued that these unprecedented monetary stimulus programs achieved modest successes in terms of lowering unemployment and pushing inflation above the zero line, they also widened wealth and income inequality.</p> <p>Even as these programs made modest dents in unemployment and deflation, they pushed asset valuations to the moon&mdash;assets largely owned by the few at the top of the wealth pyramid.</p> <p class="rtecenter"><img src="" /></p> <p>Here is a chart of selected developed economies&rsquo; income/wealth skew:</p> <p class="rtecenter"><img src="" /></p> <p>The widespread recognition that the benefits of central bank stimulus mostly flowed to the top of the pyramid places political limits on future central bank stimulus programs.</p> <h2><u>The 2008-09 Fixes Are No Longer Available</u></h2> <p>In summary, the fixes for the 2008-09 recession are no longer available in the same scale or effectiveness.&nbsp; Expanding debt to push up demand and investment, rising state deficit spending, massive monetary stimulus programs&mdash;all of these now face limitations. This means the central banks and states have very limited tools to reignite growth as global recession trims borrowing, investment, hiring, sales and profits.</p> <h2><u>What Ultimately Matters: Capital Flows</u></h2> <p>In <a href="" target="_blank">Part 2: What Happens Next Will Be Determined By One Thing: Capital Flows</a>, we&rsquo;ll look at the one dynamic that ultimately establishes assets prices: <strong>capital flows.</strong></p> <p>I personally don&rsquo;t think the world has experienced a period in which capital preservation has become more important than capital appreciation since the last few months of 2008 and the first few months of 2009.&nbsp; Other than these five months, the focus has been on speculating to obtain the highest possible yield/appreciation.</p> <p>This suggests to me that the next period of risk-off capital preservation will last a lot longer than five months, and perhaps deepen as time rewards those who adopted risk-off strategies early on.</p> <p><a href="" target="_blank">Click here to read Part 2</a>&nbsp;of this report&nbsp;<em>(free executive summary,&nbsp;<a href="" target="_blank">enrollment</a>&nbsp;required for full access)</em></p> </div> <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="279" height="196" alt="" src="" /> </div> </div> </div> Brazil Central Banks China Copper Corruption default Deficit Spending ETC Global Economy Greece Gross Domestic Product HFT Meltdown None Quantitative Easing Recession Renminbi Sovereign Debt Unemployment Yuan Sat, 29 Aug 2015 16:30:00 +0000 Tyler Durden 512571 at The Evolution of America's Energy Supply (1776 – 2014) <p>Some context for those who insist renewables will 'solve' everything...</p> <p>&nbsp;</p> <p><a href=""><img src="" width="600" height="600" /></a></p> <p><a href=""><em>Source: Visual Capitalist</em></a></p> <p><strong>The early settlers to North America relied on organic materials on the surface of land for the vast majority of their energy needs. Wood, brush, and other biomass fuels were burned to warm homes, and eventually to power steam engines. </strong>Small amounts of coal were found in riverbeds and other such outcrops, but only local homes in the vicinity of these deposits were able to take advantage of it for household warmth.</p> <p><strong>During the Industrial Revolution, it was the invention of the first coal-powered, commercially practical locomotives that turned the tide. </strong>Although wood would still be used in the majority of locomotives until 1870, the transition to fossil fuels had begun.</p> <p>Coke, a product of heating certain types of coal, replaced wood charcoal as the fuel for iron blast furnaces in 1875. Thomas Edison built the first practical coal-fired electric generating station in 1882, which supplied electricity to some residents in New York City. It was just after this time in the 1910s that the United States would be the largest coal producer in the world with 750,000 miners and blasting 550 million tons of coal a year.</p> <p>The invention of the internal combustion engine and the development of new electrical technologies, including those developed by people like Thomas Edison and Nikola Tesla, were the first steps towards today’s modern power landscape. Fuels such as petroleum and natural gas became very useful, and the first mass-scale hydroelectric stations were built such as Hoover Dam, which opened in 1936.</p> <p>The discovery and advancement of <strong>nuclear technology</strong> led to the first nuclear submarine in 1954, and the first commercial nuclear power plant in the United States in Pennsylvania in 1957. In a relatively short period of time, nuclear would have a profound effect on energy supply, and it today 99 nuclear reactors account for 20% of all electricity generated in the United States.</p> <p><strong>In more recent decades, scientists found that the current energy mix is not ideal from an environmental perspective. </strong>Advancements in renewable energy solutions such as solar, wind, and geothermal were made, helping set up a potential energy revolution. Battery technology, a key challenge for many years, has began to catch up to allow us to store larger amounts of energy when the sun isn’t shining or the wind isn’t blowing. Companies like Tesla are spending billions of dollars on battery megafactories that will have a great impact on our energy use.</p> <p><strong>Today, the United States gets the majority of its energy from fossil fuels, </strong>though that percentage is slowly decreasing. While oil is still the primary fuel of choice for transportation, it now only generates 1% of the country’s electricity through power plants. Natural gas has also taken on a bigger role over time, because it is perceived as being cleaner than oil and coal.</p> <p><strong>Today, in 2015, wind and solar power have generated 5% and 1% of total electricity respectively. Hydro generates 7%.</strong></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="967" height="613" alt="" src="" /> </div> </div> </div> Geothermal Natural Gas New York City Nuclear Power Sat, 29 Aug 2015 15:45:00 +0000 Tyler Durden 512570 at HuNTeR LuVS ASHLeY... <p><a href="" title="HUNTER MADISON"><img src="" alt="HUNTER MADISON" width="1024" height="941" style="display: block; margin-left: auto; margin-right: auto;" /></a></p> <p style="text-align: center;">&nbsp;</p> <script src="//"></script> Sat, 29 Aug 2015 15:40:40 +0000 williambanzai7 512572 at US Debt In The Age Of Unrestrained Central Banking <p><a href=""><em>Submitted by Eugen Bohm-Bawerk</em></a></p> <p>We have shown in the previous three episodes (episode <a href="">1</a>, <a href="">2</a> and <a href="">3</a>) how the US economy structurally changed after Nixon took the US off gold, letting the Federal Reserve do what it does best. Obviously, with the “hard” anchor of the US dollar cut loose, the rest followed suit. It is telling that the so-called post-Bretton Wood “gold standard” of all currencies, the Deutsche mark lost 65 per cent of its purchasing power from 1971 to 1990.</p> <p>Also note that the French, with its inferior Franc lost 84 per cent of its purchasing power over the same, time hated the Germans for it. As a “victorious” nation of the Second World War, the French had a right to veto German unification, and would only agree to re-merge east and west if the Germans would give up their coveted mark and join the euro.</p> <p>But we digress, in the this episode we will focus on debt levels within the context of unrestrained central banking.</p> <p>Throughout history the US economy used to be leveraged, on average, 1.5 times GDP; total credit market debt fluctuated more or less within a tight range of maximum one standard deviation from its long term mean. Prior to 1971 the only time debt levels really got out of hand was during the Great Depression on back of a 45 per cent decline in nominal GDP. Total outstanding debt, in dollar terms actually fell by 12 per cent over the same time span.</p> <p>So, the US economy was leveraged 1.5 times its annual output from 1840 to 1971 before fundamentally changing its trajectory. Needless to say, this low debt period was also when the US economy became the world’s largest and most sophisticated (see here) and ultimately a global hegemon.</p> <p><a href=""><img src="" width="594" height="380" /></a></p> <p>Growth, on the other hand have moved inversely to the debt level. On a decennial CAGR basis growth in 2015 is only beaten by 1935 in terms of under-performance.</p> <p><a href=""><img src="" width="594" height="370" /></a></p> <p><strong>So why did debt levels rise so dramatically after the final central bank restraint was removed? It is essentially due to the massive subsidy central bankers provided. If you tax a thing you get less of it (think all the tax on labour) but if you subsidise it you will get more of it. As time went by, debt obviously grew ever larger and eventually large enough to become an integral part of the business cycle. In other words, central banks could not stop the subsidy for fear of creating, well, a 2008 financial meltdown.</strong></p> <p>So every time spending growth came to a halt, the central banks would step in and lower rates and consequently also debt servicing cost. With more money in consumers’ pockets spending could resume.</p> <p>As debt continued to grow, debt servicing cost obviously rose along with it, and the high in interest rates could never reach its previous peak before a new slump in spending occurred. In addition, the central banks always had to lower rates to a lower level than in the preceding cycle to reinvigorate spending.</p> <p>When debt funded spending could not be stimulated even at zero rates the necessary deleveraging started with devastating consequences for global finance, trade and output.</p> <p><a href=""><img src="" width="594" height="390" /></a></p> <p>This process, which Stockman refers to as dishonest market pricing, had even more perverted effects than just rising the overall debt level.<strong> It allowed the emergence of debt that consumed current resources without adding to future production. The massive increase in mortgage loans (which per definition must be repaid out the production of the mortgage holder) and financial sector debt helped increase what we call counterproductive debt.</strong></p> <p>While we get much pushback on this concept – a house is claimed to be productive as it provides housing services – the point is simply that the future productive stream of goods and services needed to repay the resources used in the process to build the house cannot come from the house itself. Taken to its logical extreme, a two week vacation in Spain to recuperate, paid for by consumer debt is also productive in the sense that its can help bring forth a more motivated worker upon return.</p> <p>The jet fuel, food and services consumed during the two week vacation on the other hand is consumed and can only be repaid by future production; but it did nothing to actually provide the means for which future production can emerge. Unless paid for by prior production, through honest savings, debt funded consumption make society poorer and less capable of meeting its future liabilities. That this is lost on the Keynesians in charge has led to more destruction than any war have ever done.</p> <p>It is the same with a mortgage. Allocate too much resources to the building of houses paid for by promises to repay from future production and the promised income stream will never materialise, because the means it was predicated upon are no longer available to make the investments necessary. They were consumed in the process of building the houses.</p> <p>Whilst counterproductive debt rose exponentially from the 1970s, debt taken on with the intent of making a subsequent sale on the other hand remained relatively constant. Productive debt, presumably the kind that is self-liquidating, did not take the central bank subsidy bait to the same extent.</p> <p><a href=""><img src="" width="594" height="356" /></a></p> <p>Combining zero interest rates and a massive pile of counterproductive debt leads to a very toxic mix for sound and sustainable growth.<strong> Central banks, shell-shocked by the fact that they cannot goose spending at zero interest rates fear peak debt will lead to a massive deflation, starts programs to fund their governments, which can spend.</strong></p> <p>And spend they do. Government debt is under the category we call destructive debt, pure consumptive in nature without even leaving traces of wealth behind. Mortgage debt, while counter-productive, &nbsp;at the very least leave behind a house.</p> <p>As the counter-productive part of the outstanding debt went into free-fall, the government, funded by its central bank, started spending and bailing out the very same counter-productive debt. In this phase of the global debt debacle, destructive debt rises to maintain the status quo. This is obviously also the very last stage as there will be no one to bail out the governments of the world when the next deflationary down-leg starts.</p> <p><a href=""><img src="" width="594" height="352" /></a></p> <p>It is also worth noting that velocity of money falls when counter-productive debt rises too high in proportion to society’s productive capacity. By this logic, peak debt was actually reached as early as in the mid-1990s, but ever lower central bank rates, the emergence of China with its massive recycling of dollar inflation (more on this later) helped postpone the day of reckoning.</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="595" height="380" alt="" src="" /> </div> </div> </div> Central Banks China Federal Reserve Great Depression Meltdown Mortgage Loans Nominal GDP Purchasing Power Unification Sat, 29 Aug 2015 15:04:38 +0000 Tyler Durden 512569 at Joe Biden's Son Blames "Russian Agents" For Ashley Madison Profile <p><a href="">Last night we heard the best 'excuse' yet if you are caught with an Ashley Madison account, from Dan Loeb</a> - <strong><em>"due diligence."</em></strong> Today, not to be outdone by a married hedge fund manager, Vice-President Joe Biden's son "Hunter" has unleashed his own set of excuses for member ship of the extramarital affairs website, <a href="">as Breitbart reports</a>&nbsp; - <strong><em>Biden thinks international agents, possibly Russian, who objected to his board membership with a Ukrainian gas company set up a fake account to discredit him.</em></strong> However, IP mapping suggests otherwise...</p> <p>&nbsp;</p> <p><a href=""><em>As Breitbart reports,</em></a></p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><strong>Vice President Joe Biden’s son Hunter Biden’s account on the extramarital dating website Ashley Madison was used and likely created on the Georgetown University campus while Biden was teaching there.</strong></p> <p>&nbsp;</p> <p>Business executive Robert “Hunter” Biden, reportedly an adviser to his father’s political career, told Breitbart News Monday that he suspected his enemies of creating a fake Ashley Madison account for him in order to discredit him. <strong>The email address provided for “Robert Biden’s” account matched a personal email address once used by Biden</strong>, the vice president’s son confirmed.</p> <p>&nbsp;</p> <p><strong>Biden thinks international agents, possibly Russian, who objected to his board membership with a Ukrainian gas company set up a fake account to discredit him. </strong>A source close to Biden <a href="">told People Magazine</a> after the first Breitbart story ran that the IP address for the account traces to Jacksonville, Florida.</p> <p>&nbsp;</p> <p>But account information shows that the profile, which was confirmed by a credit card purchase in 2014, was used at the latitude/longitude point of 38.912682, -77.071704.</p> <p>&nbsp;</p> <p><a href=""><img src="" width="600" height="472" /></a></p> <p>&nbsp;</p> <p><strong>That <a href="'45.7%22N+77%C2%B004'18.1%22W/@38.9125667,-77.0715232,311m/data=!3m1!1e3!4m2!3m1!1s0x0:0x0">latitude-longitude point</a> just happens to exist on the Georgetown University campus, at an administrative building on Reservoir Road. And Hunter Biden just happened to be teaching there around the time the account was set up.</strong></p> </blockquote> <p>*&nbsp; *&nbsp; *<br /><span style="text-decoration: underline;"><strong>Faced with the new information, representatives for Biden said that the vice president’s son would not comment on the story </strong></span>beyond his original statements to Breitbart News denying that the account was his.</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="518" height="457" alt="" src="" /> </div> </div> </div> Florida Joe Biden Sat, 29 Aug 2015 14:26:52 +0000 Tyler Durden 512538 at The Dollar: Now What? <p>The US dollar has been on a roller coaster ride. Many have lost confidence in the underlying trend. &nbsp;An important prop for the dollar, namely the prospects for the Fed's lift-off has been pushed out again, this time ostensibly due to the heightened volatility of the financial markets, apparently sparked by events in China.</p> <p>&nbsp;</p> <p>The September Fed funds futures have nearly fully priced out the risk of a hike next month. The effective Fed funds have traded 14-15 bp this month, and the September Fed funds contract implies an average effective rate of 17.5 bp next month.</p> <p>&nbsp;</p> <p>We continue to believe that the main driver of this third significant dollar rally since the end of Bretton Woods is the divergence of the trajectory of monetary policy between the US (and UK) and nearly all the other high income countries, and many emerging markets, including China. &nbsp;There are a number of cross-currents, and other considerations, including market positioning, use of euro and yen for funding purposes, and hedging flows that at times may obscure or even reverse (technical correction) the underlying trend.</p> <p>&nbsp;</p> <p>Nevertheless, &nbsp;we expect the divergence theme to gain more traction over time. &nbsp;The Federal Reserve will raise rates at some juncture and not only will the ECB and BOJ continue to ease for at least the next 12 months, but there is risk that the central bank balance sheet exercise lasts even longer. &nbsp;The ECB's staff, which will update its forecasts in the week ahead, is likely to shave both its growth and inflation forecasts at the September 3 central bank meeting.</p> <p>&nbsp;</p> <p>The Dollar Index was slammed to its lowest level since January in the market panic at the start of last week. &nbsp;It overshot the minimum objective of the double top pattern we noted (~94.30). &nbsp; It rebounded and on Thursday had retraced nearly 61.8% of the decline since the August 7 (~98.33). &nbsp;The trend line drawn off that high and the August 19 high (~97.08) comes in near 95.80 on Monday and falls to about 95.15 by the end of the week. &nbsp;A move above 96.40 signal a return of the 98.00-98.30 area.</p> <p>&nbsp;</p> <p>The panic saw the euro reach almost $1.1715 at the start of last week. &nbsp;The subsequent sell-off saw it shed more than nickel. &nbsp;The euro settled on its lows for the week, leaving a potential shooting star candlestick formation on the weekly charts. &nbsp;The break of $1.12 creates scope for another half cent of declines but pushing the euro below the $1.1130 area may require fresh fundamental incentives, possibly in the form of more confidence that the Fed is still on track to hike rates next month, or that the ECB is particularly dovish. &nbsp; On the upside, the $1.1280-$1.1310 band should limit euro gains if the euro bears who had been squeezed out of their shorts are going to re-establish.</p> <p>&nbsp;</p> <p>Switzerland unexpectedly reported that its economy expanded in Q2. &nbsp;The consensus was expected the second consecutive quarterly contraction. &nbsp;That helped stall the dollar's upside momentum. &nbsp;The CHF0.9680 is a potent block now to additional dollar gain, though if it is overcome, the next target is near CHF0.9800. &nbsp;Support is seen near CHF0.9500. &nbsp;Support for the euro is pegged at CHF1.0750 and then CHF1.0700. &nbsp;A break of CHF1.0680 would mark a significant technical deterioration.</p> <p>&nbsp;</p> <p>The dollar also retraced 68.2% of its losses against the yen of the drop from August 18 high near JPY124.50 through the spike low on August 24 near JPY116.20. &nbsp;When that retracement objective near JPY121.35 is overcome, there is a band of resistance in the JPY121.80-JPY122.15 that will provide the next test. &nbsp; &nbsp;On the weekly charts, the dollar posted a potential bullish hammer pattern. &nbsp;An appreciating dollar against the yen assumes firm, if not rising US rates, and stability to higher equities.</p> <p>&nbsp;</p> <p>The greenback rose against all the major currencies last week save the Japanese yen. Sterling was among the weakest. &nbsp;Losing about 2.20%, sterling nearly matched the Australian dollar's decline (2.25%), which was only surpassed by the New Zealand dollar's 3.35% fall. &nbsp;Since August 18, the implied yield on the June 2016 short sterling futures contract fell more than 13 bp as investors anticipate that greater deflationary forces will delay a BOE rate hike.</p> <p>&nbsp;</p> <p>Sterling fell to its lowest level since July 8 before the weekend. &nbsp; A convincing break of the low set then (~$15330) could spur a further drop into the $1.5180-$1.5200 area. Sterling closed below its 100-day moving average (~$1.5480) for the first time since early May. &nbsp;It has spent most of the last two months above the 200-day moving average (~$1.5370) as well. &nbsp; On the weekly charts, sterling posted a large outside down week, which is a bearish development. &nbsp;On the top side, the $1.5450 area should offer resistance.</p> <p>&nbsp;</p> <p>The Australian dollar tested a monthly trend line dating back to 2001. &nbsp;It is found near $0.7025. &nbsp; Assisted by a head and shoulders bottom on the hourly bar charts, the Australian dollar bounced a little through $0.7200 before the sellers re-emerged. &nbsp;It stopped shy of the measuring objective of the head and shoulders pattern, which seems to reflect the aggressiveness of the bears. &nbsp;Even though the RBA is not expected to cut rates when it meets on September 1, it is not expected to rule out a future cut. &nbsp;A rate cut becomes more likely if the currency stops falling. &nbsp;Look for another test on the $0.7000-$0.7025 support. &nbsp;</p> <p>&nbsp;</p> <p>Canada's fundamentals are poor and this seemed to outweigh the recovery in oil prices. &nbsp;Also, the US two-year premium over Canada recouped most of the ground it had lost earlier in the week. Canada is expected to report a contraction in Q2 GDP in the coming day,s and a softening of the labor market in August. &nbsp; The US dollar's pullback from the CAD1.3355 spike on August 25 fizzled near CAD1.3140. &nbsp; Another run at the highs looks likely. &nbsp;Over the longer term, we look for the Australian dollar to fall toward $0.6000 and the US dollar to rise toward CAD1.40.&nbsp;</p> <p>&nbsp;</p> <p>Oil prices staged a strong rebounded in the second half of last week after falling to $37.75 on August 24. &nbsp;The bounce carried the October light crude futures contract to $45.25, which completes a 61.8% retracement of the slide in prices since July 29. &nbsp;The next objective is seen near $46.80 and then $48.00. &nbsp;There is good momentum, and the October contract finished the week above its 20-day moving average (~$42.95) for the first time since June 23. &nbsp;The October contract posted a potential key reversal on the weekly bar charts. &nbsp;It made a new multi-year low early in the week and then proceeded to rally, taking out the previous week's highs. &nbsp;It closed at its highest level since the end of July. &nbsp;</p> <p>&nbsp;</p> <p>The 10-year US Treasury yield plunged to 1.90% in the panic at the start of last week. &nbsp;As markets calmed and economic data, including durable goods orders and a sharp upward revision to Q2 GDP helped yields recover by 30 bp before consolidating. &nbsp;Some link the rise in US yields to selling by Chinese officials. &nbsp;While we do not rule out some Treasury sales, we suspect that it is being exaggerated as is the market's wont.&nbsp;</p> <p>&nbsp;</p> <p>Note that the TIC data, which is not complete, but authoritative, shows China's holdings of US Treasuries rose by about $27 bln in H1 14, which is the most recent data. &nbsp; The Federal Reserve custody holdings of Treasuries for foreign officials rose by about $26 bln this month, which includes a $9 bln liquidation over the past two weeks. &nbsp;We anticipate yields can move back into the 2.20%-2.25% range. &nbsp;A stronger barrier in yields may be encountered closer to 2.33%. &nbsp;</p> <p>&nbsp;</p> <p>The S&amp;P 500 recoup half of what it lost after registering the record high on August 18 near 2103 to the panic low near 1867 on August 24-25. &nbsp;That retracement is found near 1985. &nbsp;Small penetration of this did take place, but buying grew shy ahead of the 2000 mark. &nbsp;The 61.8% retracement is found near 2013, and additional resistance is likely near 2050. &nbsp; Support is seen in the 1940-1945 area. &nbsp;While the technical considerations appear constructive, with a potential bullish hammer candlestick pattern on the weekly charts, developments in overseas markets are a wild card. &nbsp;</p> <p>&nbsp;</p> <p>&nbsp;</p> <p>&nbsp;</p> <p>Observations based on speculative positioning in the futures market: &nbsp;</p> <p>&nbsp;</p> <p>1. &nbsp;The CFTC reporting week ending August 25 saw large swings in currency prices and several significant (10k contracts or more) adjustments of speculative gross futures positions. &nbsp;The gross long euro and yen positions jumped 19.3k contracts (to 87.8k) and 14k (to 59.9k) respectively. &nbsp;The powerful short squeeze in the was reflected by a 37.1k contract decline in the speculative gross short position. &nbsp;</p> <p>&nbsp;</p> <p>2. &nbsp;The gross short Australian dollar position jumped by 13.6k contracts to 111.0k, making it the second largest gross short position after the euro. &nbsp;The euro's gross short position was trimmed by 7.3k contracts, leaving 153.9k still short. &nbsp;The gross short Mexican peso position soared by 18.4k contracts to 103.5k. &nbsp;</p> <p>&nbsp;</p> <p>3. &nbsp;Although there were minor adjustments in the speculative gross sterling position, they were sufficient to switch the net position from short to long for the first time since September 2014. &nbsp;The bulls added 6k contracts to the gross long position, which now stands at 58.1k contracts. &nbsp;The bears trimmed the gross short position by 1.2k contracts, leaving 54.8k. &nbsp;The net long position stands at 3.3k contracts. &nbsp;</p> <p>&nbsp;</p> <p>4. &nbsp;The general pattern was adding to longs and cutting shorts for the euro, yen, and sterling. &nbsp;Speculators added to gross short Canadian and Australian dollar positions and the Mexican peso. &nbsp;Speculators trimmed gross longs of these currencies, except for the Canadian dollar.&nbsp;</p> <p>&nbsp;</p> <p>5. &nbsp;Given the subsequent price action over the August 26-28, we suspect that some of these new positions were unwound in the euro and yen. &nbsp;Sterling fall in the second half of last week warns that some of the late longs may have also been cut. &nbsp;Sentiment still appears overwhelmingly negative toward the dollar-bloc. &nbsp;</p> <p>&nbsp;</p> <p>6. &nbsp;The net long US 10-year Treasury futures slipped to 1.3k contracts from 7.3k. &nbsp;Gross longs and shorts were cut. &nbsp;The bulls sold 58.4k contracts, leaving the gross long position at 395.2k contracts. The bears covered 52.4k gross short contracts, leaving 393.9k. &nbsp;</p> <p>&nbsp;</p> <p>&nbsp;</p> <p>7. &nbsp;The net long speculative light sweet crude oil futures positions were pared by 5k contracts, leaving 215.6k. &nbsp;Given the large movement in prices, it is surprising to see how small of a position adjustment took place. &nbsp;The longs added 1k contracts, lifting the gross position to 474.2k contracts. &nbsp;The bears trimmed their gross position by 4k contracts, leaving 215.6k. &nbsp;</p> <div class="field field-type-filefield field-field-image-blog"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_blog" width="500" height="500" alt="" src="" /> </div> </div> </div> Australian Dollar BOE Canadian Dollar China Crude Crude Oil Federal Reserve Futures market Head and Shoulders Monetary Policy New Zealand Price Action recovery Shooting Star Switzerland Volatility Yen Sat, 29 Aug 2015 14:18:01 +0000 Marc To Market 512568 at Mass Protests Sweep Malaysian Capital As Anger At Goldman-Backed Slush Fund Boils Over <p>If we told you that thousands of protesters donning bright yellow shirts had taken to the streets to call for the ouster of a leader in an important emerging market, you’d be forgiven for thinking we were talking about Brazil, where President Dilma Rousseff is facing calls for impeachment amid allegations of fiscal book cooking and government corruption.</p> <p>But on this particular weekend, you’d be wrong. </p> <p>We’re actually talking about Malaysia, where tens of thousands of demonstrators poured into the streets of Kuala Lumpur on Saturday to call for the resignation of Prime Minister Najib Razak whose government has been accused of obstructing an investigation into how some $700 million from 1Malaysia Development Berhad mysteriously ended up in Najib’s personal bank account. </p> <p><img src="" width="500" height="290" /></p> <p>1MDB was set up by Najib six years ago and has been the subject of intense scrutiny for borrowing $11 billion to fund questionable acquisitions. <strong>$6.5 billion of that debt came from three bond deals underwritten by Goldman, whose Southeast Asia chairman Tim Leissner is married to hip hop mogul Russell Simmons’ ex-wife Kimora Lee who, in turn, is good friends with Najib’s controversial wife Rosmah Manso. </strong></p> <p><a href=""><img src="" width="318" height="650" /></a></p> <p>You really cannot make this stuff up. </p> <p>What Goldman did, apparently, is arrange for three private placements, one for $3 billion and two for $1.75 billion each back in 2013 and 2012, respectively. Goldman bought the bonds for its own book at 90 cents on the dollar with plans to sell them later at a profit (more <a href="">here from FT</a>). Somewhere in all of this, $700 million allegedly landed in Najib’s bank account and the going theory is that 1MDB is simply a slush fund.&nbsp;</p> <p>So you can see why some folks are upset, especially considering Rosmah has a habit of having, how shall we say, rich people problems, like <a href="">being gouged</a> $400 for a home visit by a personal hairstylist. Here’s <a href="">The New York Times</a> with more on the protests:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><strong><em>Tens of thousands of demonstrators in Malaysia defied police orders on Saturday, massing in the capital in a display of anger at the government of Prime Minister Najib Razak, who has been accused of corruption involving hundreds of millions of dollars.</em></strong></p> <p>&nbsp;</p> <p><em>The demonstration in central Kuala Lumpur, which has been planned for weeks, has been declared illegal by the Malaysian police, and the government on Friday went as far as to pass a decree banning the yellow clothing worn by the antigovernment protesters.</em></p> <p>&nbsp;</p> <p><em>But the demonstrators, who represent a broad coalition of civic organizations in Malaysia, including prominent lawyers, asserted their right to protest on Saturday.</em></p> <p>&nbsp;</p> <p><em>The government has acknowledged that Mr. Najib received the money in 2013 and said it was a donation from undisclosed Arab royalty.&nbsp;</em></p> <p>&nbsp;</p> <p><strong><em>One group of protesters on Saturday carried the image of a giant check in the amount of 2.6 billion ringgit, with a sign that read, “You really think we are stupid?”</em></strong></p> <p>&nbsp;</p> <p><em>The group organizing the protest goes by the name Bersih, which means clean in Malay.</em></p> <p>&nbsp;</p> <p><em>Calls for Mr. Najib to resign have come both from within his party, which is divided, and from the opposition. One junior member of Mr. Najib’s party, the United Malays National Organization, filed a lawsuit against Mr. Najib on Friday asking for details of how the money was spent.</em></p> </blockquote> <p>Of course the most prominent voice calling for Najib’s ouster is that of the former Prime Minister Mahathir Mohamad. "I don’t believe it is a donation. I don’t believe anybody would give [that much], whether an Arab, or anybody," he says.&nbsp;</p> <p>Meanwhile, Malaysia is facing a re-run of the 1997/98 financial crisis as the ringgit plunges amid broad-based pressure on emerging markets. With FX reserves now sitting under $100 billion some fear a return to capital controls (let's just call it the "1998 option") is just around the corner despite the protestations of central bank chief&nbsp;Zeti Akhtar Aziz. Here's BofAML:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><em><strong>Capital controls are not likely, but the possibility cannot be dismissed, despite&nbsp;</strong>&lt;<strong>assurances from Zeti.</strong> Introducing&nbsp;controls will be a regressive move and a huge setback, hurting the economy and&nbsp;financial sector, and derailing any ambitions of becoming an international Islamic&nbsp;financial center. Malaysia’s reputation and credibility remain tainted by the capital&nbsp;controls of 1998, even after almost two decades.</em></p> <p>&nbsp;</p> <p><em>The ringgit has depreciated almost 13% year-to-date, the worst performing EM Asian&nbsp;currency. FX reserves fell to $94.5bn at mid-August, falling below the $100bn threshold&nbsp;and down by about $9bn in July alone. At the peak, FX reserves were $141bn in May&nbsp;2013. <strong>Cover to short-term external debt is only 1x, while cover to imports stands at 5.9&nbsp;</strong><strong>months. </strong>Downside risks remain given looming Fed rate hikes, China's RMB devaluation&nbsp;and the political crisis over 1MDB. Malaysia's vulnerability is also heightened by high&nbsp;leverage (household, quasi-public and external) and a fragile fiscal position (heavy oil&nbsp;dependence, off balance sheet liabilities)</em></p> <p>&nbsp;</p> <p><em>The current crisis has not reached the extreme stress seen during the Asian financial&nbsp;crisis, when draconian capital controls were eventually introduced in September 1998. During that episode, the ringgit collapsed by about 89% from peak to&nbsp;trough at its worst (to 4.71 from 2.49 against the USD). The ringgit has depreciated&nbsp;some 26% in the current crisis. During that episode, the KLCI fell by about 79% from&nbsp;peak to trough (from 1,271 to 263) at its worst. The KLCI today has fallen by only about&nbsp;12% from its recent peak. <strong>Nevertheless, downside risks remain given looming Fed rate&nbsp;</strong><strong>hikes, China’s RMB devaluation and the political crisis.</strong></em></p> </blockquote> <p>So in short, Malaysia is on the brink of political and financial crisis, and it looks as though the nuclear route (capital controls) may be just around the corner, which would of course only serve to alienate the country's financial system at a time when the government looks to be on the brink of collapse. What's particularly interesting here is the timing.&nbsp;Mahathir Mohamad famously clashed with George Soros during the '98 crisis, going so far as to brand the billionaire a "moron". Now that the country's "founding father" is looking to oust Najib, it will be interesting to see what role he plays in shaping Malaysia's response to the current financial crisis and on that note, we'll leave you with a <a href="">quote</a> from&nbsp;Dr. Mahathir ca. 1997:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><em>"I know I am taking a big risk to suggest it, <strong>but I am saying that currency trading is unnecessary, unproductive and immoral. It should be stopped. It should be made illegal.</strong> We don't need currency trading. We need to buy money only when we want to finance real trade."</em></p> <p>&nbsp;</p> </blockquote> <p><em><img src="" width="500" height="257" /></em></p> <p><em><img src="" width="500" height="274" /></em></p> <p><em><img src="" width="500" height="333" /><br /></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="791" height="527" alt="" src="" /> </div> </div> </div> Bond Brazil Corruption George Soros New York Times Sat, 29 Aug 2015 14:06:57 +0000 Tyler Durden 512567 at What Happens When A Company, Or An Economy, Can’t Squeeze Any More Juice Out Of The Lemon <p><em>Submitted by Erico Tavares of <a href="">Sinclair &amp; Co.</a></em></p> <p>Presented here is a simple framework that can help us analyze the impact of certain policies in our companies and economies. This is Part 1, in the forthcoming Part 2, perhaps the most interesting one, this framework will be used to show why the Keynesian approach will deliver very little results in western economies</p> <p><strong>Optimizing Economic Performance – Part 1</strong></p> <ol> <li><strong><em> Squeezing the Lemon</em></strong></li> </ol> <p>We began our professional career at General Electric when it was still under the leadership of the legendary Jack Welch. At that point he was ramping up the implementation of Six Sigma, a systematic approach to improve and manage key company processes in order to reduce errors and inefficiencies, across the entire organization.</p> <p>This was a bold move given the size of the company, but Welch astutely realized that this approach could deliver radical benefits to an organization that&nbsp;had been in operation&nbsp;for over a century. There was always more juice that could be squeezed out of that lemon. And that’s exactly what happened across many of the company’s businesses and divisions (we did our bit and even earned a green belt in the process).</p> <p>What really impressed us at such an early stage of our “real work experience” is that a business is all about processes (when we moved to investment banking later on, it all became about faxes at midnight!). It's an obvious statement really, but it’s only when&nbsp;you are fully enmeshed in fixing communication breakdowns, file corruptions, server and IT failures, document losses and customer complaints that you can really appreciate it.</p> <p>Improvements typically don’t work in a linear fashion, but more like shown in the following graph:</p> <p><img src="" width="640" height="385" /></p> <p>What is being described here is how much effort we need to exert in order to achieve a certain level of improvement (time in this context is an unnecessary complication, so we assume everything happens instantaneously), and this largely depends on where we&nbsp;are in that curve:</p> <ul> <li>At the outset, a large number of opportunities for improvement can be achieved with relatively little effort. This is called the “low hanging fruit” and it’s a good analogy. You can easily pick up those fruits without having to use a ladder, which requires much&nbsp;more effort for the same result;</li> <li>After that you can reach an acceleration stage, as you&nbsp;become more knowledgeable of the process, can execute it faster and even&nbsp;improve it further;</li> <li>Of course trees don’t grow to the sky. At some point to sustain additional improvements more and more effort is required. Think of this as squeezing harder to get those last drops of a lemon – just like Welch (although he also found many new&nbsp;lemons). As a result the curve starts to flatten, and it can even turn down beyond a certain point&nbsp;(like you pushed the engine too hard and now it’s broken).</li> </ul> <p>what is interesting is that this graph can be applied not only to a company but to the entire economy – which is nothing more than an agglomeration of all the processes undertaken by economic agents. It provides a simple yet very intuitive and powerful framework that we can use to conceptualize a number of economic policies and events.</p> <p>In fact, the more we think about it, the less the classical division between microeconomics (which studies the behavior of individuals and production entities) and macroeconomics (which deals with the performance of the economy as a whole and not its individual markets and components) makes any sense - certainly not in the 21st century.</p> <p><strong>And in our view it is this disconnect between the two that is at the heart of the failure of Keynesian economics – which at best is incomplete and at worst is all just baloney</strong>. You might disagree given the pedestal on which John Maynard Keynes was placed by&nbsp;academia and government, but please bear with us throughout these series. It never hurts to get a different perspective (although the truth might…).</p> <p>OK, so what happens when a company or an economy can’t squeeze any more juice out of the lemon? Is it doom and gloom?</p> <p>Not necessarily! They can still function with much less&nbsp;growth, as long as the cash inflows can sustain the outflows. But there is a pathway towards continued improvement and hopefully new growth… through INNOVATION! This is what has sustained Mankind’s relentless march towards seven billion people on this planet today. Eat your heart out Malthus!</p> <p>When innovation is mentioned images of robots and computers immediately spring to mind. These can certainly be a part of it, but there is a multitude of&nbsp;other interrelated areas to consider. Many&nbsp;companies in the 1980s found little to no improvement after introducing robots in their production lines. Why? Because they were still repeating the same mistakes, only now the machines were repeating them faster.</p> <p>So what other things can also be regarded as innovation? Plenty – as far as the human imagination can reach in fact. Here are just a few (more mundane) examples:</p> <ul> <li>Better management practices. At GE many improvements were made just by managers encouraging people to think about their own business processes, even without getting into all the sophistication of Six Sigma. That's the power of a spotlight. And the whole initiative was further cemented by tying it to executive compensation. Good management&nbsp;can make a real difference.</li> <li>Better educating and training. The more skills you bring to your job, the more effective you can be (provided they are relevant of course). For instance, learning how to really take advantage of Microsoft Office can help you automate a number of menial tasks and give you more time to do better&nbsp;things (we are certainly not advertising Microsoft here, but we speak from experience after almost going insane on a project if it weren’t for Excel macros).</li> <li>Better logistics. Amazon is testing the use of <a rel="nofollow" href="" target="_blank">drones</a>, which could significantly reduce total logistical costs per mile. And&nbsp;you can also reduce the number of miles by relocating production and distribution centers, which Amazon&nbsp;already did. In some countries (like Brazil) there is still a lot of juice left in that lemon, and country and financial risks aside these tend to make the most profitable infrastructure projects.</li> <li>Better process reengineering. Henry Ford did not add robots to the assembly line (OK, they did not exist back then). But he radically transformed how automobiles were manufactured. Rather than having each worker focus on a certain part of the car, he made them specialize on very narrow assembly tasks along a production line streaming around the shop floor. And the increase in both productivity and the bottom line was massive – so much that he could afford to pay his employees much more to compensate them for all the mind numbing repetition.</li> </ul> <p>You have probably heard the story about NASA spending millions to invent a pen that would write in Space, whereas the Soviets merely used a pencil. This is just a <a rel="nofollow" href="" target="_blank">myth</a>, but it illustrates the point that you don’t need to be super fancy to innovate; often the simple solutions work best.</p> <p>Let’s go back to our graph and see what happens once innovation gets in the picture:</p> <p class="center"><img src="" width="640" height="385" class="center" /></p> <p>Finding new and better ways of doing things shifts the curve upwards, so that we can achieve more with the same or even less effort. Again, this is applicable not only to our companies but also to our economy as a whole (and even to our own individual skills and competences, but that’s getting a bit deep…).</p> <p>These improvements can significantly add to our wealth and well-being. A worker in an advanced economy can produce an abundance of cars leveraging all the technology and infrastructure at her disposal. With that extra time she can go to a movie, dinner with friends, bicycle ride and so forth – all of which contribute to more economic activity elsewhere. She can also learn new skills that&nbsp;will make her even more productive at work and therefore more valuable. It’s all part of that acceleration in the curve.</p> <p>In contrast, the reality of millions of people in developing countries can&nbsp;unfortunately be very different. Many spend a considerable amount of time just to pick up water. Imagine if you had to spend more than four hours a&nbsp;day just to pick a bottle of (dirty) water; what would that do to your productivity? Much more time is also robbed by lying in bed fighting diseases, many&nbsp;of them preventable using&nbsp;modern medicine. This leaves precious little time and opportunity for work or study – basically to break away from that vicious cycle of poverty and economic underachievement.</p> <p>On the flipside, there is an abundance of low hanging fruit opportunities in these developing nations, where even the most modest of improvements (like buying a bicycle) can generate a huge return. No wonder their growth prospects remain so compelling. The outlook&nbsp;for&nbsp;developed nations in this regard is&nbsp;much less rosy, which is a big part of the reason why our governments and central banks have become even more interventionist in the economy.</p> <p>In Part 2 we will look at this important economic reality in more detail and use our framework to assess if more government intervention can boost our fortunes in a durable manner.</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="800" height="481" alt="" src="" /> </div> </div> </div> Brazil Central Banks Ford General Electric John Maynard Keynes Keynesian economics Maynard Keynes Reality Sat, 29 Aug 2015 13:14:32 +0000 Tyler Durden 512566 at