The Wall Street Examiner » Must Read Get the facts. Tue, 02 Sep 2014 14:16:04 +0000 en-US hourly 1 Floyd Norris’ Hypocrisy: Elite Fraud is More Dangerous to Detect than to Commit Tue, 02 Sep 2014 09:23:51 +0000 This is a syndicated repost courtesy of New Economic Perspectives. To view original, click here.

Floyd Norris, who I once respected, has written an interesting column titled “In China, Detecting Fraud Riskier Than Doing It.”  Norris states that China’s hostility to those who expose fraud is so unusual that it is worthy of a column:  “It can be very risky to do things in China that are taken for granted in other countries.”

China is different from some other countries.  China has no domestic rule of law and no respect for the rule of law in its dealings with other nations.  The same is true of Russia.  It is important to understand such differences.

But it is even more important to focus on critical commonalities.  “Detecting [elite] fraud [is] riskier than doing it” in every nation including the United States.  The rule in every country is that elite frauds attack those that detect their frauds.  They fight back hard and dirty.  They may kick back harder in China and Russia, but they kick back in every nation.  Countering their attacks on those that detect fraud, therefore, is among the most important tasks in every nation.

Norris Knows that Elites Attack those who Detect Fraud because He Aided those Attacks

Norris knows this rule of retaliation in the U.S. because he personally participated in attacking those who dared to detect likely fraud by the Nation’s most elite banksters.  In late 2006, Norris authored a despicable column obviously fed by SEC flacks that attempted to smear an SEC whistleblower.

Norris’ column ignored the substance of SEC enforcement attorney Gary Aguirre’s blowing the whistle when he detected likely elite fraud.  His efforts to detect and investigate elite fraud were squashed by SEC leaders when he dared to ask for authority to question a politically powerful business executive (John Mack, then Morgan Stanley’s CEO) with close political ties to the Bush administration.  The SEC leadership retaliated against Aguirre for protesting his bosses’ decision to shut down the investigation before it was allowed to do any meaningful investigation.  The SEC leadership threatened to seek a criminal prosecution of Aguirre in the hopes of impeding the Senate investigation of Aguirre’s complaints about the SEC.

In important ways, the U.S. is a great deal like China when it comes to the steps that elite frauds, and those like the SEC leadership and Norris who act to protect those elite frauds, attack those who “detect” such frauds and seek to sanction the fraudsters.  In other important ways it is obviously different.  While the Senate successfully protects less than a handful of whistleblowers in any decade, China has no equivalent.  The Senate deserves praise for helping to save Aguirre’s reputation, but as the German saying warns, einmal ist keinmal (“once is never”).  Further, the Senate was unable to save Aguirre’s job or to get the SEC to investigate the elite bank CEO that Aguirre properly wished to investigate.

Norris’ column sided with Aguirre’s bosses, but did so by ignoring the merits and trying to paint Aguirre as an “arrogant” SEC litigator.  The tone of the column is snide and dismissive.  Norris’ message is clear: ignore the elite fraud that Aguirre may have detected because he is a middle-aged employee who should get up each morning and thank the SEC for hiring him, but who instead displays arrogance.  I have no idea, and Norris had no idea, whether Aguirre is arrogant.  I do know, as does Norris, that if “arrogance” is a valid basis for firing litigators then every litigator in the world (and every NYT columnist) could be fired tomorrow.

Norris’ column was obviously planted by the SEC.  It repeats their views on Aguirre’s lack of gratitude that they deigned to hire him – and it is dated December 5, 2006 – the same day Aguirre was testifying before the Senate.  The column was timed by the SEC and Norris to attempt to discredit Norris when he testified.

Aguirre was vindicated by the Senate investigation, the (second) SEC IG report, and his subsequent legal action for wrongful termination.  A series of SEC senior officials resigned promptly after release of the Senate report.  In response to that vindication, Norris not only refused to apologize for his effort to smear, but continued the effort to smear Aguirre when Patrick Byrne called him out.

“Because Mr. Aguirre was thoroughly vindicated by an investigation of the United States Senate, I thought it would be interesting to know how Floyd Norris of The New York Times felt about the hatchet job he had written on Mr. Aguirre. Given that by blowing the whistle on his former employer Aguirre had risked fortune, reputation, and perhaps even his freedom, surely a thoughtful, fair-minded journalist at ‘our newspaper of record’ would welcome the opportunity to reflect on his mocking and derisive attack on Aguirre. So I wrote Mr. Norris a short note that contained a link to his December 5, 2006 story, and the simple question, ‘How do you feel about this piece now?’

The response I received from Mr. Norris was instructive:

‘I have read our story on the Senate report, but not the report itself, and that does not change my opinion on Mr. Aguirre. I did not conclude in the blog that he was or was not fired for illegitimate reasons. The Senate thinks he was, judging by the article. The blog item remains accurate, to the best of my knowledge.’

Another New York Times reader emailed Mr. Norris a similar question, and forwarded to me the short response Mr. Norris sent him:

‘And what, precisely did I write about Aguirre that was wrong?’”

Norris choose to end his dismissal of Aguirre’s warnings about elite fraud and the SEC’s refusal to investigate elite with this conclusion.

“The S.E.C. has thoughtfully provided an E.E.O.C. judge’s opinion dismissing that case. In it, one S.E.C. lawyer who decided against hiring Mr. Aguirre, told the judge that he found Mr. Aguirre arrogant, adding that he “displayed a sense of entitlement to the position.”

It certainly sounds as if that opinion was correct.”

Norris had no reasonable basis for that conclusion.  Had he bothered to learn any of the facts he would have found that Aguirre’s job evaluations by the SEC were exemplary – until he blew the whistle.  At that juncture the SEC’s managers retaliated against him and ginned up its assault on Aguirre that enlisted Norris.  Norris knows that the primary moral and professional failings in his column arise from what he excluded from his column and his willingness to aid and abet the SEC leadership’s attempted smear of Aguirre.  Even as to his smear, Norris had no reasonable basis for making it at the time he wrote his column.

Norris wrote that the facts did not “change his opinion on Mr. Aguirre.”  Three obvious questions arise from that statement.  First, what “opinion” is he referring to?  Second, how could learning the real facts demonstrating that the SEC ginned up a campaign to smear Aguirre fail to change Norris’ “opinion on Mr. Aguirre” – particularly given Norris’ starring role in aiding and abetting the SEC’s unlawful campaign?  The SEC IG, with the strong support of the Senate, called for the termination of Aguirre’s superiors for their misconduct in the case.

Third, if Aguirre’s only “opinion” about Aguirre is that he felt “entitled” to a job at the SEC – why did Norris write the column and time it to try to discredit Aguirre?  What conceivable news value would such a column have?  If anyone is tempted to accept Norris’ disingenuous response as remotely credible, think of what it means about how desperate Norris was for column ideas.  Here’s how I envision his claim.

“News flash: I, Floyd Norris, a financial columnist for the New York Times, have found an SEC employee to write about.  I have never met or spoken to him, but I’ve decided to write a NYT column about him because I think he feels a sense of entitlement about his job.  Tomorrow I’m writing my column about a CFTC worker who criticizes his boss rather than expressing eternal gratitude.  Wednesday’s column will expose the scandal of an FDIC worker who takes personal phone calls at her desk from her daughter’s child care facility during working hours.”

Obviously, none of these columns would ever be written by a NYT financial columnist and if he did turn in drafts of such proposed columns his editors would reject them and tell him to start doing his job writing financial columns.  But Norris’ smear of Aguirre was published by the NYT even though it is not remotely newsworthy.  That means that Norris’ editors were also willing to publish an obvious smear in order to try to discredit a whistleblower’s Senate testimony about elite fraud, the SEC’s unwillingness to investigate it, and the resultant retaliation by the SEC.

It is over seven years past time for Norris to admit the truth.  He knows “precisely” what he did to Aguirre that was “wrong.”  He worked with SEC flacks to try to smear Aguirre in order to try to discredit Aguirre’s testimony before the Senate.  Mr. Norris: that is “precisely” what you did that was “wrong.”

It’s bad to be wrong in your judgment of a person you have never met, talked to, read his work, or listened to his views.  It is inexcusable to be part of a smear of a whistleblower.  It is beyond the pale to serve up a planted story for the entity retaliating against the whistleblower who has detected likely elite fraud.  It is reprehensible to time your smear to try to discredit the whistleblower’s Senate testimony.  It is despicable to refuse to apologize for each of these acts after you know you were wrong.

But it is fall down funny for Norris to write a column decrying those who try to harm whistleblowers who detect fraud.  Norris must lack the gene that makes one hypocrisy-intolerant.  His column on fraud served up an enormous portion of haute hypocrisy

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The Only Way to Fix the Broken U.S. Free Market Economy Tue, 02 Sep 2014 09:00:17 +0000 This is a syndicated repost courtesy of Money Morning. To view original, click here.

There’s a reason America is floundering economically. There’s a reason for the ever-widening divide between the “haves” and the “have-nots” in the United States.

Our country is no longer a free market, capitalist republic.

America has devolved into a socialist plutocracy as a result of the “financialization” of the economy.

Wealthy financial alchemists with the backing of paid-for White House administrations and Congressional lap-dogs engineer and manage the U.S. economy.

They also manage the public’s access to money and credit for their speculative benefit when they win, and to taxpayers’ detriment when they lose.

There’s only one way out of this downward spiral…

What Went Wrong with American Free Markets

The truth about who runs the country, for whose benefit, and how they do it, has to be told.

Then what to do to get us back on our constitutional, republican path will be obvious…

The history of how America morphed into a socialist plutocracy where financialization of the economy has completely undermined free-market capital allocation is straightforward enough.

Although the seeds were sown long before 1971, the official beginning of the financialization of the American economy began when President Richard Nixon announced on August 15, 1971 he was taking the United States off the gold standard.

The American dollar was redeemable in gold at $35 an ounce until Nixon took us off that fiscal tether. The currency, to which most others were pegged, would forevermore be allowed to “float” against other currencies.

u.s. free market economy

To get Shah’s critical briefing on how to protect your assets against this “financialization” morass – plus his weekly updates –
click here.

Floating exchange rates means the value of one currency in terms of another currency isn’t fixed, it changes depending on what the “market” determines the exchange rate should be.

The principal determinant in the valuation of one currency against another currency is the interest rate differential between the countries.

A country with a higher rate of interest (the 10-year U.S. Treasury rate is 2.40%) would likely have a more valuable, more expensive currency relative to a country with lower interest rates (Germany’s 10-year bund pays less than 1%) because investors would sell their euros to buy dollars in order to park their money in higher yielding U.S. government bonds, which they have to pay for with dollars.

For importers and exporters of all stripes, exchange rates matter a lot. When exchange rates were “pegged” they didn’t move much at all. When they began to float, changing currency values upended international trade.

Huge sums of currencies are swapped every day by importers and exporters who transact business in different currencies around the world. Constantly changing foreign currencies exposed businesses to huge profit and loss swings that had to be hedged to whatever extent possible.

But, as you now know, interest rates play the largest part in foreign exchange valuations. So, not only did currency hedging explode due to international trade factors, speculating on interest rate movements within countries and between countries emerged as the new biggest game.

Financial product innovation exploded as hedgers and speculators sought instruments to manage and profit from currency and interest rate movements. The Great Financialization game was on.

The biggest problem with untethering the U.S. dollar from a gold standard was that fiscal discipline disappeared.

If the dollar wasn’t redeemable in gold, its value didn’t matter on any relative basis, other than how it floated against other currencies. That left the Federal Reserve free to print as much money as it wanted to, and Congress with the ability to spend money it wouldn’t have to raise by taxing the citizenry because the Fed could just print the money it wanted to spend.

Of course that wasn’t supposed to happen. The prevailing economic theory of the day was “monetarism” as espoused by renowned economist Milton Friedman. According to Friedman’s monetary theory, the Fed could grow the economy conservatively and robustly at 3% per year by simply increasing the money supply by that same amount every year.

It didn’t work out that way because there was no control over the Fed. In theory they would manage the money supply, but in reality they answer to the bankers that control the Fed and to Congress which uses the Fed to pay for spending programs they lavish on voters to keep getting themselves re-elected.

The most disgusting and egregious manifestation of Congress’ abdication of their fiscal and public duties occurred in 1977 when Congress amended The Federal Reserve Act, stating the monetary policy objectives of the Federal Reserve as:

“The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long-run growth of the monetary and credit aggregates commensurate with the economy’s long-run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”

The so-called “dual mandate” gave the Fed the infinite, untethered ability to flood the economy with money to promote “maximum employment.” In truth, Congress needed them to print money for their spending under the guise of lowering interest rates to spur economic growth and create jobs.

With all the capital they needed being supplied by the Fed, banks, so-called investment banks and trading juggernauts were awash in profit possibilities.

Financial products, including derivatives and other weapons of mass financial destruction, were devised as speculative vehicles for banks and trading houses to leverage themselves up in pursuit of paper profits on mathematical anomalies.

Since the beginning of the Great Financialization, the Fed has consistently flooded the banking system with capital and liquidity whenever it became over leveraged and favored institutions verged on insolvency.

Here’s How to Fix the Problem

The Fed’s backstopping of speculators’ and bankers’ failed schemes, originally named the “Greenspan Put,” then the Bernanke Put, now the Yellen Put, virtually eliminated “moral hazard” and keeps the speculators bankrolled in an endless array of “carry trades.”

With the majority of America’s capital being allocated to financial speculation on account of its unprecedented return possibilities, it’s easy to understand why there’s not enough economic growth happening.

There isn’t a free market allocating capital to productive endeavors, the kinds of endeavors that create long-term employment and careers.

The financialization of America is why the economy isn’t growing and why the rich are getting richer.

If we want free market capitalism again, the first thing that has to be done is eliminate the Fed’s dual mandate. Immediately. Next, we’ll have to eliminate the Federal Reserve altogether.

There are other ways to control the money supply and manage price stability. The “Taylor Rule,” which puts stipulations on when interest rates can be manipulated, is one way.

And last but certainly not least, fiscal discipline has to return to Congress.

The way to do that is to make sure no one currently in Congress returns to Congress.

Editor’s Note: This is a developing situation. It’s very important for you to understand what’s happening. You can get Shah’s critical briefing on how this currency situation is affecting our economy – plus get his weekly updates – by clicking here.

The post The Only Way to Fix the Broken U.S. Free Market Economy appeared first on Money Morning – Only the News You Can Profit From.

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The Sky Is Falling on Chinese Corporations Tue, 02 Sep 2014 07:15:00 +0000 This is a syndicated repost courtesy of Wolf Street. To view original, click here.

The four largest banks in China, the banks that have to officially show big profits and profit growth no matter what because they’re an integral part not only of the government but also of China’s miraculous debt-driven expansion, are showing officially tolerated signs of increasing stress. For perspective, in 2009, following the Lehman moment, as other banks were collapsing and were bailed out, the profits of these four banks grew even then, if only by a combined 2.9%.

These four mastodons – Industrial & Commercial Bank of China, China Construction Bank, Agricultural Bank of China, and Bank of China – admitted to 384.7 billion yuan ($62.6 billion) of bad loans on their book at the end of June, a 13.2% jump from just six months earlier. The jump in bad loans ranged from 11% at Agricultural Bank of China to 17% at Bank of China.

If we suspend our disbelief in Chinese numbers, bank numbers in general, and Chinese bank numbers in particular, for a very brief moment and accept them temporarily as if these bad-loan numbers were actually something close to reality, rather than something ludicrously beautified, they would amount to about 1% of total lending by these banks. And it’s gnawing at their profits: their relentless state-mandated rise slowed to 9.6% over prior year.

Culprit? Struggling companies in the manufacturing, wholesale, and retail sectors, particularly those involved in the now curdling property market. Marine shipping companies have been slammed. Overcapacity in manufacturing, which has been hounding China for years, has caused prices to plunge. And the real estate sector has begun to quake at its foundation, after years of overbuilding, which goosed GDP in the government-mandated manner by creating a breath-taking amount of oversupply including entire ghost cities. To round out the scenery, companies selling luxury goods or services have gotten hit by a crackdown on corruption – politically motivated or not; conspicuous consumption, the erstwhile hallmark of officials now deemed corrupt, has become unpopular.

It all has turned into a reeking mix of teetering companies and banks that lent these companies regardless of realities on the ground because it was the government’s way to push the economy forward, no matter what. And these companies are now getting crushed.

For the first half, of all the companies listed in Shanghai and Shenzhen, 366 (or 14%) reported losses, according to the Nikkei Asian Review. An all-time record.

Of the bleeding companies, 67% were manufacturers. Steel and nonferrous metals sectors have been getting clobbered by the turmoil in the property sector where an ongoing home-price crash has pricked one of the largest construction bubbles in history. And 26 companies in the real estate sector also reported red ink.

The biggest loser: state-owned Aluminum Corp. of China.

READ THE REST of this post at

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Once again we wait for "shock and awe" from the ECB Tue, 02 Sep 2014 03:20:00 +0000 This is a syndicated repost courtesy of Sober Look. To view original, click here.

The ECB (Eurosystem) balance sheet continues to decline as the LTRO/MRO loans to the banking system are repaid. We’ve seen a decline of about one trillion euros in the past year and a half.
Eurosystem consolidated balance sheet (source: ECB)

Anywhere else this would have been considered a massive tightening of monetary policy (imagine the Fed selling $1.3 trillion of bonds). But not in the Eurozone. In fact the area has experienced some significant easing recently. Both the euro and the long-term rates have fallen far below ECB’s own forecast.

Source: Scotiabank


Source: Scotiabank

Near-term German rates are now firmly in the negative territory (see chart) – you now have to pay the German government to hold your money for 2-3 years. The central bank was able to loosen conditions while reducing its balance sheet – mostly as a result of unexpectedly soft economic reports from the area, falling inflation (see chart) and inflation expectations (see chart), as well as Draghi’s jawboning.

The ECB got this round of easing “for free”, but now markets will be expecting a follow-through from the central bank. And unless we see some “shock and awe”, some of this easing (lower rates and lower euro) could see a sharp reversal.


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The Underbelly of Corporate America: Insider Selling, Stock Buy-Backs, Dodgy Profits Tue, 02 Sep 2014 02:47:00 +0000 This is a syndicated repost courtesy of oftwominds-Charles Hugh Smith. To view original, click here.

The hollowing out of corporate strengths to enable short-term profiteering by the handful at the top leads to systemic fragility.

Anonymous comments on message boards must be taken with a grain of salt, but this comment succinctly captures the underbelly of Corporate America: massive insider selling, borrowing billions to buy back their own stocks to push valuations to the moon so shares granted as compensation can be sold for a fortune, and dodgy accounting strategies that boost headline profits and hide the gutting of investments in long-term growth.
Here’s the comment:
“I’m occupying a vantage point that allows me to see what is going on inside the top Fortune 50 companies. I have never seen such rot before. Of the 50, at least 30 have debt at 120% of cash. Most have cut capex, R&D and maintenance by 80%. Most have been borrowing money to do stock buy-backs, while simultaneously selling off business units and doing layoffs.

Of the 50, at least 20 have 100% insider selling. For some, you would have to go back decades to find a point where all of the acting board of directors are selling. In essence, they are paying the mortgage with their credit cards. Without bookkeeping games, there are no solid earnings. There will be no earnings growth.

“Executive compensation based on stock performance” is killing corporate America.

A black swan is not needed to make it fall, a gentle breeze will do just fine.”
(source message thread)

So let’s try contesting these points.

Where is the data showing insiders buying hand over fist at these valuations?

Insider selling has been raising red flags since March 2014: In-the-know insiders are dumping stocks

Where is the data proving Corporate America isn’t borrowing billions of dollars and using the nearly-free money to buy back shares? Buying back shares reduces the float (stocks available for purchase by the public), reducing supply and creating demand which pushes prices higher.

Stocks’ Biggest Gains Are an Inside JobCompanies spent $598.1 billion on stock buybacks last year, according to Birinyi Associates in Westport, Conn. That was the second highest annual total in history, behind only 2007, Birinyi calculated. The pace picked up in the first quarter of 2014, when companies spent $188 billion, the highest quarterly amount since 2007.

Where is the data showing Corporate America has added jobs?

Who actually creates jobs: Start-ups, small businesses or big corporations? During the 1990s, American multinational companies added 2.7 million jobs in foreign countries and 4.4 million in the United States. But over the following decade, those firms continued adding positions overseas (another 2.4 million) while cutting 2.9 million jobs in the United States.

As for dodgy accounting: when the dodgy accounting has been institutionalized, it’s no longer viewed as dodgy. Which brings us to the money shot of the comment: “Executive compensation based on stock performance” is killing corporate America.

When executives and others at the top of the corporate pyramid have such an enormous incentive (stock options worth tens of millions of dollars) if they can push the stock price higher with buy-backs paid with borrowed money and accounting gimmicks that inflate headline earnings, then why wouldn’t they do precisely that?

The profits are as bogus as the stock prices: both are relentlessly gamed to make sure fortunes can be reaped in a few years by those at the top.

As the comment noted, this hollowing out of corporate strengths to enable short-term profiteering by the handful at the top leads to systemic fragility. No shock is needed to bring down these fragile corporate structures: existing debt and the slightest tremor of global recession will be enough to topple the rickety facade.


Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)

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World Stock Markets Trading Discussion – Ennui epidemic Tue, 02 Sep 2014 01:41:55 +0000 This is a syndicated repost courtesy of The Daily Stool. To view original, click here.

Early openers lethargic: Kiwis and Aussies -0.1%, Sth Korea -0.6%.  Nikkei showing some life, +0.8%.

In Aussie sectors, Energy +1% down to Utilities -1.3%.







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(What’s Left of) Our Economy: The Real and Surprising Lessons of China’s Bullying of Foreign Firms Mon, 01 Sep 2014 20:17:39 +0000 This is a syndicated repost courtesy of RealityChek. To view original, click here.

It was tempting to dismiss a recent Financial Times op-ed by a China-based international lawyer with a few (appropriately) cynical tweets. The author, after all, was urging the Chinese government to heed Premier Li Keqiang’s call for more rule of law in the People’s Republic, and wrote that abundant evidence indicated that Beijing authorities are picking exclusively on foreign firms in their investigations of corporate wrongdoing. What else can you reasonably say but “Too funny” and “Duh”, respectively?

Worthier of serious comment was author Tao Jingzhou’s observation that “none of the foreign companies singled out by” China’s National Development and Reform Commissin for price rigging “has mounted a defence. All admitted wrongdoing even before a price investigation began.”

Yet what’s important about the foreign firms’ behavior is not the apparent cravenness it reveals. These companies have meekly endured corruption and legal and regulatory discrimination for decades. Their reasoning? Access to China’ big and potentially gargantuan market would eventually more than offset their tribulations. What’s important instead is what the multinationals’ assumptions show about an ignorance of China’s development philosophy that far transcends the corporate sector, and that explains why continued economic integration with the current Chinese regime can only be a loser for America, and for the entire world economy.

For China’s behavior, and especially its clearly ramped up campaign against foreign investors, should make clear that Beijing emphatically rejects the doctrine of comparative advantage that has justified global trade liberalization literally for centuries and U.S. trade policy in particular for decades. This theory, of course, holds that the freer global trade flows become, the better able national economies will be to focus on the goods and services production at which they’re most proficient, the more efficient the entire world economy will become, and the more prosperous all countries and their people will grow. In other words, freer trade will enable the power of specialization to create an optimal global division of labor.

In particular by encouraging foreign firms to bring their capital and technology to China, and by reducing many trade barriers and introducing numerous other free market reforms, Chinese leaders have long indicated that they buy into comparative advantage and all of its implications. But as revealed by their ever rougher treatment of foreign investors, and by other signs of resurgent protectionism, helping to create the most efficient possible global division of labor and the most prosperity for all was never part of China’s game plan.

Rather, the aim was always maximizing China’s wealth and capabilities, whatever the international impact. As long as foreign capital and technology have been needed to achieve this goal, they’ve been welcome. Now, however, China evidently views foreign contributions to its economy as ever less important. And having chewed up these non-Chinese enterprises, it now looks like it’s starting to spit them out.

Comparative advantage, of course, portrays this behavior as perverse not only from a global standpoint, but from China’s standpoint. But before reflexively endorsing this view, think of the situation as China’s leaders undoubtedly do (unless you believe they’re completely stupid): China is already an immense economy and keeps growing. Its population, though stabilizing, is even bigger. Therefore, the country is already a gigantic store of actual and potential talent, knowledge, and resources. Which means that China already possesses, or can realistically hope to develop on its own, all of the main assets and capabilities that comparative advantage theory and its corollaries claim can only be accessed by extensively integrating with the global economy. That is, Chinese leaders view their own country as a reasonably close approximation of the international economic system as a whole in crucial respects, and believe that by focusing exclusively on China’s own development, it can reap all of the advantages of such integration while paying none of the costs.

And here’s an irony for you: The United States has always been, and remains in, a far better position to prosper without freer trade and greater global integration than China. For unlike China, the United States has always been diverse enough economically and socially to reap on its own at least most of the benefits of competition that free global trade alone supposedly can provide. A much greater degree of competition, moreover, could easily be created through greater anti-trust enforcement. Finally, whatever the United States does need to access from the international economy could readily be obtained, in principle, China-style – by capitalizing on the truly matchless lure of its domestic market, and strategically opening to trade and investment. Surely that’s why, for most of its history, free trade etc. had nothing to do with the strategy the United States actually pursued — and the unprecedented success it achieved.

China’s social and political systems are so noxious that it’s easy to understand why Americans reject the notion that the PRC’s bullying of foreign firms can teach them anything useful. Why Americans keep refusing to learn from their own economic history, especially given the mounting failures of their current approach to the world economy, is much harder to figure out.

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Europe’s Fantastic Bond Bubble: How Central Banks Have Unleashed Mindless Speculation Mon, 01 Sep 2014 14:39:03 +0000 This is a syndicated repost courtesy of David Stockman's Contra Corner » Stockman’s Corner. To view original, click here.

Capitalism gets into deep trouble when the price of financial assets becomes completely disconnected from economic reality and common sense. What ensues is rampant speculation in which financial gamblers careen from one hot money play to the next, leaving the financial system distorted and unstable—a proverbial train wreck waiting to happen.

That’s where we are now. And nowhere is this more evident than in the absurd run-up in the price of European sovereign debt since the Euro-crisis peaked in mid-2012. In that regard, perhaps Portugal is the poster-boy. It’s fiscal, financial and economic indicators are still deep in the soup, yet its government bond prices have soared in a triumphal arc skyward.

Unfortunately, the recent crashing landing of its largest conglomerate and financial group (Espirito Santo Group) is a stark remainder that its cartel-ridden, import-addicted, debt-besotted economy is not even close to being fixed. Notwithstanding the false claims of Brussels and Lisbon that it has successfully “graduated” from its EC bailout, the truth is that the risk of default embedded in its sovereign debt has not been reduced by an iota.

At the time of the 2011-2012 crisis, its central government was already sliding rapidly into a debt trap with a ratio of just under 100%. Self-evidently, the nation’s so-called EC bailout has only made its public debt burden dramatically worse. Today Portugal’s debt to GDP ratio is 129% and there is no sign of a turnaround.

But that has not deterred the rambunctious speculators in peripheral sovereign debt. Since mid-2012 and Draghi’s “whatever it takes” ukase, the price of Portugal’s public debt has soared. This means that leveraged speculators—-and they are all leveraged on repo or similar forms of hypothecated borrowings—-have made a killing, harvesting triple-digit gains on the thin slice of non-borrowed capital they actually have at risk in these carry trades.

As shown below, in response to this central bank induced bond buying campaign by fast money speculators, the 10-year Portuguese government bond yield has experienced a stunning plunge from 15% to 4% during the last 24 months. Among other things, this dramatic improvement virtually overnight in its fiscal financing costs has taught Portugal’s government a dangerously false lesson. Namely, that in the face of unsustainable fiscal profligacy all its takes is a little budgetary sleight of hand and fake austerity. In fact, nearly all of its fiscal improvement is owing to the one-time sale of state assets including the airport operator and various public utilities under financial arrangement which amount to little more than off-budget borrowing.

Moreover, regardless of the quality of its fiscal recovery measures, the sharp drop in its bond yield would ordinarily at least imply that Portugal has turned its chronic fiscal deficits on a dime, but that is not remotely the case, either.  Portugal has been burying itself in red ink for decades and despite being down from their crisis peak of 10% of GDP in 2010-2011, government deficits are shown are still running at the historic rate of 5% of GDP and will be lucky to break below that level in 2014 or anytime soon thereafter.

Needless to say, when a country’s nominal GDP is stuck on the flat-line, it can’t add 5% of annual output to the public debt each and every year without quickly being doomed by sheer arithmetic. That baleful fiscal math, in fact, is exactly the reason its bonds sold off so sharply in the first place, and why in the absence of massive central bank distortion of bond prices, Portugal would still be under the thumb of crushing yields on its monumental public debt.

So what is at work here is the opposite of is honest price discovery of the type that occurs on a genuine free market. There is virtually no logical basis for the bond market rally in Portuguese or other European sovereign debt. As detailed below, the whole thing is a central bank driven wave of short-term speculation and inflows of hot money which can reverse as quickly as it arrived following Draghi’s ukase.

in the meanwhile, the Wall Street and London sell-side continues to promote hairline and often transient  improvements as justification for the rally, which is to say, purchase of bonds and derivatives from their trading desks. In truth, the dismal facts of Portugal’s stunted economy and profligate fiscal practices have barely improved, but that does not prevent sell side ballyhoo from breaking out all over.

During recent quarters, for instance, Portugal’s real GDP has turned slightly upward, but the magnitude of improvement is laughably marginal—-certainly not remotely consistent with the massive gain in its bond prices. Thus, after three quarters of hairline gains, its real GDP in the Q2 2014 was a barely measureable 0.8% larger than the same quarter a year ago. And these rounding error gains, of course, have not yet made up a fraction of the deep shrinkage that occurred in the prior two years.

Historical Data Chart

Indeed, despite all the sell-side drum-beating, Portugal’s real GDP is still 6% smaller than it was on the eve of the financial crisis in 2007. In that context, the galloping bond market rally during the past two years is insensible: a slight uptick from the bottom of a deeply depressed trend is no evidence whatsoever that Portugal’s battered national economy is being sustainably rejuvenated national economy, or that its capacity to service its spiraling debts has been improved in the slightest.  In short, the entire bond rally has noting to do with the fundamentals of Portugal’s fiscal and economic circumstances.

The real problem, of course, is that all sectors of the Portuguese economy buried themselves in debt during the years after it joined the EC and was able to access the cheap funding available in the euro bank and bond markets. Indeed, the explosive growth of debt was so extreme that it could be fairly labeled as a sheer financial orgy.  As shown below, during the 14 years between 1996 and 2010, for example, household sector debt increased by 6X at a time when the nominal GDP grew by less than 2X. Even after some modest liquidation during the last 4 years, household debt is still 5X larger than it was in the mid-1990s, yet Portugal’s nominal GDP has actually declines since the 2010 debt peak, meaning that the household leverage ratio is now worse than ever.

The same holds for non-financial business debt, which also soared by 6X after the turn of the century. As is evident below, there has been no progress whatsoever in reducing the enormous burden on the business sector.

Toss on top of this the still rising government debt burden and the implication is obvious. During the halcyon years of Europe’s debt orgy, Portugal went whole hog attempting to borrow its way to prosperity. Now its economy is crushed by the resulting balance sheet fiasco, and shows no signs that its devastating leverage ratios have been reduced by its so-called austerity program.

indeed, what all this fantastic borrowing did was to allow Portugal to finance a wholly unsupportable national life-style by importing vastly more goods and services than it exported, and financing the difference by means of the above borrowings in the euro debt markets.  During the decades leading up to it financial crisis, its current account deficit averaged between 6% and 12% of GDP—surely a dead-end trend if there ever was one.

Once again, however, the sell-side propaganda about the “turn” in Portugal’s current account is just another case of grasping at straws. In order to liquidate its towering debts, Portugal actually needs to run large trade surpluses for years to come in order to generate the means of pay down. But despite a modest uptick in exports which is inherently constrained by the faltering condition of the EC economies and the general world slowdown, it has barely made a dent in its level of imports. Stated differently, the Portuguese economy continues to live high on the hog as is its debt crisis had never really happened.

Historical Data Chart

The fact is, away from Wall Street’s fatuous focus on superficial, hairline signs of recovery, Portugal’s real economy is still deep in the doldrums. Its industrial production index, for example, is down 5% from 2010 levels and 18 percent from turn of the century levels.

But the most telling indicator is its plunging labor force participation rate. As shown in the graph below, the dramatic plunge since 2000 is even more severe than the ballyhooed decline in the US figure. The reason is that Portugal’s work force has been out-migrating in droves or tumbling into its over-burdened social safety net.  Like, in the US, its recent hairline gains in the unemployment rate—still above 15%—are essentially attributable to a shrinking work force.

This is the crux of the matter. With a declining level of labor input and the unavoidable need for nominal wages—which were vastly inflated during the debt boom—to shrink in absolute terms to more sustainable levels, Portugal’s national income growth rate will flat-line for years to come under the best of circumstances, and will continue to decline in the face of another European and global recession.

Accordingly, there is no relief in sight for its towering leverage ratios in all sectors—government, households and business. In these circumstances, a 4% sovereign debt yield is nothing short of absurd.

The truth of the matter is therefore quite simply. Draghi ignited a short-term buying stampede with his mid-2012 pronouncement. This caused a hot money inflow—especially from dollar based Wall Street speculators and hedge funds. It certainly helped that the latter were drowning in liquidity owing to the Fed’s $85 billion per month of QE purchases and the ready availability of essentially zero cost repo financing. Indeed, the combination of QE3 and Draghi’s “whatever it takes” amounted to a bugle call to the financial hounds.

In short order, the impact was to drive both Euro bond prices and the Euro/USD exchange rate dramatically higher. In fact, between July 2012 and spring 2014, the euro rocketed from 120 to 140 or by nearly 17 percent. Not only did the resulting combo of a rising euro and soaring peripheral bond prices result in a tsunami of hot money into the euro markets, but it also laid the planking for today’s pathetic excuse that Europe is suffering from an economic affliction that can only be solved with an even more fantastic increase in ECB monetary intervention—-even beyond the financial repression it has in place today including negative deposit rates.

But there is no structural deflation in Europe—just the short-term impact on the rate of price change owing to a spike in the exchange rate that, ironically, resulted from Draghi’s pledge that he would run the printing press at some future date at whatever speed might be necessary to “save” the euro and prop up the sovereign debt of the EC periphery.

In truth, the current “deflationary” scare will soon abate as the euro moves through the 130 mark, and dollar-based speculators are forced to sell their peripheral bonds in order to avoid losses. The trend level of euro area inflation has been, and will remain, in the order of 2.2% per annum since 2000 as shown below. Other than the short-run exchange rate effects on the  rate of price change, the idea that Europe is suffering a deflationary crisis is absurd.

Accordingly, bond yields everywhere throughout the euro area are distorted beyond recognition.  In a recent post, EconMatters laid this out quite explicitly.  The data for all of the major European countries shown below truly describe the mother of all bond bubbles. This is central bank destruction at work on a monumental scale.

Read the rest of this post at David Stockman’s Contra Corner » Stockman’s CornerView original post.

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Busybody Nation Mon, 01 Sep 2014 14:07:51 +0000 If anyone above a kindergarten pay-grade has figured out America’s vital interest in the Ukraine, it has not been reported — or even leaked from the foundering vessel that is the US State Department. In fact, when you consider the …

This is a syndicated repost courtesy of KUNSTLER. To view original, click here.

If anyone above a kindergarten pay-grade has figured out America’s vital interest in the Ukraine, it has not been reported — or even leaked from the foundering vessel that is the US State Department. In fact, when you consider the results, it’s hard to understand the rationale behind any recent US foreign policy endeavor. Mr. Putin of Russia summed it up last week, saying, “Anything the US touches turns to Libya or Iraq.” Vlad has a point there, and what he left off the list, of course, was Ukraine, which entered the zone of failing states a few months ago when the US lubricated the overthrow of its previously-elected government.

What complicates things is that Ukraine is right next door to Russia. For many years it was even part of the same nation as Russia. Russia has a lot of hard assets in Ukraine: pipelines, factories, port facilities. Because they were recently part of the same nation, a lot of Russian-speaking people live in the eastern part of Ukraine bordering Russia. The casual observer from Mars might easily discern that Russia has a range of real interests in Ukraine. Especially if the central government of Ukraine can’t control its own economic affairs.

The US claims to have interests in Afghanistan, Iraq, Syria, and Libya. These nations are respectively 11,925, 11,129, 10,745, and 10,072, miles away from America — not exactly neighbors of ours. All of them, one way or another, and partly due to our exertions, are checking into the homeless shelter of failed statedom. Afghanistan was, shall we say, a special case, since it was being used thirteen years ago explicitly as a “base” (al Qaeda) for launching attacks on US soil. But that was then. No other war or “war” in US history has lasted as long. And it remains unclear whether our presence there yet today is a “nation-building” project or a mere occupation, in the absence of some better idea of what to do.

President Obama has made noises about pulling US troops out of Afghanistan, but we’re still there. How is the nation-building project working out? With Mr. Osama bin Laden dead and in his watery grave, and the Islamic extremist action moved to other venues, how significant is Afghanistan’s role as a strategic base for Jihad?

How many educated, media-marinated professors in their Ivy League turrets can explain in one paragraph what the necessity of overthrowing Muammar Gaddafi was, exactly? Anyone remember? I suppose, like many actions in history, it just seemed like a good idea at the time. If the idea was to keep the oil and gas flowing to western nations — i.e. the “Carter Doctrine” —well, excuse me while I cough into my sleeve. Production is about one-eighth what it was before Mr. Gaddafi exited the scene. That really worked.

Then, of course, there is ISIS (or the Islamic State or the Caliphate), the most visible outcome of a decade of US foreign policy endeavors in Iraq and Syria. Good show, ladies and gentlemen! You have managed to give the world a political movement arguably more barbaric than even the Nazis. On Sunday, The New York Times stood back in breathless admiration for the accomplishments and skills of that organization in the headline: ISIS Displaying a Deft Command of Varied Media. Like a mad scientist in thrall to his own creation, the Times appears dazzled by the political Frankenstein monster we have loosed upon the world.

Considering all the current mayhem in the Middle East, and the potential for deadly mischief from it spreading even into the US and western Europe, do we really have any business hassling Putin and Russia about its feckless, floundering next-door-neighbor, Ukraine? In fact, is any other nation in a better position to prevent Ukraine from descending into full-blown failure? Why don’t we just shut up and mind our own business?

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Japan moves from Paul Krugman’s liquidity trap to Haruhiko Kuroda’s "indefinite QE" trap Mon, 01 Sep 2014 05:34:00 +0000 Japan's 10-year government bond yield is hovering around 0.5%, an all-time low.
This is a syndicated repost courtesy of Sober Look. To view original, click here.

Japan’s 10-year government bond yield is hovering around 0.5%, an all-time low.

Clearly this is the result of the Bank of Japan’s unprecedented securities purchases via the ongoing quantitative easing (QE) program that was accelerated last year.

BoJ’s holdings of Japanese government securities (source BOJ)

While a number of economists such as Paul Krugman fully support this effort as a way of exiting the so-called “liquidity trap”, the central bank’s purchases are eroding the JGB market.

The Economist: – The BoJ is buying ¥7 trillion ($67 billion) of JGBs a month. It now owns a fifth of the government’s outstanding debt. Trading volumes have fallen dramatically, as has volatility in prices. One day in April there was no trading at all in the most recent issue of the benchmark ten-year bond.

Last year’s QE acceleration has begun to take more securities out of the private market than is being issued by the government.

Source: Deutsche Bank

The Bank of Japan was hoping that as yields decline, the banking system will begin replacing JGBs it holds with loans to the private sector, thus stimulating growth and releasing more bonds into the market. But banks have been slow to get out of JGBs.

The Economist: – Part of the reason that bond prices remain high is that financial institutions have not sold as many JGBs as the BoJ had hoped. It had assumed that falling yields would prompt banks to shift their holdings into riskier assets, stimulating the economy. Although Japan’s biggest banks sold JGBs in the months immediately following the BoJ’s first purchases in 2013, they have now largely stopped. Regional banks, the most notorious JGB-addicts, hung on to their bonds, and are now purchasing more.

With rates on private sector loans now also at historical lows (around 0.8%–0.9% according to DB) and the overall private inventory of government paper declining, JGBs remain attractive on a relative basis, even at current rates. In fact, measured in terms of returns on regulatory capital, private sector lending looks terrible. Just as the case in the Eurozone, holding government paper is quite rational for banks.

Moreover, markets are pricing in an ongoing QE effort for the foreseeable future, which will end up taking even more paper out of private hands.

Deutsche Bank: – … note that implied volatility in the JGB futures market is now abnormally low, which would appear to reflect a general expectation that the BOJ will persist with its massive bond-buying operations indefinitely. Put simply, very few market participants currently believe that the central bank is capable of achieving its +2% “price stability target”, and therefore assume that it will remain in easing mode for the foreseeable future.

Exiting this program in a market that has become increasingly dysfunctional will be more difficult and disruptive with time. And given the government’s unparalleled debt problem, is exit from QE even possible without nudging the “unsustainable equilibrium” (vicious circle of rising rates and rising debt burden)?

Japan has moved from Paul Krugman’s liquidity trap to Haruhiko Kuroda’s “indefinite QE” trap.


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