China's 'Eco' Ghost Town
Back in 2006, Hu Jintao was excited when he visited Caofeidian, the “the world’s first fully realized eco-city”, built on land reclaimed from the sea. Since construction began in 2003, it has devoured the princely sum of $100 billion, most of it provided by banks. One million resident were once supposed to live there. It is a ghost town today, sporting only a few thousand inhabitants. Practically no-one has ever stayed in the city, and the buildings are already deteriorating. In fact, many of the buildings have been left half-finished, as credit eventually ran out.
The Guardian has posted a number of haunting pictures of this monument to massive capital malinvestment.
As the Guardian notes:
The ‘eco-city’ was made possible through huge bank loans. Once it was half-built, these loans were halted and many projects suspended due to the rising cost of raw materials and a lack of government support.”
A few of the pictures are reproduced below:
The city's obligatory bridge to nowhere – only the ten pylons have been erected, then the project had to be abandoned.
(Photo credit: Gilles Sabrie)
Behold the Monet
Economics is like a Monet painting. Stand too close and all you see is a bunch of seemingly random paint strokes. Back up a few steps and an image emerges.
The painting of bubblenomics started with the Plaza Accord, September 1985, where five nations agreed to manipulate the dominant currencies at the time. Japan enjoyed a 50% devaluation of the US$ vs the yen, artificially enriching its citizens so they could travel the world in busloads with eighty pounds of cameras around their necks.
The consequences of that bubble have yet to be corrected. Twentyfour years of fiscal and monetary accommodation led Japan to sport the world's largest public debt-to-GDP ratio.
The next big one was the US dotcom bubble, which was generating great wealth during the 1990s. More importantly, it started the era during which income and savings became “old school”. Everyone could live off and retire on never ending asset appreciation. When that bubble burst, in came Greenspan with the mother of all bubbles – the sub-prime bubble.
Monet's famous “Twilight of the Bubble”
(Painting: San-Giorgio-Maggiore by Twilight, by-Claude-Monet)
The Russell 2000 Index and the Modified Davis Method
The Russell 2000 Index (RUT) has spent this year oscillating in a wide range, making very little net progress:
Russel 2000 index daily – no progress this year – click to enlarge.
The problem is that it is therefore underperforming the big cap S&P 500 ever more. Given that outperformance by the Russell has been a hallmark of the cyclical bull market since the 2009 low, this development should be of grave concern to investors.
There are thousands … millions … gazillions of dots in the universe. Today, we connect two of them.
First, let us note that so Zen-like and calm are investors that the worries of Thursday – triggered by the downing of Malaysia Airlines Flight MH17 over eastern Ukraine – were forgotten by Friday.
The Dow closed up 123 points on the last day of the week. Gold sold off. So, let’s return to our dots. The first one is epistemological. The second is an important observation about investing.
Hi! I'm from Australia and I do exist …
(Photo via Fotoagentur Holgi)
Equal Opportunity Offender
Let us begin with some criticism from a reader:
“What you said about Janet Yellen is disrespectful to All Women. You said you meant no disrespect, and then you go ahead and say most women her age are baking cookies for their grandchildren and saying she has soft shoulders.
You would not make the same kind of sexist comment about a man holding the position that she does. You should grow up… your comments are so old fashioned and out of touch. If you are going to put someone down because you don’t agree with what they are doing, resorting to sexist commentary as a metaphor only makes you look like the fool.”
Ouch! We thought we headed off this kind of complaint with our frank alert a few weeks ago. Didn’t we warn readers?
Sexist … ageist … religionist … racist … abilityist … intelligencist. We are an equal opportunity offender. We disrespect all groups without favor or distinction. Especially those we like.
Besides, didn’t we advise those with delicate feelings and hypersensitivities to cover their ears and eyes, lest they discover some calumny?
The dear reader says she speaks for “All Women.” We don’t know if she’s polled them all… but wow! We offended half the world’s population in a single paragraph. And without even breaking a sweat.
And we stick by our point: It’s better to bake cookies than to wreck the world’s biggest economy! So, let us divert the conversation, from our personal failings to the coming disaster.
The Price of Shipping Is Collapsing
A recurring theme of mine is that one cannot understand the world in terms of the linear Quantity Theory of Money. Let’s look at the cost of shipping.
The money supply has certainly been expanding since 2008. And yet the price of shipping has almost completely collapsed. From a high over 11,000 it’s now down to 755. This is a drop of almost 94%.
The Baltic Dry Index is a dollar price of moving the major materials by sea. The chart shows from just before the acute phase of the crisis to today, July 16, 2014.
I like to look at the Baltic Dry because, unlike commodities, there is no way to speculate on it and hence drive up the price. (If readers are aware of some sort of futures market or other way for speculators to use credit to bid up prices, then I encourage them to please contact me.) – via Monetary Metals, click to enlarge.
A Dangerous Misconception
Ever since the echo bubble went into overdrive due to the Fed adding what by now are nearly $5 trillion to the broad US money supply TMS-2, while keeping the administered interest rate practically at zero, people have been looking for excuses as to why the latest bit of asset boom insanity will never end (few of them wanted to be long “risk” in 2009, but they sure are eager to justify their exposure now).
One popular theme gets reprinted in variations over and over again. Here is a recent example from Business Insider, which breathlessly informs us of the infallibility of the yield curve as a forecasting tool: “This Market Measure Has A Perfect Track Record For Predicting US Recessions” the headline informs us – and we dimly remember having seen variants of this article on the same site at least three times by now:
“There are very few market indicators that can predict recessions without sending out false positives. The yield curve is one of them.
At a breakfast earlier today, LPL Financial's Jeffrey Kleintop noted that the yield curve inverted just prior to every U.S. recession in the past 50 years. "That is seven out of seven times — a perfect forecasting track record," he reiterated.
The yield curve is inverted when short-term interest rates (e.g. the 3-year Treasury) are higher than long-term interest rates (e.g. the 10-year Treasury yield).
"The yield curve inversion usually takes place about 12 months before the start of the recession, but the lead time ranges from about 5 to 16 months," wrote Kleintop in a recent note. "The peak in the stock market comes around the time of the yield curve inversion, ahead of the recession and accompanying downturn in corporate profits."
The Federal Reserve has been signaling that tighter monetary policy is on its way, which means short-term interest rates should move higher. Is this something we should be worried about? Kleintop offered some context:
How far the Fed must push up short-term rates before the yield curve inverts by 0.5% depends on where long-term rates are. Even if long-term rates stay at the very low yield of 2.6% seen in mid-June 2014, to invert the yield curve by 0.5% the Fed would need to hike short-term rates from around zero to more than 3%. Based on the latest survey of current Fed members that vote on rate hikes, they do not expect to raise rates above 3% until sometime in 2017, at the earliest…
Lots of economic and market factors drive what happens with interest rates. So the shape of the yield curve is definitely worth paying attention to. "The facts suggest the best indicator for the start of a bear market may still be a long way from signaling a cause for concern," he said.
Portuguese Banking Group's Woes Deepen
When we wrote about the troubles at Banco Espirito Santo yesterday (our post was written before European markets opened) information was still fairly scant. However, on the very same day the situation continued to escalate. Here is an excerpt from the WSJ providing further details:
Shares in the troubled Portuguese lender have been under pressure since May, when the bank disclosed that an audit ordered by Bank of Portugal into Espírito Santo International SA, the conglomerate that indirectly holds a stake in the bank, had found Espírito Santo International was in a "serious financial condition" and had uncovered accounting irregularities. But the declines mounted drastically Thursday after investors learned Espírito Santo International had delayed coupon payments relating to some short-term debt securities.
Switzerland-based Banque Privee Espírito Santo SA, which is owned by Espírito Santo Financial Group, said in an emailed statement Wednesday that Espírito Santo International has delayed the repayment of short-term debt sold to some of its clients. It said the repayment is the sole responsibility of the conglomerate. The conglomerate declined to offer a separate comment.
The bank's stock dropped more than 17% before trading in its shares was suspended. Trading in Banco Espirito Santo's controlling shareholder, Espirito Santo Financial Group SA, listed in Luxembourg and Lisbon, was also suspended earlier Thursday. The Portuguese markets regulator banned short selling, or betting against, Banco Espirito Santo shares in Friday's session.
They Haven't Been Praying Enough
According to press reports, Espirito Santo Financial Group, one of Portugal's largest financial groups and the biggest shareholder in Banco Espirito Santo (i.e., the Holy Spirit Bank, BES), is about to miss interest payments on some of its short term notes. The event prompted a sell-off in Portuguese government bonds as well. 10 year government bond yields have declined from more than 16% at the height of the sovereign debt crisis to about 3.25% at their recent lows, but have shot up by more than 60 basis points in recent weeks.
The chart of BES suggests that the troubles at the Holy Spirit Bank must have been on the minds of market participants for a while already. We have a feeling a costly scandal is brewing.
Staggering Amounts of Debt and Bludgeoned Statistics
We write with a Zombie Update. As you know, annual GDP growth rates in the US have been trending lower since the end of World War II. Frequently touching on 10% in the 1950s and 1960s… we’re now lucky to get 2%.
And to get that we have to pump in trillions of dollars in new liquidity into the financial system… take on staggering amounts of new debt… and bludgeon the statistics, too.
After the disastrous first quarter, which saw an annualized drop in output of 2.9%, it will be hard to get back to decent figures for this year. JP Morgan Chase, for example, just cut its guess for GDP growth this year to 1.4%.
This slowdown has happened as technology has raced ahead. You’d think an economy with better technology would grow faster, not slower. But there you have the puzzle: Why the lower growth rates?
We offer a simple explanation: zombies.
Breaking From the Wedge
France is currently Europe's “sick man”, not least due to the destructive economic policies pursued by its socialist government. Halfhearted attempts at reform have so far not achieved any notable change, precisely because they are going nowhere near far enough. President Hollande seems to be waiting for the recovery in the rest of Europe to bail him out. His willingness to look beyond leftist dogma and display political courage seems rather limited, which we have always attributed to his fear of being challenged from elements even further to the left, both in his own party and outside of it. However, it is probably more than that: he is a true believer, and is suffering from the delusion that governments can suspend economic laws by fiat. This delusion is of course shared by central planners all across the so-called capitalist world, but it is especially pronounced in his case.
A friend just pointed out to us that France's stock market suddenly looks rather wobbly. French stocks rallied strongly along with other European stock markets once fears over the sovereign debt crisis receded. As we have discussed previously in these pages, year-on-year true money supply growth in the euro area surged strongly from its late 2011 low near 1%, to a high slightly above 8% in early 2013, and has since then begun to decline noticeably again (see our assessment of Europe's tepid economic recovery from mid May: Europe’s Recovery is Stuck in the Mud. A chart of the euro area's true money supply and its annualized growth rate can be seen here). The money supply growth rate is still fairly high at present, but the trend is down and one cannot tell in advance what level will be the threshold that triggers the next bust. However, it would certainly make sense if France's stock market were to lead other European markets at the turning point.
There is a chance that such a turning point may have arrived. Of course, this isn't the first time European stocks are correcting since their uptrend started, and one can never be certain whether short term moves really have significance for the larger degree trend. France's stock market is acting worse in the recent correction than other European markets, but we thank that may well be because it is leading them.
The character of the recent correction seems different from that of previous short term downturns, even though its extent is not yet unusual. Contrary to previous dips, the market has put in a second lower high on the daily chart. The move has moreover clearly violated the lower boundary of the preceding wedge-like advance. The last rebound attempt didn't even manage to move the CAC-40 index back to the broken trend line for a “good-bye kiss”, which we believe is a strong sign that something is amiss.
A Get-Together of Central Planners
Christine Lagarde, the well-baked looking leader of the IMF, was recently dragged away from her ultraviolet light arrays to put in an appearance at an event by the name of the “Michel Camdessus Central Banking Lecture”. No kidding, that's what that pow-wow is actually called.
It may be remembered that Michel Camdessus was the longest-serving IMF chief, after a stint at the Bank of France. A quintessential statist establishment globalist/central planner, who would certainly not have looked out of place as the head of GOSPLAN either. He received his postgraduate degrees in economics at the Institut d'Etudes Politiques de Paris (Sciences Po) in Paris and more importantly, the traditional breeding ground of French bureaucrats and politicians, the École nationale d'administration. He presided inter alia over the Asian crisis, and we wouldn't be overly surprised if his name has become a swear word in places like Indonesia.
The people getting together at such meetings likely number among the biggest obstacles to sustainable economic growth in the modern age. They would undoubtedly disagree vehemently with this assessment, but the reality of the matter is that their usefulness is indeed not far removed from that of Soviet commissars. They may be intelligent and well educated, but they are tasked with doing what is literally impossible. Leaving aside for the moment that every single major central bank was founded to promote special interests, the modern-day justification of central banking has been thoroughly refuted a long time ago already.
No Respect for Capitalism
“The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance or the get-rich-quick adventurer. They will die poor.”
– Jesse Livermore, How to Trade in Stocks
Cotton plant, Texas, 1996.
(Photo courtesy of USDA Natural Resources Conservation Service)
The trouble with capitalism’s guardians is that they have no respect for it. Markets have been around for at least 2,000 years. Since then they have evolved in many directions, with fancy and sophisticated techniques… and elaborate systems and complicated instruments that take a PhD to understand.
But despite all the brain power put into trying to figure them out, markets still surprise, confound and puzzle everyone. There is still no formula for predicting market movements. And even the smartest and most experienced traders often wash up.
You’d think Janet Yellen and other central bankers would take a step back and stand in awe. Like astronomers looking at the heavens, they should be studying its black holes and its exploding supernovae. Or at least looking for signs of intelligent life.
Instead, Yellen et al ignore the intricate mechanisms that balance supply and demand; they want to force people to demand more. They have no interest in discovering prices; they want to impose their own prices. And they could care less what Mr. Market has to say; they only hear their own voices.
More guards than guardians, they believe they can improve the markets… control them… whip them into shape… and force them to do their bidding. The gods must be rolling in the aisles.
Looking for Value
Editor’s Note: At the Diary, we are big on value. Bill’s motto is “buy cheap.” And someone who knows where to find value in today’s generally overpriced markets is Dr. Steve Sjuggerud, editor of Stansberry & Associates True Wealth Systems.
If you think there is no value out there … think again.
In today’s edition – originally published in the June 30 issue of Daily Wealth – Steve reveals the system he uses to identify global value … and why the cheapest stocks in the world are outside the US.
What’s Cheap in the World Today? by Dr. Steve Sjuggerud, Editor, True Wealth Systems
You probably haven’t noticed, but boring government bonds are up double digits this year. US stocks continue to push to all-time highs as well. Even Europe is soaring to multi-year highs. Today, we’ve got uptrends around the globe. The big question is: after so many investments have run up so high, where is the value in the world today? Is there any left out there? In short, yes!
Let me show you exactly where the value is right now. There are dozens of ways to size up what’s cheap. One classic measure of value is the price-to-earnings (P/E) ratio. But like most value measures, it isn’t perfect on its own. To fix that problem, we built an in-house value indicator for a few dozen global markets. We call it the “True Wealth Systems (TWS) Value Composite Measure.”
These TWS Value Composite readings give us a simple way to see where the value really is in the world. And today, there is a clear winner. Let me show you what I mean by looking at a few major developed countries’ stock markets.
The table below shows each country’s historical premium or discount relative to its own history, based on our TWS Value Composite. In addition, it shows each market’s premium/discount to U.S. stocks – the benchmark for comparison for developed markets.
Articles that might be of interest for you:
- In Defense of Austrian Economics
- Fleeing the French Welfare State
- Market Sentiment and Money Supply Update
- The Democracy Delusion
- Janet Yellen Chimes in on the Bubble Question
- Germany Rolls Back Labor Reforms
- Austria Succumbs to the Charms of Vlad the Terrible
- The Massive Myth about Hillary Rodham Clinton
- The Government’s Inflation Figures Are a Lie
- Outlook for Gold, Stocks, Economy by Incrementum’s Advisory Board