Stanley Fischer Speaks – – -More Drivel From A Dangerous Academic Fool

With every passing week that money markets rates remain pinned to the zero bound by the Fed, the magnitude of the financial catastrophe hurtling toward main street America intensifies. That’s because 80 months – – and counting – – of zero interest rates are fueling the most stupendous gambling frenzy that Wall Street has ever witnessed or even imagined. Sooner or later, therefore, this mother of all financial bubbles will splatter, bringing untold harm to millions of households which have been lured back into the casino.
The truth is, zero cost in the money market is irrelevant to main street. As we have repeatedly demonstrated the household sector is stranded at ‘peak debt’ and, consequently, there is no interest rate low enough to elicit a spree of pre-crisis style consumer borrowing and spending. Based on the clueless jawing that occurred this weekend at Jackson Hole, the following simple chart that I laid out last week bears repeating:
On the eve of the financial crisis in Q1 2008, total household debt outstanding – including mortgages, credit cards, auto loans, student loans and the rest – – – was $13.957 trillion. That compare to $13.568 trillion outstanding at the end of Q1 2015.

This post was published at David Stockmans Contra Corner by David Stockman ‘ August 31, 2015.

Russia’s Surrealistic August

Russia appears to have survived August without a major catastrophe this year.
There have been no coups and no defaults. No submarines have sunk, no trains or shopping malls have been bombed, and no wars have started – well, at least no new ones.
There’s been plenty of silliness, to be sure: bulldozers running over forbidden goose meat in Tatarstan, the mass slaying of contraband Ukrainian ducklings in Belgorod, and a viral video of a crazed man (or good actor) sticking it to the West by destroying iPhones and iPads, just to name a few examples.
There have also been the routine exposes of the elite’s opulence, this time Kremlin spokesman Dmitry Peskov’s $620,000 watch and lavish honeymoon on a yacht. And there were surprises, like the shock resignation of Vladimir Yakunin, one of Russian President Vladimir Putin’s closest cronies, as head of Russian Railways.
But if this August was largely uneventful, it has been marked, at least among the chattering classes, by a sense of foreboding.
Russia is stuck in a quagmire in eastern Ukraine. The economy is buffeted by falling oil prices, a sinking ruble, and Western sanctions. And the best the Kremlin can do is wage a war on foreign cheese.

This post was published at Wolf Street on August 31, 2015.

Inside the Miracle Of Red Capitalism – – – The Mailed Fist Of A Still Totalitarian State

Beijing’s security forces are transforming China into a place of ‘fear and panic’, the families of 12 attorneys and activists who disappeared during a crackdown on human rights lawyers have claimed.
In an open letter to Guo Shengkun, the minister of public security, the families said they had heard nothing from their relatives since they were detained during a roundup of government critics nearly two months ago.
‘Words fail to express our anxiety and helplessness,’ they wrote, according to a translation by China Change, a human rights website.
‘When a terrorist attack is perpetrated, a terrorist group will come out and claim responsibility for it. When the police system of the People’s Republic of China disappears its citizens, shouldn’t it make a statement and say something?’
On 9 July Chinese security services launched what observers describe as an unprecedented offensive against the country’s outspoken ‘rights defence’ movement, a network of lawyers known for taking on politically sensitive cases.
Scores of lawyers and their associates were detained or interrogated in what activists believe is a coordinated attempt to stamp out opposition to the Communist party.
Many were subsequently released after being warned not to speak out, but more than 20 activists, lawyers and legal staff remain in detention, with some being held in undisclosed locations.

This post was published at David Stockmans Contra Corner on August 31, 2015.

Looting Made Easy – – The $2 Trillion Stock Buyback Binge

Corporations are taking the retirement savings of elderly public employees and using them to inflate their stock prices so wealthy CEOs and their shareholders can enrich themselves at the expense of their companies. And it’s all completely legal. Under current financial regulations, corporate bosses are free to repurchase their own company’s shares, push stock prices into the stratosphere, skim off a generous bonuses for themselves in the form of executive compensation, and leave their companies drowning in red ink.
Even worse, a sizable portion of the money devoted to stock buybacks is coming from ‘massively underfunded public pension’ funds that retired workers depend on for their survival. According to Brian Reynolds, Chief Market Strategist at New Albion Partners, ‘Pension funds have to make 7.5%,’ so they are putting their money ‘in these levered credit funds that mimic Long-Term Capital Management in the 1990s.’ Those funds, in turn, ‘buy enormous amounts of corporate bonds from companies which put cash onto company balance sheets…and they use it to jack their stock price up, either through buybacks or mergers and acquisitions… It’s just a daisy chain of financial engineering and it’s probably going to intensify in coming years.’ (‘How a Public Pension Crisis Is Driving an Epic Credit Boom’, Financial Sense)
So, once again, ordinary working people are caught in the crosshairs of a corporate scam that could blow up in their faces and leave them without sufficient resources to muddle through their retirement years.
The amount money that’s being funneled into buybacks is simply staggering. According to Dave Dayen at the Intercept:

This post was published at David Stockmans Contra Corner on August 31, 2015.

China Slowdown’s Next Victim – – Asian Supply Chain

The combined effects of China’s economic slowdown, a maturing smartphone industry and market volatility are sending jitters through Asian electronic-parts suppliers, which have relied on Chinese consumer demand and manufacturing muscle to power their growth in recent years.
After several years of torrid expansion, smartphone sales are slowing in China as stocks of unsold handsets are mounting in stores and warehouses. World-wide sales of smartphones grew at their slowest rate since 2013, research firm Gartner said this month, with sales in China falling for the first time in the second quarter.
The slowdown in smartphone sales is expected to hit Asian semiconductor giants such as Samsung Electronics Co. and SK Hynix Inc., whose memory chips are widely used to store data in the devices. Some JapaneseELECTRONICS SUPPLIERS that operate further up the industry’s supply chain – like Fanuc Corp., a maker of industrial robots and machine tools used by smartphone makers, and Tokyo Electron Ltd., a provider of chip-making equipment – recently lowered their forecasts for sales and earnings in the fiscal year ending next March.
‘I don’t think this is a bust, but we’re going to have to work through the slowdown,’ said Amir Anvarzadeh, Japan equity strategist at BGC Partners. ‘Inventories will have to come down.’
The slowdown in smartphone sales in China is also contributing to a decline in the price of liquid-crystal displays, exacerbating the woes of a leading supplier, Sharp Corp. of Japan. The company cited ‘increased competition in the China market’ as a reason for posting an operating loss in its display division in the most recent quarter.

This post was published at David Stockmans Contra Corner on Aug 31, 2015.

One Theory About Last Monday’s ETF Implosion

Earlier today, we noted that BNY Mellon and SunGard were, as of Sunday evening, still attempting to sort out exactly what happened last Monday when suddenly, a system ‘glitch’ caused widespread errors in calculating NAV for some 1,200 ETFs and mutual funds.
For its part, SunGard claims the problem has nothing to do with the flash-crashing mayhem that unfolded across US equity markets last Monday morning and everything to do with a ‘corruption’ that apparently occurred last Saturday when someone tried to do a system upgrade. As we said earlier,’Bank of New York Mellon can’t simply come out and say that broken markets broke its accounting software because that would be to place the blame squarely where it belongs and everyone knows that is a very dangerous thing to do.’
Of course our guess is that in one way or another, broken markets were in fact the culprit here and SunGard’s system ‘corruption’ was just a casualty of the corruption of capital markets in general.
As we said last week, no one will ever know what exactly happened to cause the ETF pricing model to break down but if one had to venture a guess, it might involve ‘market makers simply walking away or else putting in absurdly low bids in order to avoid getting steamrolled when the constituent stocks came off halt [and/or] ‘liquidity providers’ acting in ways that neither provide liquidity or appear to emanate from human traders, all of which ultimately conspired to cause market orders to hit absurdly low bids, which in turn served to take out stops, and somewhere amid the rampant confusion, Bank of New York Mellon’s/ SunGard’s platform simply malfunctioned.’

This post was published at Zero Hedge on 08/31/2015.

Uncle Sam’s Solar Racket – – A Cesspool Of Waste And Corruption

The Department of Energy’s Inspector General revealed last week that the legendary solar-panel manufacturer Solyndra – a poster baby of the Obama stimulus – lied to the feds to get a $535 million loan guarantee before going bust in 2011. Solyndra is a cautionary tale, but the Obama Administration is still throwing caution to the sun.
The IG report, which follows a four-year investigation by the IG and FBI, describes how Solyndra engaged in a ‘pattern of false and misleading assertions,’ including inflating the value of corporate contracts and sales, to win a giant loan guarantee in 2009.
All evidence suggests that DOE was a willing victim. The IG notes that DOE loan officers felt ‘tremendous pressure’ from the White House and Congress to rush through loan-guarantee applications. In their haste DOE officials failed ‘to ask specific questions, and require specific assurances’ and overlooked major red flags.
The larger problem is that the White House is more concerned with boosting the politically favored solar industry than protecting taxpayer dollars. More troubling, the solar industry may be growing too big to fail, and the Administration is assisting another taxpayer solar scam.

This post was published at David Stockmans Contra Corner on August 31, 2015.

How A Real Plunge Protection Team Works – – China Rolls Out The Paddy Wagons, Snatches 200 Rumor-Mongers

BEIJING – Chinese authorities said they punished nearly 200 people for spreading online rumors in connection with recent major news events, in a government crackdown on politically sensitive discourse.
The sweep targeted people who the government said spread false Internet rumors regarding events such as the stock-market turmoil and deadly explosions earlier this month in the port city of Tianjin, the Ministry of Public Security said Sunday.
The ministry said the accused expressed remorse for their actions, in which they ‘misled society and the public, generated and spread fearful sentiment, and even used the opportunity to maliciously concoct rumors to attack [Communist] Party and national leaders.’

This post was published at David Stockmans Contra Corner on August 31, 2015.

Stanley Fischer Speaks – – -Airballs From A Dangerous Academic Fool

With every passing week that money markets rates remain pinned to the zero bound by the Fed – – the magnitude of the financial catastrophe hurtling toward main street America intensifies. That’s because 80 months – – and counting – – of zero interest rates are fueling the most stupendous gambling spree that Wall Street has ever witnessed or even imagined. Sooner or later, therefore, this mother of all financial bubbles will splatter, bringing untold harm to millions of households which have been lured back into the casino.
Then truth is, zero cost in the money market is irrelevant to main street. As we have repeatedly demonstrated the household sector is stranded at ‘peak debt’ and, consequently, there is no interest rate low enough to elicit a pre-crisis style spree of consumer borrowing and spending. Based on the clueless jawing that occurred this weekend at Jackson Hole, the following simple chart that I laid out last week bears repeating:
On the eve of the financial crisis in Q1 2008, total household debt outstanding – including mortgages, credit cards, auto loans, student loans and the rest – – – was $13.957 trillion. That compare to $13.568 trillion outstanding at the end of Q1 2015.

This post was published at David Stockmans Contra Corner by David Stockman ‘ August 31, 2015.

Turning Just 2.4% Income Growth Into A Robust Recovery

Today’s release of personal income and spending is very much related to the revised GDP figures, though I have no doubt that the BEA wishes it were not. To start with, the ongoing chain of benchmark revisions has produced an inordinately volatile set of economic accounts. That is quite against the stated purpose of all this adjusting and statistical intrusiveness; they are intended, after all, for a smooth and regular appearance. The fact that revisions have played such havoc is already a signal about further irregularity in what these accounts may be projecting in the first place.
Starting with the personal savings rate, the BEA cannot seem to find a home for it. Up and down and around again, the savings rate has been all over the place for the better part of a year’s worth of revisions.
While the more recent months in late 2014 and 2015 so far have been more scattered, the axis of these revisions is clearly around 2012. That isn’t surprising given that it is the 2012 slowdown that is causing all these issues. But rather than being simply an academic review of past insufficiency in both the actual economy and the statistics that are supposed to describe it, this ongoing statistical ‘battle’ more than suggests the real problem as it exists right now.

This post was published at David Stockmans Contra Corner by Jeffrey P. Snider ‘ August 28, 2015.

Why The Mainstream Narrative Is a Pack Of Lies About The State Of The Economy

Like the characters in Samuel Beckett’s Waiting for Godot, the world awaits the return of wealth and prosperity. But the global economy may be entering a period of stagnation.
Over the last 35 years, the economic growth necessary to increase living standards, increase wealth and manage growing inequality has been based increasingly on rising borrowings and financial rather than real engineering. There was reliance on debt-driven consumption. It resulted in global trade and investment imbalances, such as that between China and the US or Germany and the rest of Europe.
Everybody conspires to ignore the underlying problem, cover it up, or devise deferral strategies to kick the can down the road.
Citizens demanded and governments allowed the build-up of retirement and healthcare entitlements as well as public services to win or maintain office. The commitments were rarely fully funded by taxes or other provisions.

This post was published at David Stockmans Contra Corner on August 30, 2015.

Mom and Pop Running For The Hills – – Investors Yank Funds Like Its 2008

Mom and pop are running for the hills.
Since July, American households – which account for almost all mutual fund investors – have pulled money both from mutual funds that invest in stocks and those that invest in bonds. It’s the first time since 2008 that both asset classes have recorded back-to-back monthly withdrawals, according to a report by Credit Suisse.
Credit Suisse estimates $6.5 billion left equity funds in July as $8.4 billion was pulled from bond funds, citing weekly data from the Investment Company Institute as of Aug. 19. Those outflows were followed up in the first three weeks of August, when investors withdrew $1.6 billion from stocks and $8.1 billion from bonds, said economist Dana Saporta.

This post was published at David Stockmans Contra Corner on August 29, 2015.

Guns, Drugs, and Booze: The Bipartisan Support for Prohibition

It’s been noticed more than a few times that there aren’t many substantive differences between the Republicans and Democrats. While this is true in many ways for the parties themselves, the Left and Right certainly differ on a range of issues from welfare to abortion to gay rights.
What they have in common – at least the mainstream varieties – is a desire to use the state to shape society in whatever way they see fit. As Andrew Napolitano put it, ‘We have migrated from a two-party system into a one-party system, the big-government party. There’s a democratic wing that likes taxes and wealth transfers and assaults on commercial liberties and there’s a republican wing that likes war and deficits and assaults uncivil liberties.’ And both parties love prohibition, just of different things.
Alcohol Prohibition There aren’t many people left who believe the prohibition of alcohol in the 1920s was a good idea. Interestingly enough, it was the progressives of the time that pushed for that. As historian William Leuchtenburg noted, ‘It was a movement that was embraced by progressives.’ On the other side, in the words of historian Daniel Okrent, were the ‘… economic conservatives who … pushed so hard for repeal.’
Prohibition turned out to be a disaster. A report from the Cato Institute found that after Prohibition passed in 1920, homicide rates increased, corruption increased, alcohol-related deaths were unchanged and after a short dip in 1921, alcohol consumption returned to what it had been before the law was passed. Furthermore, in the midst of this chaos, Al Capone and organized crime came to power. Indeed, black markets and prohibition go together like peas and carrots.

This post was published at Ludwig von Mises Institute on AUGUST 29, 2015.

Origins Of China’s Credit Bubble And Stock Market Crash – – The Key Explanatory Charts

This week’s Chinese stock market implosion has been widely viewed as a reaction to the Chinese government’s devaluing the yuan on Aug. 11 – a move many presume was a frenzied bid to lower export prices and strengthen the economy.
This interpretation doesn’t stand up to scrutiny. First, Chinese investors haven’t been investing based on how the economy is doing, but rather, based on what they think the government will do to prop up the market. The crash, termed ‘Black Monday,’ was more likely a reaction to the central bank’s failure over the weekend to announce a widely expected cut to the bank reserve requirement since previous cuts in February and April had boosted stock prices. The government eventually caved andannounced a cut on Tuesday (Aug. 25). Second, the crash happened nearly two weeks after the devaluation, and the government only let the yuan depreciate by about 3% before swooping in and propping up its value again – which hardly helps exporters since the currency’s value effectively rose some 14% in the last year.
The devaluation probably had more to do with breaking the yuan’s tightly managed peg to the US dollar, an obligation that has been draining the economy of scarce liquidity as capital outflows swell.
Both moves – the government pulling back from its market bailout and the currency devaluation – stem from the same ominous problem: China’s leaders are scrambling to find the money to keep its economy running. To understand the broader forces that led to this predicament, here’s a chart-based explainer tracing its origins:

This post was published at David Stockmans Contra Corner on August 29, 2015.

What Happens When A Company, Or An Economy, Can’t Squeeze Any More Juice Out Of The Lemon

Presented here is a simple framework that can help us analyze the impact of certain policies in our companies and economies. This is Part 1, in the forthcoming Part 2, perhaps the most interesting one, this framework will be used to show why the Keynesian approach will deliver very little results in western economies
Optimizing Economic Performance – Part 1
Squeezing the Lemon We began our professional career at General Electric when it was still under the leadership of the legendary Jack Welch. At that point he was ramping up the implementation of Six Sigma, a systematic approach to improve and manage key company processes in order to reduce errors and inefficiencies, across the entire organization.
This was a bold move given the size of the company, but Welch astutely realized that this approach could deliver radical benefits to an organization that had been in operation for over a century. There was always more juice that could be squeezed out of that lemon. And that’s exactly what happened across many of the company’s businesses and divisions (we did our bit and even earned a green belt in the process).
What really impressed us at such an early stage of our ‘real work experience’ is that a business is all about processes (when we moved to investment banking later on, it all became about faxes at midnight!). It’s an obvious statement really, but it’s only when you are fully enmeshed in fixing communication breakdowns, file corruptions, server and IT failures, document losses and customer complaints that you can really appreciate it.
Improvements typically don’t work in a linear fashion, but more like shown in the following graph:

This post was published at Zero Hedge on 08/29/2015.

Mass Protests Sweep Malaysian Capital As Anger At Goldman-Backed Slush Fund Boils Over

If we told you that thousands of protesters donning bright yellow shirts had taken to the streets to call for the ouster of a leader in an important emerging market, you’d be forgiven for thinking we were talking about Brazil, where President Dilma Rousseff is facing calls for impeachment amid allegations of fiscal book cooking and government corruption.
But on this particular weekend, you’d be wrong.
We’re actually talking about Malaysia, where tens of thousands of demonstrators poured into the streets of Kuala Lumpur on Saturday to call for the resignation of Prime Minister Najib Razak whose government has been accused of obstructing an investigation into how some $700 million from 1Malaysia Development Berhad mysteriously ended up in Najib’s personal bank account.

This post was published at Zero Hedge on 08/29/2015.

The Corruption Of American Freedom

This is my third column in a row on corruption.
In the first, I suggested that 75% may be the most important figure in American politics. It is the percentage of Americans who say in the Gallup World Poll that corruption is widespread in government. Given this extraordinary level of contempt for American political and administrative elites, it is no wonder that non-establishment figures like Donald Trump, Ben Carson, and Bernie Sanders are gaining such traction in the presidential nominating contests.
In the second, I compared the American view of widespread governmental corruption with the view in other countries. It turns out that 82 countries have a better view of their government, although many of them not by much. For example, at 74%, Brazilians’ dissatisfaction with corruption in their government has led to nationwide protests. But there are many countries where the view of government corruption is far less: Germany (38%), Canada (44%), Australia (41%), and Denmark (19%).
Today I want to offer some historical context for America’s understanding of corruption.
America’s Founding Fathers had a very precise understanding of corruption. As I describe in my book ‘A Nation Like No Other,’ the Founders used that word less to describe outright criminal behavior than to refer to political acts that corrupt a constitutional system of checks and balances and corrode representative government. They frequently accused the British Parliament of corruption, citing practices such as the crown’s use of ‘placemen’ – members of Parliament who were also granted royal appointments or lucrative pensions by the crown, in exchange for supporting the king’s agenda.
In ‘The Creation of the American Republic,’ Gordon Wood, a scholar of the American Revolution, explains the Founders’ idea of corruption:

This post was published at Zero Hedge on 08/28/2015 –.

On Second Thought, China Slowdown Will Hit Global-Growth Outlook

China’s deepening struggles are starting to make a bigger dent in the global economic outlook.
Moody’s Investors Service on Friday cut its 2016 growth forecast in Group of 20 economies to 2.8 percent, down 0.3 percentage point from the company’s call less than two weeks ago. China is projected to grow 6.3 percent in 2016, down from 6.5 percent previously, the credit-rating company said in a report. Citigroup Inc. last week pared its projection for world growth in 2016 to 3.1 percent from 3.3 percent, the third straight time the bank has cut the forecast.
Recent Chinese data including numbers on credit expansion and fixed-asset investment suggest a sharper slowdown this quarter than Moody’s previously judged, while Citigroup said the worsening outlook was driven by ‘significant’ downgrades for China, the euro area, Japan and several other major countries. Economists in a Bloomberg survey earlier this month gave a median estimate of 3.5 percent global growth in 2016, compared with 3.6 percent in the July survey.
‘We’re seeing evidence that the slowdown is broader than expected’ in China, said Marie Diron, a London-based senior vice president at Moody’s and one of the report’s authors. ‘It’s long been clear that there’s a slowdown in the manufacturing and construction sector, but the service sector was more resilient. That’s still the case, but we’re seeing some signs of weakness in the labor market.’

This post was published at David Stockmans Contra Corner on August 28, 2015.

Brazil Economy Shrinks More Than Forecast

Brazil’s economy contracted more than analysts forecast in the second quarter, as tighter monetary policy and faster inflation torpedoed confidence and caused activity to nosedive.
Gross domestic product contracted 1.9 percent in the second three months of the year from the previous quarter, the national statistics agency said in Rio de Janeiro on Friday. That was the biggest contraction in more than six years, and worse than the median estimate of a 1.7 percent fall from 41 economists surveyed by Bloomberg.
Latin America’s largest economy is suffering from multiple woes: borrowing costs at their highest since 2006, inflation at more than double the target, rising unemployment, a crumbling currency and a corruption scandal that could unseat President Dilma Rousseff. The government has also chopped investment as part of its effort to fortify fiscal accounts and avoid a sovereign downgrade to junk.
‘There’s no source of growth for Brazil going forward, at least in the short term – we see all the confidence indicesMOVING down,’ Luciano Rostagno, chief strategist at Banco Mizuho do Brasil, said by phone from Sao Paulo. ‘There’s no sign that the economy has found a bottom, so I think we will continue to see poor data coming.’ The real, which has depreciated 25 percent this year, fell 0.4 percent to 3.5668 per U. S. dollar at 10:37 a.m. local time. Swap rates on the contract maturing in January 2017 rose nine basis points, or 0.09 percentage point, to 13.96 percent.

This post was published at David Stockmans Contra Corner on August 28, 2015.

“No Recovery For You!” Brazil Officially Enters Recession, Goldman Calls Numbers “Disquieting”

Well, you know what they say: when it rains it pours, especially when you’re the poster child for an epic emerging market unwind and you’re suffering through the worst stagflation in over a decade while trying to clean up the feces ahead of the summer Olympics.. or something.
Make no mistake, Brazil is in a tough spot.
Here’s a list of problems: 1) collapsing commodity prices, 2) the worst inflation-growth outcome in over a decade, 3) deficits on both the fiscal and current accounts, 4) street protests calling for the President to be sacked, 5) a plunging currency, 6) allegations of rampant government corruption. And we could go on.

This post was published at Zero Hedge on 08/28/2015.