A 100% Consensus
This doesn't happen very often. Marketwatch reports that Jim Bianco points out in a recent market comment that the 67 economists taking part in a regular Bloomberg survey have a unanimous forecast regarding treasury bond yields: they will be higher 6 months from now. This is a truly striking result, and given the well-known propensity of mainstream economists to guess wrong (their forecasts largely consist of extrapolating the most recent short term trend), it may provide us with a few insights.
In fact, considering that there have been only a handful of instances since 2009 when a majority of the economists surveyed predicted a decline in yields, we can already state that their forecasts regarding treasuries are quite often (though obviously not always) wide of the mark. In fact, so far this year they are already wrong again – and so are fund managers, as they hold their lowest exposure to treasuries in seven years.
This is not the only thing there is complete unanimity about. Not a single economist taking part in a separate survey believes an economic downturn is possible.
“Economists are unwavering in their assessment of where yields are headed in the next half year.
Jim Bianco, of Bianco Research, points out in a market comment Tuesday that a survey of 67 economists this month shows every single one of them expects the 10-year Treasury yield to rise in the next six months.
The survey, which is done each month by Bloomberg, has been notably bearish for some time now, with nearly everyone expecting rising rates. In March, 97% expected rising rates. In February, 95% expected yields to climb. And in January, 97% held that expectation. Since the beginning of 2009, there have only been a handful of instances where less than 50% expected rates to rise.
Still, the fact that every single survey participant is bearish is striking. The last time the survey had that result was in May 2012, when benchmark yields were well below 2%.
“Literally there is maybe one economist in the United States straddling the bullish/bearish divide on interest rates. The rest are bearish,” Bianco writes.
He adds that a J.P. Morgan client survey shows that the percentage of money manager respondents who said they are underweight Treasurys is the second highest in seven years.
This is all the more surprising when we consider that investors went into 2014 thinking yields would rise significantly. Instead, the benchmark yield is lower than when the year started, as the market waded throw subpar economic data, geopolitical tensions, and uncertainty over the Federal Reserve. The 10-year note last traded at a yield of 2.72% on Tuesday, down from just over 3% on Dec. 31.
Then again, a separate poll of economists recently showed that exactly zero expect the economy to contract.
But when the entire market thinks one thing is about to happen, the opposite outcome is often in store, notes James Camp, managing director of fixed income at Eagle Asset Management. So don’t count out that result with Treasurys, he advises.
“It’s the most hated asset class,” says Camp, but Treasurys are some of the best performers year-to-date.”
Color us unsurprised regarding the fact that the 'most hated asset class' has turned out to be one of the better performing so far this year. Gold is probably hated even more, and for similar reasons. Everybody expects the weakest recovery of the entire post WW2 era to reach 'escape velocity' (whatever that is supposed to mean), even after adding almost $8 trillion to the federal debt and some $4.8 trillion to the broad true money supply since the 2008 crisis have led to such a dismal outcome (of course as card-carrying Austrians we believe this development is precisely what should have been expected).
The Prophets of Doom
Repent, ye sinners!
(Photo via thecargoculte.com / Author unknown)
The end is nigh! It is quite fascinating that prophecies of imminent worldwide doom enjoy such enduring popularity. Predictions of global apocalypse have been highly fashionable throughout history. As an added bonus, the caste of professional doomsayers was often able to make quite a good living from predicting that humanity's downfall was just around the corner.
The oldest known prediction of the end of the world is recorded on Assyrian tablets dating from the 28th century BC (more likely they are actually Akkadian or Sumerian, given the date and have been wrongly attributed). Followers of Zoroastrianism (a religion founded in 700 BC) published the following not entirely unreasonable forecast, aside perhaps from the part about the 'sinners and the pious': They claimed that the end of the world will happen when a comet, called Gochihr, strikes the earth. It will cause all the world's metals to melt and will burn up the world. At the same time, sinners and the pious will pass through this river of molten metal. Sinners will have their sins burnt away and the pious will feel like they're "passing through warm milk." (in chapter 30 of the 'Bundashin').
In 634 BCE, the downfall of Rome was widely expected. This forecast was based on the myth that 12 eagles had revealed a mystical number to Romulus, which represented the lifetime of Rome. A number of early Romans hypothesized that each eagle represented 10 years.
In 389 BC, undeterred by Rome's failure to fall 250 years earlier, the prediction of doom was revised. The mystical number revealed to Romulus was now held to represent the number of days in a year, so the destruction of Rome was rescheduled for 389 BC. Once again, nothing happened.
In AD 66-70, Simon bar Giora of the ascetic Essene sect announced that the Jewish revolt against the Romans was the 'final end time battle'. The 'redemption of Zion' was allegedly at hand. The world unexpectedly kept turning from AD 71 onward.
In AD 365, Bishop Hilarius of Poitier, a.k.a. 'Malleus Arianorum' (the 'Hammer of the Arians') or 'Athanasius of the West', announced that the world would end that very year. Funny enough, his name actually stems from the Latin word for 'cheerful' (the English word 'hilarity' is from the same etymological root). Even though Augustine of Hippo called him “the illustrious doctor of churches”, his end time prediction somehow didn't pan out.
In AD 375 to AD 400, Bishop Martin of Tours (a.k.a. Sanctus Martinus Turonensis) had an epiphany. He reckoned that Hilarius was only slightly off with his prediction. It was clear to him that the world was undoubtedly set to end before AD 400. According to Martin's biographer Sulpicius Severus, a group of pagans proposed to fell a sacred fir tree, if only Martin would agree to stand directly in its path. He did so, and it miraculously missed him. In spite of his uncanny ability to avoid getting hit by falling trees, the world still failed to end at the appointed date.
Maintaining the Empire
We made an observation last week: The US empire and its credit bubble will probably come to an end at the same time. Each depends on the other. If the US were not so big and powerful, it could not impose its money as the world’s reserve currency. Without its position as the issuer of the world’s reserve currency (dollars instead of gold), the US wouldn’t be able to flood the world with its cash.
Without the rest of the world’s need for dollars, the credit bubble couldn’t continue growing. And without the credit growth there would be no way to pay the expense of maintaining a worldwide empire. This does not explain the miracle of “growth without savings” we discussed last week, but it gives us a hint as to what will happen when the trick no longer works.
All Empires End
All bubbles … and all empires … eventually blow up. An empire that depends on a credit bubble is doubly explosive. All it takes is a turn in the credit cycle, and the fuse is lit. We wrote a book on the subject, along with co-author Addison Wiggin, in 2006. From the invasion of the Philippines to the Vietnam War… the US empire was financed by the rich, productive power of the US economy.
But as the war in Vietnam was winding down, the source of imperial finance changed from current output to future output. The US switched to a purely paper money system … and turned to borrowing to finance its military adventures. Today’s blockhead puffs out his chest and enjoys feeling like a big shot. He passes the bill on to tomorrow’s taxpayer.
The argument for heavy security spending collapsed between 1979 (when China took the capitalist road) and 1989 (when Russia abandoned communism). But by then, the “military-industrial complex” (or the military-industrial-congressional complex) President Eisenhower warned us about was already firmly in control of Washington. Presidents – Democrat and Republican – came and went. Nothing nor nobody could keep resources from the security industry.
One disastrous adventure led to another. Each provided a source of more funding … more status … more power … more generals … more security clearances … more clandestine, “off-budget” operations … and more jackass parasites pretending to protect Americans from unknown enemies.
The return on investment from this spending was probably well below zero. That is to say the foreign meddling probably created more enemies than it neutralized. But it didn’t matter.
Besides, the same phenomenon was happening in other major industries. In health care, education and finance more and more resources were commanded by political considerations – even though these industries were still considered part of the private sector economy.
In education, for example, the number of teachers stagnated, as the number of administrators and “educators” soared. Freighted with zombies, there were few real gains in these sectors. Meanwhile, the US manufacturing sector withered. Real wages stopped increasing. Economic growth slowed.
And social welfare spending increased. “Guns and Butter” was LBJ’s promise. Both were greasy and slippery. And without the strong growth of the 1950s and 1960s, it was not possible to pay for so much zombie lard. The US empire turned to credit. It has not had a genuinely balanced budget since. Instead, since the end of the Carter administration, deficits have increased, year after year.
When the Reagan team came into office in the early 1980s there was a fierce internal battle about what to do with federal finances. The fiscal conservatives – led by David Stockman, Reagan’s young budget director – felt the government had an obligation to balance its budget. The new, or “neo,” conservatives were more hip to the public mood … and to the miracle made possible by increasing credit.
“Deficits don’t matter,” said Dick Cheney. The neocons won. Stockman left the administration and went to work on Wall Street. Deficits soared. Later, Stockman wrote a good book, The Great Deformation, explaining how the US economy had been corrupted by its leading industries: government, security and finance.
By the 1990s, the combination of a bull market on Wall Street, falling interest rates, the end of the Cold War and disillusionment with old-style democratic spending left the Clinton administration in a rare sweet spot. It found it couldn’t spend money fast enough. Its revenues were high. Its spending opportunities were low. The result was what was feted as a “balanced budget” – but the books only balanced if you ignored the cost of Social Security!
It was President George W. Bush, however, who really took the lid off the credit machine. Details to follow … tomorrow.
The above article is from Diary of a Rogue Economist originally written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.
A Nightmare of Red Tape
Last glimpse of a real estate practitioner drowning in CFPB red tape
(Image source unknown – The Web)
Before the bailout, General Motors was known as a giant pension plan that occasionally made cars. The real estate industry today is a government compliance business. Real estate practitioners exist for the purpose of filling out a mountain of forms and occasionally sell houses or make loans.
From my personal experience, my first real estate offer was written on a single page 8.5"x11" form (circa late 1970s). My first client's loan application, all two pages of it, was initially denied. The borrower had over 20% to pay down and was self-employed with more than sufficient income to service the loan. After a sit down meeting with the loan officer, explaining the details, the loan was approved as it should have been. There is no chance this borrower would be approved today. The escrow closing statement was one legal size page and the loan documents amounted to something like four legal size pages.
Fast forward to today, it is impossible to count the mountain of paperwork involved in a simple real estate transaction. A purchase contract, with addenda, can easily exceed 50 pages. The loan package, from the loan application to the loan documents, including all the verifications, is best measured in inches, or by weight. An entire transaction file is about the size of Tolstoy's "War and Peace".
It begs the question: is the system therefore better today than the simple version of old? The answer is a resounding NO.
A Fool All Year Round
Meet typical writer of foreign policy editorials for the WP
(Image source unknown)
Coming off successes in Iraq and Afghanistan, it makes sense that the US should send troops to Ukraine, no?
When we first read this in the Washington Post, we thought it might be a late April Fools’ Day joke. Then we discovered the writer was sincere about it; apparently, James Jeffrey is a fool all year round:
“The best way to send Putin a tough message and possibly deflect a Russian campaign against more vulnerable NATO states is to back up our commitment to the sanctity of NATO territory with ground troops, the only military deployment that can make such commitments unequivocal.”
To its credit, the administration has dispatched fighter aircraft to Poland and the Baltic states to reinforce NATO fighter patrols and exercises. But these deployments, like ships temporarily in the Black Sea, have inherent weaknesses as political signals. They cannot hold terrain – the ultimate arbiter of any military calculus – and can be easily withdrawn if trouble brews.
Troops, even limited in number, send a much more powerful message. More difficult to rapidly withdraw once deployed, they can make the point that the United States is serious about defending NATO‘s eastern borders.”
And why not? The US has a global empire, supported by an unprecedented mountain of debt. All bubbles need to find their pins. And all empires need to blow themselves up. What Jeffrey is proposing is to speed up the process with more reckless troop deployments.
How to Rile Up China
Reuters reports that Japan's government has recently decided to expand the country's military footprint for the first time in four decades. This is in keeping with the nationalistic-militaristic agenda of Shinzo Abe, whose political philosophy is informed by his grandfather Nobusuke Kishi, a wartime cabinet minister and later prime minister. Abe is member of a group in the LDP calling itself the 'true conservatives', and one of the aims of this group is the restoration of 'national greatness' via expansion of the military and altering the pacifist post WW2 constitution. In other words, these people are bad news.
“Japan began its first military expansion at the western end of its island chain in more than 40 years on Saturday, breaking ground on a radar station on a tropical island off Taiwan. The move risks angering China, locked in a dispute with Japan over nearby islands which they both claim.
Japanese Defense Minister Itsunori Onodera, who attended a ceremony on Yonaguni island to mark the start of construction, suggested the military presence could be enlarged to other islands in the seas southwest of Japan's main islands.
"This is the first deployment since the U.S. returned Okinawa (1972) and calls for us to be more on guard are growing," Onodera told reporters. "I want to build an operation able to properly defend islands that are part of Japan's territory."
The military radar station on Yonaguni, part of a longstanding plan to improve defense and surveillance, gives Japan a lookout just 150 km (93 miles) from the Japanese-held islands claimed by China.
Building the base could extend Japanese monitoring to the Chinese mainland and track Chinese ships and aircraft circling the disputed crags, called the Senkaku by Japan and the Diaoyu by China.”
The disputed islands are the very issue over which Japan and China could one day come to blows. Shinzo Abe promptly added to the tension by sending an offering to the Yasukuni shrine, where a number of 'class A' war criminals are entombed (for a backgrounder on the shrine and its history see our previous article “The Strange Shrine Obsession of Japan’s LDP Politicians”). Evidently, Abe just cannot leave the shrine alone, and this is actually quite telling. His predecessor strictly avoided visits to the shrine, which accomplish little except angering the political leaders of China and South Korea. For Abe affirming his credentials as a nationalist apparently takes precedence.
File Under 'Foreseeable'
On Friday we wrote the following regarding the Geneva agreement that was supposed to chart the way forward for the Ukraine:
“We concur with [Jason] Ditz that both sides accusing each other of reneging on the deal is something one must probably expect to happen.”
The ink on the agreement wasn't even dry when the accusations started flying already. Reuters reports:
“At least three people were killed in a gunfight in the early hours of Sunday near a Ukrainian city controlled by pro-Russian separatists, shaking an already fragile international accord that was designed to avert a wider conflict.
The incident triggered a war of words between Moscow and Ukraine's Western-backed government, with each questioning the other's compliance with the agreement, brokered last week in Geneva, to end a crisis that has made Russia's ties with the West more fraught than at any time since the Cold War.
The separatists said armed men from Ukraine's Right Sector nationalist group had attacked them. The Right Sector denied any
We also pointed out that
“[...] one must also consider that the idea that Russia's government can 'order' the separatists to surrender and hand over their weapons is likely erroneous, although it possibly has a certain degree of influence with them.”
In fact, it is highly likely that the supposed influence of Russia's government on the separatists is of the same order as the influence the government in Kiev has on the 'Right Sector' – fairly small. Both sides have their extremists, whose purposes and intentions are diametrically opposed.
“Separatists are the key players in this crisis, but it does not appear they were even invited to the table.”
He also noted that it is not even certain who, if anyone, can speak for the separatists. At least one of the more prominent leaders (Pavel Gubaryev) of the Eastern Ukrainian separatists is imprisoned in Kiev.
The Eternal War's Legacy of Destabilization
The neo-conservative clique running George W. Bush's foreign policy was all gung-ho. The WTC attack had given them the opening they had been waiting for. They were always unhappy with the elder Bush's decision to halt the attack on Iraq as soon as the military objective of getting Saddam's armies out of Kuwait was achieved. 'Containment' was not for them. 'Everyone wants to go to Baghdad, real men want to go to Teheran', one of their battle cries went. Just as long as none of their own children were involved in the fighting of course. As is usual with the men who order others into war, they themselves were no longer of fighting age. It is always young men (and these days women as well) that are sent to die for one cause or another.
So what is the legacy of the intervention? Here is a list of what happened in Iraq over the past several days:
448 people dead in politically and religiously motivated violence in just 6 days and even more wounded. And on and on it goes. A day like April 18, when just 35 people were killed counts as 'peaceful' nowadays.
The Smart and the Good
[excerpted from “The New Empire of Debt” - ed.]
“Dere’s dem dat’s smart… an’dere’s dem dat’s good,” said Uncle Remus. Many young people today can’t even identify Uncle Remus. Some of their elders might want to arrest you for quoting him in the original dialect. But the man was a genius.
When we were young, we were a lot smarter. But as the years go by, many of the things we thought were smart don’t seem so smart anymore. And now we realize that, no matter how smart we think we are, we are never quite smart enough.
We think stocks are going up; we think we can build a better world in Mesopotamia; we think we can tell the fellow down the street how to discipline his children or decorate his house. But what do we know?
It is easier to be smart than to be good; that’s why there are so many smart people, and so few good ones. Smart men get elected to high office. They run major corporations. They write editorials for the newspaper.
Pity the poor good man; he goes to parties and has nothing to say that is not mocking and cynical. Others talk about their smart deals, their smart ideas, their smart plans and successes. Women crowd around them; a smart man grows taller as he speaks. The good man shrinks.
Ukraine's Army Fails to Retake Anything in the Eastern Ukraine
The Ukrainian army's recent foray into the country's East to regain control over administrative buildings seized by separatist militants has proved spectacularly unsuccessful. In Slovyansk the operation stalled out, although there was actually a shoot-out in Slovyansk which left three people dead. Pro-Russian groups insist that these were unprovoked shots at peaceful protesters, but it is of course difficult to be sure what actually happened.
“A military operation that the Ukrainian government said would confront pro-Russian militants in the east of the country unraveled in disarray on Wednesday with the entire contingent of 21 armored vehicles that had separated into two columns surrendering or pulling back before nightfall. It was a glaring humiliation for the new government in Kiev.
Though gunshots were fired throughout the day, and continued sporadically through the evening in this town that is occupied by pro-Russian militants, it was unclear whether anybody had been wounded. One of the armored columns stopped when a crowd of men drinking beer and women yelling taunts and insults gathered on the road before them, and later in the day its commander agreed to hand over the soldiers’ assault rifles to the very separatists they were sent to fight.
Another column from the same ostensibly elite unit, the 25th Dnipropetrovsk paratrooper brigade, surrendered not only its weapons but also the tracked and armored vehicles it had arrived in, letting militants park them as trophies, under a Russian flag, in a central square here. A pro-Russian militant then climbed into the driver’s seat of one and spun the vehicle around on its tracks, screeching and roaring, to please the watching crowd.
The events of the day underscored the weakness of the new government in Kiev entering critical talks with the United States and Russia in Geneva on Thursday over Ukraine’s future. Unable to exercise authority over their own military, officials increasingly seem powerless to contain a growing rebellion by pro-Russian militants that has spread to at least nine cities in eastern Ukraine.
In a tactical error, the Ukrainian soldiers on Wednesday had no accompanying force to control the crowds that formed around their advancing units. Their task, to confront armed militants intermingled with civilians, would be extremely difficult for any conventional army, but for this group, which apparently lacked the tools and the heart to carry it out, it proved to be impossible.”
The Death of Sashko Bily
EU representatives have let the new government in Kiev know that they are deeply concerned about the armed storm troopers of 'Pravy Sektor' and other militant groups in the Ukraine. Pravy Sektor is the organization that has done more than any other of the groups involved in the Kiev protests to chase former president Yanukovich and his henchmen away – mainly because it was not shy to resort to violence.
President Turchynov has quickly promised to disarm all extremist groups. There has already been one much debated confrontation between security forces (SOKOL) and one of the leaders of 'Pravy Sektor', Alexandr Muzychko, better known as Sashko Bily. Muzychko died in a shoot-out in a cafe in Rivne in the western Ukraine. Muzychko was actually wanted for war crimes in Russia: According to IB Times, “Russian officials had issued an arrest warrant for Muzychko for alleged atrocities, including torture, against Russian troops in Chechnya during the 1990s.”
IB Times also notes that there are conflicting reports about how exactly Muzychko died, who incidentally had predicted that he would be killed shortly before it happened in a video posted on Youtube. He in turn also repeatedly threatened to kill the Ukraine's new interior minister Arsen Avakov, whom he apparently disliked. Evidently, Asakov was faster.
The BBC reports that 'Pravy Sektor' promptly declared it would avenge Sashko Bily's death:
A Generous Offer He Couldn't Refuse
The tireless advocate of European-style socialism for America, the New York Times' famous promoter of Keynesian snake-oil, Paul Krugman, has joined the 'war against inequality' by deploying himself right on the front lines.
No, he still isn't going to debate Robert Murphy on economic theory so that $100,000 can be donated to New York food banks. That would be tantamount to participating in a 'circus'. Only 'serious debates' would be of interest to the great man. $106,000 have been pledged to help poor people? Well, f*** the poor people, the great man simply has no time for Mr. Murphy's 'circus'.
So what does he have time for? After all, the poor are dear to his heart, as he never tires to stress when he reminds his followers that the market is far 'too free', and that more regimentation, higher taxes and more deficit spending and money printing are absolutely needed to save the day and help the downtrodden against the nefarious schemes of the plutocrats (this is quite ironic, because the plutocrats probably agree wholeheartedly with Krugman's proposals).
Enter the University of New York (CUNY) and its Luxembourg Income Study Center , a research arm devoted to “studying income patterns and their effect on inequality”. Via 'Gawker' we learn that the institute has hired the selfless crusader to support its work on 'income inequality studies' for the pittance of $225,000, which he will receive for an engagement lasting 9 months. Surely an onerous workload awaits the poor man at the 'Income Study Center' if he should accept.
One imagines that there should at least be some 'serious debate', or perhaps that he will even teach a course that explains to students why free markets are bad. After all, growing inequality is only to be expected if one allows capitalist exploiters to run wild, as is the case in the completely unregulated free-for-all the world is forced to endure at present.
“According to a formal offer letter obtained under New York’s Freedom of Information Law, CUNY intends to pay Krugman $225,000, or $25,000 per month (over two semesters), to “play a modest role in our public events” and “contribute to the build-up” of a new “inequality initiative.”
It is not clear, and neither CUNY nor Krugman was able to explain, what “contribute to the build-up” entails.
It’s certainly not teaching. “You will not be expected to teach or supervise students,” the letter informs Professor Krugman, who replies: “I admit that I had to read it several times to be clear … it’s remarkably generous.” (After his first year, Krugman will be required to host a single seminar.)”
It looks as though the US stock market is in the process of topping out. But if you’d bet heavily on a bear market, each time you saw one coming, you’d be broke by now. We will wait to see what happens…
Meanwhile, we are still puzzling over the miracle produced by the Fed. Uri Geller could bend spoons. The Fed bends the entire economy. Hardly a single price is unaffected. Hardly a single business plan or investment strategy goes forward without an eye on the central bank.
Jesus turned water into wine and multiplied loaves and fishes. But the Fed make the Nazarene seem like a two-bit shell game hustler. The loaves and the fishes couldn’t have had a market value of more than a few thousand shekels!
Swiss Referendum on Introducing the World's Highest Minimum Wage
Most of our readers probably know what we think of minimum wages, but let us briefly recapitulate: there is neither a sensible economic, nor a sensible ethical argument supporting the idea.
Let us look at the economic side of things first: for one thing, the law of supply and demand is not magically suspended when it comes to the price of labor. Price it too high, and not the entire supply will be taken up. Rising unemployment inevitably results.
However, there is also a different way of formulating the argument: the price of labor must not exceed what the market can bear. In order to understand what this actually means, imagine just for the sake of argument a world without money. Such a world is not realistic of course, as without money prices the modern economy could not exist. However, what we want to get at is this: workers can ultimately only be paid with what is actually produced.
As Mises has pointed out, most so-called pro-labor legislation was only introduced after enough capital per worker was invested to make the payment of higher wages possible – usually, the market had already adjusted wages accordingly.
However, unskilled labor increasingly gets priced out of the market anyway, which is where the ethical argument comes in. If a worker cannot produce more than X amount of goods or services, it is not possible to pay him X+Y for his work. Under minimum wage legislation he is condemned to remain unemployed, even if he is willing to work for less.
Other articles that might be of interest for you:
- A Brilliant Look at US Monetary History
- Growing Unrest in the Eastern Ukraine
- The Germans Just Love Russia
- Insiders Become Extremely Pessimistic
- Gold and Gold Stocks – A Comment on the Correction
- Walt's Law
- How This Central Bank Bubble Ends
- Who Are We Killing? It Seems a Good Question
- Why Was China Carrying Gold?
- Nasdaq Suffers Worst Day Since 2011