Government, bankers get ‘D’ for debt and demographics
Much optimism surrounds “Abenomics,” the efforts of Japanese Prime Minister Shinzo Abe to lift Japan from the maw of deflation. But Abenomics doesn’t go far enough to address Japan’s two major problems: debt and demographics.
Japan is one of the world’s most heavily indebted developed countries. Its total debt to GDP tops 500%, compared to the U.S.’s 370%. Japanese gross sovereign debt is around 240% of GDP, while its net debt is around 135%, substantially higher than most developed countries.
For the fiscal year ended March 2013, total government spending was 124.5 trillion yen (26.1% of GDP) against government revenue of 59.2 trillion yen (12.5% of GDP). The government borrowed to finance 52% of its spending. Prime Minister Abe’s program is likely to lead to further deterioration in public finances. Unless nominal GDP growth increases dramatically without an increase in Japanese government bond (JGB) rates, Japan’s debt will increase.
To stabilize debt levels, Japan would need to move to a structural surplus (budget deficit before interest payments on government debt) of 3%-4%, compared to a current deficit of around 8%. Given the lack of growth and deteriorating demographic profile, the required tax increases or spending cuts may not be feasible. There are proposals for an increase in consumption taxes, conditional on an improvement in economic activity. But the government is also looking at corporate tax cuts, which would reduce the revenue impact. Even if such policy measures were to be taken, the resulting potential contraction in economy activity would drive debt higher.
A falling savings rate
Driven by an aging population and
will increasingly make it more difficult for the government to finance spending domestically, at least at current low rates.
Forecast current account deficits will complicate the government’s financing task. Japan’s large merchandise trade surplus has shrunk and will remain under pressure reflecting
Weak export demand and
High imported energy costs.
With the passage of time and in absence of a change in circumstances,
Japan may also face increasing stress on its government finances from higher rates.
Increased borrowing costs may be driven by several factors.
If Japan has to resort to financing from foreign investors rather than domestic Japanese investors, then its interest rates may increase, perhaps significantly.
If current policy initiatives result in inflation reaching its 2% target level, then interest rates on JGBs will need to rise.
If Japan’s risk profile continues to deteriorate, then investors may require more compensation to purchase JGBs.
Higher interest rates will increase the stress on government finances. Despite low interest rates, approximately
25% of tax revenue is used to service outstanding government debt, compared to 6% in the U.S..
At borrowing costs of even 2% to 3% per annum, two to three times current rates, Japan’s interest payments will be an unsustainable proportion of tax receipts.
Higher JGB rates will also trigger problems for Japanese banks, pension funds and insurance companies. For example, JGBs total around 24% of all bank assets, which is expected to rise to 30% by 2017. According to the Bank for International Settlements, the JGB holdings of Japan’s banks equate to 900% of their Tier 1 capital, compared with about 25% for U.K. banks’ exposure to gilts and 100% for U.S. banks’ exposure to Treasurys.
An increase in JGB yields would result in immediate mark-to-market large losses on existing holdings, although higher returns would boost income longer term. The BoJ estimates that a 1% rise in rates would cause losses of $43 billion for major banks, equivalent to 10% of Tier 1 Capital for major banks or 20% for regional banks. Higher rates increase the risk of a Japanese banking crisis.
Higher volatility in the JGB markets can result in rapid increases in bank risk and increased capital needs. This may force sales of JGBs leading to a destabilizing cycle of higher rates, even higher volatilities and forced liquidations which happened in 2003.
An aging population, a shrinking workforce and an increasing dependency ratio of the number of aged supported by a reduced number of workers are integral to Japan’s problems.
Former BoJ governor Masaaki Shirakawa summarized the challenge: “Japan’s economic growth gradually slowed during the past two decades mainly for two reasons. In the former half of the period, the Japanese economy was hobbled by the crippling effect of the burst of the bubble. In the latter half, the rapid population aging hampered the Japanese economy through a variety of channels.”
Current initiatives will have limited impact on low fertility rates, immigration levels or increase labor force participation rates. Prime Minister Abe’s program may exacerbate economic risks without addressing the demographic problems.
The drive for higher wages highlights the contradictions. It is difficult to engineer an increase in incomes across the economy when
older workers with higher salaries and benefits are retiring while young workers replacing them are only paid entry-level wages or hired as contractors without benefits or job security. Japan’s overall consumer spending power will therefore fall, rather than rise.
Demographics may also contribute to deflation. Empirical evidence suggests links between population growth rates and inflation.
Ironically, deflation has maintained the purchasing power and consumption of consumers — especially the aged on fixed incomes, as falling prices have compensated for stagnant and falling incomes and extremely low investment returns on savings. Higher inflation would reverse this, driving consumption even lower.
An untrammelled belief in central planning underlies the present program. In the 1960s, Prime Minister Hayoto Ikeda introduced a plan, which was successful in helping Japan achieve strong growth. Between 1964 and 1972, Prime Minister Eisaku Sato, who replaced Ikeda, implemented three successive growth plans, which were noticeably less successful.
More recently following the onset of the global financial crisis, successive administrations have introduced a conga line of growth plans:
Prime Minister Yasuo Fukada’s 2008 Economic Growth Strategy;
Prime Minister Taro Aso’s 2009 Future Pioneering Strategy;
Prime Minister Yukio Hatoyama’s 2010 New Growth Strategy;
Prime Minister Naoto Kan’s 2011 Scenario to Bring Back A Lively Japan, and
Prime Minister Yoshihiko Noda’s 2012 Japan Revival Strategy.
None of the plans have achieved their objectives. It is unclear why
Prime Minister Abe’s “three arrow” program
will succeed, where similar previous initiatives have failed.
Japan’s deep-seated fundamental problems are within its real economy. It needs to deal with its
Demographics problems, as well as
Declining competitiveness and
These structural problems cannot be dealt with by adjustments in fiscal and monetary policy, despite attempts by governments and central bankers to convince audiences to the contrary.
Satyajit Das is a former banker and author of “Extreme Money” and “Traders, Guns & Money.”
2 - Japan Debt Deflation Spiral
JAPAN - Shinzo Abe Hasn't the Stomach for the Heavy Lifting Needed to Accomopany ABE-nomics.
Prime Minister Shinzo Abe is likely to win a mandate on Sunday for his three-part recipe to end stagnation in the world's third-biggest economy, but anyone expecting him to use it to push a "Big Bang" reform agenda may need a reality check.
Abe's Liberal Democratic Party-led bloc is expected to win a hefty majority in a July 21 upper house election, ending a "twisted parliament" in which the opposition controls the upper chamber. Media surveys published on Monday showed the LDP maintained a substantial lead over rival parties. That stalemate has hampered policies for most of the past six years since Abe, then in his first term as premier, led the LDP to a humiliating 2007 upper house defeat. He resigned two months later and was followed by a string of short-term leaders. Abe, who returned to office in December for a rare second chance, will have few excuses for shying away from reforms including deregulation that many see as vital to generating growth - but his commitment to doing so remains in doubt.
"What's required is the kind of thorough-going reform that Mr. Abe doesn't seem to have the vision or stomach for," said Jun Okumura, a senior advisor for Eurasia Group and former bureaucrat at Japan's trade and industry ministry.
"Just because he wins an election doesn't mean vested interests will be any more amenable to changes that would affect them negatively," he said. "A leader can do a lot with the ability to appoint and dismiss cabinet members and ultimately, the right to call a general election. "But I don't see Mr. Abe as that kind of leader."
Hopes for his "Abenomics" prescription of hyper-easy monetary policy, big spending and steps to promote growth pushed up Tokyo share prices and weakened the yen even before his LDP-led bloc won a December poll for the powerful lower house.
"ENRICH THE COUNTRY, STRENGTHEN THE ARMY"
Business executives and economists welcomed his decision in March to join talks on the U.S.-led Trans-Pacific Partnership (TPP) free trade pact despite fierce opposition from the farm lobby, a traditional backer of the LDP.
Advocates say joining the pact would open Japan's economy to competition and boost momentum for deregulation to spur growth.
"TPP is not about agriculture reform, it's about whether Japan sits at the table when global rules are made and doing whatever it takes to be a first-rate power," said Jesper Koll, head of equities research at JP Morgan in Tokyo. "That's what fires them up."
Abe has also backed reform of the energy sector that would break up regional utility monopolies, also powerful LDP supporters - although a political scuffle just before parliament ended in June prevented the reform bill from passing.
Optimists argue the desire of Abe and like-minded nationalists for a strong economy to ensure Japan's place on the global stage will keep up pressure for reform - a sort of 21st century version of the "Enrich the Country, Strengthen the Army" slogan of the late 19th century reformers who modernized Japan.
"I think he sees a genuine challenge to the sovereignty and power of the country," said Robert Feldman, chief economist at Morgan Stanley MUFG in Tokyo. But reaction to Abe's "Third Arrow" of structural reforms unveiled in June has been tepid, prompting the premier and his aides to promise that more is in store after the upper house election.
Among the areas where critics want bolder steps are
Agrarian land reform,
Labor market measures to make it easier for firms to exit loss-making business and shift to growth sectors,
Cuts in the corporate tax rate and
An easing of barriers to immigration to cope with Japan's ageing, shrinking population.
ACHILLES' HEEL ON HISTORY?
Reform advocates also worry about potential backsliding on promised steps such as energy market reform. "The LDP might change some part of the (utilities reform bill) so it doesn't have so much impact on incumbent utilities," said Hiroshi Takahashi at Fujitsu Research Institute, who sat on an advisory panel that recommended the reforms incorporated in the bill.
A split among Abe's growth strategists between those who see a big role for government in picking and backing new growth sectors, and those who want government to get out of the way to allow innovation, also clouds the outlook for reform.
Ironically perhaps, too big a victory on Sunday could make it harder for Abe to push through the sort of reforms that would harm traditional LDP supporters. Such a win would increase party complacency along with the number of MPs with ties to vested interests.
Some media forecasts give the LDP a shot at winning an upper house majority on its own for the first time since 1989. With no national poll required until 2016, LDP members keeping quiet now ahead of the election are likely to become more vocal afterwards. "Are we dealing with Japanese politics" the answer is 'yes'. Will there be compromise? You bet. The risk of compromise moving to the forefront gets bigger the bigger they win," said Koll, who nonetheless argues Abe is intent on meaningful reforms.
Abe will also face a tough decision in autumn on whether to give the go-ahead for a plan to raise the 5 percent sales tax to 8 percent next year, the first stage in a scheduled doubling by October 2015 to help curb Japan's huge public debt.
Some LDP members fear a tax hike would derail a recovery, but postponing it could cause havoc in financial markets, where the move would be taken as a signal of reneging on fiscal reform.
The International Monetary Fund (IMF), while giving a cautious OK to "Abenomics", has warned of downside risks if Japan doesn't both
Cut its debt - already twice the size of its $5 trillion economy - and
Enact structural reforms.
Concerns have eased a bit that the deeply conservative Abe might shift attention after the election from the economy to pet projects such as revising the pacifist constitution, drafted by U.S. Occupation officials after Japan's defeat in World War Two. The LDP's junior partner, the New Komeito, is wary of such changes and media forecasts suggest the LDP and small parties that also favor constitutional revision will fall short of the two-thirds majority needed to submit changes to a plebiscite. But Abe may find his Achilles' heel in questions relating to Japan's wartime history, which he wants to recast with a less apologetic tone. Abe visited Tokyo's Yasukuni Shrine, where wartime leaders convicted as war criminals by an Allied tribunal are honored with war dead, after becoming LDP leader in September. He has declined to say if he will do so as premier, but could face pressure from supporters to go on the August 15 anniversary of Japan's defeat or at an annual autumn festival. A pilgrimage to Yasukuni would outrage China and South Korea, which suffered from Tokyo's wartime aggression.
Tokyo's relations with Beijing are already strained by rows over rival claims to tiny, uninhabited isles. Abe may also have trouble refraining from comments on history that spark ire in Beijing and Seoul, in turn upsetting security ally Washington and potentially undermining his support at home.
"It is going to be very tempting for Abe to speak his mind that seems like an endorsement of what he stands for as a politician," said Sophia University professor Koichi Nakano.
The bond vigilantes may be back for retribution, argues UBS economist Paul Donovan.
Harken back to 1994, where in a kind of economic protest of expansionary government spending, investors sold off bonds to raise yields, thus increasing the net cost of borrowing. When these "bond vigilantes" felt as though policy was inflationary in nature, they just went ahead and ditched bonds, effectively stifling the government's ability to over-spend. The Clinton White House was forced to abandon its stimulus plan. Yields returned to normal.
So when the Fed launched quantitative easing in the wake of the crisis, some observers warned we would see the bond vigilantes back protesting perceived inflation as the Fed flooded the financial system with liquidity. They never showed up, according to UBS economist Paul Donovan.
"The threat of 'implement plausible policies or we won’t buy your bonds' was itself implausible, when confronted by the lack of alternative investment options," Donovan wrote to investors this week.
Now, as the Fed begins to outline how it will scale back QE, market expectations are shifting. And bond vigilantes may have a role to play, governments beware.
Emboldened by a sense of the power of policy and the persistence of market failure, governments have pursued a wide range of policies – some valid, some subject to criticism. The inability of markets to chide politicians for unwise policies has, perhaps, encouraged a sense of complacency in government circles. With global circumstances altering, that complacency is likely to be tested, as bond market vigilantes seek retribution for past as well as for current sins.
Donovan admits, however, that many investors are required by regulation (or encouraged) to own government bonds, limiting the power of bond markets to reprimand governments.
Still, Donovan argues many governments' policy errors were never rebuked in the market thanks to extraordinary financial circumstances. Now markets can afford to be more critical.
3- Bond Bubble
EU BANKING CRISIS
SPAIN - Clear Signs of Desperation from a Growing Collateral Contagion
In what has to be the most insane level of desperation, the Spanish banking system is lobbying to turn its deferred tax 'assets' into fungible capital to meet new stricter Basel III requirements. In other words, the Spanish banks believe that capitalizing historical losses provides a fungible 'stash' of capital against future losses... Following this morning's round of incredulity from the Spaniards, we have no words...
Spanish banks are lobbying the government to turn more than two thirds of their 50 billion euros ($65 billion) in deferred tax assets into state-backed tax credits that would boost their capital but add to the state's debt, three banking sources said.
The so-called deferred tax assets (DTAs) are created when a bank makes losses or writedowns that it can offset against future tax bills when it returns to profit.
Under stricter Basel III rules on capital, being phased in as of January 2014, most forms of DTAs will no longer be allowed to count towards capital, while tax credits will be.
Spanish banks are asking the government to convert between 15 billion and 30 billion euros of their DTAs into tax credits, the banking sources said.
4- EU Banking Crisis
SPREADS - Widen in Peripherals and Significantly in Portugal and Greece
Following a handsome bounce driven by Draghi, Carney, and various Fed officials promising moar, peripheral European bonds and stocks are having a bad day (and week). Greece, Portugal, Spain, and Italy are all ending the week lower (after solid performance mid-week) with Germany's DAX seeing the benefits of a rotation from high-beta momo with a 5.1% rise on the week (the best week in 20 months!).
Safe-haven flows dominated in bonds; Bunds rallied slightly more than Treasuries on the week but once again Peripheral nations collapsed. Spanish bond spreads jumped the most in a year. Italy was notably weak, but Portugal has seen spreads jump 28% in the last 2 weeks (the worst in over 3 years!).
EURUSD had its best week in 5 weeks - and despite the peripheral collapse, Europe's VIX had its best (drop) week in 4 months ending at 19%.
A huge divergence in Europe this week... (seems evident that Spain, Portugal, and Italy are being traded as one entity...)
but bonds were the big news... (in percentage terms, Portugal's move was the owrst in 37 months)
Meanwhile, in Greece, the stock-market has dropped 7 of the 8 weeks and is dramatically underperforming the supposed reality that the bond market represents... Charts: Bloomberg
4- EU Banking Crisis
PORTUGAL - Presidential Warning Spikes Yields To 8 Months Highs
UPDATE: 5Y now +126bps (biggest jump in 19 months - snce the record highs) and rest of Europe is catching their systemic risk flu
Stocks red in the periphery now...
Amid all the fun and games of the last few days that have seen everyone buy everything everywhere, we noted that the President of Portugal has 'warned' his politicians that if they don't find a coalition solution in a "very short period" then he will call early elections (throwing the Troika-imposed austerity program into shambles). It seems the 'time-bomb' was on a long fuse - thanks to Bernanke - and the reaction is very evident today as Portuguese bonds implode. Spreads are 76bps wider on the day, breaking above 600bps for the first time in 8 months. The 5Y yield on Portuguese debt is now at 7.5% (up 109bps today!) - and yet still they discuss the expectation of coming to market soon for new issuance. Europe remains very un-fixed and every now and again, when the domestic buyers are overwhelmed by some real liquidity, we get a glimpse.
Submitted by Mark J. Grant, author of Out of the Box,
The Lords of Chaos are
The enemies of Logic,
The jugglers of Truth
Whether it be the plains of Asgard, the fields of Mordor, the yellow brick road in Oz; I can recognize and appreciate fantasy. I take delight in meandering off in my mind when emerging myself in one of these pieces of fiction. This morning I can share with you that a new and quite imaginative fairy tale has been told and it has been spun by the government of Spain.
Spain, as you know, and no matter how the story is fabricated, was bailed out by the European Union. The money was lent to the banks so that Spain does not have to count it as sovereign debt even though the country guaranteed the loans. A nod to magicians and the clever use of a sleight of hand trick but the truth is readily apparent. Then, having mastered that trick they are on to new and grander schemes.
Madrid tells the truth in the same manner as a sardine naturally climbs mountains.
Spain has set up a "bad bank" known as Sareb (Sociedad de Gestión de Activos procedentes de la Reestructuración Bancaria). This operation has $66 billion of Real Estate loans and property as their assets we are told. So far they have sold 700 properties and they claim they can achieve an annual return on equity of 13%-14% over its fifteen year tenure.
You see, I was not joking; Spain is out with a wonderful new fantasy competing with the Hobbits, "he who cannot be named" and the land of the Munchkins. Who knew, besides the Portuguese, that the Spaniards could be so inventive? Madrid has outdone itself and Don Quixote has returned to the capital.
Sareb has roughly 107,000 properties and 90,000 loans they tell us. The loans are collateralized by about 400,000 pieces of Real Estate. This all sounds fine as presented but then Sareb started looking at what they actually owned. "Oh no Pancho," 150 loans were all collateralized by the same apartment building. "Oh no Rodrigo," six banks had all lent money to one downtown building and each bank had the same collateral. "Oh no Manuel," we are holding a deed as collateral on a building that does not exist. The problem is that each example that I have presented is not an isolated instance. Such a good tale; invisible buildings, documents relating to non-existent people, collateral shared by everyone and held at face value at Sareb.
What to do, what to do? So Spain turns once again to Clifford Chance. This is the same firm that assured us of the health of the Spanish banks. Another fairy tale please. One more story told around the campfire to engage the investors. One more piece of Pulp Fiction.
If there was a Pulitzer Prize for fiction Spain would be the sure winner.
"Take care, your worship, those things over there are not giants but windmills."
Recent developments across the euro area’s non-core sovereign credits have reminded investors that regional financial and political stability — so critical for the euro’s long-term survival — remain elusive.
Political turmoil in the ruling coalition in Portugal,
Foot-dragging by Italy’s new government,
Rising non-performing loans in the Spanish banking system and
The Greek administration’s failure to boost asset sales as unemployment soars
point to the essential fragility of the crisis-management structures of the region.
France’s loss of its aaa rating at Fitch, its third downgrade in two years, is a reminder that the past year’s relative calm in regional markets has not altered the negative fiscal-growth feedback loop plaguing sovereign credits. while the situations in Gr eece, Cyprus, Portugal, Slovenia, Spain and Italy are being managed in isolation, and systemic cross-border contagion appears limited, the confluence of these crises later in the year will present a new challenge to political cohesion in the monetary union.
Mounting austerity fatigue, political instability, poor economic growth and rising unemployment threaten to derail national stabilization programs, with region-wide consequences.
While the European Union’s tried and tested crisis management tactics will contain sovereign default risks within the euro area, keeping break-up risk low, current national programs have yet to show successful results on the three main performance parameters:
1) Setting economies on to sustainable growth paths,
2) Achieving debt sustain- ability, and
3) Restoring full sovereign and bank access to capital markets (without European Central Bank support).
Stabilization programs for Portugal and Greece have come off the rails. It is be- coming virtually impossible for local shaky coalition governments to adhere to the current Troika aid conditionality.
The European Commission estimates that Greece faces a potential deficit of 2 billion euros for the fiscal year 2013-14, if measures are not implemented. Portugal, which is fully funded until May 2014, faces a 30 billion-euro refinancing requirement in fiscal 2014-15
Some program restructuring for Greece and Portugal along the lines of an extension of bailout funds and/or debt restructuring will be needed before 2014.
The alternative of releasing pre-agreed program funds earlier to plug in Greece’s slipping national funding hole would simply delay the inevitable to the early months of the new year, making for a turbulent 2014.
Portugal’s precarious debt position means a full return to capital markets after June 2014, as previously hoped, is now off the cards.
Cyprus and Slovenia remain textbook cases of failed bank reforms and monetary union fragmentation.
The plight of the smaller non-core borrower countries in the euro area is politically toxic at a time when German Chancellor Angela Merkel is campaigning ahead of the September elections on the promise that no new claims on German taxpayers will arise from regional crises.
Germany has resisted talk of a second Greek debt write-down and rejected outright claims of any mutualization of national bank losses via the EC’s banking union plans, currently in the making.
Meanwhile, the European Commission has been peremptory in its claims that Greece’s restructuring was unique and Portugal is not another candidate-in-waiting for managed default — a euphemism for debt write-off by private creditors.
Without any form of debt relief, it is hard to imagine Greece or Portugal taking on additional conditionality terms to access Troika funds. It is also hard to imagine Ita- ly and Spain taking on further conditionality to access the ECB’s o utright Monetary Transactions bond-buying facility. Equally, it is impossible to see how the ECB could materially ease its conditions for any country’s use of OMTs — conditions which will ultimately be decided in the Bundestag as per the German Constitutional Court rulings earlier in the year.
Even so, Italy and Spain are particularly vulnerable to the lack of successful sta- bilization programs among their smaller neighbors or to the demonstrative lack of an EU political consensus for long-term solutions for the euro’s integration.
All this, together with regional legacy sovereign debt and toxic bank assets, creates long-term pressures on Spain and Italy, as well as France and Germany, on which the euro’s survival depends.
The ratings downgrade for France is a symptom of Europe’s weakening fiscal defenses against the crisis. It may also present a political block to Europe’s tran- sition towards full fiscal integration, both in terms of firming Germany’s resistance to mutual obligations in future and with respect to France’s position on extending stabilization programs for Greece or Portugal next year.
The problem is that when the current programs come up for review again, against thedeadlines of year-end funding budgets and possibly under the pressure of increasingly jittery investors, they could each become the stage for the region’s grand political clashes over the future of euro fiscal and banking integration.
The biggest test yet to Europe’s political unity is around the corner.
Prompted by their FrAAAnce downgrade to AA+, French-owned Fitch has downgraded Europe's last best promise/hope - the EFSF - from AAA to AA+... but the crisis is still behind us - we are assure by such truth-sayers as Juncker, Barroso, and Merkel (pre-elections).
Fitch Ratings-London-15 July 2013: Fitch Ratings has downgraded the European Financial Stability Facility's (EFSF) guaranteed and long-term debt Long-term rating to 'AA+' from 'AAA'. The EFSF's short-term (less than 12 months contractual maturity) guaranteed debt instruments' Short-term rating has been affirmed at 'F1+'.
KEY RATING DRIVERS
The rating actions were prompted by Fitch's downgrade of France's Long-term Issuer Default Ratings (IDRs) to 'AA+'/Stable and the affirmation of its Short-term rating at 'F1+' on 12 July 2013. EFSF's ratings rely on the irrevocable and unconditional guarantees and over-guarantees provided by euro areas member states (EAMS). These commitments are governed by an international agreement dated in June 2012 by the 17 EAMS - the EFSF Framework Agreement (FA) - and by a Deed of Guarantee. The downgrade of France's IDR had a high weight in Fitch's rating actions.
The original version of the FA ensured that all payments due on EFSF debt are covered by guarantees provided by EAMS, pro-rata based on their contribution key in the European Central Bank, which could be extended to 120% of their initial amount. Subsequent amendments to the FA and Deed of Guarantee, applicable to all debt issued since October 2011, reduced the credit enhancement through cash buffers and extended the percentage of over-guarantee percentage to 165%.
Following the downgrade of France's IDR, the EFSF's long-term debt issues are not fully covered by 'AAA' guarantees and over-guarantees and, for debt issued before October 2011, by the cash reserve. However, short-term debt issues remain entirely covered by guarantees and over-guarantees issued by EAMS rated 'F1+'.
As of 12 July 2013, 100% of the long-term debt issued by the EFSF is covered by guarantees and over-guarantees rated 'AA+' and 'AAA'. In the event that one or more of the 'AAA' and 'AA+' guarantors, namely Germany (AAA/Stable), France (AA+/Stable), Netherlands (AAA/Negative), Austria (AAA/Stable), Finland (AAA/Stable), and Luxembourg (AAA/Stable), are downgraded below 'AA+', and if the coverage by 'AA+' guarantees falls below 100%, Fitch would also review the Long-Term rating assigned to EFSF debt issues.
Fitch assumes there will be progress in deepening fiscal and financial integration at the eurozone level in line with commitments by euro area policy makers. Fitch also assumes that the risk of fragmentation of the eurozone remains low.
On the even of Bastille Weekend and the 100th anniversary of the Tour de France, you know it must be bad when the French-company-owned ratings agency Fitch is forced to remove its AAA rating from France. Key drivers include Debt-to-GDP projections rising and substantially weaker economic output and forecasts.
Fitch Ratings-London-12 July 2013: Fitch Ratings has downgraded France's Long-term foreign and local currency Issuer Default Ratings (IDR) to 'AA+' from 'AAA'. The Outlook is Stable. At the same time, the agency has affirmed France's Short-term foreign currency IDR at 'F1+' and the Country Ceiling at 'AAA'.
KEY RATING DRIVERS
The downgrade of France's foreign and local currency IDRs reflects the following key rating drivers and their relative weights:
- Fitch now forecasts general government gross debt (GGGD) to peak higher at 96% of GDP in 2014 and decline only gradually over the long term, remaining at 92% in 2017. This compares with Fitch's previous projections in December 2012 of GGGD peaking at 94% (and 92% when it first revised the Outlook to Negative in ecember 2011), and declining more rapidly to below 90% by 2017.
- The agency commented at the time of its previous rating review that this was the limit of the level of indebtedness consistent with France retaining its 'AAA' status assuming debt was firmly placed on a downward path from 2014. Its projections for France's GGGD ratio are significantly higher than the 'AAA' median of 49% and 'AA' median of 27%. The only 'AAA' country with a higher debt ratio is the US (AAA/Negative), which has exceptional financing flexibility and debt tolerance afforded by the preeminent global reserve currency status of the US dollar.
- Risks to the agency's fiscal projections lie mainly to the downside, owing to the uncertain growth outlook and the ongoing eurozone crisis, even assuming no wavering in commitment to fiscal consolidation. A debt ratio that is higher for longer reduces the fiscal space to absorb further adverse shocks.
- Economic output and forecasts are substantially weaker than when Fitch revised the Outlook to Negative. The unemployment rate has also jumped to a 15 year high of 10.9% in May 2013. The weaker economic outlook is the primary factor behind increases in the budget deficit and France remaining in the EU's Excessive Deficit Procedure for a year longer. Fitch expects the French economy to recover less quickly then official projections, owing to headwinds from subdued external
demand, weaker competitiveness, high unemployment and fiscal consolidation. Its latest forecasts are for GDP to contract in 2013 before growing by 0.7% in 2014.
- As well documented by organisations such as the OECD, IMF and European Commission, the French economy faces a number of structural challenges, including gradually declining competitiveness, weak profitability and rigidities in the labour, goods and services markets, which weigh on the medium term outlook. Fitch's projection for long term potential growth is broadly unchanged at around 1.5%.
- France's current account was in a deficit of 2.3% of GDP in 2012. Although that is not especially high, it has deteriorated steadily from surpluses a decade ago, reflecting a steady loss of competitiveness and export market share. This evolution has been mirrored by the rise in net external debt which has risen to 25% of GDP, compared with the 'AAA' median of 20%.
Despite the loss of its 'AAA' status, France's extremely strong credit profile is reflected in its 'AA+' rating with a Stable Outlook, which reflects the following main factors.
- France's wealthy and diversified economy and political stability entrenched by strong and effective civil and social institutions.
- Fitch judges financing risk to be very low reflecting an average debt maturity of seven years, low borrowing costs and strong financing flexibility underpinned by its status as a large benchmark eurozone sovereign issuer.
- France has a track record of relative macro-financial stability including low and stable inflation. It also benefits from moderate levels of household indebtedness and a high household saving rate.
- Since coming into office last year the Socialist government has set out and started to implement a wide-ranging programme of structural reforms, including the "National Compact for Growth, Competitiveness and Jobs" and recent labour market reforms. This may help improve the long term growth and current account position. However, the quantitative impact of the new measures is uncertain and reforms are subject to implementation risk.
- The recent structural reform of the budget procedure through the organic law that transposes the EU Fiscal Compact into national law will strengthen the confidence in the outlook for French fiscal policy. As part of the reforms an independent body, the High Council of Public Finances was created with the role to give an opinion on the growth forecasts underpinning budget forecasts. It will also monitor the government's compliance with the multi-annual planning law and will be charged with identifying and making public any major budget slippage.
- Risks in the French banking system have eased as asset quality, funding and capitalisation have improved, though exposures to Italy remain significant.
- The intensity of the eurozone crisis has eased over the past 12 months reflecting progress with country fiscal and reform plans and policy enhancements at the EU level, including the ECB's OMT and gradual steps towards banking union. Nevertheless, in Fitch's view the eurozone crisis is not over and contingent liabilities arising from the crisis remain material. France has already incurred commitments totalling EUR48.1bn (2.4% of GDP) as the second largest guarantor of the EFSF. France's paid-in capital contribution to the European Stability Mechanism (ESM) is EUR16.2bn with a further EUR126.4bn in callable capital.
5- Sovereign Debt Crisis
CHINA - Confirming A European Import Led Slowdown
Michael Spence, Nobel Laureate in Economics and Professor of Economics, NYU 07-23-13 (Interview with Tom Keene of Bloomberg)
Q: You were just in China. What did you see? Did you see a slowdown?
A: Oh, there’s definitely a slowdown. There’s no question. And it’s coming from the export sector. The primary cause would be Europe because of the zero to negative growth there. The good news is the Chinese authorities have decided that they’re serious about making the structural change in the growth pattern, and they’re going to let it happen. I wouldn’t be surprised if growth went down to 7 percent. Most people think that’s bad. I think that’s good news.
Q: That’s incredibly important. Why is it good news?
A: It’s good news because they don’t do something stupid, like overlever the economy or overinvest in order to prevent it from happening.
Q: Is it good news for American companies, like GE, that are operating in China for the government to be shifting from an export-driven model to a consumer-led model?
A: Oh, yes. The McKinsey Global Institute projections are that the 230 million middle-class consumers in China are going to go to 630 million in the next decade. That’s a mammoth business opportunity for multinational companies, including ours. The other observation I would make in China is that they are building infrastructure, and a lot of it isn’t getting used. There are huge infrastructure projects on a scale that we can’t imagine over here. And yet they aren’t being fully utilized.
Q: You visit with corporate leaders worldwide. What are you hearing from those leaders? What are the questions they’re asking you?
A: They’re obviously interested in where there’s sustainable growth going on and where there’s trouble brewing. They find human talent that’s accessible all over the world. So you find multiple-location R&D facilities and multinational companies, and so on. It’s quite interesting.
6 - China Hard Landing
CHINA - Likely to Continue Interest Rate Liberalization
China Likely to Continue Interest Rate Liberalization 07-23-13 Tao Dong of Credit Suisse via Bloomberg Brief
The People’s Bank of China announced a new step in interest rate liberalization on July 19, with three changes taking effect the next day.
First, the floor of financial institutions’ lending rate, which was set at 70 percent of the benchmark rate, was removed.
Second, the control on the discount bill interest rate was abolished.
Third, the ceiling of the Rural Credit Cooperatives’ lending rate, which was 230 percent of the benchmark rate, was lifted.
Meanwhile, the central bank emphasized that current credit policy toward the housing market will not be changed.
While the most important move among the three changes is the removal of the floor of financial institutions’ lending rate, the actual impact on the economy is limited, at least in the near future. According to the PBOC’s monetary policy report, only 11.44 percent of total loans were extended below the benchmark rate in March. The problem in the current environment is the mismatch of lenders and borrowers. Those whom banks prefer to lend to don’t have much appetite to borrow, and those who are interested in receiving credit are those whom banks are cautious about lending. This is nothing unusual when the economy is in a down cycle.
Removing the deposit rate ceiling would be more significant to the economy and banking sector than removing the floor to the lending rate. The deposit rates have been set artificially low and in negative territory, when adjusted for inflation, in most parts of past few years. This was one of the major reasons behind the significant increase in shadow banking, which offered more attractive yields. When the deposit rate ceiling is removed, we would expect smaller banks to raise rates to lure deposits. It makes sense given the funding costs and uncertainty in the interbank market. The competition would increase the yield of deposit rates and shrink the margins of large banks. This may potentially change the dynamism of wealth management products and the corporate bond market. While the government has given no indication about the timing of deposit rate liberalization, we believe it may happen in the coming months.
Still, this is a good start. Even though there have been many talks about interest rate liberalization in the past few years, there was no major move under the administration of Hu Jintao and Wen Jiabao. This move is the first structural reform launched by the regime of Xi Jinping and Li Keqiang. This is the easy part of interest rate deregulation, and will probably have a limited impact on the economy. However, it is an important first step in the right direction for structural reforms. It shows that the government is willing to take constructive steps against interest groups and to break the monopoly in the banking sector.
Even so, rate liberalization alone will not be able to address all the problems that China faces today. The core issue for the economy is that private investment interest weakened significantly as the manufacturing sector became broadly unprofitable. The government needs to open the service sector to private capital and lower big picture continued from page 1 tao dong, credit suisse corporate tax rates. Furthermore, the government needs to remove the Hukou system, granting rural population access to healthcare, pension and education systems. We suspect these may take some time to materialize as it involves huge funding needs. Nonetheless, deregulating interest rates is a good start.
(Tao Dong is chief economist for Asia excluding Japan at Credit Suisse in Hong Kong.)
BofA Merrill Lynch just released the results of its July Fund Manager Survey, which surveys 238 fundies around the world responsible for a combined $643 billion in assets under management.
One of the most striking results of the survey is how investor perceptions toward China can completely turn on a dime. "China is the biggest area of concern for investors," says BAML Chief Investment Strategist Michael Hartnett. "[The] number of investors expecting stronger China growth collapsed to a net -65%, a massive reversal from 67% in December 2012."
All it takes is two quarters of slowing economic growth, and sentiment among fund managers toward China is now at the lowest level since January 2009, during the height of the global financial crisis.
Meanwhile, fears of a hard landing for the Chinese economy now far and away eclipse anything else as the largest perceived outlier risk to investor portfolios among managers.
The percentage of survey respondents that view China as the biggest tail risk nearly doubled just from June to July.
"Investors continue to view a China hard landing and commodity collapse (56%) as the biggest tail risk," says Hartnett. "In fact, they view [emerging markets] as the greatest potential threat to Financial Market Stability."
6 - China Hard Landing
CHINA - "Will introduce some measures to arrest the slowdown of growth in the next couple of quarters"
Chinese Q2 GDP climbed 7.5% in line with expectations. This is down from 7.7% growth in the first quarter. Economists had been cutting their GDP forecasts leading up to the data release.
Chinese GDP grew 1.7% quarter-over-quarter, slightly below expectations for a 1.8% rise. China's GDP is up 7.6% in the first half of the year. The official government target is for 7.5% growth in 2013.
The cash crunch in June is also expected to have impacted economic growth. We also had other economic data out tonight.
Chinese industrial production was up 8.9%, below expectations for a 9.1% rise. Industrial production was up 9.3% in the first half of the year. The 10.8% rise in crude oil output, following the rise in crude oil imports suggests some improvement in investment activity.
All important year-to-date fixed asset investment (FAI) climbed 20.1%, missing expectations for a 20.2% rise. A breakdown showed that railway FAI slowed to 15.7%, from 24.2% in May, manufacturing FAI slowed to 15.2%, from 16.5%, and property FAI was up 19.4%.
Retail sales were up 13.3%, above expectations for a 12.9% rise. In real terms however, retail sales were up 11.7% in June, down from 12.1% the previous month. Retail sales were up 12.7% in the first half of the year.
Chinese electricity consumption was up 6.3% YoY in June to 438.4 billion kilowatt hours, and up 5.1% in the first half of the year.
National Bureau of Statistics spokesman, Sheng Laiyun, said that China is creating jobs despite the slowdown in the economy, according to Bloomberg.
"We’d like to reiterate our call of “Li Keqiang Put”, which means that in the first couple of years of Premier Li’s term, he may try to prevent a growth hard-landing and a financial crisis," wrote Bank of America's Ting Lu following the release.
"That’s why we expect Li’s cabinet will introduce some measures to arrest the slowdown (in yoy term) of growth in the next couple of quarters."
Markets will be watching to see if policymakers move to support their 7.5% growth target.
6 - China Hard Landing
CHINA - Slower Growth In the Cards & Endorsed by New Leadership
Following last night's China's GDP figures (which indicated slowing, but which came in line at 7.5% for Q2) Nomura is slashing its 2014 growth forecast to below 7%, which is kind of major threshold.
Economist Zhiwei Zhang gives three reasons for reducing the firm's 2014 GDP forecast to 6.9%.
First, we believe the government may lower its annual growth target to 7% for 2014. While this decision will not be made until the Central Economic Working Conference in December, the government has made it clear to the public that it is less concerned about the growth rate and more about the quality and sustainability of growth. We believe lowering the growth target would be a sound policy to adopt.
Secondly, we believe China has likely entered a prolonged period of deleveraging, which will last well into 2014. Clear signs of systemic financial stress have seen the new government acting to rein-in credit growth since it took office in mid-March and we believe it is determined to bring down leverage. That said, a sharp deleveraging process is to be avoided as that would cause a disruptive slowdown in the economy; the liquidity squeeze in June illustrating just how easily a tightening could lead to unintended consequences. We therefore believe a gradual and prolonged deleveraging is the most likely scenario (see China may enter a prolonged period of policy tightening, 24 June 2013).
Thirdly, potential growth continues to slow and may drop below 7% in 2014. The size of the working-age population fell in 2012 – for the first time in at least 20 years – and will likely continue to slide in 2014 and beyond. Progress on structural reforms has been slow. The government has announced guidelines twice in the past five years to encourage private investment, but concrete action has been limited. When the Central Committee of the Communist Party meets in October, it is expected to lay out the reform agenda for the next five to 10 years. We expect some positives to help growth recover modestly in H2 2014, but do not expect reforms to fully offset the negative effects of deleveraging and the demographic trends through H1 2014.
6 - China Hard Landing
POLICY UNCERTAINTY - Confidence in Monetary Policy Direction is Exposed
"That’s noteworthy against the view that US monetary policy has become more difficult to read in light of recent Fed communications," said UBS economist Andrew Cates. "It bodes well moreover for the broad US economic outlook from here inasmuch as business and consumer confidence have clearly suffered in recent years owing to the uncertainty about which direction economic policy might take."
It can be risky to read too much into "economic certainty" indices. Everyone feels pretty certain about economic policy until they don't.
Economist Peter Redward predicts US dollar strength due to a gradual decline in the supply of greenbacks to global capital markets
The world appears to be awash in US dollars, thanks to the US Federal Reserve’s aggressively loose money supply. Paradoxically, however, global capital markets may be experiencing a gradual tightening of access to greenbacks, according to independent economist Peter Redward.
This suggests to him that the US dollar is likely to appreciate against other major currencies during the next 18 months or more.
The New Zealand-based analyst (he previously served as head of emerging Asia research at Barclays in Singapore) said: “The rest of the world needs dollars to conduct international trade and capital markets activity.”
The source of dollars is from the US current-account deficit, and from US corporations and banks lending dollars. The size of America’s trade deficit in nominal terms may be growing, but it’s actually shrinking when expressed in terms of the GDP of the rest of the world.
“The size of the US current-account deficit is actually the same as the early 1990s,” Redward said. “Relative to the rest of the world, the US is not exporting dollars into global markets as it used to.”
Even if the US trade deficit widens further, America’s declining share of global output is leading to what Redward terms a “dollar squeeze” in global capital markets.
“It’s occurring gradually,” he said. “Most people are missing this.”
Moreover, America’s trade deficit is actually narrowing. Its balance of payments is improving thanks to a domestic increase in oil production; to trends in e-commerce; to more international tourism to the US; to falling foreign remittances from the US; and from US consumers minding their pocketbooks.
This means a stronger dollar. Redward says other trends also support the dollar, including interest rate differentials, as other central banks engage in balance-sheet expansion, and falling commodity prices. “Investors are steadily increasing their long-dollar positioning,” Redward said. “This is going to have an impact in global capital markets.”
Redward spoke last week at FinanceAsia affiliate title AsianInvestor’s institutional investor event in Seoul
I recently discussed how traders were stampeding out of gold as a result of rising interest rates and the threat of evaporating monetary fluid that was lubricating markets. Hovering around $1,200 at the beginning of July, the gold price has completely disconnected from the precious metal's fundamentals, in my opinion. Prices have fallen too far out of fear, but the drivers for gold are still in place.
My friend and highly respected analyst, Gregory Weldon, highlighted an important point about rising rates in the U.S. As interest rates rise, debt will be rolled over at a higher rate, making the burden even greater than it already is. This suggests a likely tipping point for Treasuries. Will the Federal Reserve suppress yields at that "line in the sand?"
In this environment, gold should remain attractive. However, as the West flees the precious metal, another set of gold buyers has come forward with the aim to preserve wealth. Take a look at the chart below which shows total gold production compared to the gold deliveries on the COMEX and the Shanghai Gold Exchange. In May, gold imports into the Asian giant rose to the second-highest level ever. While mining production is around 1,134 tons so far this year, gold delivery on the Shanghai Gold Exchange is 918 tons. This is strikingly in contrast to the gold delivery on the COMEX, which stands at only 103 tons year-to-date as of the end of May.
In fact, this year's demand is so significant that the physical gold delivered on the Shanghai Gold Exchange through May is almost all of the official gold reserves in China! As George Topping of Stifel Nicolaus puts it, "Annualizing 2013 year-to-date figures, China's imports would be equivalent to 50 percent of [world] mine production."
China may be devouring even more of the supply in the future if the price of gold remains subdued. I've been talking with several gold company executives, who tell me they are seeing squeezed margins because of lower grade finds, as well as governments raising taxes or increasing royalty rates.
The top priority for these miners today is cost control, focusing their efforts on viable projects that have all-in costs of less than $1,000 per ounce of gold. If spending is too expensive, exploration is cut and production is halted.
This is an extremely conservative amount, as some gold mining projects in certain countries come in significantly higher. The CEO of Gold Fields recently indicated that the average all-in cost in Africa is $1,500!
This is a similar phenomenon to the supply of natural gas recently. When there were huge discoveries in the commodity, companies immediately halted drilling. There's a notable difference in drilling gas versus mining gold, though: The natural gas cycle is shorter and measured in months, so there can be a relatively quick recovery in supply. When gold companies cut production, the restart cycle can take decades.
To me, these supply and demand drivers point to a sustained higher gold price.
23 - US Reserve Currency
DETROIT - Detroit by the Numbers
The city of Detroit, Michigan, once home to as many as 1.85 million people and formerly considered the hub of America’s auto industry, filed for bankruptcy protection on July 18, becoming the largest municipal bankruptcy in U.S. history. The city is scheduled to have its first day in court as it plans to restructure more than $18 billiion in debt. Below is a look at Detroit by the numbers.
$18 billion Detroit’s estimated debt obligations.
$11.9 billion City’s unsecured obligations to lenders and retirees.
$6.4 billion City’s obligations backed by enterprise revenues (Revenue Bonds).
38 cents Of every tax dollar that the city collects goes to service legacy debt and other obligations rather than providing services for tDETROIT - The Numbers You Need to Knowhe city’s residents and businesses.
$115.5 million Detroit’s negative cash flows in fiscal year 2012.
8% Interest accrued on Detroit’s deferred payment of pension fund contributions.
Over 100,000 Estimated number of Detroit creditors.
22% Reduction in city employees since fiscal year 2010.
1.85 million Detroit’s population in 1952, its highest point.
62% Decline in Detroit’s population from 1950 to 2012.
150,000 Number of manufacturing jobs Detroit lost between 1947 and 1963 as smaller auto makers disappeared and Big Three auto makers move operations to suburbs and out of state.
47% Detroit’s share of US auto sales in 2008.
80% Of Detroit’s manufacturing was lost between 1972 and 2007.
78% Of Detroit’s retail establishments were lost between 1972 and 2007.
735,104 Number of jobs in Detroit for residents and non residents in 1970.
346,545 Number of jobs in Detroit for residents and non residents in 2012.
9.4% Jobless rate in Detroit as of June 2013.
30% Decline in Detroit’s municipal income tax receipts since 2002.
36% Of Detroit’s population lives below the poverty level.
54% Of Detroiters own a home.
16% Of Michigan’s population lives below poverty level.
28% Decline in Detroit’s receipts from utility user’s tax over the last decade.
$1.6 billion Decline in city’s assessed property values over the last five years.
$134.9 million Property tax revenues for city’s 2013 fiscal year.
139 square miles Detroit’s city footprint.
40% Of city’s street lights do not work.
78,000 Number of abandoned structures in Detroit, representing 20% of the city’s housing stock.
210 City parks were closed during fiscal year 2009, reducing its total by 66%.
Source: Bankruptcy Court Filings, Bureau of Labor Statistics, Bloomberg LP
US GROUP DETROIT
18- State & Local Government
DETROIT - A Structural Problem that Failed to be Politically Addressed
"Detroit, otherwise known as Motor City or Motown, was the center of the auto industry, making it a booming and prosperous city in the middle of last century," wrote Bank of America Merrill Lynch's Michelle Meyer. "The tide began to turn in the late 1970s/early 1980s when US automakers began to lose market share to Japanese ones. The Big Three — GM, Chrysler and Ford — were slower to adapt to technological changes and respond to demand for smaller and fuel-efficient vehicles."
As the auto industry struggled, unemployment rose, people fled the city, and the economy shrunk while municipal spending remained high. Meyer's report included a 45-year chart of U.S. motor vehicle sales as a share of GDP to illustrate how the industry lagged the U.S. economy.
"In the early 1980s the Big Three made up about 75% of total US auto sales, compared to just 45% of sales today," said Meyer. "And accordingly motor vehicle output has declined from 4.5% of GDP in the late 1960s to only 2.8% today." Read more: http://www.businessinsider.com/auto-sales-shrinking-component-of-gdp-2013-7#ixzz2aQRYWPXf
US GROUP DETROIT
18- State & Local Government
MACRO News Items of Importance - This Week
GLOBAL MACRO REPORTS & ANALYSIS
GLOBAL TAX GRAB - G20 Focusing on Finding Much Needed Tax Revenue
The OECD has stated in a report commissioned by the G20 that
there will be “global tax chaos” in the next few years due to falling tax revenues from multinational companies around the world.
Perhaps we could have saved a few thousand dollars by not commissioning the OECDreport, since we could have all told them that was going to happen. It really does come to something when we waste the money that we don’t have on reports that we don’t need. Sometimes people get money for old rope it seems. But one other adage is also true: you can’t teach old dog new tricks; the old dog being the multinationals. They are hardly likely to suddenly start paying more tax, are they? Although, maybe someone somewhere will commission a report to see if they will and then discover that they won’t after all. Oh well!
It’s not just that the report has been commissioned when it was probably needless to say more than common knowledge around the world, but also that it has been hailed as a ‘long-awaited’ report that will be used this weekend as the G20 Finance Ministers continue to meet in Moscow along with Central Bank Deputies. They met yesterday and the meetings will continue throughout the day, ending in a Finance-Ministers’ and Central-Bank Governor s’ Meeting on Saturday July 20th.
Although the report by the OECD is rather more an analysis of the situation than a solution-finding aid (there are very few actual, concrete proposals that are made), it does state the following:
Companies should be made to publish tax-avoidance plans so that they can be looked into by authorities who should determine whether they are acceptable or not. Although, that seems rather strange since companies such as Amazon and Google that are writing off their tax are doing so through the exploiting of loopholes that we have allowed to exist still today in an antiquated system.
Tax havens need to be reformed as they provide for unfair situations for some multinationals (with no suggestion as to how to reform the situation. Any ideas?).
Economic activity must be in line with generation of income. At the moment, through subsidiaries, multinationals are able to disassociate income from economic activity by using low-tax countries. On-line companies would be forced to pay tax in countries where the sales are generated and not where they are headquartered.
Multinationals must be requested to publish all costs (including license expenses, interest, administrative costs and salaries).
International rules allow companies today to have a digital presence in a country but not pay tax there due to a lack of both a legal framework encompassing that and also lack of legal binding to that country’s economy. This must be changed.
The OECD report has stated that there is a need for “urgent reform”, but also that bilateral agreements between countries must be made into multilateral frameworks that will solve the tax avoidance problem in the world. It also states that "the way in which multinationals have greatly minimised their tax burden has led to a tense situation in which citizens have become more sensitive to tax fairness issues."
Reports from the meeting in Moscow have said that the Finance Ministers of the G20 and the Governors of the Central Banks believe that there will be some breakthroughs in dealing with tax evasion in the years to come, although without actually stating how, when or where. But, it also states that eradicating tax evasion will take a long time. But, thereby hangs the whole crux of the matter. The downfall of administration is that it is exceedingly long and procrastinated. It doesn’t live in the real world in which people communicate and take decisions at a million miles a second across the planet. The administration we are engulfed in is drawn-out and exceedingly slow. The hare and the snail. But, admittedly, the snail won the race in the end. We shall see if that happens this time. There are many that believe that by the time the Finance Ministers of the G20 and the Governors of the Central Banks have come to any sort of agreement it will be a few years down the road. Then we shall have to wait for those plans to be implemented and show results. That will be another couple of years. By that time, the companies that are doing the diddling and the tax dodgers will have dodged their way into another cushy number that will be a loophole that the admin guys failed to see. But, one saving grace is that the admin guys that are in Moscow today will not be the admin guys of times to come, so the new guys will be able to point the figure and say “I told you so”.
The US administration stated that it would not allow for anything to stand in the way of development of fast-growing US multinationals such as Google and Amazon, for instance. The US agreed that there was a need to bring tax regulations into the 21st century and update antiquated 1920s international tax agreements. But, moderate change was requested in the days before the G20 summit opened.
We shall see after Saturday’s meeting in Moscow if the Finance Ministers of the G20 and the Governors of the Central Banks are able or even willing to come to some sort of agreement and find common ground that will be beneficial to the average people in their countries, or if, on the other hand, they are going to be guided by competitive self-interest in maintaining the system as it is.
Markit has released its global business confidence survey, and it makes for sobering reading. Due to sharp declines in business confidence in both the US and China, a new post crisis low has been reached in June. Only the UK was a notable exception, as business confidence there jumped. We would submit that this is no coincidence, as the pace of money supply growth is increasing sharply in the UK, while it it slowing down in both the US and China.
The culprit for the slowdown in money supply growth in the US is lending by commercial banks, which is decelerating sharply even as monetary pumping by the central bank continues at full blast.
Global business activity, future expectations, via Markit. Data collected between June 12 and June 26 – click to enlarge.
THIS IS WHY BUSINESS CAPEX INVESTMENT IS FALLING!
GLOBAL SENTIMENT IS WORSENING - NOT IMPROVING!
Markit's chief economist summarizes the findings as follows:
“The global economy is clearly in a soft-patch again, largely reflecting darker outlooks in the US and China.
“The deterioration in business optimism in the US suggests the pace of economic growth is slowing sharply compared to that seen earlier in the year and calls into question the ability of the economy to continue generating jobs at anything like the pace seen in recent months. Any thoughts of an imminent tapering of the Fed?s stimulus are looking premature on this basis.
“The UK, on the other hand, is undergoing a period of solid and increasingly sustainable-looking economic growth. Expansion is being led by the service sector, where business optimism has surged to the highest since late-2006. Even manufacturing is seeing the brightest outlook for two years. Exporters are benefitting from sterling?s depreciation, which is offsetting worries about slower growth in many key export markets.
“Business confidence meanwhile remains high in Japan, having pulled back only slightly since the wave of „Abenomics?-fuelled optimism seen at the start of the year. Exporters, aided by the steep depreciation of the yen, are especially upbeat about future prospects.
“The eurozone remains a weak spot in the global picture, though far less so than late last year. However, while there are signs of rising optimism in the periphery, notably Spain and Ireland, the mood in France and Germany remains subdued compared to earlier in the recovery, which will restrain the overall pace of economic recovery for the region.”
It is noteworthy that while China's stock market clearly reflects the somber mood among businessmen, the buyers of US stocks are evidently a lot more confident than the people running the businesses they are buying shares in.
S&P 500 versus Shanghai A-Shares Index (green line).
At least one of them seems to be in la-la-land
US ECONOMIC REPORTS & ANALYSIS
US RECESSION - Term Structures Suggest Signs of a US Recession Ahead
Fixed income investors might have over-reacted to the prospective shift in U.S. central bank policy. The Fed has confirmed that highly accommodative policy will remain well past the point when unemployment reaches 6.5 percent. It will continue to pressure long-term rates lower by purchasing longer-term assets until a sustainable recovery is achieved.
Despite this, the 10-year Treasury yield has jumped more than 90 basis points since May 2nd. Y ields on the 10-year, at about 2.6 percent, don’t signal distress. A return to more growth-friendly levels is both desirable and likely in the longer term. Investors are rationally demanding higher returns for holding onto longer-maturity bonds.
Disinflation is moving through the economy.
During the current downcycle, the Fed has not only pushed short-term rates to zero, its asset-purchase programs have arguably pressured long-term rates to historically low levels, as Figure 1 shows, this has helped to push the yield-curve slope lower from its late-2009 peak.
Interestingly, the term premium for holding 10-year bonds has turned upwards during the past six months, based on our estimates of the Fed’s deconstructed 10-year nominal yield. The term premium appears to have been its lowest at the height of the last two asset bubbles – the tech bubble in the late-1990s and the housing/financial bubble in late 2006 – when investors were most willing to take on additional risk.
Conversely, when bubbles burst, investors appeared to demand a larger risk premium as the safe-haven demand for cash – or short-term securities took hold.
True to form, the term premium began to shrink again in the post- crisis era and then became negative as the Fed’s resolve to keep short-term interest rates extremely low for an extremely long period became apparent. A turn upward in the estimated term-premium presents a quandary for monetary authorities as they grapple with the liquidity traps and fiscal restraint that have squashed developed market economies.
Households and corporations clearly prefer to sit on cash. Higher rates at this point, unless growth accelerates well beyond the long-term trend of 2.5 percent, would make investment even less likely.
Although this has not been the first time that the bond market has sold off after the financial crisis, monetary policy has dictated that fixed-income investment be a one-way trade.
After five years of distressing news in the advanced economies, recent market activity could be construed as a positive sign for the health of the U.S. economy. The Fed has made it perfectly clear that it is willing to step up asset purchases if economic growth were to falter. I n addition, civil turmoil in Brazil and Turkey, and hints of a banking crisis in China have the potential to increase the safe-haven demand for U.S. Treasuries once again.
David R. Kotok, Cumberland Advisors’ chairman and chief investment officer, said municipal bonds are an “outrageous bargain” in the wake of Detroit’s bankruptcy filing. “The present pricing of tax-free bonds makes sense only if we happen to think the income-tax code of the U.S. is going to be repealed,” Kotok said. “We are seizing on this bargain provided to us by market dysfunction.”
CONSUMPTION - Dramatic Slowing in Restaurant Business
On one hand restaurants and bars have been a boon to the US economy. As first reported in June, and updated two weeks ago, America's waiters and bartenders (increasingly more of which are part-time) have made up a disproportionately large portion of job creation in the nation, rising by more than 50,000 on average each month in the last three, and hitting an all time high of 10.34 million workers in July, accounting for 9% of all private-sector payrolls. The surge was enough for Joel Naroff of Naroff Economic Advisors to conclude that "Apparently, people are eating out again like crazy." It turns out this conclusion was 100% wrong.
According to this week's very weak retail sales report, Food-service sales fell 1.2% in June, the largest decline since February 2008 and the year over year change in "eating out" rose by just 3.1% - the lowest annual increase since June 2010. But at least all those empty restaurant seats have a record number of waiters catering to the non-existent clients which on the surface should mean the speediest service in history.
Restaurants and bars account for only 11% of total retail sales. But spending at those locations is largely discretionary and could signal Americans’ confidence in the economy. Meals out can be skipped more easily than trips to the gasoline pump or grocery store.
In other words, yet another example of "capital misallocation" where either restaurants are hiring record numbers of workers to cater to demand that just isn't there or the BLS is simply extrapolating payroll numbers based on historical trend averages and which reflect nothing but what some statistical model says the waiter and bartender jobs should be.
Of course we all know that the reason Americans aren't eating out any more is simple: they are all staring at their E-trade trading portals, generating their own personal wealth effect.
The "coming economic collapse" has already been happening. You see, the truth is that the economic collapse is not a single event. It has already started, it is happening right now, and it will accelerate during the years ahead. The statistics in this article show very clearly that the U.S. economy has fallen dramatically over the past ten years or so. Unfortunately, there are lots of mockers out there that love to mock the idea of an economic collapse even though one is happening right in front of our eyes.
They love to say stuff like this (and I am paraphrasing):
"An economic collapse is never going to happen. We can consume far more wealth than we produce forever. We can pile up gigantic mountains of debt forever. There is no way that the party is over. In fact, the party is just getting started. Woo-hoo!"
That sounds absolutely ridiculous, but "economists" and "journalists" actually write things that reflect these kinds of sentiments every single day.
They do not seem alarmed about the fact that our national debt is nearly 17 times larger than it was 30 years ago. They do not seem alarmed about the fact that the total amount of debt in our country is more than 28 times larger than it was 40 years ago. They do not seem alarmed about the fact that our economic infrastructure is being absolutely gutted and we are steadily becoming poorer as a nation.
They just think that the magic formula of print, borrow, spend and consume can go on indefinitely.
Unfortunately, the truth is that a massive economic disaster has already started to unfold. We inherited the greatest economic machine in the history of the world, but we totally wrecked it. We have been able to live far, far beyond our means for the last couple of decades thanks to the greatest debt bubble in the history of the planet, but now that debt bubble is getting ready to burst.
Anyone with half a brain should be able to see what is coming. Just open your eyes and look at the facts. The following are 40 stats that prove the U.S. economy has already been collapsing over the past decade...
#1 According to the World Bank, U.S. GDP accounted for 31.8 percent of all global economic activity in 2001. That number dropped to 21.6 percent in 2011.
#2 The United States was once ranked #1 in the world in GDP per capita. Today we have slipped to #14.
#3 The United States has fallen in the global economic competitiveness rankings compiled by the World Economic Forum for four years in a row.
#9 Between December 2000 and December 2010, 38 percent of the manufacturing jobs in Ohio were lost, 42 percent of the manufacturing jobs in North Carolina were lost and 48 percent of the manufacturing jobs in Michigan were lost.
#10 Back in 1998, the United States had 25 percent of the world’s high-tech export market and China had just 10 percent. Today, China’s high-tech exports are more than twice the size of U.S. high-tech exports.
#11 In 2002, the United States had a trade deficit in "advanced technology products" of $16 billion with the rest of the world. In 2010, that number skyrocketed to $82 billion.
#12 The United States has lost more than a quarter of all of its high-tech manufacturing jobs since the year 2000.
#13 The number of full-time workers in the United States is nearly 6 million below the old record that was set back in 2007.
#14 The average duration of unemployment in the United States is nearly three times as long as it was back in the year 2000.
#16 The official unemployment rate has been at 7.5 percent or higher for 54 months in a row. That is the longest stretch in U.S. history.
#17 The U.S. government says that the number of Americans "not in the labor force" rose by 17.9 million between 2000 and 2011. During the entire decade of the 1980s, the number of Americans "not in the labor force" rose by only 1.7 million.
#18 The average number of hours worked per employed person per year has fallen by about 100 since the year 2000.
#19 The U.S. economy continues to trade good paying jobs for low paying jobs. 60 percent of the jobs lost during the last recession were mid-wage jobs, but 58 percent of the jobs created since then have been low wage jobs.
#23 In the year 2000, there were only 17 million Americans on food stamps. Today, there are more than 47 million Americans on food stamps.
#24 In the year 2000, the ratio of social welfare benefits to salaries and wages was approximately 21 percent. Today, the ratio of social welfare benefits to salaries and wages is approximately 35 percent.
#25 Since Barack Obama entered the White House, the average price of a gallon of gasoline in the United States has risen from $1.85 to $3.64.
#26 More than twice as many new homes were sold in the United States in 2005 as will be sold in 2013.
#27 Right now there are 20.2 million Americans that spend more than half of their incomes on housing. That represents a 46 percent increase from 2001.
#28 The price of ground beef increased by 61 percent between 2002 and 2012.
#29 According to USA Today, water bills have actually tripled over the past 12 years in some areas of the country.
#30 In 1999, 64.1 percent of all Americans were covered by employment-based health insurance. Today, only 55.1 percent are covered by employment-based health insurance.
#34 Median household income for families with children dropped by a whopping $6,300 between 2001 and 2011.
#35 Back in 2007, about 28 percent of all working families were considered to be among "the working poor". Today, that number is up to 32 percent even though our politicians tell us that the economy is supposedly recovering.
#40 Today, more than a million public school students in the United States are homeless. This is the first time that has ever happened in our history. That number has risen by 57 percent since the 2006-2007 school year.
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES
QE - To be Replaced with Guidance, Thresholds and Promises
A few weeks ago, US equity markets were experiencing turbulence on news that the Fed was inclined to "taper" the pace of Quantitative Easing, the program whereby the Fed buys bonds in order to make monetary policy looser.
But the freakout didn't last long, when it became clear that the Fed wasn't really in a rush to tighten.
Instead it became clear (especially after Bernanke spoke last week) that while the Fed was eager to reduce QE, it had no interest in increasing interest rates, and if anything it might extend zero interest rates for longer than people thought.
In other words, the Fed is leaning less on asset purchases, and more on guidance, and other promises to keep rates very low.
There are various reason for why this might be:
The Fed could be concerned that QE helps contribute to a shortage of safe assets in the market.
Or it might be worried about the swollen size of the Fed's balance sheet, and the challenges associated with winding it down.
Or maybe the Fed doesn't really think asset purchases accomplish anything.
Whatever the reason is, it doesn't seem unique to the Federal Reserve. The Bank of England just came out with minutes of its last monetary policy meeting (the first one with new chief Mark Carney), and it too gave the same indication, that it wasn't eager to do more QE, and that instead it would likely rely on other measures, such as guidance.
An expansion of the asset purchase programme remained one means of injecting stimulus, but the Committee would be investigating other options during the month, and it was therefore sensible not to initiate an expansion at this meeting. Given the already large size of the asset purchase programme, there was merit in pursuing a mixed strategy with regards to the different policy instruments at the Committee’s disposal. The Committee’s August response to the requirement in its remit to assess the merits of forward guidance and intermediate thresholds would shed light on both the quantum of additional stimulus required and the form it should take.
We already know that at the meeting (which took place on July 4) the Bank of England explored the policy of using more forward guidance, the way the Federal Reserve has for some time.
In a somewhat unsurprising speech, Bernanke lays out the same old data-dependent, we-might-Taper-but-only-if-things-are-great (and they're not), just-enough-for-everyone to hope for the punchbowl to never be taken away on the basis of dreaming of more dismal data to come:
*BERNANKE SAYS PACE OF BOND PURCHASES NOT `ON A PRESET COURSE'
*BERNANKE SAYS FED MAY TAPER QE IN 2013, HALT IT AROUND MID-2014
*BERNANKE SAYS FOMC BELIEVES RISKS TO ECONOMY EASED SINCE FALL
*BERNANKE SEES HIGHLY ACCOMMODATIVE POLICY IN FORESEEABLE FUTURE
While the market is skittish on this (maybe on his ongoing recognition that the bubble is right back where it was), we suspect the post-speech Q&A will be the key as he will have had over two hours to see the market's reaction and therefore walk it back if he needs to.
BERNANKE BOX - Talking Out of Both Sides of Your Mouth
"Bernanke and many other advocates of QE have a big problem. They are now trying to convince people that tapering or halting QE is separate from rate hikes. For years they asserted that once ZIRP is employed further rates cuts can be administered via QE because the asset monetization generate benefits similar to those that would accrue from negative interest rates.
In fact numerous Fed officials prepared the market for QE by insisting that X amount of QE would be the same as a Y interest rate cut. Now Bernanke and his ilk are trying to convince the market that QE tapering isn't the same as rate hikes. This contradicts their earlier assertions and modeling.
Indeed, in a Congressional hearing on February 9, 2011, Representative Tim Huelskamp questioned how the Fed 'picked $600 billion' when the FOMC decided on a second round of QE (called QE2) at its November 2010 meeting. Fed Chairman Ben Bernanke responded, 'We asked the hypothetical question, if we could lower the federal funds rate, how far—how much would we lower it?' He noted that 'a powerful monetary policy action in normal times would be about a 75 basis point cut in the federal funds rate. We estimate that the impact on the whole structure of interest rates from $600 billion is roughly equivalent to a 75 basis point cut.'"
So, either Bernanke was lying back then or is he lying now? The problem is that the Fed is literally caught in a "liquidity trap" from which there is currently no escape. If they reduce liquidity the markets tank, taking down consumer confidence and negatively impacting the economy. If they keep the liquidity going they will inflate an asset bubble which will ultimately burst destroying the financial markets and the economy. The choice is, ultimately, a lose-lose scenario even as the bullish case for equities persists.
Of course, as Chuck Schumer stated to Bernanke at the last Humphrey-Hawkins testimony, "You are the only game in town."
Post-2008 monetary policy is different. Very different! And its deviations from conventional monetary policy are widely identified. But three other critical questions follow:
(1) How do we manage this issue of excess reserves?
(2) What about the issue of extraction of duration from the market as part of the transactions within the Fed’s balance sheet expansion?
(3) What is the size and meaning of the Fed’s (Federal Reserve) balance sheet?
Let’s take those in order.
Excess reserves are not required of the banking system. They are created by the Fed’s process of purchasing Treasuries and federally backed mortgage securities. Right now they are at an unprecedented size in the banking system and are on deposit back at the Fed. The Fed currently pays 0.25% (25 basis points) to banks that deposit excess reserves with it. The banks deposit these excess reserves because that is, at this time, the most prudently profitable way to deploy them.
The big future concern is this: what happens when the excess reserves leave the banking system for other assets? What happens when there are loans and investments? Is there a multiplier? Does too much stimulus result? Will inflationary impacts ensue? Will asset bubbles form? The answer to all of those questions is … yes and no. Remember, that for a given single transaction, most of the transfer between agents is of excess reserves from one bank to another: I buy something from you; my bank settles the transaction; and the total amount of excess reserves held by my bank is reduced, while the total amount of excess reserves held by your bank is increased. It takes a loan and credit expansion to increase the amount of required reserves.
What can the Fed do with this issue of large excess reserves? My colleague Bob Eisenbeis has written about the fact that they could raise the reserve requirement, such that the excess reserves become required reserves. Furthermore, they could change the amount of required reserves as needed in order to neutralize the impact of what is currently a large overhang of excess reserves.
Another option is that the Fed could change the interest rate on excess reserve payments. They have said that they could use this tool. At Jackson Hole there were discussions of these options, with lots of possibilities, combinations, permutations, and incantations. The bottom line is that the Fed has not figured out what it is going to do, or when, or how. The fact is that the Fed has these tools and can use them when and if it is ready. Markets seem to ignore this. My personal view is that if the Fed were to use one of these tools, the markets would respect the Fed’s decisive intervention; their response would actually flatten the yield curve; and long-term interest rates would fall.
BALANCE SHEET SIZE:
Let’s get to the question regarding the size of the Fed’s balance sheet. Just how big is it? This is another serious issue. In the old days, the balance sheet was big enough to create enough reserves to meet the requirements of the banking system, plus fund the need for currency. The size of the Fed’s balance sheet was roughly $900 billion before the failures of Lehman Brothers and AIG (American International Group, Inc.).
The asset side consisted mostly of holdings of short-term Treasury securities. The liability side entailed the required reserves on deposit with the Fed plus currency in circulation worldwide. That is what the balance sheet looked like then.
Now that balance sheet contains a couple trillion more dollars and is growing every day. Doesn’t that make a difference? The Fed buys securities and creates excess reserves by paying for them, and three hours later those excess reserves are back on deposit at the Fed. They generate no multiplier now, sitting where they are as excess reserves, but they are high-powered money. So, they can potentially multiply with extensions of credit and they can have a stimulative effect when interest rates tick upward or when loan demand improves.
Under the present circumstances, credit multiplication is not happening – or if it is, it is doing so in a very small way. What happens now? The Fed buys more government-backed securities, and a few hours later the excess reserve balance is higher than it was the day before. The Fed holds the securities; the balance sheet and excess reserves are increased; and very little economic impact occurs. There may be a psychological impact. That is, the Fed may have seeded the notion that it is going to continue with stimulus until the economy becomes more robust. All of those things are true; however, the impact of the single transaction is negligible.
The third question concerns the duration of the assets the Fed holds. In the old days, the Fed held mostly short-term Treasury securities. Think of it as holding 90-day Treasury bills. Now the Fed is buying Treasury notes and bonds. Let’s look at two transactions. In the first, the Fed buys $1 billion worth of 90-day Treasury bills. In the second, the Fed buys $1 billion worth of 30-year Treasury bonds. In the first transaction, the amount of duration withdrawn by the purchase of the 90-day Treasury bills is negligible. It is a speck, a tiny amount. In the second transaction, the Fed has taken the duration of a 30-year Treasury bond out of the market. That is long duration. That is a lot.
The size of the Fed’s balance sheet does not change, whether it buys a 90-day Treasury bill or a 30-year Treasury bond. Using balance sheet size as a determinant of the outcome of Fed policy is not equal even though it measures the same.
Then what is the impact of buying the 30-year bond? It is that the Fed has extracted long duration from the market and put it on its own balance sheet. It has said to the market, “We are going to take duration away from you and keep it.” Therefore the market has had to adjust its duration outlook. Duration is a key ingredient in the pricing of home mortgages, bonds, corporate finance, and long-term finance of any type. By its action, the Fed has reduced interest rates in the long and intermediate sections of the public market.
That is what the Fed wanted to do. It wanted to bring down home mortgage interest rates and make longer-term financing more palatable to investors, speculators, businesses, and all sorts of agents that care about the duration of their own holdings. It wanted to say, “Look, you can play in the game now. We are backstopping the world, and there will not be another Great Depression.”
What happens if the Fed reduces the duration of its portfolio? What happens if it does not reduce its duration and the portfolio size stops growing? What happens if it does either of those things in the context of a federal deficit that is getting smaller versus one that is getting larger? Can the Fed reduce duration by buying fewer long-term bonds even as the federal government is issuing fewer long-term bonds in order to shrink the deficit? These are the types of questions we cannot answer. But we debated them in Wyoming.
The research literature does not help us here. It focuses on eras when we did not have this wild, exciting, and very different construction of these reserves. All this is new. Meaningful research will be done many years from now. Today we are throwing the textbooks in the trash and starting over.
Our view is from the bottom line. The interest rate of importance is going to be the short-term rate, which is the target of the Fed. It is near zero and is going to be there for the next two years or more. It is bullish for assets. We believe spread product in the bond market is a desirable thing to own. We particularly like municipal bonds. Stocks, real estate, and other asset classes are likely to rise in price as long as this current policy is in place, which will likely be, at least, a couple more years.
The latest reports on retail sales and manufacturing only affirm this outlook. We remain fully invested.
Inflation, Jobs and Fiscal Policy Among the Question Marks
The Federal Reserve's plans to wind down its big bond-buying program depend on solving four economic puzzles involving the job market, the inflation rate and fiscal policy.
Fed Chairman Ben Bernanke gets another chance to clarify the central bank's thinking when he testifies before Congress on Wednesday and Thursday, after weeks of market volatility generated largely by confusion and uncertainty about the Fed's plans. Mr. Bernanke rattled markets last month when he said the Fed could start reducing its $85 billion-a-month in bond purchases later this year and could end the program by the middle of 2014 if the economy strengthens as Fed officials expect.
The Fed's plans hinge on:
Economic growth picking up,
Super-low inflation returning to 2% and
Hiring staying strong.
But the Fed would rethink its timetable if the economy doesn't deliver on these expectations.
Here are four questions that Fed officials are considering as they think about when to pull back on the monetary throttle and that lawmakers might pose to Mr. Bernanke in the days ahead:
Is job growth sustainable?
In the past nine months, the economy has generated a little more than 200,000 jobs per month. But according to most economist estimates, the economy has grown at a paltry annual rate of less than 1.5% over that period. That doesn't add up.
The economy usually needs to grow much faster to get employers to add workers to their payrolls at such a robust rate. In a March 2012 speech, Mr. Bernanke pointed to the anomaly of slow growth and healthy hiring as a puzzle that nagged at him. He said then that employers were probably playing catch-up after firing people too aggressively during the 2007-09 recession. Eventually, Mr. Bernanke concluded, economic growth would need to pick up for employers to keep adding to their payrolls. The latest data suggest growth hasn't accelerated, which raises questions about the sustainability of hiring.
"Our projections are that there'll be some pickup in growth," Mr. Bernanke said in Boston last week. If he's wrong about that, Fed officials might not want to start scaling back their bond buying.
Is the jobless rate overstating the labor market's health?
The Fed is tying many of its plans to the jobless rate. Mr. Bernanke and other officials have laid out guideposts for where they expect the rate to be when they make big decisions—about 7% when they end the bond-buying program and 6.5% when they start considering an increase in short-term interest rates.
But a number of Fed officials have doubts about whether the jobless rate is a very good indicator of the labor market's health. In the past year the unemployment rate has fallen from 8.2% to 7.6%, an apparent sign of improvement. However, the rate has fallen in part because people are dropping out of the labor force—the share of adults holding or seeking a job—meaning they're no longer counted as unemployed.
"We have underemployment, part-time work, people leaving the labor force, reduced participation, long-term unemployment," Mr. Bernanke said at his June press conference. That could mean the jobless rate is "not exactly representative of the state of the labor market," he said. Those unemployment thresholds that get so much attention in the markets, in other words, might turn out to be unhelpful guideposts for the Fed's actions.
Will inflation return to target?
The Fed's favored measure of inflation—the personal consumption expenditure price index—was up 1% in May from a year earlier, well below the Fed's 2% objective.
Another measure of inflation, the Labor Department's consumer price-index, was up 1.8% in June from a year earlier, the Labor Department said Tuesday. Fed officials say inflation is being held down by temporary factors and that it should move back toward 2% in the months ahead.
However some private economists have questioned whether it is all due to temporary factors. And some Fed officials have doubts. St. Louis Fed President James Bullard dissented at the Fed's June policy meeting because he worried inflation was getting too low and wanted the post-meeting statement to express that concern.
Minutes of the officials' meeting showed "many others worried about the low level of inflation, and a number indicated that they would be watching closely for signs that the shift down in inflation might persist."
If inflation doesn't move back toward 2%, the Fed might keep the bond program going for longer.
Is more fiscal chaos coming?
Last year the Fed's forecast was thrown off by federal tax increases and spending cuts that turned out to be bigger than Fed officials expected.
Important fiscal landmines once again loom, including a federal debt limit debate this fall that could trigger financial market turmoil and another round of across-the-board spending cuts set to begin with the start of the next fiscal year, on Oct. 1.
Congress also has to pass legislation to fund government operations by then or risk a partial government shutdown.
The Fed might find that other Washington policymakers are the hardest economic actors of all to predict, forcing central bank officials back to the policy drawing board.
Mr. Bernanke acknowledged as much last week. "It's still early to say that we have weathered the fiscal restraint," he said.
In his latest Weekly Kickstart note, Goldman Sachs strategist David Kostin says clients remain focused on one thing: Monetary policy and fiscal policy. This is in spite of the fact that we're in the throes of earnings season, which, one would thing, would be a good opportunity for clients to focus on what's going on with individual companies they're invested in. Not so much.
Profit results outside the Financials sector have been lackluster with 2Q EPS falling 1% on a year/year basis.
Information Technology firms have generally disappointed and the sector has lagged, returning 4% during the past month and 10% YTD.
In contrast, Financials firms have thrived. EPS soared by 34% versus 2Q 2012 and the sector has outpaced the market, returning 8% during the past month and 27% YTD.
Our banks research team notes that corporate loan demand is improving and pipelines are building, while construction lending to housing continues to increase and spending volume has accelerated, particularly at the high end.
Although it is reporting season, recent client inquiries have not focused on corporate results. Instead, investors have sought perspective on monetary and fiscal policy risks to the equity market and the proverbial “great rotation” from bonds to stocks.
As we noted last week, our Rotation Index signals the strongest risk appetite in five years as domestic equity funds have received $34 billion of inflows since the start of June vs. a $45 billion outflow from taxable bond funds.
Since the end of the crisis, investors have been remarkably macro focused. That obviously hasn't changed. At least now, eagerness to invest in stocks is on the rise, as evidenced by the upsurge in inflows into stock funds that Kostin is talking about.
As for the Fed, not only is there plenty to talk about with regards to tapering and all that, but for the next couple of months, there should be plenty of interest in who the next Fed chief will be, and what kind of impact they will have on the economy.
EARNINGS -Financial Loan Loss Reserve Reversals Hiding a Disaster
It's been an odd earnings season so far. Talking heads are replete with examples of ad hoc names that have exceeded beaten-down earnings expectations choosing to ignore the belwether names that have missed and guided down. Data are thrown around left and right to support the argument that stocks are cheap to forward-earnings, that growth is around the corner, and that all is well in the real economy supporting the lofty exuberance among US equity markets. However, if one so chooses, the chart below should give you a glimpse behind the facade of the Q2 2013 EPS 'beat'. There is one source of the elixir of life, one provider of the mother's milk of stocks; S&P aggregate Q2 EPS is tracking $0.38 above the season start levels (around 0.8% beat) and financials account for an astounding $0.63 of that!
Still think the US economy is ticking along nicely? Maybe the top-down GDP expectations are on to something after all?
We have extensively covered the evolution of Q2 earnings in the US where so far nearly half or 240 of firms have reported (and 136 on deck this week): from the revenue recession (2nd consecutive decline), to the overreliance on financial firms as the sole driver of EPS upside, to the fact that the only reason banks are beating is to FAS115, the unaccounting of AFS swings and the suspension of MTM. In other words, no top-line growth and bottom-line upside solely due to financial balance sheet gimmicks. But what about, Europe where accounting magic is not nearly as advanced a science as it is in the US?
Not surprisingly, we find that of the 120 DJStoxx600 companies reporting so far, the revenue picture is about the same as in the US, with 58% of companies beating the topline and 42% missing, a carbon copy of the US' 58%/43%. But it is the EPS where the difference truly shines: while in the US some 73% of firms have "beat", in Europe this number is only 48%. The flipside, or misses? In the US it is 26%. In Europe: a majority of companies, or 51%. In brief, anyone expecting a quick and easy turnaround in Europe's corporate earnings picture will have to wait some more.
Source: Deutsche Bank
COMMODITY CORNER - HARD ASSETS
GOLD - German Repatriation A Destabilizing Trigger
Given that knowledge, one might assume that, in the rush to perfect ownership of physical gold, certain "interests" that happen not to be in a position to deliver said commodity to large, important, and extremely powerful customers might want to try and "shake the trees" a little to see what drops out.
The trees have been shaken mightily, and it certainly looks as though some weak holders of the GLD shares have delivered bullion into the hands of the authorised participants - but is it enough? I doubt it.
Meanwhile, over at the COMEX, gold is being removed from the warehouses, bound for destinations unknown. We can't tell for certain where it is headed, but I suspect a significant amount is being placed in private storage, out of the grasp of the bullion banks who need it the most.
So what does all this look like if we put it together on one chart? Well, it looks like this:
As you can clearly see, virtually from the day that Germany demanded to have its gold delivered back to the Bundesbank, three very clear phenomena have occurred:
1. The gold price, which had been trending sideways, has plummeted.
2. The physical gold held at the COMEX has been pouring out of the warehouses.
3. The amount of physical gold held by the ETFs has stopped rising and started falling. Fast.
Coincidence? I very much doubt it.
Wanna know what I think, folks? I think the central banks have been leasing their gold out for decades to the bullion banks and now find themselves in the rather precarious position of needing to reclaim that which they are supposed to own before the shortfall is exposed. I think that creates a big problem for both sides of that little scheme.
I think the smash in paper was specifically designed to shake out loose holders - and it has worked to a degree, but only amongst the weaker holders of the ETFs, who tend to "rent" gold rather than own it. I think the stronger hands have been getting their gold out of the official warehouses as fast as they can; and central banks in places like China, Russia, and all over the rest of Asia and South America have been trying to buy and, crucially, to take delivery of physical gold while they still can.
I also think that retail investors — particularly here in Asia — are, unfortunately, compounding the banks' problems by using the weakness in the paper markets to acquire as much physical metal (or, as it's known in this part of the world, "wealth") as they can.
To paraphrase Everett Dirkson, "A few hundred ounces here, a few hundred ounces there, and pretty soon you're talking real problems."
Now, call me old-fashioned if you will; call me a conspiracy theorist, a goldbug, a wacko - whatever you like - but if you do, will you please give me an explanation as to why this gold is vanishing, where it is going, and who is taking delivery of it? Because, from where I stand, the evidence points to the beginning of the unraveling of the fractional gold lending market, and THAT spells trouble.
There's one last puzzling development that does however fit neatly into the scenario laid out here today, and that is the curious action of something called the GOFO rate. GOFO is the Gold Forward Offered Rate, and it is the rate used for gold vs. dollar swap transactions. If you hold gold and want dollars in a hurry, you can use your metal as collateral, which reduces your rate significantly.
Ths week, the GOFO rate did something it has only ever done a handful of times in its long history: it went negative out to three months, which means somebody was willing to pay to have gold instead of dollars right now. The FT takes up the story:
(FT): The cost of borrowing gold has risen to the highest since the post-Lehman Brothers scramble for supplies, as the bullion market adjusts to a new era in which western investor demand is less dominant.
The niche gold lending market, largely the preserve of a few big banks and central banks, has been uneventful in recent years as investors have built up large holdings and lent them out on the market, keeping rates depressed.
But as investors have turned sellers in recent months, availability of gold in the lending market has been squeezed, bankers said.
The squeeze has triggered a sharp rise in gold leasing rates — the implied interest rate for lending gold in the market in exchange for dollars. The one-month gold leasing rate has risen from 0.12 per cent a week ago to 0.3 per cent on Tuesday, the highest since early 2009.
The move reflects the dramatic shift in the gold market over the past few months as investors have liquidated their holdings en masse, triggering a 25 per cent collapse in prices since the start of the year.
Strong buying in Asia has created additional demand for physical gold, with refineries operating at full capacity to meet orders.
The lack of liquidity in the leasing market has pushed gold forward rates, known as "gofo", into negative territory, meaning that gold for future delivery is trading at a discount to physical market prices — a rare situation that has occurred only a few times in the past 20 years. The last time forwards were negative was in November 2008, when a scramble for physical gold spurred a sharp price rally.
The degree to which the underlying structure of the physical gold market has changed over the last few months has yet to make itself apparent; but the first time we get an "event" that makes it necessary for people who don't have gold to buy some, and for people who do own it to have more, we will see how things have changed.
The gold price has been falling heavily for several months, but when the need to own gold jumps again - and it will; this is a long way from over - all the pieces of this jigsaw puzzle of the weird and wonderful forest of gold manipulation that we have dropped onto the table will slot neatly into place.
What if, when that happens, there just isn't enough gold to go around?
For over a month, JPMorgan managed to mysteriously avoid matching up the gold held in its (world's largest) vault with the Comex delivery notice update. However, as of today, that particular can will be kicked no more. Starting yesterday, JPM reported that just under 12,000 ounces of Eligible gold (the same Registered gold that two days earlier saw its warrants detached and convert to eligible) were withdrawn from its warehouse 100 feet below CMP 1. But it was today's move that was the kicker, as a whopping 90,311 ounces of eligible gold were withdrawn, accounting for a massive 66% of the firm's entire inventory of non-Registered gold, and leaving a token 46K ounces, or a little over 1 tonne in JPM's possession.
Needless to say, today's massive move which increasingly puts JPM's gold holdings in the danger zone vis-a-vis future delivery notices which just refuse to stop, has pushed total JPM vault gold to a new all time low of just 436k ounces, or a little under 14k tonnes with just 12 tonnes, or 390k ounces, of Registered gold left and rapidly draining. And to think that two years ago around this time JPM had over 3 million ounces of gold in its possession.
Finally, those who believe there is a connection between the ongoing run on JPM's vault gold, the suppressed price of the metal, the redemption of Bundesbank gold, and the fact that 3M GOFO has now been negative for 10 straight days or the longest period in history it has been below zero, and indicating an unprecedented gold collateral shortage, you are correct.
Finally, putting it all in context, this is what 1 ton of gold looks like in the real world courtesy of Demonocracy:
How does one destroy an idea? Further, how does one destroy the truth? Corrupt governments have been struggling with this dilemma since men wore loincloths and worshiped fire. Fortunately for those of us in the “lower strata” of social organization, honorable ideas and indelible truths have a life of their own. Even when a culture as a whole remains oblivious and unguarded, the facts tend to rise to the surface one way or another. The reality which elitists at least partly understand, is that the truth cannot be destroyed, but it can be forgotten, at least for a time.
This is a never-ending process. New generations arise, greater awareness builds, old but astonishing concepts of freedom are rediscovered, and the machine must struggle once again to keep the cogs in line. The truth is a metaphysical force. When you do battle with the truth, you do battle with the universe, and the universe's Kung Fu is superior to your Kung Fu.
Oligarchs and tyrants still attack the foundations of natural law and natural liberty by conning the public into believing that these inherent belief systems are “antiquated” or “passe”, but this strategy has a limited effect as long as strong freedom champions exist. Liberty based movements and organizations are often tenacious, intelligent, socially savvy, and much more willing to sacrifice themselves for their cause than the enemy is willing for his cause. The truth, when wielded by formidable warriors, rolls forward like a high velocity electric storm.
Because of this dynamic, criminal governments and their puppeteers have taken a simpler path, moving to cripple and defame the speakers of truth in a manner that they hope will stain and sully the truth itself.
In the past decade, the Liberty Movement has grown beyond all expectation. Millions of people have been jolted from their intellectual sleep to discover a nation and a world on the brink of economic, political, and moral collapse. They have seen beyond the veil. They have been disgusted. And now, they are preparing to fight back. Among those with open eyes are certain standouts; those individuals and groups who were railing against the establishment and its maniacal methods long before it was fashionable. These men and women are leaders, in the sense that they are teachers rather than managers. They do not control the movement, but they do INSPIRE the movement. It is the most dedicated and the most uplifting of activists that the system tends to target in order to demean the core strength of the overall movement and tarnish its reputation.
A recent and malicious example is the subversive electronic planting of false evidence in an attempt to connect organizations like Oath Keepers, We Are Change, and PANDA to illicit and illegal pornographic materials:
This is only one method of attack in the arsenal of slander and destabilization, and while the culprits behind the action are not yet known, the strategy is very similar to government run demonization campaigns of the past (just read up on the history of Cointelpro). The following is a list of tactics commonly used by governments to divide activist groups, reduce their momentum, or cripple their image in the public eye...
Low Hanging Fruit
A tactic used over and over again by federal agents is the “grooming” of unaware stooges, or people only loosely associated with a particular organization, otherwise known as “low hanging fruit”. This is done through carefully planned suggestive questions by undercover operatives. These questions will usually be designed to elicit an incriminating response, which is then used to arrest the activist and smear the organization he belongs to by association. For instance, if someone you have not known for very long (meaning less than several years) asked you:
“If the SHTF, what buildings would you blow up and how would you do it?”
“Which local cops do you think you would take out if you had to and how would you do it...?”
Then there is a good chance you are talking to a fed, or an informant with a wire. Charges are built using the concept of “conspiracy”, meaning, if they catch you on tape discussing anything that might be construed as committing a specific crime, you can be arrested and charged. This is exactly how the FBI pursued their case against Hutaree Militia members in 2010, which eventually fizzled. However, federal agencies have been very successful in many other incidences. Anyone participating in Liberty Movement activism should remain vigilant, and should never enter into hypothetical discussions of specific violent actions.
To stop good men from doing good things, you can kill them, but this is messy and creates many questions. If possible, it is better to simply damage their public image as “good men”. That is to say, if you make good men criminals in the eyes of the public, then no one will ask questions when you use force against them later. The sad reality is, many people WANT to believe the worst in others. Much of humanity is infected with apathy, compliance, and nihilism. They live empty lives pandering like beggars for scraps from a soulless system. They claim they want to believe in honor, courage, and clarity, but when confronted with a person who actually exhibits these qualities in abundance, they secretly feel ashamed of their own inadequacies.
A substantial part of our society revels in the snuffing of heroes, because they never want to admit how cowardly they personally are in comparison. The fall of a hero makes them feel better about themselves.
Defamation works because people assume in most cases that slander is true without evidence to support it. Depending on the nature of the supposed crime, the stain may never go away even after vindication in a court of law. If you want to poison the citizenry against a particular freedom group, why not create false accusations of thievery, rape, murder, terrorism, child pornography, etc. among its members?
Evidence planting is an old favorite of evil men, but in the digital age, such corruption has taken on more elaborate life. Computers are layered storage devices, and most computer users never deal with or touch a majority of these layers. As the Snowden/NSA scandal has now made abundantly clear, the government has the ability not to mention the legal framework to allow infiltration of your computer's underlying structure. They can remove whatever information they wish, and, they can ADD whatever information they wish. A computer could be secretly laced with incriminating data without the user being aware.
Furthermore, arrested activists have no ability to monitor their home environment. Whatever is “found” within the home can immediately be used as evidence against the owner, even if the home has been placed out of the owner's control. Law enforcement officials are not necessarily required to search a person's home under owner supervision. Anything can be planted at anytime.
Make The Legal Appear Illegal
The following video was discovered within the DHS/FEMA HSEEP website archives. It portrays an imagined scenario using fictional news footage in which “militia members” are raided by federal officers under the guise of stopping terrorism:
Take note that the DHS lists semi-automatic firearms, ammo, night vision, and flak jackets as “contraband” in the video. These are all perfectly legal items today. Arrests of those within the liberty community are often accompanied by a display of stockpiled weapons, as if the stockpiling of firearms is illegal. Household chemicals, fertilizers, or reloading gunpowders are commonly presented to the public as “bomb making materials”.
During a crisis, prepping could easily be labeled “hording”, and those with the good sense to organize for their own survival might be treated as “selfish” or “treasonous” for refusing to surrender their stockpiles to emergency management bureaucrats to be parceled out as they see fit. In this way, the establishment uses the fears of the populace to open morally relative doors. That which was normal and legal before is made illegal without the law ever actually being changed.
Scatter Gun False Flags
Large scale complex false flag operations used to be a tried and true fallback for despotic regimes (I recommend deep study into the exposure of Operation Gladio for a greater understanding of how False Flags function). Lately, though, intricate false flags seem to be backfiring on the establishment. The Boston Marathon Bombing did produce an opportunity to test run large scale martial law tactics in a populated area not seen since Katrina, but the event was incredibly sloppy. Most Americans are at least partially suspicious of the nature of the attack and the government response, including the fact that the two main suspects were longtime FBI informants.
False flag events will certainly be used against the Liberty Movement, but I believe this will be done using multiple smaller scale attacks with less players involved, like a spray of shot from a scatter gun. The "crazed constitutionalist gun-nut" fantasy will be trotted out over and over again in random shootings, bombings, cop killings and so on. The media will make it seem as though stepping outside of your home is certain death by way of "right wing extremism". Targets will be random and unassuming, giving rise to fears that anyone, no matter where they live, could be next.
Night Of Long Knives
Beyond the realm of defamation lay physical action. Every tyranny in history finalized authority using a “wiping of the slate”, as it were. Political opponents are swept away in the night, or killed in their beds in a meticulously organized and coordinated assault. This may seem like an outmoded style of government aggression, but it is still used today. Once again, the raids on members of the Hutaree Militia were handled exactly like a Night of Long Knives scenario, using multiple groups of officers in three separate states. Regardless of what you might think of the Hutaree, the point is that the establishment is training its law enforcement to use such tactics and use them in advanced ways.
Prominent Liberty Movement proponents should prepare for the worst, harden their homes, and build strong local community in case such an event arises. The process of “decapitating the leadership” of ideologically opposing organizations is a mainstay of oligarchy. In the U.S. today, the existence of the indefinite detention and rendition provisions of the NDAA and the “enemy combatant status” applied to classified White House assassination lists means this concern is not paranoia, but a cold hard reality of life for any American standing against the system.
Good Guys And Bad Guys
In order for any government or corporate aristocracy to take control of a culture, it must first assert itself as relevant. It must at least appear useful to the people, so that it can gain their support. As long as the state is viewed as the “bad guy” in the public mind, there can be no dominance. A new bad guy must be engineered, and who better to present as the great villain than your most effective political adversaries.
There will come a time in the near future when the demonization campaigns of the DHS or the SPLC today will seem like a cakewalk. Count on it. The best our movement can do for now is to expose each misstep of the establishment, and continue to weaken their position. Every time we call out a propaganda initiative, or derail it in advance of its inception, we reduce THEIR public image, and cement our own.
It's a bit ironic, but usually what evil men want most is to be seen as saviors; as guardians and protectors. They want to be seen as benevolent knights in shining armor coming to rescue the poor oblivious multitudes. When any information war hits it's climax, the goal of either side is to maintain the moral high ground. We already have it, and thus, they have to take it. How they will seek to do this is at once predictable, and horrifying.
Back in September we, somewhat naively, penned "US Totalitarianism Loses Major Battle As Judge Permanently Blocks NDAA's Military Detention Provision" in which we said that "in May, U.S. District Judge Katherine Forrest ruled in favor of a temporary injunction blocking the enforcement of the authorization for military detention. Today, the war against the true totalitarian terror won a decisive battle, when in a 112-opinion, Judge Forrest turned the temporary injunction, following an appeal by the totalitarian government from August 6, into a permanent one." Sadly, the "victory" lasted about 10 months. Today, US totalitarianism wins again.
U.S. APPEALS COURT THROWS OUT PERMANENT INJUNCTION THAT HAD LIMITED U.S.
GOVERNMENT'S USE OF INDEFINITE MILITARY DETENTION -- COURT RULING
In other words, every legal decision will be binding... until Obama's cronies in the 13 circuit courts of the appellate system get a tap on the shoulder. And good luck with the SCOTUS.
And with that, the time to be on the lookout for black helicopters is back.
How do you change the direction of the country when power has been seized by the ultra-wealthy criminal class? When the financial, economic, political, military, judicial, and media organizations have been taken over by criminals who are looking out only for their financial interests, the few citizens who have the courage to speak the truth become enemies of the state. There is no non-violent solution to this state of affairs. This is what Fourth Turnings are all about.
Coup d’etat — Paul Craig Roberts FORMER Assistant Secretary of the US Treasury
The American people have suffered a coup d’etat, but they are hesitant to acknowledge it. The regime ruling in Washington today lacks constitutional and legal legitimacy. Americans are ruled by usurpers who claim that the executive branch is above the law and that the US Constitution is a mere “scrap of paper.”
An unconstitutional government is an illegitimate government. The oath of allegiance requires defense of the Constitution “against all enemies, foreign and domestic.” As the Founding Fathers made clear, the main enemy of the Constitution is the government itself. Power does not like to be bound and tied down and constantly works to free itself from constraints.
The basis of the regime in Washington is nothing but usurped power. The Obama Regime, like the Bush/Cheney Regime, has no legitimacy. Americans are oppressed by an illegitimate government ruling, not by law and the Constitution, but by lies and naked force. Those in government see the US Constitution as a “chain that binds our hands.”
The South African apartheid regime was more legitimate than the regime in Washington. The apartheid Israeli regime in Palestine is more legitimate. The Taliban are more legitimate. Muammar Gaddafi and Saddam Hussein were more legitimate.
The only constitutional protection that the Bush/Obama regime has left standing is the Second Amendment, a meaningless amendment considering the disparity in arms between Washington and what is permitted to the citizenry. No citizen standing with a rifle can protect himself and his family from one of the Department of Homeland Security’s 2,700 tanks, or from a drone, or from a heavily armed SWAT force in body armor.
Like serfs in the dark ages, American citizens can be picked up on the authority of some unknown person in the executive branch and thrown in a dungeon, subject to torture, without any evidence ever being presented to a court or any information to the person’s relatives of his/her whereabouts. Or they can be placed on a list without explanation that curtails their right to travel by air. Every communication of every American, except face-to-face conversation in non-bugged environments, is intercepted and recorded by the National Stasi Agency from which phrases can be strung together to produce a “domestic extremist.”
If throwing an American citizen in a dungeon is too much trouble, the citizen can simply be blown up with a hellfire missile launched from a drone. No explanation is necessary. For the Obama tyrant, the exterminated human being was just a name on a list.
The president of the united states has declared that he possesses these constitutionally forbidden rights, and his regime has used them to oppress and murder US citizens. The president’s claim that his will is higher than law and the Constitution is public knowledge. Yet, there is no demand for the usurper’s impeachment. Congress is supine. The serfs are obedient.
The people who helped transform a democratically accountable president into a Caesar include John Yoo, who was rewarded for his treason by being accepted as a law professor at the University of California, Berkeley, Boalt school of law. Yoo’s colleague in treason, Jay Scott Bybee was rewarded by being appointed a federal judge on the US Court of Appeals for the Ninth Circuit. We now have a Berkeley law professor teaching, and a federal circuit judge ruling, that the executive branch is above the law.
The executive branch coup against America has succeeded. The question is: will it stand? Today, the executive branch consists of liars, criminals, and traitors. The evil on earth seems concentrated in Washington.
Washington’s response to Edward Snowden’s evidence that Washington, in total contravention of law both domestic and international, is spying on the entire world has demonstrated to every country that Washington places the pleasure of revenge above law and human rights.
On Washington’s orders, its European puppet states refused overflight permission to the Bolivian presidential airliner carrying President Morales and forced the airliner to land in Austria and be searched. Washington thought that Edward Snowden might be aboard the airliner. Capturing Snowden was more important to Washington than respect for international law and diplomatic immunity.
How long before Washington orders its UK puppet to send in a SWAT team to drag Julian Assange from the Ecuadoran embassy in London and hand him over to the CIA for waterboarding?
On July 12 Snowden met in the Moscow airport with human rights organizations from around the world. He stated that the illegal exercise of power by Washington prevents him from traveling to any of the three Latin American countries who have offered him asylum. Therefore, Snowden said that he accepted Russian President Putin’s conditions and requested asylum in Russia.
Insouciant americans and the young unaware of the past don’t know what this means. During my professional life it was Soviet Russia that persecuted truth tellers, while America gave them asylum and tried to protect them. Today it is Washington that persecutes those who speak the truth, and it is Russia that protects them.
The American public has not, this time, fallen for Washington’s lie that Snowden is a traitor. The polls show that a majority of Americans see Snowden as a whistleblower. It is not the US that is damaged by Snowden’s revelations. It is the criminal elements in the US government that have pulled off a coup against democracy, the Constitution, and the American people who are damaged. It is the criminals who have seized power, not the American people, who are demanding Snowden’s scalp.
The Obama Regime, like the Bush/Cheney Regime, has no legitimacy. Americans are oppressed by an illegitimate government ruling, not by law and the Constitution, but by lies and naked force.
Under the Obama tyranny, it is not merely Snowden who is targeted for extermination, but every truth-telling American in the country. It was Department of Homeland Security boss Janet Napolitano, recently rewarded for her service to tyranny by being appointed Chancellor of the of the University of California system, who said that Homeland Security had shifted its focus from Muslim terrorists to “domestic extremists,” an elastic and undefined term that easily includes truth-tellers like Bradley Manning and Edward Snowden who embarrass the government by revealing its crimes. The criminals who have seized illegitimate power in Washington cannot survive unless truth can be suppressed or redefined as treason.
If Americans acquiesce to the coup d’etat, they will have placed themselves firmly in the grip of tyranny.
A PARAMILITARY POLICE - Tools of Statism (i.e. German 'Brownshirts' & Gestapo)
How did it ever come down to abandoning peace keeping and accepting law enforcement by any means? Even the New York Times expresses alarm in, When the Police Go Military.
"The Posse Comitatus Act of 1878 generally bars the military from law enforcement activities within the United States. But today, some local and city police forces have rendered the law rather moot. They have tanks - yes, tanks, often from military surplus, for use in hostage situations or drug raids - not to mention the sort of equipment and training one would need to deter a Mumbai-style guerrilla assault."
"The SWAT concept was popularized by Los Angeles Police Chief Darryl Gates in the late 1960s in response to large-scale incidents for which the police were ill-prepared. But the use of SWAT teams has since exploded. Massive SWAT raids using military-style equipment are becoming routine methods for executing search warrants. One study estimates 40,000 such raids per year nationwide:
"These increasingly frequent raids… are needlessly subjecting nonviolent drug offenders, bystanders, and wrongly targeted civilians to the terror of having their homes invaded while they're sleeping, usually by teams of heavily armed paramilitary units dressed not as police officers but as soldiers."
John W. Whitehead writes in the Huffington Post that "it appears to have less to do with increases in violent crime and more to do with law enforcement bureaucracy and a police state mentality."
Mr. Whitehead is correct as usual. Unfortunately, few other constitutional conservatives seem to have the courage to criticize the thin blue line of establishment regulators.
"American neighborhoods are increasingly being policed by cops armed with the weapons and tactics of war. Federal funding in the billions of dollars has allowed state and local police departments to gain access to weapons and tactics created for overseas combat theaters - and yet very little is known about exactly how many police departments have military weapons and training, how militarized the police have become, and how extensively federal money is incentivizing this trend. It's time to understand the true scope of the militarization of policing in America and the impact it is having in our neighborhoods. Since March 6th, ACLU affiliates in 25 states filed over 260 public records requests with law enforcement agencies and National Guard offices to determine the extent to which federal funding and support has fueled the militarization of state and local police departments."
One of the "so called" unintended consequences of the Iraq and Afghanistan wars is the intentional indoctrination of troops into the culture of excessive force, citizen combatant threats and indiscriminate brutality. The suppression of common law natural rights is the ultimate causality of this deranged and profane mind control.
The study Can a Veteran go into Law Enforcement after a PTSD Diagnosis?, inquiry provides a useful comparison chart of several police agencies. The summary concludes that several agencies stated that they had hired individuals with histories of PTSD and most agencies did not have specific protocols for evaluating PTSD.
If military training becomes instinctive and reactive, treating civilians as expected terrorists, why would society presume that stateside transition into a police academy course will purge the damaging traits of urban warfare?
Behind the curtain of "public safety" the real controllers adopt and practice their perverse version of, The Psychopathic Influence, that dominates the domestic police mentality.
Both the financial elite and their servants who maintain this system, appear to exhibit behavior that is consistent with symptoms associated with a medical disorder known as psychopathy.(*) Psychopaths, also called sociopaths, are categorized as those who exhibit superficial charm and intelligence, and are absent of delusions or nervousness. Their traits include:
- Frequent lying
- Deceitful and manipulative behavior (either goal-oriented or for the delight of the act itself)
- Lack of remorse or shame
- Antisocial behavior
- Poor judgment and failure to learn by experience
- Incapacity for love
- Poverty of general emotions
- Loss of insight
- Unresponsiveness in personal relations
- A frequent need for excitement
- An inflated self-worth
- An ability to rationalize their behavior
- A need for complete power
- A need to dominate others
Often candidates with such a Napoleonic complex, demonstrate that they really are "little men", when it comes to their desire to become goons. The Police Are Paramilitary Thugs, makes a valid point.
"In America, our cops are becoming less and less distinguishable from the security apparati of 1970s-era petty dictatorships in Central and South America. Where once they wore uniforms which were appropriate to civil servants, albeit ones with guns, they now don the habiliments of what more closely resembles a paramilitary organization, and they have the bullying, menacing, we’re-above-the-law attitudes to go along with them. These attitudes are demonstrated in this video, which unambiguously shows one such paramilitary — what point is there in referring to them any longer as "cops" since that term suggests a civil role? – Seizing a video recording device from an innocuous bystander. The transparently absurd justification for the seizure was that the device contained evidence that the person being arrested was "resisting", and therefore, they were entitled to take it."
How did 9/11 alter the domestic relationship between the military and police?
"It really just accelerated a process that had already been in motion for 20 years. The main effect of 9/11 on domestic policing is the DHS grant program, which writes huge checks to local police departments across the country to purchase machine guns, helicopters, tanks, and armored personnel carriers. The Pentagon had already been giving away the same weapons and equipment for about a decade, but the DHS grants make that program look tiny.
But probably of more concern is the ancillary effect of those grants. DHS grants are lucrative enough that many defense contractors are now turning their attention to police agencies -- and some companies have sprung up solely to sell military-grade weaponry to police agencies who get those grants. That means we're now building a new industry whose sole function is to militarize domestic police departments. Which means it won't be long before we see pro-militarization lobbying and pressure groups with lots of (taxpayer) money to spend to fight reform. That's a corner it will be difficult to un-turn. We're probably there already. Say hello to the police-industrial complex."
"To Protect and Serve" is now an euphemism for breaking heads. Police Thugs Claim They’re Here to "Serve" wants you to believe that "police are basically the same all over the world: they describe their role of carrying out the force and coercion required by those wanting to control others as being a role of "serving the people." Those who are at the receiving end of the force and coercion are usually submissive and question nothing." Tell that to Adam Kokesh.
The "Code of Silence" enables The Militarization of American Police, to blow smoke on a gullible public. Accountability and recourse is a myth. The SWAT system whacks the public as if they were nuisance flies.
"Police supporters claim the public already has plenty of oversight. But observers always find the same pattern: The internal investigations are not public, and the deputies stay on the force with no obvious punishment. The DA exonerates the deputies. The grand jury only gets involved in the most highly publicized cases, and such juries are controlled by the DA and represent a narrow, conservative demographic. (Around here, it's mostly retired government workers who can afford to spend half their day working at the court for virtually no pay.) When a member of the public files a complaint with a police or sheriff's department, it typically takes months to hear anything back. Then the only legal requirement is for the agency to say whether the complaint was "sustained" or "not sustained." Such complaints are rarely sustained."
The psychotic statists that have no problem with the militarization of law enforcement are enemies of the people. How far has this country fallen . . . Listen to the fateful words of the nature of the police by the original Godfather of the Chicago Gestapo. The demented and mentally deranged oligarchy, who is at war with the American public, is the true terrorist. Police need to examine, recite and act upon the Oath Keepers - Declaration Of Orders We Will Not Obey.
SARTRE – July 14, 2013
- See more at: http://batr.org/gulag/071413.html#sthash.yvki1Pgf.dpuf
2012 - FINANCIAL REPRESSION
GOVERNMENT DATA - Knowingly Inaccurate According to Former BLS Head
After every non-farm payroll report we provide our own breakdown of what the real unemployment rate is in a country in which the labor force participation rate has not been adjusted to normalize for the Second Great Depression. In the most recent such endeavor we found the "Real Unemployment Rate" to be 11.3%.
As of May, assuming realistic LFP assumptions, the real U-3 unemployment rate should have been not 7.6% but 11.3%.
Today, courtesy of the Post's John Crudele we find that our estimate was spot on not just from anyone, but the former head of the BLS himself: Keith Hall.
Keith Hall believes the US economy is a lot sicker than the 7.6 percent unemployment rate would lead you to believe. And he should know.
Hall was, from 2008 until last year, the guy in charge of Washington’s Bureau of Labor Statistics, the agency that compiles that rate. “Right now [it’s] misleadingly low,” says Hall, who believes a truer reading of those now wanting a job but without one to be more than 10 percent
The fly in the ointment is the BLS employment-to-population ratio, which is currently at 58.7 percent. “It’s lower than it was when the recession ended. I think that’s a remarkable statistic,” says Hall, a senior research fellow at the Mercatus Center at George Mason University in Fairfax, Va.
That level tells Hall the real unemployment rate is actually about 3 percentage points higher than the BLS number. If the jobless rate is unacceptable at 7.6 percent, it’d be shockingly bad if he is right and the true rate is 10.6 percent.
Hall reckons there are millions of U-6 people on top of the 4.5 million long-term unemployed. "This has been a very slow, very bad recovery,” he says. “And I think the numbers have really struggled as a result. In fact, I’ve been very disappointed in the coverage of the numbers."
It is not just the artificial manipulation in the labor force participation rate, which we first brought up in 2010 and only became a mainstream theme this past year. There is also the monthly seasonal adjustment factor which provides the much needed smoothing function whose only job is to provide a "credible" number to be used by the HFT algos to ramp stock momentum almost exclusively to the upside: after all the only thing the Fed has left is to promote confidence in the economy using the only transmission mechanism subject to the Fed's central-planning: the manipulated monetary policy vehicle known as the S&P500.
There are other problems with numbers coming out of BLS, according to Hall. And they will just add to the confusion.
All parts of Washington’s data-collecting machine adjust to smooth out the bumps caused by the seasons of the year. But the recession that started five years ago was so severe and the recovery so anemic that the seasonal adjustments have been thrown off.
Crudele, a long-time skeptic of manipulated data, points out some other obvious divergences between the Fed's propaganda and reality:
The Fed, and particularly Chairman Ben Bernanke, are acting rather strange these days. One minute Bernanke is suggesting that his highly controversial and very dangerous money-printing operation, called quantitative easing, will be tapered off in the near future because the economy is doing better.
The next minute Bernanke is talking about how QE will continue if the economy isn’t strong enough to stand on its own. The Fed chief often points to the housing and the stock markets as evidence of economic improvement, although those are nonsense indicators.
The stock market is only rising because Bernanke is printing so much money. And housing is improving, with prices rising sharply in spots, because big-time investors who can’t find anywhere else to park their assets profitably are scooping up big-city real estate by the bundle.
Finally, while Hall isn't a whistleblower in the pure sense of the word, and hasn't disclosed any specific illegal data manipulation by the BLS, the fact that such systematic data "massaging" has been acknowledged by the former head of the statistical agency should be enough for the BLS and the Obama administration to hang their heads in shame.
Of course, they won't - to a big part because nobody in the mainstream media will actually call them out on it - and will instead point to the S&P hitting all time manipulated high after all time manipulated high as proof the economy is doing great. Alas, to their chagrin, nobody believes that particular lie anymore.
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