I claim no special power here, nor any inside information. This is simply arithmetic coupled with logic. I’ll give you a “decision tree” sort of format with the critical points outlined. Note that if you’re going to mitigate any of what I see coming around the bend you need to do it right damn now, not wait. By the time you get to those critical points it’s too late. For many people it’s already too late, but if you’re not in that batch then you need to make your lifestyle changes today. I am operating on the premise that the rank corruption that I outlined in the Ticker here will not be addressed. It will not be addressed for the same reason the 17th Amendment will be cited as the reason the American political experiment failed when the book on America is finally closed, as that Amendment permanently removed the ability of the States to call a hard-stop on any expansion of Federal Power they did not consent to. That was designed in to our government by the founders and it was removed intentionally by the 17th Amendment. That balance of power can never be restored absent a Revolution because to do so The Senate would have to literally vote themselves out of a job at a supermajority level which they will never do and there is no means to compel them to do so. For the same reason the 30-year trend in Medicare and Medicaid spending will not be stopped. It may be tinkered with around the edges but it won’t be stopped because to stop it without literally throwing people into the street and letting them die you have to break the medical monopolies and in doing so you will inevitably (1) destroy the graft machine that drives a huge part of DC and at least half of the jobs inside the Beltway, along with the asset values they support, (2) create an immediate and deep (15% of GDP, but temporary) recession on purpose which neither Congress or Trump will ever voluntarily initiate as it would cause a guaranteed 70% stock market crash along with the immediate detonation of about 1/3rd of all in-debt corporations in the United States and (3) expose the outrageous theft of trillions of dollars from taxpayers over the last several decades to fund the medical scam machine at all levels.
When former Chinese Politburo member Zhou Yongkang was arrested in 2014 on corruption charges, the scale of his ill-gotten gains was astounding, totalling some $16 billion. When sums that large are involved, most of the assets have to be invested in financial instruments and real estate. But the list of physical currency found in his homes is revealing: 152.7 million Chinese yuan (valued at the time at $24.5 million), 662,000…10,000…55,000 Swiss francs — and US$275 million. The former head of China’s internal security services and one of the 10 most powerful men in China apparently preferred to keep his “petty cash” mainly in U.S. dollars. He’s not alone. China lost around $1 trillion to capital flight in 2015, before clamping down hard at the beginning of 2016. Much of this money leaves China via fake invoicing in Hong Kong, where the local currency is pegged to the U.S. dollar. Illicit outflows are also facilitated by casinos in the Philippines, South Korea, and on remote Pacific islands, all of which operate primarily in dollars. Predictions of the dollar’s demise and eventual replacement by the Chinese yuan, are a staple of global economic punditry, but they have little basis in reality. Of course China has become an important component of the global economy, accounting for more than 15 percent of global gross domestic product. But when Chinese people themselves prefer to hold dollars, there is little chance that the Chinese yuan will ever replace the U.S. dollar as the world’s key currency.
‘Economic Shock & Awe’ turns into ‘Nightmare Without End’ On Tuesday November 8, Narenda Modi, the prime minister of India, the world’s second most populous nation and Asia’s third largest economy, announced in a public address to the nation that India’s two biggest denomination notes, the 1,000 rupee and 500 rupee bills, were now worthless and would have to be replaced with newly designed bills. That was six days ago. Since then all hell has broken loose. Official Motives There are plenty of reasons for the government’s action. Partly it was intended to flush out the cash hoardings of black market operators and stop the rampant corruption permeating all levels of business and government in India. It is also part of the government’s plan to thwart counterfeiters and bring more stashed currency into the banking system. One of the biggest beneficiaries will be the nation’s nascent digital economy. Paytm, India’s largest digital wallet startup, hailed the move. ‘This is the golden age to be a tech entrepreneur in India. Especially a fintech one,’ tweeted Vijay Shekhar Sharma, the company’s founder, whose investors include Alibaba Group Holding Ltd. ‘Keep the money digital.’ The coffers of both the nation’s government and banks are also expected to benefit handsomely. According to some reports, banks’ non-performing loan ratios have already shrunk in recent days as small and mid-sized businesses that had been defaulting on repayments suddenly started rushing to banks to repay the money they owed. As for the government, it hopes to boost its tax revenues from the current anemic level of 17% of GDP to somewhere closer to the OECD average of 34%.
This post was published at Wolf Street on November 15, 2016.
President-elect Trump stated in his victory speech that he intends to make America great again by infrastructure spending. Unfortunately, he is unlikely to have the room for manoeuvre to achieve this ambition as well as his intended tax cuts, because the Government’s finances are already in a perilous state. It is also becoming increasingly likely that the next fiscal year will be characterised by growing price inflation and belated increases in interest rates, against a background of rising raw material prices. That being the case, public finances are not only already fragile, but they are likely to become more so from now on, without any extra spending on infrastructure or fiscal stimulus. So far, most informed commentaries on the prospects for inflation have concentrated on the negative effects of an expansionary monetary policy on the private sector. With the pending appointment of a new President with ideas of his own, this article turns our attention to the effects on government finances. Government outlays are already set to increase, due to price inflation, more than the GDP deflator would suggest. The deflator is always a dumbed-down estimate of price inflation. At the same time, tax receipts will tend to lag behind any uplift from price inflation. Furthermore, the wealth-transfer effect of monetary inflation over a prolonged period reduces the ability of the non-financial private sector to pay the taxes necessary to compensate for the lower purchasing power of an inflating currency. Trump is a businessman. Such people often think that running a country’s economy is merely a scaled-up business project. Not so. Countries can be regarded as not-for-profit organisations, and democratic ones are driven by the consensus of diverse vested interests. The only sustainable approach is to stand back and give individuals the freedom to run their own affairs, and to discretely discourage the business of lobbying. President Calvin Coolidge expressed this best: ‘Perhaps one of the most important accomplishments of my administration has been minding my own business’.
This post was published at GoldMoney on NOVEMBER 10, 2016.
For most people, the economy’s ups and downs are best measured by famous indicators like monthly job reports and quarterly releases of gross domestic product. But students of the arcane took special notice earlier this month when the Bureau of Economic Analysis released some disturbing data that didn’t make anybody’s front page. In August, domestic heavy-truck sales fell 29 percent from the same period of 2015, the weakest month in well over three years. Any drop that dramatic could always be an anomaly, but heavy-truck sales have been slipping for two years. Broad weakness in this category has historically been a reliable hint that a recession is on its way.
China’s smaller banks have never been more reliant on each other for funding, prompting rating companies to warn of contagion risks in any crisis. Wholesale funds, including those raised in the interbank market, accounted for a record 34 percent of small- and medium-sized bank financing as of June 30, compared with 29 percent on Jan. 31 last year, Moody’s Investors Service estimated in an Aug. 29 note that analyzed central bank data. Shanghai Pudong Development Bank Co.’s first-half earnings showed its short-term borrowings and repurchase agreements surged by 75 percent in the past three years, while its consumer deposits rose just 24 percent. Policy makers have sought to sustain an economic recovery by keeping the seven-day repurchase rate at around 2.4 percent for the past year, a level that has encouraged borrowing for investment in property, corporate bonds or risky loans, often packaged as shadow banking products. China’s banking regulator told city banks last week to learn the lesson of the global financial crisis and get back to traditional businesses. CLSA Ltd. estimates total debt may reach 321 percent of gross domestic product in 2020 from 261 percent in the first half. ‘Contagion risks are definitely rising,’ said Liao Qiang, Beijing-based senior director for financial institution ratings at S&P Global Ratings. ‘The pace of the development is concerning. If this isn’t stopped in time, the central bank will lose some control and flexibility of its monetary policy.’
Bad debts in the Chinese banking system are ten times higher than officially admitted, and rescue costs could reach a third of GDP within two years if the authorities let the crisis fester, Fitch Ratings has warned. The agency said the rate of non-performing loans (NPLs) has reached between 15pc and 21pc and is rising fast as the country delays serious reform, relying instead on a fresh burst of credit to put off the day of reckoning. It would cost up to $2.1 trillion to clean up this toxic legacy even if the state acted today, and much of this would inevitably land in the lap of the government. ‘There are already signs of stress that point to NPLs being much higher than official estimates (1.8pc), most obviously the increased frequency with which the banks are writing off or offloading loans,’ it said. The banks have been shuffling losses off their balance sheets through wealth management vehicles or by classifying them as interbank credit, seemingly with the collusion of the regulators. Loans are past 90 days overdue are not always deemed bad debts.
Possibly the defining business trend coming out of the financial crisis has been a ‘startup boom.’ Everyone is building an app or starting their own business it seems. This image, however, may be just an illusion, according to Michelle Meyer, US economist at Bank of America Merrill Lynch. Both the formation of firms (for example, McDonald’s as a whole) and establishments (an individual McDonald’s restaurant), have dropped off precipitously since the financial crisis and remained low. This is important, according to Meyer, because new businesses typically hire faster and produce higher levels of productivity than firms that have been around for a while. Thus the decline in business formation can explain some of the labor market’s postrecession problems, and is at least part of the reason for the steep drop in productivity. Additionally, Meyer says, it can end up affecting the nation’s gross domestic product. Here’s Meyer (emphasis added):
China has failed to curb excesses in its credit system and faces mounting risks of a full-blown banking crisis, according to early warning indicators released by the world’s top financial watchdog. A key gauge of credit vulnerability is now three times over the danger threshold and has continued to deteriorate, despite pledges by Chinese premier Li Keqiang to wean the economy off debt-driven growth before it is too late. The Bank for International Settlements warned in its quarterly report that China’s ‘credit to GDP gap’ has reached 30.1, the highest to date and in a different league altogether from any other major country tracked by the institution. It is also significantly higher than the scores in East Asia’s speculative boom on 1997 or in the US subprime bubble before the Lehman crisis. Studies of earlier banking crises around the world over the last sixty years suggest that any score above ten requires careful monitoring. The credit to GDP gap measures deviations from normal patterns within any one country and therefore strips out cultural differences. It is based on work the US economist Hyman Minsky and has proved to be the best single gauge of banking risk, although the final denouement can often take longer than assumed. Indicators for what would happen to debt service costs if interest rates rose 250 basis points are also well over the safety line.
China Debt Default? To alleviate its debt problem, China should adopt appropriate macro-economic policies encompassing currency depreciation and cutting interest rates to an ultra-low-level within two to three years, believe Nomura analysts. Yang Zhao and team said in their September 14 research piece titled ‘China: Solving the debt problem’ that they believe RMB depreciation will continue and forecast USD/CNH at 7.1 at the end of 2017. China Debt Default – China should join ultra-low interest rate club Also see the Big Short II – hedge funds bet on major fall on yuan Zhao and colleagues highlight two stylized ‘facts’ which haven’t been properly understood: high debt versus low leverage and the ever-rising M2-to-GDP ratio, which has been growing for over three decades, except during 2004 to 2008. The analysts argue that China faces a debt problem, but not a leverage problem. They highlight that while the country’s debt-to-GDP ratio is breathtakingly high, its corporate debt-to-asset ratio is generally low. They attribute the low leverage ratio largely to fast-growing asset values, driven by fixed asset investment and rising property prices.
Victory for Donald Trump in the U. S. presidential election could be a game changer for China’s economy. The candidate’s promise to slap punitive tariffs on Chinese imports would be highly contractionary, deflationary and wipe hundreds of billions off the value of the world’s second-biggest economy, according to new research by Kevin Lai, the Hong Kong-based chief economist for Asia (excluding Japan) at Daiwa Capital Markets. Lai estimates that Trump’s suggestion for a 45 percent tariff on Chinese goods to narrow the trade deficit with America would spark an 87 percent decline in China’s exports to the U. S. – a decline of $420 billion. That would, over time and factoring in multiplier effects, mean a 4.82 percent blow to China’s gross domestic product, or about a half trillion dollars’ worth. It doesn’t even take into account an estimated $426 billion in foreign direct investment repatriation if companies started to withdraw. ‘A loss of GDP or a slowdown in GDP growth of this scale would be staggering,’ Lai wrote in a note entitled ‘What would a Trump presidency mean for China.’ ‘Eventually, Trump and his administration may actually compromise with a watered-down version of tariffs.’
The great ‘science’ of economics once discovered an empirical relationship between GDP and unemployment that has been dubbed Okun’s Law. It simply states that the unemployment rate rises as GDP contracts, or vice versa, as production shrinks less people will be employed. It is not exactly rocket science. However, this made us think about another relationship we have observed lately. US government real tax receipts have been trending downwards while employment has kept up remarkably well. If we draw a chart of US withholding taxes (smoothed from all the short-term noise) and overlay that with employment growth, we find a worrisome divergence that has historically not been the
Since truth hardly matters anymore, we all get numb to the day-to-day barrage of falsities and outright lies that come at us every day. But something clicked today and caused me to simply stop and take it all in. And even “take it all in” is an exaggeration on my part. I couldn’t take it all in if I wanted to. I simply paused this morning as I perused the headlines and let the lies and corruption wash over me for a moment. Let’s start with The Federal Reserve. Not only is this organization named in a way that is intentionally trying to deceive you, their mission of sparking inflation through the endless creation of new fiat cash (upon which their owners can charge interest) is theft on a grand scale. All of your hard work, in the form of your accumulated savings, is being constantly devalued and stolen by these criminal bankers. But no, you’re told that The Fed is this omnipotent, altruistic and benevolent organization that works for the American people. Wrong! They work for their owners, first and foremost. And who are their owners? Their member Banks. And then there’s this notion that The Fed must now raise the Fed Funds rate because “the economy is robust and strong”. Really? Last I checked, Q1 GDP came in at just 1.1% and the just-revised estimate of Q2 GDP is also just 1.1%. Even today, productivity has declined again while US manufacturing levels have collapsed to economic contraction levels. Again, you’re being lied to. A Fed Funds rate hike by The Fed is NOT designed to benefit you or the general economy. Instead, it’s designed to benefit The Fed’s member Banks. How and why is hard to know but, like every other Fed decision from TARP to QE, the moves the FOMC and Fed make are ALL designed with The Banks’ best interests at heart, not yours. Is this what you are told on CNBS or BBG? Of course not. Instead, just lies and deception in order to pump an agenda.
The massive wildfires in Alberta earlier this year had a tremendously negative effect upon not just the oil sector but all of Canada. Not surprisingly, Canadian GDP released today was abysmal. Falling 1.6% in Q2, that was the worst quarter since 2009. Fortunately for the Bank of Canada who had been ‘stimulating’ again since last July when it cut the overnight rate by 25 bps to 0.50%, the wildfires give its policies some cover to explain what would have been otherwise already dismal. Pre-report estimates showed that the wildfires were expected to contribute about 1% to 1.1% of the GDP decline. Thus, even without the hellish conflagration across a huge chunk of Alberta’s oil production fields Canadian GDP would still have contracted in Q2. After such an atrocious and devastating year last year, as ‘transitory’ oil prices crashed the Canadian economic margins, 2016 was supposed to be the year to forget all that. Instead, what we find in Canadian GDP is what we find almost everywhere else – unstable growth. From the start of 2015, GDP has contracted in half of the six quarters since; and of the other three, one, Q4 2015, was near zero, leaving just two quarters as significantly positive where even the best was just 2.5%.
There’s ‘very little’ that Japan can do about its mounting debt pile, which presents a potential risk to growth, according to Pacific Investment Management Co.’s Jamil Baz. With a government debt load that’s 2 1/2 times the size of annual gross domestic product and a total national borrowing burden that’s six times as large, ‘Japan is suffering from the excesses of the past’ and the country ‘is in a bind right now,” the fund manager’s head of client analytics said in an interview in Sydney last week. Japan’s economy is still struggling to gain traction even after policy makers hit it with repeated doses of budgetary stimulus and unprecedented monetary easing to drag the country out of its deflationary funk. The Bank of Japan’s adoption of negative interest rates has pushed down debt financing costs for now, but repeated delays to a planned sales tax increase, a new 28 trillion yen ($272 billion) fiscal boost from Prime Minister Shinzo Abe and the pressures of an aging population mean the borrowing pile is likely to keep on growing.
Chinese companies’ borrowing costs have never been so low. That’s little consolation to firms cutting debt rather than investing amid a slowing economy. The amount of local yuan bond sales minus maturities fell 39 percent in August from a year earlier for non-financial firms to 124 billion yuan ($18.6 billion), data compiled by Bloomberg show. Net issuance since March 31 has slowed to 496 billion yuan after a record 810 billion yuan in the first quarter of 2016. Yields on AA and AA rated five-year securities dropped to record lows this month. The decline in bond financing and the lowest fixed-asset investment growth since 1999 suggest central bank monetary easing will have trouble reviving growth that’s forecast to slow through next year. China must balance cutting corporate debt, which more than doubled in five years to 111.7 trillion yuan at the end of 2015, with steps to revive the world’s second-biggest economy. ‘Firms are adjusting their balance sheets by slowing further investments and hoarding cash because they see more uncertainty with economic growth,’ said Xia Le, chief Asia economist in Hong Kong at Banco Bilbao Vizcaya Argentaria SA. ‘For the aggregate economy, it means slower growth because fewer companies are expanding.’
Why The Eurozone Is A Financial Powder Keg ………. In short, Europe is a financial and political powder keg. The ECB is bluffing a $40 trillion debt market (including bank loans) and the Brussels apparatchiks are bluffing 340 million citizens. The only problem is that the true facts of life are so blindingly obvious that it’s only a matter of time before these bluffs are called. And then the furies will break loose. In the first place, the EU-19 is marching toward the fiscal wall and even Germany’s surpluses cannot hide the obvious. During the last six years, the collective debt-to-GDP ratio among the Eurozone nations has gone from 66% to 91% of GDP. The sheer drift of current policy momentum will take the ratio over the 100% mark long before the end of the decade.
For some time, Stephanie Pomboy, an economist and the founder of MacroMavens, has pushed a provocative theory that a crisis-chastened U. S. consumer would retard global growth. That is why a U. S. recovery has taken so long to take off, and why Japan and Europe look set to embark on more rounds of quantitative easing. An avid reader of Shakespeare, Pomboy appreciates the comic and tragic dimensions of the markets – the giddy optimism for the second half of the year, and the potentially disastrous consequences of excessively low rates. As stocks teetered at new highs, we phoned Pomboy in Vail, Colo., where she lives when not in Manhattan, to hear her latest views. They aren’t rosy: Investors and policy makers are deluding themselves that we will soon return to a pre-financial crisis framework. Things have changed, she says, which means expectations for economic growth in the second half are far too optimistic. And today’s low rates could cause another financial crisis, bankrupting pension plans, putting retirees at risk, and hurting stocks. Barron’s: You like to focus on the consumer – and plot U. S. consumer spending as a percentage of GDP versus world trade. Why? Pomboy: What ignited and supported the entire era of globalization was the spendthrift U. S. consumer; economies have been totally reliant on trade to U. S. consumers. This once-in-a-generation asset deflation will fundamentally change behavior, just as the Depression changed an entire generation’s attitude about spending and saving.
You’ve probably heard of the ‘capex cliff’, the term for the collapse in capital expenditure plans by Australian businesses that is an inevitable feature of the economy following the once-in-a-lifetime mining investment boom driven mainly by the surge in Chinese demand over the past two decades. But with Australia’s manufacturing industry having been hollowed out too over the past decade, the capital investment pipeline for both mining and manufacturing are gone. So the fall-off, when measured in terms of a percentage of GDP, is nothing short of spectacular in historical context, as shown in this chart from Macquarie:
Japan’s exports declined the most since 2009, with shipments down for a 10th consecutive month. The continued drop highlights the difficulty of kick-starting growth and pulling Japan’s economy out of the doldrums. Key Points Overseas shipments fell 14 percent in July from a year earlier, the Ministry of Finance said on Thursday. The median estimate of economists surveyed by Bloomberg indicated a 13.7 percent decline. Imports dropped 24.7 percent, leaving a trade surplus of 513.5 billion yen ($5.2 billion). Big Picture Weak exports have been a drag on Japan’s growth, with net exports cutting 0.3 percentage point off gross domestic product growth in the second quarter.