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Central Banks Have Shot Their Wad - Why The Casino Is In For A Rude Awakening, Part I
Submitted by David Stockman via Contra Corner blog,
There has been a lot of chatter in recent days about the plunge in commodity prices - capped off by this week’s slide of the Bloomberg commodity index to levels not seen since 2002. That epochal development is captured in the chart below, but most of the media gumming about the rapidly accelerating “commodity crunch” misses the essential point.
To wit, the central banks of the world have shot their wad. Accordingly, the 12-year round trip depicted in the chart is not about the end of some nebulous “commodity supercycle” that arrived from out of the blue after the turn of the century. Nor, most certainly, is it evidence of the Keynesians’ purported global shortage of “aggregate demand” that can be remedied by an even more extended spree of central bank monetary stimulus.
No, the Bloomberg Commodity index is a slow motion screen shot depicting the massive intrusion of worldwide central bankers into the global economic and financial system. Their unprecedented spree of money printing took the aggregate global central bank balance sheet from $3 trillion to $22 trillion over the last 15 years.
The consequence was a deep and systematic falsification of financial prices on a planet-wide scale. This unprecedented monetary shock generated a double-pumped economic boom—–first in the form of an artificial debt-fueled consumption spree and then a sequel of massive malinvestment.
Now comes the deflationary aftermath. Soon there will follow a plunge in corporate profits and collapsing prices among the vastly inflated risk asset classes which surfed on these phony booms.
So it is worth recounting how we got here. In the first phase, central banks engineered a massive wave of household borrowing and consumption/housing spending in the DM economies which, in turn, ignited an export manufacturing boom in China and among its caravan of EM suppliers. This China/EM export boom eventually over-taxed the world’s existing capacity to supply the raw materials required by a booming industrial economy—hydrocarbons, iron ore, met coal, aluminum, copper, nickel etc.
The resulting commodity price boom peaked on the eve of the Great Financial crisis and was crystalized when oil hit $150/barrel in July 2008. During the 2007-2008 initial peak period, the spread between cash costs of production and soaring commodity and materials prices was inflated to unprecedented size, generating vast economic rents that accrued to owners of existing production assets and reserves.
Even though DM consumption spending and demand for global exports was not sustainable, the pre-crisis windfalls naturally generated a surge of capital investment in search of supra-normal returns. But then the central bankers doubled down in the face of collapsing global trade and the liquidation of DM domestic economic excesses in the fall and winter of 2008-2009.
Indeed, the desperate scramble by governments and their central banking branches to dig out from under the plunge in consumer spending and the subsequent liquidation of dodgy mortgages, excess inventories of manufactured goods and over-stocked labor in the DM economies triggered the second artificial economic boom. This time it was manifested in a renewed frenzy of CapEx and public infrastructure spending in China and the EM economies.
To the pull of windfall profits in global mining, energy, materials, shipping and manufacturing was added the push of dirt cheap central bank enabled credit on an heretofore unimagined scale. In the case of China, for example, public and private credit outstanding at the end of 2007 amounted to just $7 trillion or about 150% of its GDP. During the next seven years—-owing principally to Beijing’s maniacal stimulus of domestic infrastructure investment designed to replace waning exports——China’s now completely unhinged credit machine generated new debt equal to triple the 2007 amount, thereby bringing credit outstanding to $28 trillion or nearly 300% of GDP at present.
Adding fuel to the fire, DM central bankers drove interest rates to the zero bound in a foolish quest to jump-start spending by debt-saturated households. But this did not cause consumers to spend more in the US, England, Spain, Italy, Greece or France because the vast middle classes of these DM economies were already at “peak debt”. Instead, it generated a madcap scramble for yield among money managers and an eventual capital outflow of $4-5 trillion into EM debt markets.
Taken together, the combination of unprecedented financial repression in DM capital markets and the prodigious expansion of domestic business credit in China and the EM elicited a tidal wave of capital investment unlike the world has ever witnessed. This put a renewed round of pressure on commodities that caused a second surge of prices which peaked in 2011-2013.
The torrid demand for commodities during this second wave resulted in part from the need to feed cement, steel, copper, aluminum and hydrocarbons into the maw of China’s massive infrastructure, high rise apartment and commercial building projects and similar construction booms in other EM economies. And on top of that was another whole layer of demand for the raw materials needed to build the ships, earthmovers, mining machinery, refineries, power plants and steel furnaces and mills that were directly embodied in the capital spending spree.
Stated differently, the torrid demand for construction steel in China indirectly led to demand for more iron ore bulk carriers, which in turn required more plate steel to supply China’s shipyards which were given the contracts to build them. In short, a capital spending boom creates a self-feeding chain of materials demand——especially when its fueled by cheap capital costs and the economically false rates of return embedded in long-lived capital assets funded by it.
And therein lies the origins of the deflationary wave now rocking the global commodity markets. Neither the DM consumer borrowing binge nor the China/EM infrastructure and industrial investment spree arose from sustainable real world economics. They were artifacts of what history will show to be a hideous monetary expansion that left DM world stranded at peak household debt and the EM world drowning in excess capacity to produce commodities and industrial goods.
The reason that the Bloomberg index will now knife through the 100 index level tagged on both the right- and left-hand side of the chart is the law of supply and demand——along with its first cousin called variable cost pricing and a destructive interloper best described as zombie finance. The latter is what becomes of central bank driven bubble finance when the cycle turns, as it is now doing, from asset accumulation and inflation to asset liquidation and deflation.
But to understand the potentially devastating extent of the coming asset deflation cycle, it is important to reprise the extend of the just completed and historically unprecedented global capital investment boom.
Thus, in the case of the global mining industries, CapEx by the top 40 miners amounted to $18 billion in 2001. During the original boom cycle it soared to $42 billion by 2008, and then after a temporary pause during the financial crisis, reaccelerated once again, reaching a peak of $130 billion in 2013. Owing to the collapse of commodity prices as shown above, new projects and greenfield investments have pretty much ground to a halt in iron ore, met coal, copper and the other principal industrial materials, but there is a catch.
Namely, that big projects which were in the pipeline when commodity prices and profit margins began to roll-over in 2012, are being carried to completion owing to the sunk cost syndrome. This means that available, on-line capacity continues to soar. The poster child for that is the world’s largest iron ore port at Hedlund, Australia. The latter set another shipment record in June owing to still rising output in mines it services——-a record notwithstanding the plunge of iron ore prices from a peak of $190 per ton in 2011 to $47 per ton a present.
The ramp-up in E&P investment for oil and gas was similar. Global spending was $100 billion in the year 2000, but had risen to $400 billion by 2008 and peaked at $700 billion in 2014. In the case of hydrocarbon E&P investment, however,the law of variable cost pricing works with a vengeance because “lifting costs” even for shale and tar sands are modest compared to the front-end capital investment. Accordingly, the response of production to plunging prices has been initially limited and will be substantially prolonged.
Similar cycles occurred in utilities, shipping, manufacturing, ports and warehousing and other process industries like chemical production. In the case of the steel industry, for instance, global capacity doubled from 1.1 billion ton to more than 2.3 billion tons during the past 15 years, far outstripping current demand. In fact, the 600 million tons of excess capacity shown in the chart below will grow considerably larger as the demand for steel embedded in the completion phase of the rapidly cooling global CapEx boom winds down.
So in this industry alone excess capacity could easily reach 35%. Most of that is in China, Brazil, Mexico and elsewhere in the EM, and amounts to more than the combined steel industry of the US, Europe and Japan combined.
According to Thompson Reuters, in fact, the global capital spending total for all listed companies on a worldwide basis went nearly parabolic after the turn of the century.
Thus, during the preceding decade (1991-2001), and not withstanding the technology boom of that period, global CapEx for manufacturing, transport, construction, process industries and utilities rose from $450 billion to $700 billion or at a 4.5% annual rate. By contrast, during the capital spending boom which peaked in 2013, outlays accelerated to $2.6 trillion annually. This means that capital spending nearly quadrupled, rising at a 12% annual rate over the course of 12 consecutive years.
Since 2013 that staggering total has begun to roll-over, but the lagged effect of the project completion cycle has temporarily braked the fall. Accordingly, excess capacity continues to build, meaning that the cliff-diving phase of commodity and industrial prices and profit margins has just begun.
And that’s where central bank enabled zombie finance comes in. Production cuts and capacity liquidations in virtually every materials sector are being drastically delayed by the continuing availability of cheap finance.
So what “extend and pretend” really means is that prices and margins will be driven even lower than would otherwise be the case in the face of excess capacity. Stated differently, the correlate of zombie finance is flattened profits for an unusually prolonged period of time.
Here the thing. During the central bank driven doubled-pumped boom, profits margins rose to historically unprecedented levels because scarcity rents were being captured by producers during most of the past 15 years.
Now comes the era of gluts and unrents. And as will be shown in part 2, the casino is most definitely priced as if scarcity rents were a permanent fixture of economic life——when they were actually a freakish consequence of the central bankers’ reign of bubble finance.
Yes, the central bankers may try a while longer to stimulate GDP in a futile quest to enable the monumental debts they have fueled to be serviced and the massive excess capacity to be absorbed. But they have only one tool—namely, financial repression and the systematic falsification of financial market prices, especially the carry costs of debt.
That will only feed the zombies, inflate the bubble in financial asset prices further and insure that when the day of reckoning finally comes the casino will be in for a rude awakening.
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what again?
Oh no! The sky is falling! (Insert country) ought to have never financed their deficits with such instruments. Had they increased taxes instead to finance their follies, it would be more interesting.
the central banks of the world have shot their wad
Out of Printer Ink? That most be the only commodity that is scarce. No worries, Bits and Bytes are so inexpensive they can be manufactured from mere thoughts alone. Gotta love that telepathy manufacturing process.
electrons are vastly cheaper than ink
Monsters... from the id.
Courtesy of folks without super-egos.
How long before the USA bans shorts, freezes trading of AAPL and prohibits selling of stocks?
Shot wad?
8====D~o ~o
Actually, USA banning of naked shorts, especially in the ridiculously manipulated PM paper markets, would be an excellent start.
...or just return to the days when settlement could be demanded in the commodity.
....or both.
It's hard to think about David Stockman talking about shooting wads. Sort of like seeing your grandpa getting an erection.
.... While looking at a chart from Janet Yellen...
I don't know about you guys but I am buying put options on stocks like Bank of America with retarded strike prices like $8 (Currently $18), and call options on 3X Inverse ETF's like FAZ with strike prices of $40. (Currently $10). I have total faith that the collapse to come this fall is going to be epic... massive..
Someone else must know something because I estimated that $700,000 was invested on the same FAZ Call Option for a strike price of $40 expiry Jan 2016. Open interest is 25,000 on a FAZ skyrocketing in six months.
People know...
VXX, split adjusted, has been as high as 1500 5 years ago. Is there any reason why it can't go that high again?
Love FAZ, It actually hit $40K during the height of the 2008 collapse. Personally, I am tits deep in shorting the market. I think it will start in the fall, there are already fractures within the fabric of the “market,” the real carnage will start in 2016 when the negative consequences of fucked up central planning start to rear their ugly heads. In other words it takes a bit of time for the markets to take all this in and start digesting.
Who's going to be left to pay you on the short, silly?
Oh I am well diversified into precious metals that I lost in a boating accident ;) But once shit hits the fan they will try to save the system, during this period is when you get out. The system will fail a la soviet collapse, but it will take some time, which will give us ample time to get out. Plus you liquidate your assets over time as they hit profit targets. When people are in a acute financial pain they will pay what you ask on assets that are going up in value.
It started collapsing in '08. Now, they're talking about banning cash to keep the sheep in the pen.
Origins of the phrase "shot the wad" surely go back to the use of muzzle-loaded weapons. Just saying.
In many cases it might have been better if Grandpa hadn't ever got an erection...
It might not be so hard to imagine if you saw his wife when he was testifying during Congressional hearings. Maureen was a beautiful and elegant platinum blonde.
He later re-married....another blonde beauty, but much younger.
Have a look.
https://www.google.com/search?q=David+Stockman+wife&rlz=1C1CHHZ_enUS625U...
You better hope you do as well, sonny.
http://www.cnbc.com/2015/07/22/social-security-disability-fund-could-run...|hero&par=xfinity
Im sure the Welfare system is fully funded....
Good link, I'm sure Tylers have already taken note.
""The president has proposed a commonsense solution to improve the solvency of this fund in the short run so that Americans who rely on it will continue to receive the benefits they need," Treasury Secretary Jacob Lew said. "It is vital that Congress move forward to maintain the integrity of this critical program sooner rather than later."
That sentence jumped out. "Commonsense solution", indeed! LOLOL
"Commonsense solution" = your "fair share" will be going up.
agstacks- or down depending on which side of the equation.
"There is an easy fix available: Congress could shift tax revenue from Social Security's much larger retirement fund, as it has done in the past. "
what fucking revenue - it is already being used and we're still deficit spending around a trill. What a fucking joke.
Meanwhile, SSDI can't possibly have the fraud and abuse that Medicare does - but not for lack of trying...
No worries.......congress will just increase the debt to cover the short fall................they look after seniors like they look after veterns.........uh, wait...........
Well they finally done it,,, a video you cannot stop. Thank god I still have volume control.
Last thing I need is some moron telling me what they want me to think rather than allowing me to read the article in peace and quiet.
Extremely discourteous but not unexpected in todays world especially from Merikans.
Hasn't he been saying that since SPX 860? Just wondering how long he has been saying that.
there's always another wad
I've been waiting for Mr Creosote to eat his after dinner mint for such a long time. His capacity seems much more substantial than I had realized.
There no guess who will clean up when it does eventually happen.
Miffed;-)
bucket for monsueir!
Wouldn't be surprised to see a 'massaged' CPI showing rapid inflation so they can quickly raise rates...since they will have to immediately lower them again.
Velocity of money has flatlined, so for intents and purposes the economy is dead.
"That will only feed the zombies, inflate the bubble in financial asset prices further and insure that when the day of reckoning finally comes the casino will be in for a rude awakening."
I'm sure I read a passage or two in the book of Revelation that could be word-played to sound like that.
It's fine to be morally right in the financial world. I like to consider myself to be so. But you just look like an idiot when you try to make predictions of doom rather than trying to be the change you want to see in the world.
Vote me down if you must, but this is why I like Bitcoin. The people in that community are actually attempting to replace the banking industry with something that is at the control of the users. They're trying to change things rather than just waiting for a collapse.
Like other hedges, cryptocurrencies can be useful. However, they rely on a power grid and network that is very much controlled by government. In a real "collapse" there isn't going to be any place to hide, (aside from thos well-fortified plantations). The vast majority of sheep will be forced to look in the fucking mirror and deal with their neighbors. It won't be pretty, never is.
Same as it ever was...
Their own currency system also relies on the power grid, they'd be shooting their own system in the foot.
Physical cash and PMs require no power and they still control physical cash for sure, so, FAIL.
We have been here before the outcome will be no different this time around and the herd will be thinned...
hedge accordingly.
I've no doubt that you have a point such that in a true nuclear apocalypse, where all systems fail, that crypto doesn't work. But as we've seen from actual examples... In those situations even gold and silver fail as currency because the most important things are food and water.
Also, don't forget that TPTB will do everything they can to salvage what exists of the system they look after. What I take this to mean is that the kinds of collapse that you're describing are much more unlikely than something more like Greece/Cyprus/Iceland.
Besides which, if it is a temporary shutdown, but the network still exists, Bitcoin will recover faster than any banking/credit system could.
Their own currency system also relies on the power grid, they'd be shooting their own system in the foot.
Not if they want a bank holiday called an EMT attack. Cheney and Obama have spoke about it so much that I'd say they already have it penciled in on the calendar(another set of prime numbers like 9/11) within the first year of the next white president's term. Then, the MSM can trot the sock puppet out to say, "See, I warned you but, you were too busy bein' racist!"LOL!!!!! Did the printers/computers at the central banks stop working? This isn't over, not by a long shot.
Was it over when the Germans bombed Pearl Harbor? Hell no! [/Bluto]
"Now comes the deflationary aftermath"
If the big D really gets rolling then Banksters Inc. will get out the extra big bazookas, and "shoot their wad" all over the place.
$22 trillion... chump change, watch and see.
Time to go back to the 50s, the 1850's, I'm hoping we don't go back to the 1250's...
Can't make up my mind on a theme song...
This https://www.youtube.com/watch?v=_x2m6i4KFqg
Or this https://www.youtube.com/watch?v=yJkmHQ2q--I
No shit. My guess is those 2002 lows are going to be taken out in a big way! Morgan Stanley already admitted they have no idea how low the oil price could go . They can print all the fiat they want...the party-train has left the station!
Morgan Stanley already admitted they have no idea how low the oil price could go.
This means QE4 is just around the corner.
Tobias Funke, former analrapist, currently central banker.
https://www.youtube.com/watch?v=RRXsz8XUKPs
Okay, so wtf is "DM"?
I assume Developed Markets as opposed to Emerging Markets (EM). I could be wrong.
That's what I thought he meant.
China has been a member of the WTO since December 2001. Straight to dogpile.
I take it the printer's broken and they can't print another wad.
Shooting yur wad,was firing blanks with muzzle loaders.No balls.
Blank banknotes ?
...the perception of shooting...
The Australian port to which David refers is actually called Port Hedland.
If you google "Hedlund" you just get a tall actor from Minnesota.
The question I would ask is whether the central banks really "shot their wad'. All that is needed to create more wad is for nations to incur national debt, which will take the form of sovereign bonds, which will be monetized by the central banks. And then the same central banks will turn around and trade these "good/safe" bonds for bad bonds that are held by the private sector. Presto, the private sector is flush with sovereign bonds, which are as liquid as cash and can be used to buy anything, including risk assets like stocks and real estate.
Everyone keep in mind that the main function of incurring national debt is to increase asset prices, and to bankroll and military adventurism, not to pay for l a few measly welfare recipients.
They are not done yet...all they have left now is printing money..Greece is a prime example...just give them more free printed money to pay off the other free printed money...it just goes up and up and on and on.....wait until we are 100s of tiilions in debt...I give that 5 years..as things will accelerate quickly as countries try to save themselves....and others have to react to that...
The banks are made up of people and those people seemingly do whatever they do for "covet means", power and control.
I cannot imagine that they ever shoot their wad. By the look of the way the (non) markets act, they run things up and run things down so as to take money from those on the outside and give it to those on the inside... plain and simple.
WTF is a process industry? Every industry is made up of processes.
time for Uncle Sugar to start selling off the "national" parks?
This is exactly what we should prevent from happening. USGOV and TPTB orchestrated the financial collapse in the early part of the previous century. The dirty bastards then started "saving" the states from ruin by buying up huge tracts of land within each state. And all these purchases were done with their printing presses and phony money. TPTB stole everything that they "purchased" with their FRN's. I actually fear setting up my final homestead near a GOV park and then have some foreign corporation take over the area. With the coming of TPP and corporations being exempt from environmental concerns we could all be down wind of some toxic dump.
cherrio!!
Just looked at Joy Global (JOY) - coal mining cap equip mfg, significantly for China - hadn't looked at it in a long, long time. From $101 in 2011 it's in the $27 range.
It's PITIFUL to watch a group of so-called academics and theorists ( Central Bankers & Politicians ) being led into the CESSPIT by a group of opportunists and hyenas ( Investment Bankers & Corporate Terrorists ). The naivety, weakness and stupidity of the former being suckered by the egos and hubris of the latter. The blind leading the blind.
There is lots more fiat magic left to come. They havent even moved the decimal point even one place yet. Besides there is still more value to swipe and thats before they start with real wealth confiscation. They have many more dirty tricks left to pull on everybody.
Me thinks the real thefts are just getting started. All those mom and pops must be wiped out to protect the multi nationals cuz they are also tbtf. Then there is all those evil horders that must be stripped to the bone.
So yes there are lots of forms of real wealth yet to swipe.
Oh, the Price Discovery day of reckoning is coming...And wow, is it gonna be an eye-opener for a lot of people! To paraphrase, I do not think the asset is worth what you think it is worth...
The value of those asset is going to be what tptb need it to be. First rule of accounting 2+2= whatever tptb want it to.
Todays, world depression is designed, created and caused by: The criminal banksters and their government cronies that were not prosecuted in 2008.
“The economic crash of 2008” is the wrong context and a brainwash mental block.
“The successful bankster American mortgage crime of 2008 that crashed the American and world economy” should begin any conversation on the crash of the economy in 2008.
What was the cause of the 2008 crash? Was it bankster fraudulent mortgage loans and MERS fraud from 2000+ that was fraudulently spread around the world that finally caught up to reality in 2008?
Were the fraudulent bankster criminals and their fascist government cronies sent to prison? NO! The criminals black-mailed and bribed Congress to bail their dirty paper out with 700 billion dollars instead of throwing the criminals in prison and bailing out the American home owner for between 1 billion and 50 billion dollars! The criminal bankster crime spree should have ended in 2008.
Where did Congress get the 700 billion dollar bail out? Well, they borrowed the money from the banksters! Ha. Ha. Ha.
http://necsi.edu/news/2011/bailouts.html
The bankster criminals went on to create the derivatives scam that now looms over the world today at a godzillion dollars!
So what will happen to silver which is a currency commodity hybrid?
Damn, that was as cogent an analysis as any I've seen recently on any subject. Now I have to wait for a fucking Part 2?!
Edge of my seat here.
Good stories are hard to find. Maybe Stockman will even slip for a minute and break away from the horrors of "financial repression" to mention what it's gonna mean for the "common people" worldwide.
We'll all be Greeks soon, it sounds like to me.
I agree with Stockman. EXCEPT... all us sane individuals have thought "they can't go any further (more insane and corrupt) than this!!!!!" many times.
But they always do.
This is why hyperinflation rages even as "they" know what is happening. They are literally willing to destroy the entire universe to keep their predatory games going another year, month, week, day, hour, minute.
So don't underestimate how crazy their actions can become.
Because they will.
Prepare for 100% bail-in worldwide. They will steal EVERYTHING that is held by anyone but the owner. So the only assets you can perhaps end up keeping after those locusts pass through the planet are physical assets that YOU hold. In the short run this can even include piles of fiat cash. In the longer run, gold, silver, rural property, farmland is good. Best of all is to invest most of your assets into a functioning business that produces an endless stream of basic goods and goodies that people need and want as the collapse continues.
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PS: Another possibility that I cannot fully figure out all the consequences of is an official world-wide devaluation of all currencies by 90% or so. That has a similar effect as just grabbing everyones loot, except it mostly saves the top 1% who keep much of their assets in stocks (which will rise by 10x the day after the devaluation). Meanwhile, the value of all bank accounts held by "regular folks" will be 90% wiped out!
I hope I'm not giving them any ideas.