Monday, May 29, 2017

Mosul's Transformation Into A Pile of Rubble / By: Bruce Wilds

Mosul Has Become A Scene Of Destruction And Carnage
Mosul's transformation into a pile of rubble filled with the bodies of dead civilians nears completion. The destruction of Mosul continues, and as the end nears we are now seeing Mosul back in the news. Several of the news reports center around how victory is near at hand, this may be so we are prepped for the celebration and ready to give credit to those who are bringing ISIS to its knees. Over the Memorial Day Weekend on Face The Nation, Defense Secretary James Mattis made it clear, containment is not enough the goal is total annihilation and humiliation so that nothing will rise from the ashes of ISIS.

Mosul and the surrounding area in northern Iraq had in the past housed about two and a half million people. Since being occupied by the Islamic State of Iraq and the Levant in June of 2014 many people have fled. Knowing that to stay was to risk your life and the lives of those with you the population today has declined to around two hundred thousand.  Adding to the woes of civilians that remain trapped by the fighting or afraid to flee are reports from U.S. based Human Rights Watch that Iraqi Kurdish fighters battling the Islamic State have unlawfully destroyed Arab homes in scores of towns and villages in what may amount to a war crime, in short, your potential liberators may not be your friend.

The good news is that when the operation began to liberate the city of Mosul and eliminate the last bastion of ISIS in Iraq things were moving faster than many people had anticipated according to Prime Minister Haider al-Abadi. Still, problems continued to surface slowing the advance, such as a wave of car bombs sent by the Islamic State group. Iraqi special forces Maj. Gen. Sami al-Aridi said, "there are so many civilian cars and any one of them could be a bomb." As Iraqi forces try to advance further into Mosul these suicide car bombs have taken a toll. With Islamic State militants even deploying armed children in Mosul’s Old City as means to bolster the impression they are still in control it is obvious many more civilians will die before this is over.

 Civilians, As Well As ISIS Fighters, Are Being Killed
Clearly, the once great and ancient city of Mosul will be reduced to nothing more than a pile of rubble. Mosul shares this fate with many other cities in the region that have become war zones. Within the slowly shirking kill zone, it is not difficult to imagine 100,000 or more of the innocent people trapped within the city killed as troops seeking to eradicate the last of the estimated four to six thousand ISIS fighters go about their task. Death often occurs rather indiscriminately in such places and is dealt out to both civilians and combatants. In this case, civilians will be used as human shields increasing the toll and carnage. 

As for how those many tens of thousands of civilians who fled fighting near Islamic State-controlled Mosul last week many are now stranded outside the city without basic humanitarian assistance. The situation became so desperate near the end of last year it was reported that army officers began distributing rations meant for their soldiers and buying extra supplies with money out of their own pockets. We have seen this all before, when the smoke begins to clear a campaign will develop to raise massive amounts of money to rebuild and set things right but until then it is suffering and death and nothing we do will change this reality of war.

An article written in the middle of November 2016 pointed out that a matter that merits our attention has become merely a footnote lost in the noise of daily news, these are the events taking place as Iraqi troops and a coalition of anti-ISIS forces try to retake Mosul. Even though they are in different countries both Mosul and Aleppo stood in the path of total destruction destined to be wrecked by the forces of war. Aleppo was of course further down this path as we have seen in the photos that have become far too common. These photos depict the total devastation and death modern warfare brings upon those caught in its way.

It should be noted the Mosul offensive began in mid-October 2016, in the days leading up to the American Presidential election, at the time the offensive was expected to last weeks, if not months. The media reports were spun to let us know a forthcoming victory was in the offing, it seemed this was done to assure voters American foreign policy has not been a dismal failure. The fact is Mosul should never have never fallen. The blood and treasure wasted and spent in Iraq are in many ways a reflection and the legacy of intervening where you don't belong. When this campaign is over victory will be declared but what exactly will we be celebrating?

Monday, May 22, 2017

Catalyst Of Our Economic Demise Yet To Be Determined / By: Bruce Wilds

Catalyst Yet To Be Determined!
Time has a way of revealing certain realities but does so at its own choosing. It is important that we remember the power of time, it controls us rather than the other way around. During certain periods of our lives the clocks often seem to be moving at their own pace. As a child the special days like Christmas approached slower than a turtle in peanut-butter, however, vacations had a way of slipping by far too soon. The fact that events seem to advance unevenly reinforces the concept of lag time where the effect is not rapidly apparent and the idea that at times we see life passing before our eyes. Time is a powerful force and will at its leisure remind us we are not in control, all things come to an end and so will this market and the economy it has wrought.

The book that I authored several years ago focused on how mankind has by way of its advancements constructed a world in which we are rapidly moving ever faster into a future that we only partially control. This brings me to the crux of this article and that is the catalyst of our economic demise remains in question. Over the years many articles have been written speculating on what will be our downfall and when we will stumble yet we have bumbled our way forward. A patch here and a patch there has allowed the flawed economic system the world has cobbled together to continue with the help of an emergency action every now and then. But has it been luck, cunning or skill that has brought us to this point?

When it comes to the economy we are not talking about a well-oiled and designed machine and in the end, we may find that it is not really completely under the control of those who have been placed in the driver's seat. At any rate, many scenarios exist as to how one or more missteps may lead to the collapse of this rather fragile contraption. As for taking a hands-off approach and allowing markets to find their own way, that time is long gone and that ship has already sailed. Over the years central banks across the world have become so deeply involved in manipulating and distorting markets they are at a point where true price discovery no longer exist. On occasion, I dust off an article that I feel hit some important cords and do so now.

Let the chips fall where they may is a figure of speech which means, "What happens happens" or "Let the imminent events unfold." This metaphoric term dates back to the 1800s and alludes to chopping wood,  "chips" refers to chips of wood. This phrase uses the image of a person chopping wood and letting the chips fly everywhere instead of trying to be neat and chop on one side so they'll fall in a pile. It implies the woodcutter should pay attention to the main task of cutting logs and not worry about small chips. It is often joined to a statement that one should do what is right, such as, "No matter what the consequences, I'm going, to tell the truth about what happened and let things and events unfold as they may.

A Huge Number Of Chips
It has become abundantly clear that when it comes to the "economic chips" the powers that be have no intention of letting them fall where they may. However, several factors determine just how much influence can be applied to the how current economic policies unfold. Continuing with the metaphor of "falling chips." Things like the size of the chips, the rate or speed at which they fall, and the number of chips in the air may make them uncontrollable. My point is we could find ourselves up to our neck in chips in a blink of an eye and in the middle of an economic tsunami, all bets are off as to how successful efforts to stem a catastrophe might be. We should expect that during the final stage of a global shakedown events will be uncontrolled and become very wild.

Many people have come to accept the fact the world might soon witness a major shift in the value of one investment over another as investors seek firmer ground. Derivatives, currencies, plunging stock prices, air rushing out of a bond market bubble, how debts are structured, and the timing or direction from which problems arise are all factors that must be considered. Investors are constantly reminded that investing involves risk, investing in foreign markets is subject to additional risk including currency fluctuations. This means we face the loss of principal or capital, however, year after year of climbing markets tends to make people complacent. What many people don't realize is no matter what they invest in or how safely they think they have salted away their wealth or savings risk is always lurking.

The question remains how best to prepare for a economic meltdown. Values constantly change and the unfortunate situation of having your wealth in the wrong place at the wrong time can be devastating, the inability to access your funds can make the situation even more dire. It could be said that in some ways all of us are involved and playing this game whether we are aware of it or even want to be included. Another concern is the economic overlords have the power to change the rules and when this happens it generally is not to benefit you or me. During times of economic chaos, you can only hope you will not be one of those thrown under the bus. With much of the world facing down a road paved in promises that are economically unsustainable, it is likely many will be broken. Pensions and other payments granted to us in our later years are the kinds of promises that are at risk of not materializing or being cut.

How Will The Dominoes Fall?
Much of how things play out revolves around the issue of debt a subject of great importance to both lenders and borrowers, and again timing can mean everything when determining whether a creditor will totally default or force a lender to suffer a major write-down of their expectations. Debt is generally set to be paid over time and a balloon payment coming due at a time when money is difficult to borrow can be the kiss of doom. Inflation or deflation, as well as a big shift in interest rates, may determine the true winners or losers in this brutal game.

I contend the amount of money and free currency (able to move around and be deployed) actually standing or remaining after the next major economic meltdown begins will be the determining factor of whether inflation or deflation is indeed the flavor of the day. A person may think they are wealthy or have real wealth, but will they be able to tap into it and move it about? Often "paper wealth" is merely a promise of future value. Many people would be shocked at just how little in the way of tangible assets many very wealthy people own and to find much of the wealth people own is on paper, and this is full of risk. What is often missing or overlooked is tangible fully paid for items and things that are likely to hold their value and in the direct possession of the owner. People tend to avoid tangible assets in their control because they are often inconvenient or need to be insured.

Going forward we find the size of the chips, and the order in which they fall is both unpredictable and does matter in determining how an individual's wealth is affected. The story of the gold miner who labored for years then gave up and walked away set things up for the next young lad who started in to hit gold in days and strike it rich highlights that being right is not always enough, the value of tenacity should not be underestimated, and timing is crucial. A bit of luck is also helpful in a world that has become a giant casino and our economic future often a game of chance, at stake, is just how much of our wealth we as individuals can protect. When we talk about contagion it is easy to imagine the dominoes falling, but have no doubt the direction they fall often determines which if any will remain standing. Expect both luck and caution to play a big role on our individual fortunes as we move through the financially violent period before us.

Friday, May 19, 2017

Owning A Tesla Could Suddenly Become Uncool / By: Bruce Wilds

Tesla Crashes Have Drawn Much Attention
Enough about Tesla being worth more than Ford and all the other automobile producers that have many times its market share. Current supporters of its value even go so far as to claim it is really a tech company masquerading as an automobile company. It should be noted that J.P. Morgan analyst Ryan Brinkman welcomes margin improvements at Tesla and the reiteration of Model 3 timing, but said execution risks remain. He rates the stock underweight with a $190 price target, up from a previous $185. I and many other market watchers see both of these numbers as far too high.

In a note Brinkman recently wrote, “We continue to be cautious relative to the potential for a slower than guided start to Model 3 assembly, and newly believe that the potential for Model 3 pre-orders cancellations may increasingly become a point of investor concern.” Nothing tarnishes a brand faster than producing a lemon or product that becomes synonymous with failure. I hate to tell Tesla lovers that owning a Tesla could rapidly become uncool if when rolled out the Model 3 fails to live up to the high expectations many of those placing orders have for the car.

Model 3 May Fail To Tantalize Or Underwhelm
Tesla has repeatedly tried to lower expectations and reiterated that the model 3 is a downgrade from the model S but many of those on the waiting list may not fully comprehend exactly what this means. Do not rule out the possibility that once the aura surrounding Tesla leaves, reality may wash over those so eagerly awaiting their new toys and a main driver of sales vanish. In a world where few cars sporting the Tesla nameplate exist the car remains a novelty that garners the owner a bit of notoriety. So far the attention gained has been positive, however, if it were suddenly to turn negative not only would many owners lose a bit of bounce in their step but the value of their cars could drop like a stone.

As this is written we are forced to wonder just how much of a downgrade the model 3 will be and how it will be received. Many questions still exist as to whether its roll-out will be on time or delayed by a series of glitches and problems that often plague new models. If the actual car fails to tantalize buyers or leaves them underwhelmed it could be all over. One is born every minute refers to a fool or sucker.  There's a sucker born every minute" is a phrase closely associated with P. T. Barnum, Buying stock in Tesla is the same as going to a casino, it will end with you being most likely a goat rather than a hero. Remember the companies Musk is involved with have been on the government dole.

Like many high-flyers before him, Elon Musk has a history of promising more than he can deliver which investors and the market has chosen to ignore. I have written several articles about Musk and Tesla not because I'm wowed by either but because they are both poster children of a market which I feel has discoupled from reality. Do not be surprised if looking back someday in the future we view Tesla's stock which continues trading at incredibly high multiples as a reflection of our historically low-interest rates and the luck of being in the "QE moment" rather than the company's financial success. Bears and those that doubted if the company could hold together ironically have pushed up the stock adding to the image that Musk lives a charmed life.

In the past, I and many others have pointed out the uphill battle Tesla is fighting and the many obstacles that could derail its success. In May of 2015 David Stockman wrote; In a world saturated with excess automotive capacity and dominated by some of the most formidable engineering, manufacturing and marketing organizations on the planet—Toyota, BMW and Ford, to name just three–There is no way that an amateurish circus barker like Elon Musk will ever make a profit selling electric vanity cars to the 1%. Stockman went on to state, You might describe Tesla as $30 billion of capitalized hopium, but that would be too generous. In an honest free market, Tesla would have long ago been carted off to the chapter 11 junk shredder.

Oh, how sweet and challenging the auto industry is, like a fickle mistress it has those in its grasp always on their toes or they will suddenly find themselves crushed by their overconfidence. A marvelous example is how Ford in the 1950s ambitiously rolled out the car everyone was waiting for. Unfortunately, their ambition gave birth to the Edsel, whose name became synonymous with abject corporate failure and while the nascent brand was killed in 1959, its legacy lives on. The Edsel's short history makes a fascinating cautionary tale for anyone in business–not just the car industry. In the end, the name of Elon Musk may be added to a long list of bold men herald and declared to be "gods gift to business," only to find they flew too close to the sun only to crash and burn.

Footnote; The link below is to a prior article that is an overview of Elon Musk and Tesla Motors. It gives some of the background story behind their rise to prominence.

Tuesday, May 16, 2017

"It Will All End Badly" - A Tribute To The Late Allen Meltzer

During April of 2016, I wrote; We should not wait until someone is gone to salute them in tribute. Life is finite and at some point, we should acknowledge we are nearing the end. Allan H. Meltzer, a distinguished monetary economist and historian and a longtime professor of economics at Carnegie-Mellon Institute, died last week at the age of 89.  While he had a long and productive life I only wish Allen had lived long enough to have seen he was right on what has been happening since 2008. An older lady often told me "she no longer bought green bananas" as a way of saying she recognized this truth. In that spirit, I'm writing about a person born in 1928 that while viewed by many economists as America’s foremost expert in monetary policy is little known by the masses.

In the middle of 2013, I wrote "It Will All End Badly" where I stated that what I like about numbers is that when they are not jockeyed, jerked around, and falsified they tend to tell the truth. Continuing on this thought looking down the road the numbers do not work, this is where Meltzer enters the story. Allen H Meltzer is recognized for his wisdom and achievements in economics. Meltzer is a professor of political economy at Carnegie Mellon University and a visiting fellow at Stanford University's Hoover Institution. He is also the author of the three-volume “A History of the Federal Reserve.” For over 25 years he was the chair of the Shadow Open Market Committee, a group that meets regularly to discuss the policy of the Federal Reserve. Back then his mood was troubled “We’re in the biggest mess we’ve been in since the 1930s,” he has been quoted as saying “We’ve never had a more problematic future.”

People have been forced into riskier assets because of low-interest rates.When interest rates rise, as they will at some point, the value of these risky investments will decline, and these investors will be hurt. Making things worse is the fact that interest payments on the public debt will rise increasing the budget deficit which has grown massively in past years. It is clear that prices in some sectors of the economy have been rising rapidly and major distortions exist within the marketplace. When the large "too big to fail" banks like Goldman and Bank of America report they made profits in the market on roughly 95% of trading days in 2012 we have to raise an eyebrow. This is an indication that the game is manipulated as no trader is that good.

Even back in 2013, Meltzer had not been a fan of recent economic policy for some time, in a Wall Street Journal opinion piece on June 30, 2010, titled "Why Obamanomics Has Failed" Meltzer wrote about how uncertainty about future taxes and regulations was the biggest enemy facing future economic growth. He goes on to say that the administration's stimulus program has failed. Growth is slow and unemployment remains high. The president, his friends, and advisers talk endlessly about the circumstances they inherited as a way of avoiding responsibility. Two overreaching reasons explain the failure of Obamanomics. First, administration economists and their outside supporters neglected the longer-term costs and consequences of their actions. Second, the administration and Congress have through their deeds and words heightened uncertainty about the economic future.

Meltzer went on to say that most of the earlier spending was a very short-term response to long-term problems. Part of the money financed temporary tax cuts, this was a mistake because it ignores the role of expectations in the economy. Economic theory predicts that temporary tax cuts have little effect on spending. Unless tax cuts are expected to last, consumers save the proceeds and pay down debt. Another large part of the stimulus went to relieve state and local governments of their budget deficits. Transferring a deficit from the state to the federal government changes very little. Some teachers and police got an additional year of employment, but their gain is temporary. Any benefits to them must be balanced against the negative effect of the increased public debt and the temporary nature of the transfer.

Peter Schiff says, printing money is to the economy what taking drugs is to a drug addict. In the short term it makes the economy feel good, but in the long run, it is much worse off. What was once the "long run" or "distant future" may be getting very near. Soon the dollar and the American economy will be nearly dead. I recently reviewed a book I read years ago, in his book "A Time For Action" written in 1980 William Simon, a former Secretary of the Treasury tells how he was "frightened and angry".  In short, he was sounding the trumpet about how he saw the country was heading down the wrong path. Looking back, it is hard to imagine how we have made it this long without addressing the concerns that Simon wrote about so many years ago. Back then it was about billions of dollars of debt, today it is about trillions of dollars.

Returning to Allen Meltzer he penned a piece that appeared in the Wall Street Journal in May of 2014, in the article Meltzer gives his take on where the economy is headed. I highly value his opinion, not only because it is based on his long developed work and studies, but he seems to have far less motivation to lie than many of those currently involved in forming policies today. Meltzer wrote;

     The U.S. Department of Agriculture forecasts that food prices will rise as much as 3.5% this year, the biggest annual increase in three years. Over the past 12 months from March, the consumer-price index increased 1.5% before seasonal adjustment. These are warnings. Never in history has a country that financed big budget deficits with large amounts of central-bank money avoided inflation. Yet the U.S. has been printing money—and in a reckless fashion—for years.
    The Obama administration has run huge budget deficits every year, which, together with the Bush administration, has amounted to $6.7 trillion from 2006 to 2013. The Federal Reserve financed almost $3 trillion of these deficits by purchasing Treasury bonds and notes. The Fed has also purchased massive amounts of mortgage-backed securities. Today, with more than $2.5 trillion of idle reserves on bank balance sheets, there is enormous fuel for greater inflation once lending and money growth rises.

    To avoid the kind of damaging inflation the U.S. experienced in the 1970s and early '80s, the Fed could raise interest rates, including the interest it pays banks on reserves, inducing banks to hold most of the $2.5 trillion of reserves idle. But interest rates high enough to discourage borrowing and lending would likely send the economy into another damaging recession.
    Fed Chairwoman Janet Yellen recently admitted that the central bank doesn't have a good model of inflation. It relies on the Phillips Curve, which charts what economist Alban William Phillips in the late 1950s saw as a tendency for inflation to rise when unemployment is low and to fall when unemployment is high. Two of the most successful Fed chairmen, Paul Volcker and Alan Greenspan, considered the Phillips Curve unreliable. The Fed's forecasts of inflation ignore Milton Friedman's dictum that "inflation is always and everywhere" a result of excessive money growth relative to the growth of real output. 
    The Fed focuses far too much attention on distracting monthly and quarterly data while ignoring the longer-term effects of money growth. The country's present dilemma originated in 2008 when the Fed properly and forcefully prevented a collapse of the payments system. But long before idle reserves reached $2.5 trillion, the Fed didn't ask itself: What can we do by adding more reserves that banks cannot do by using their massive idle reserves? The fact that the reserves sat idle to earn one-quarter of a percent a year should have been a clear signal that banks didn't see demand to borrow by prudent borrowers.
    The Fed's unprecedented quantitative easing since 2008 failed to lead to a robust recovery. The unemployment rate has gradually declined, but the main reason is that workers have withdrawn from the labor force. The stock market boomed, bringing support from traders, but the rise in asset prices of equities didn't stimulate growth by inducing investment in new capital. Investment continues to be sluggish.
    And some side effects of the Fed policies have had ugly consequences. One of the worst is that ultra-low interest rates induced retired citizens to take substantially greater risk than the bank CDs that many of them relied on in the past. Decisions of this kind end in tears. Another is the loss that bondholders cannot avoid when interest rates rise, as they have started to do.
    Accumulating data from the sluggish loan market and the weak responses of employment and investment should have alerted the Fed that the growth of reserves and the low interest rates haven't been achieving much. Similarly, the Fed should have noticed in recent years that instead of a strong housing-market recovery, not many individuals were taking out first mortgages. Many of the sales were to real-estate speculators who financed their purchases without mortgages and are now renting the houses, planning to resell them later.
    Most of all the Fed years ago should have recognized that the country's economic problems weren't arising from monetary factors. Instead of keeping interest rates low to finance deficits, the Fed should have explained that costly regulation, increased health-care costs, wasteful spending and repeated threats to raise tax rates were holding back the recovery.
    Broadly speaking, the Obama administration has pursued a course the opposite of that taken by the Kennedy and Johnson administrations in the 1960s (and the Reagan administration in the 1980s). Kennedy-Johnson enacted across-the-board tax cuts: Promoting growth came first, redistribution later. By putting redistribution first and sacrificing growth, the Obama administration got neither.
Ironically, despite often repeated demands for increased redistribution to favor middle- and lower-income groups, the policies pursued by the Obama administration and supported by the Federal Reserve have accomplished the opposite. 
    When the president campaigns in the midterm election, he will talk about the relative gains by the 1%. Voters should recognize that goosing the stock market through very low interest rates, not to mention the subsidies and handouts to cronies, have contributed to that result. We are now left with the overhang. Inflation is in our future. Food prices are leading off, as they did in the mid-1960s before the "stagflation" of the 1970s. Other prices will follow.

This post is not only in tribute to Allen Meltzer but to make clear that just because we have muddled along putting band-aids on our economy does not mean that we have done anything but postpone the day of reckoning, and in many ways, we may have made it far worse. The time the Federal Reserve has bought for the country to come to terms with its many problems has been squandered at a great cost. While many people say the economy is getting better others like me who are involved in business on Main Street all across America say this is not true and that an ugly reality is only being masked by the easy money and deficit spending policies we have today. While it is difficult to time when certain events will unfold it is clear the direction we are moving in.

Monday, May 15, 2017

Washington Might Just As Well Be Closed For Business

So Little Being Done It Might As Well Close
While the doors are open it seems Washington remains "closed for business" and nobody has seemed to notice or care. This could be one of the reasons the stock market has continually made new highs as the economy struggles with multiple issues and faces an uncertain future. Seriously, even this could not explain wall streets disconnect economic reality, however, it is difficult to argue with the fact America's capital is locked in a dysfunctional mindset. Anyone who thinks Obamacare is well on its way to being repealed or replaced by a "better plan" is delusional. Other than a celebration when legislation claiming such a feat passed the House little of substance is in the works.

Just as remote as a "fix all for healthcare" is the likelihood of a tax plan being signed into law anytime soon that will simplify or solve are budget woes. This has done little to slow the advances of stocks on wall Street because in the eyes of those buying stocks such a deal is in the bag. They are oblivious to the reality no intelligent plan has been written or is moving through the halls of congress. The fact is we cannot cut taxes while increasing spending at the same time and not explode an already massive national deficit. The odds of getting a complicated tax reform bill through a polarized and divided congress are nil. In fact, most of the developed countries across the world are in exactly the same boat and upcoming elections hold little promise that things will be sorted out soon.

Trump Heads Off On Multi-Nation Trip
Thank goodness for the distractions that allow us to take our eyes and minds off the business of making the necessary structural reforms to move forward. The recent firing of FBI Director James Comey by President Trump can be considered one of those distractions. While few Americans were love struck over Comey this has stirred up a hornet's nest and energized Trump's critics. Only so many hours exist in a day and when they are spent or wasted in speculation the bottom-line is if nothing is getting done, Washington might just as well be closed for business.

It is difficult to believe the productivity of Washington could drop any lower, and while our elected officials busy themselves with calling for further investigations and making promises of getting to the bottom of this America putters along on autopilot. The flavor of the day is same as it was yesterday and the year before, nothing has changed. The politicians and Washington elite continue dithering away their time as well as the money of the American taxpayer and even that of future generations. With matters under control and having completed his strenuous first 100 days in office President Trump is about to head off on a global fly about to meet with various world leaders which should result in more of the same.

The days of "Hope and Change" are behind us and we are firmly on the path towards making America great again, unfortunately, the message has fallen on deaf ears when it comes to our elected officials in Washington. Tonight I will raise my glass and toast the cynical and skeptical Americans scattered across this great land for again they are well on their way to being right about how nothing really gets done until the last minute and even then if delay is an option it will be exercised. To top things off tonight as I get ready to post this article the White House has gone into damage-control mode after a report that Trump revealed classified information in a meeting with Russian officials last week. Ironically this may be as good as it gets.

Friday, April 28, 2017

China Still Adding Liquidity To System At Record Pace

In a world where money flows across borders at the press of a button, it doesn't matter which major central bank is adding money to the system the effect is the same. Today money printed and injected into the economy of any country drives markets higher across the world by distorting demand and prices. The fact is China has continued to add liquidity to their economy at a record pace and the liquidity China injects into its system spills out into the global economy, the money leaking out of China bolsters and lends credence to the illusion all is well both in China and across the world reinforcing the narrative economies are beginning to gain traction.

The figures and economic data China reported for March and Q1 showed the first back to back GDP acceleration in seven years. "The rebound in retail sales growth was particularly important as it indicates that consumer spending remains strong," said Rajiv Biswas, Asia-Pacific chief economist at IHS Markit in Singapore. The data fractionally beat expectations across the board as investment picked up, retail sales rebounded and factory output strengthened, following record credit growth and a fresh rebound in China's property markets. It should be noted an increase in Chinese housing prices which many people see as a housing bubble is a double edged sword and not necessarily something the government is glad to see. Not only do these increases make housing unaffordable but they also tend to cause leveraged speculators to enter the market.

China's Credit Growth Far Outpaces Growth In GDP
Returning to the issue of cross-border money flows it must be noted newly printed money and liquidity printed and released into the Chinese economy quickly affects distant markets. This reinforces what other central banks across the globe have been doing for years. Taking turns one after another countries have added fuel to the global economy in an extended rolling process determined to deflate the effects of their previous credit excesses.

This means when Japan announces a new stimulus package or easing, markets across the world rejoice and move higher in unison. Those who doubt the power of cross-border money flows need only look to Vancouver Canada which has been forced to implement a foreign buyer tax in an effort to halt the rise in housing prices inflated by "hot money" from China. Toronto's housing market has also gone crazy with prices soaring 33% from the prior year. Recently CBC reported Ontario's Liberal government will slap a 15 percent tax on home purchases by non-resident foreigners and will expand the province's existing rent control system to cover all tenants. The wave of speculation has caused landlords to raise rates and distorted expectations of future prices this has broad implications for the housing market going forward.

China's Money Supply Soared From $10 To $24 Trillion
According to Bloomberg the better numbers coming out of China make the problem of excess leverage look a little more manageable, at least as long as factory reflation stays strong. Stronger consumer consumption contributed 77.2% to growth in the first quarter, this points to progress in further rebalancing the economy away from exports and the old industrial growth drivers. The data was of course followed by a bit of optimism and spin as Bloomberg noted, the chief greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong said, "for the first time in the recent years, China starts a year with a strong headline GDP. Thanks to strong investment and property, the economy is performing well."

Because of China's Q1 expansion we have seen producer prices soar, this validates in the minds of some market watchers the ongoing global "reflation" trade. As industrial output picked up courtesy of soaring credit many people continue to brush aside the fact this additional liquidity temporarily mask huge problems within the country. Over the years the credit growth in China has far outpaced growth in the GDP and with each wave of new money into the system less growth has been created. It seems much of the new money has been used to pay interest on past debt that has already formed or in speculating on which existing assets will rise in price and when the government creates policies to end speculation it fuels the desire for wealth to flee the country in search of better investment opportunities.  

While the economic data out of China was welcomed by many investors we must recognize China's relentless credit pump continues set on high. It was reported the broadest measure of new credit rose more than estimated last month amid strong growth in shadow banking. Aggregate financing grew 2.12 trillion yuan ($308 billion). This means for the first quarter, total social financing reached a new record high 6.93 trillion yuan. At current exchange rates, China's credit creation in Q1 totaled to just over 1 trillion US dollars. This is equal to the size of Mexico's economy and well above last year's first quarter total. With this in mind, concerns continue to mount that China's growth is merely the result of relentless credit expansion and at some point, this debt-fueled model will break and the system collapse under its own weight.

Sunday, April 23, 2017

Central Banks Massive Incursion Into Buying Stocks / By: Bruce Wilds

One indication of just how messed up and flawed the global markets have become is reflected in the way central banks across the world are now buying stocks. This has become a part of their response to correcting the forces of past excesses. Their incursion into this bastion of the free markets signals we have entered the era where true price discovery no longer exist. The central banks are often viewed as price insensitive buyers so this incestuous influx of money is in some ways the ultimate distortion. This is especially true when the markets are not deep enough to accommodate the size of these purchases. Over the years global currency reserves have grown and this has increased pressure on central-bank managers to diversify them moving from being a liquidity manager to focusing on investment management but with this comes risk.

A recent article in the Wall Street Journal details the reason behind why central banks are buying stocks. There are several forces driving this. Part of it is a hunt for higher returns, because of negative rates, nearly $11 trillion, or roughly one-quarter, of global fixed-income assets yielded below zero at the end of 2016, according to Bank of America Merrill Lynch. This means some are investing a bigger share of their growing foreign-exchange reserves in equities, corporate bonds, and other riskier assets while others are doing so merely to prop up their stock market in an effort to create a wealth effect hoping it will cause consumers to feel better and go out and spend which will propel the economy forward. This should not be confused with buying  foreign currencies or with quantitative easing programs, under which central banks like the Federal Reserve have already bought trillions of dollars worth of assets to boost growth and inflation.

China Is Adding Huge Amounts Of Liquidity
While the QE programs of the European Central Bank, Bank of England and Bank of Japan have been involved in buying riskier assets each with the currency that they themselves print this it taking things to a new level. One thing I found telling is a statement in the article that many central banks are hiring outside managers to handle the nontraditional assets in their portfolios. It went on to claim this presented an opportunity to a financial industry struggling with stagnant revenue growth but this in not the job of central banks. I find this frightening because the stock market and financial sector has already far out preformed Main Street.

All this feeds into speculation or can even be interpreted as a confirmation the stock markets are indeed rigged and that any fall is merely a signal for them to rush in and buy more. Doing so accomplishes two things, it bolsters and supports current holdings while reinforcing the image markets are climbing higher because our economic future is getting brighter. All this comes at a price and leaves many economy watchers wondering where this leads. This was apparent in a comment made by a reader on another site who looked ahead and questioned the end game of this intervention. When the central banks own all or a majority of stocks will they begin to appoint new management working under their control?

Buying Both Stocks And Bonds Japan Masks Reality
One thing is clear, the central bank's large foray into stock ownership represents more than just a moral hazard and in many ways, it paves the way for a liquidity crisis in our future. Much like the negative interest rates of recent years this action takes us further down the path towards a "liquidity trap," a term that can be baffling and difficult to understand. This term has been used by Allen Greenspan and a few others, it represents a huge problem for the economy. It can have several components, but sooner or later all of them feedback into a loop that disrupts the flow of credit and impacts the real economy. 

The tip of the spear may turn out to be the currency markets where each day trillions of dollars slosh back and forth as traders fight for even a fractional move in their favor. Consider how destabilizing currency swings can be it is easy to see how they could obliterate the global economy. We must remember officials in less-developed nations where large currency reserves sit often use the printing press to buy foreign assets and at the same time cheapen their currency. Some developed central banks such as the Swiss National Bank often accumulate foreign reserves precisely because they want to keep their currency from getting too strong, which would harm exporters and weaken prices. This helps support my theory that for some time the big central bankers are busy manipulating currencies so they trade in a narrow range that will not rock the boat.

Over the years the central banks appear to have taken turns in rolling out injections into their economy's and each time their actions have spilled across porous financial borders carrying markets in one direction or another. This continues to desensitize markets to reality. This creation of stimulus in one form or other by major central banks is their answer to correcting past excesses, simply put they still are struggling to deflate credit bubbles they allowed to form in the past. Japan is viewed by many as trapped in such a situation following a massive credit bubble in the early 1990s they have attempted time and time again to shake off a hangover that has manifested itself in deflation and slow growth. By not addressing the real cause Japan's government and the BOJ now find they are forced to buy both bonds and stocks at an alarming rate just to reassure the Japanese people all is well.

Today China by all measurements is facing the mother of all credit bubbles and addressing it with the same failed policy's we have seen before. This is where I point out any false market can be viewed as a bubble that cannot survive. Simply put, at some point the return on loaning money to banks, governments, and others is simply not worth the risk! Bastardizing the stock market so that it no longer reflects true price discovery will eventually mean investors will begin to perceive it as just another false scheme that is held together only by promises made by a government they can no longer trust. Why do you want to invest or loan money if most likely you will never be repaid or repaid with something that is totally worthless? When this happens the only safe place to store wealth will be in "tangible assets" and the central banks will be left printing fiat money that nobody wants.