Money Supply and Lending Growth Decline Sharply
Both the growth rate of China's narrow M1 money supply and the broader M2 measure have recently declined to levels not seen in many years. Here is a recent chart showing both:
Annualized growth in China's narrow money measure M1 (currency and sight deposits) has collapsed to just 1.5%, a level not seen in at least the past 15 years (and probably a good while longer). M2, which includes savings deposits, corporate time deposits, deposits in trusts and a few other smaller items grew at 13.2% year-on-year, but even that is one of the lowest growth rates of the past decade – click to enlarge.
We're not 100% sure if China's M1 is a good proxy for money TMS, as there is a paucity of readily available monetary data from the PBoC (its web site is basically useless, at least it was when we last looked) and we don't know whether savings deposits are available on demand in China or not, but it is a fairly good bet that it actually is at the very least a good proxy for TMS-1.
Homeland InSecurities, A Case for Divestment, Part 2
The Homeland however, the last post warman standing, the leader island of the Pax Americana, defender of individual liberty and democracy, though clearly not a defender of transparency, had itself started the journey taken by those failed states. Its journey began with the creation of the Federal Reserve (1913) on the one hand, and on the other with the Federally mandated promise to provide a guaranteed quality of life for every citizen via a perpetual tax on the wages earned by each new member of the nation's work force: Social Security in 1933 (and the many thousands of programs since) to the unaffordable everything that is the national business of Homeland Inc. today. The planners of these programs did not account for mismanagement, inflexibility or the simple possibility there may one day not be enough funds to pay for claims against long ago promises made. They are annuities clearly gone bad, and as bad as any private sector Ponzi scheme.
The top 200 corporations (of thousands) who do business with the Homeland, as of this writing, receive over 560 billion dollars for the work they do for it. (Source: http://www.govexec.com/) This does not include the expense of the mass army of salaried spendingminders (with handsome and liberal social benefits unique to them) who inhabit every pocket of the nation as the overseers of Federal programs and those programs directly funded to the states, who then have their own cohorts of minder reporters (indeed legions) in descending order fromthe state capitol buildings to the neighborhood precinct captains, minding down and reporting back to the very top, while the funds flow and all take their delegated and or, in government speak, appropriated cut.
Bill Bonner and Addison Wiggin: America's Glorious Empire of Debt
Let us take a moment to stand back and gaze at America's great Empire of Debt. It is the largest edifice of debt ever piled up. It sustains the most magnificent world economy ever assembled. It suppers more people in better style than any system ever before devised.
Not only is it incomparably effective, it is also immeasurably entertaining. For it has burnished helmets and flying banners; its intellectuals and its gladiators; its Caesars, Antonys, Neors and Caligulas. It has its temples, its forums, its Capitol, its senators; its praetorian guards; its Via Appia; its proconsuls; centurions and legions all over the world as well as its bread and its circuses in the homeland; and its costly wars in periphery areas.
The Roman Empire rested on a classical model of imperial finance. Beneath a complex and nuanced pyramid of relationships was a foundation of tribute formed with the hard rock of brute forces. America's Empire of Debt, on the other hand, stands not as a solid pyramid of trust, authority and power relationships but as a rickety slum of delusion, fraud and misapprehension.
"My tax guy has been bugging me … You know, real estate is where it is at.” In June 2005, NBC quoted a young someone who had bought a second home at a Colorado resort. According to the report, more than a third of the houses sold in the previous 12 months were not primary residences, but second homes or investments.
Down at the bottom of the pyramid were petty agents spreading deceit and misinformation – such as the aforementioned "tax guy.” You would think a young woman could trust her certified tax advisor to give her sound counsel. Instead, he urged her to speculate on the most bubbly property market in American history.
In California, house prices raced so far ahead of incomes that barely 1 in 10 buyers could afford the median house. Yet thanks to "creative finance,” more houses were being sold than ever before.
Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the center cannot hold;
Mere anarchy is loosed upon the world,
The blood dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.
The Second Coming, 1st Stanza, 1919, William Butler Yeats
Newly Appointed Chief of Ukrainian Navy and Other Military Leaders Defect to Crimea
The new government in Kiev quickly disbanded the former riot police Berkut, as well as firing all top Ukrainian military commanders in an attempt to install commanders held to be more likely to obey its orders. In an ironic twist, the new commander-in-chief of the Ukrainian navy, rear admiral Denis Berezovsky – appointed by interim president Turchynov only on Saturday in order to replace Yuri Ilyin – decided to defect to the autonomous Republic of Crimea a mere two days after his appointment. A good chunk of the Ukrainian navy seems to have defected with him. Precise figures are not available, but European TV stations reported on Tuesday morning that only two vessels in Crimean ports still declared their allegiance to Kiev.
“Admiral Berezovsky appeared in Sevastopol before cameras alongside Sergiy Aksyonov, the pro-Russian politician elected by Crimea's regional parliament as local prime minister.
Mr Aksyonov announced he had given orders to Ukrainian naval forces on the peninsula to disregard any orders from the "self-proclaimed" authorities in Kiev.
Sunday, he said, would go down in history as the birthday of the "navy of the autonomous republic of Crimea". The admiral then pledged to "strictly obey the orders of the supreme commander of the autonomous republic of Crimea" and "defend the lives and freedom" of Crimea's people.
Admiral Berezovsky was later sacked by interim Ukrainian Defence Minister Ihor Tenyukh and a treason case launched against him.”
Avoid Car Dealerships
Today, a warning about the US shale oil boom …
But first, a little practical advice. You want to buy the car you want at the price you want? Don’t go into a dealership. We met a man here in Aiken, South Carolina, who owns a nationwide car dealership. He explained:
“This is how it works. The dealer doesn’t really make much by selling cars. He makes it on the add-ons. The customer comes in. He knows what he wants. But he leaves with much more. The salesman shows him the upgrades. The shiny wheels, the on-board entertainment, four-wheel drive, service contract, and so forth.
You want to save money? Just figure out what you really want then get a couple dealers to bid on it. Don’t go into the dealership.”
There … that will save you some money, dear reader.
Foreign Currency-Denominated Loans Strike Again
You can't teach an old dog new tricks. At least that is the impression one gets when considering the credit exposure of the two large Austrian Banks still active in the Ukraine (a third one, Erste Bank, wisely shut up shop in Kiev in late 2012).
The two banks concerned are Raiffeisen International (RBI) and Bank Austria (BA), which together have exposure of 8 billion euro (approx. $10.9 bn.) in the Ukraine. This is only a small percentage of their total loan book, but still, it is quite a bit of money for banks based in Austria. Guess what: 70% of the credit extended to Ukrainian borrowers is denominated in foreign currencies. Right now there is no foreign currency against which the hryvnia is not crashing. Evidently, European banks have learned nothing from foreign currency lending debacles suffered elsewhere, from Hungary (where the government forcibly converted the loans into Forint and saddled the banks with huge losses), to the extremely popular Swiss franc loans they have extended just about everywhere they are doing business.
In the context of the once highly popular CHF loans, the customers the banks favored with these 'excellent opportunities to save money' were as a rule not sophisticated financial market wizards, and so were relying on the 'expert advice' dispensed along with the banks' sales pitch. They were told that the Swiss franc would always remain stable against the euro. Since Swiss interest rates were considerably lower than euro interest rates at the time most of these loans were peddled, there was 'free money' waiting to be picked up. And then the crisis hit, and suddenly the Swiss Franc became worth a lot more. Instead of saving money, borrowers suddenly found themselves in dire straits.
Guess what is going to happen with foreign exchange denominated loans in the Ukraine.
The National Debt Cannot Be Paid Off
Government spending is out of control and, while most say they want spending cuts, people oppose cuts that impact them. Among those who get government money, there’s practically an unspoken, unbreakable pact to keep the money coming. But when I say that the national debt cannot be paid off, it’s not a political forecast; it’s a statement on the flawed nature of the dollar.
Astute observers call the dollar a fiat currency. Fiat means force. It’s true that we’re forced to use the dollar (e.g. by taxes on gold) but the dollar is also irredeemable. There’s no way to cash it in. The dollar is credit that is never repaid. Today’s dollar is a dishonored promise.
This was not always true. Before 1933, the dollar represented an obligation to pay 1/20 ounce of gold. People could deposit gold and get paper notes in receipt. Those notes circulated, and any bearer could redeem them for gold. Back then, $20 was not the gold price. It was the legal rate at which gold was deposited and redeemed.
War Games Enlarged
Russia has put some 150,000 troops on alert according to media reports, enlarging 'previously planned' war games near the border with the Ukraine. Russian politicians naturally continue to complain about the situation in the Ukraine, and their tone of voice has become quite a bit more strident over the past two days.
Part of Russia's Black Sea fleet is actually stationed in the Crimea, so it is easily conceivable that a pretext for a military intervention could be concocted. However, we tend to think these recent developments are just old-fashioned saber rattling, in spite of the strong interest Russia has in what happens in the Ukraine. Obviously, betting on Yanukovich was a big mistake – he was simply too corrupt and too big of a gangster. Still, markets were slightly rattled early on Wednesday and the Ukrainian hryvnia continued its free-fall. Interestingly though, Ukrainian stocks concurrently kept rising (adjusted for the fall in the hryvnia, the rally is of course not worth mentioning).
“Ukraine's protest leaders named the ministers they want to form a new government following the overthrow of President Viktor Yanukovich, as an angry Russia put 150,000 troops on high alert in a show of strength.
President Vladimir Putin's order on Wednesday for soldiers to be ready for war games near Ukraine was the Kremlin's boldest gesture yet after days of sabre rattling since its ally Yanukovich was ousted at the weekend.
Moscow denied that the previously unannounced drill in its western military district was linked to events in its neighbor but it came amid a series of increasingly strident statements about the fate of Russian citizens and interests. U.S. Secretary of State John Kerry warned Moscow that "any kind of military intervention that would violate the sovereign territorial integrity of Ukraine would be a huge – a grave mistake".
With the political turmoil hammering Ukraine's economy, the central bank said it would no longer intervene to shield the hryvnia currency, which tumbled 4 percent on Wednesday and is now down a fifth since January 1. Wednesday's abrupt abandonment of Ukraine's currency peg sent ripples to Russia where the rouble fell to five-year lows and bank shares fell.”
Russia has repeatedly expressed concern for the safety of Russian citizens in Ukraine, using language similar to statements that preceded its invasion of Georgia in 2008.
"In accordance with an order from the president of the Russian Federation, forces of the Western Military District were put on alert at 1400 (1000 GMT) today," Interfax news agency quoted Russian Defence Minister Sergei Shoigu as saying.
Shoigu also said Russia was also "carefully watching what is happening in Crimea" and taking "measures to guarantee the safety of facilities, infrastructure and arsenals of the Black Sea Fleet," in remarks reported by state news agency RIA.”
Yuan Declines Several Days in a Row
We want to point readers to our previous article on the rout in various EM currencies, in which we opined that the dramatic weakening of the Japanese yen was likely an important trigger of these moves. We felt reminded of the Asian crisis in this context, which could ultimately be traced back to a succession of events, beginning with a massive unilateral yuan devaluation in 1994, which was soon followed by the yen weakening sharply from its 1995 blow-off top. The 'Asian Tigers' meanwhile had maintained currency pegs to the dollar, which led to large current account deficits and the build-up of credit and asset bubbles. Many companies in these countries borrowed in dollars, believing the pegs had removed currency risk. The outcome was not pretty.
In theory, there exists much greater flexibility nowadays – there are no longer any pegs, with the notable exception of the currency board arrangement of the Hong Kong Dollar, and many of the former crisis countries have used the time since the Asian crisis to build up large war chests in the form of sizable foreign exchange reserves. However, sudden capital outflows and sharply weakening exchange rates are still bound to have numerous knock-on effects.
Anyway, we were wondering for how much longer China would allow the yuan to appreciate in this environment and are therefore keeping a close eye on the currency. It may well be that the trend is about to change. In recent days, the yuan has weakened markedly, although the move is still small in a bigger picture context. Still, it is the biggest monthly downward correction in some time. If the yuan were to weaken further, we would have to conclude that China's leadership has decided that it is no longer advantageous to let the currency appreciate.
The yuan has been a one way street for so long now that we imagine all sorts of trading strategies have been implemented around this seeming one way bet. In other words, a significant weakening of the yuan may have numerous unexpected effects due to the interconnectedness of financial markets.
Ukrainian Hryvnia Crashes
Bank runs, lack of reserves, danger of default – these were the sound bites lately emanating from the post-revolutionary Ukraine. Amid reports of intensifying bank runs during which some 7% of all bank deposits have reportedly been withdrawn, Russia let it be known that it believes the Ukraine is on the brink of default. This has some weight, as Russia was poised to extend an emergency loan amounting to $15 billion to the Ukraine. Shortly after the government of former president Yanukovich and the opposition had agreed on a truce and just prior to the confrontation on Maidan square turning bloody, Russia had announced it would release a $2 billion tranche of the loan. One assumes that the Russians are well informed about the Ukraine's financial condition. Moreover, the new interim government already let it be known that it needs at least $35 billion in aid.
For more details on these developments see this write-up on the situation by Mish. On Monday we pointed out that the hryvnia had oddly failed to appreciate in spite of a sudden urge by investors to load up on Ukrainian stocks and bonds. Later on Monday, the currency started to move lower quite quickly. Come Tuesday, and the currency has basically crashed (and the move may not be over yet).
Read the rest of this entry »
The Social Media Bubble
Facebook's $19 billion takeover of WhatsApp (largely financed by issuing more of FB's inflated stock, hence the price tag is in a way actually an illusion) has predictably produced a very wide range of reactions. Jeff Macke at Yahoo's Daily Ticker was describing it as a 'brilliant deal', heaping scorn on critics who in his opinion just don't understand the value of a business employing metrics other than the money it actually makes (or stands to make in the future even under very generous assumptions, since a major attraction of the service is that it is actually free for one year, and thereafter costs a pittance). “They'll eventually figure out how to make money from it”, according to Macke. Perhaps; Facebook's shareholders were no doubt relieved to hear it.
On the other end of the spectrum of reactions, Peter Schiff is criticizing it as just another outgrowth of the latest Fed-induced credit and asset bubble, noting that such pricey takeovers are typically only seen when oodles of money from thin air have flooded the system.
The valuation metrics applied to the WhatsApp acquisition are clearly a throwback to the infamous 'eyeballs' measure that was fashionable to determine the value of various internet stocks in the late 1990s stock market bubble. On the other hand, Mr. Macke has a point when he notes that a large user base is probably more valuable than it appears based on traditional valuation measures such as current profitability (which is essentially non-existent in this case). Stock market traders often love companies that have no earnings whatsoever and instead have a large 'fantasy' component. As long as there are no hard data on earnings, there can be no 'earnings disappointments' either – instead one is free to fantasize all day long what the business might one day make. The sky's the limit.
When Debt Contracts …
The Dow fell 26 points on Friday. Gold rose a few bucks. Nothing important. After a good fright two weeks ago, investors in US stocks are comfortable again. They've learned their lesson: Whenever the stock market goes down, stay calm; it will always come back.
So here is our prediction: The next time it won't. The next bear market will last at least 10 years … and probably 20.
Why? Debt and demography. Our old friend the late Dr. Kurt Richebächer spelled it out for us years ago:
“You can't build lasting stock market gains or solid GDP growth on debt. Because debt cannot expand forever. Sooner or later it must stabilize and then it must contract. When that happens, all the positive features of debt become negative features. Instead of borrowing and spending more, people must spend less and pay off past debt. Instead of adding to corporate sales and profits, they subtract from them. Instead of driving up asset prices, they push them down.”
Borrowed money has an almost magical effect on the way up. It comes out of nowhere. So there is no labor cost to offset against it. It goes almost directly into corporate profits.
But on the way down Dr. Jekyll becomes Mr. Hyde. Debt has a maniacal effect when it goes into contraction mode. Jobs and wages go down as spending slows … making it harder than ever to pay debt … forcing households to make cuts far beyond what they would have had to do in the good times before.
There Must be Bad Weather Everywhere …
Over the past few days and weeks the 'negative economic surprises' sure have a way of piling up globally. We are by now used to US data regularly underwhelming the consensus, because US economic forecasters are apparently not paid well enough to be able to afford thermometers and/or barometers, and have no time to look out of the window or watch a weather report on TV. They all seem to possess a ruler though, which we guess is the main forecasting tool of economists and Wall Street equity strategists alike.
But why is consumer confidence 'unexpectedly' plummeting in Europe, from one negative number to an even worse negative number? The weather is balmy, and has been so for some time. Not only that, everybody knows the euro area has been saved and the upswing is finally here. Why are consumers so grumpy? Factory owners also seem subdued ('unexpectedly', natch). Why? No-one seems to know.
Economic and Political Quagmires
We want to briefly take another look at the situation in four of the emerging market countries that have recently been the focus of considerable market upheaval. The countries concerned are Turkey, Venezuela, Argentina and South Africa. There are considerable differences between these countries. The only thing that unites them is a worrisome trend in their trade and/or current account balances and the recent massive swoon in their currencies as foreign investors have exited their markets (this in turn has pressured the prices of securities). There is currently an economic and political crisis in three of the four countries, with South Africa the sole exception.
However, even South Africa is feeling the heat from the fact that it has a large current account deficit and the ongoing exodus of foreign investors from emerging markets. However, the country is actually used to experiencing vast fluctuations in foreign investment flows in short time periods and has the potential to relatively quickly turn its balance of payments position around. Of the four countries in question, it seems to us to be the most flexible one in this respect.
Violence Erupts Again
Violent protests have shaken the Ukraine again, leaving 26 people dead. Press reports on the protests and the most recent crackdown contain a few interesting details. For instance, the protests in the Ukraine seem to be distinguished by the fact that some of the demonstrators are armed with rifles with telescopic sights which they use to shoot at policemen. This is certainly not exactly comparable to popular political demonstrations elsewhere. Or putting it differently, this confrontation is really getting quite serious.
“Ukrainian President Viktor Yanukovich accused pro-European opposition leaders on Wednesday of trying to seize power by force after at least 26 people died in the worst violence since the former Soviet republic gained independence.
European Union leaders said they were urgently preparing targeted sanctions against those responsible for a crackdown on protesters who have been occupying central Kiev for almost three months since Yanukovich spurned a far-reaching trade deal with the EU and accepted a $15-billion Russian bailout. The sprawling nation of 46 million people with an ailing economy and endemic corruption has become the object of a geopolitical tug-of-war between Moscow and the West. That was played out in hand-to-hand fighting through the night, lit by blazing barricades on Kiev's Independence Square, or Maidan.
Russian President Vladimir Putin's spokesman insisted the Kremlin was sticking to a policy of not intervening in Ukraine, although his point man has called for action to crush the protests. The Kremlin said Putin and Yanukovich spoke by telephone overnight, calling the events an attempted coup. Moscow announced the resumption of stalled aid to Kiev on Monday with a $2-million cash injection hours before the crackdown began.
After a night of petrol bombs and gunfire on Independence Square, black smoke billowed from a burned out trade union building that protest organizers had used as a headquarters. Security forces occupied about a third of the square – the part which lies closes to government offices and parliament – with protesters pouring in to reinforce their defenses on the remainder of a plaza they have dubbed "Euro-Maidan". In a statement posted online in the early hours, Yanukovich said he had refrained from using force since unrest began but was being pressed by "advisers" to take a harder line.
"Without any mandate from the people, illegally and in breach of the constitution of Ukraine, these politicians – if I may use that term – have resorted to pogroms, arson and murder to try to seize power," the president said. He declared Thursday a day of mourning for the dead. A senior opposition leader, world champion boxer-turned-politician Vitaly Klitschko, walked out of a meeting with Yanukovich during the night, saying he could not negotiate while blood was being spilt.
When fighting subsided at dawn, the square resembled a battle-zone, the ground charred by Molotov cocktails. Helmeted young activists used pickaxes, and elderly women used their bare hands, to prise up paving to stock as ammunition. The Health Ministry, updating the casualty toll, said 25 people had been killed in the fighting in the capital, of which nine were police officers. The police later said a 10th officer had died of his wounds.
Both police and opposition representatives said many were killed by gunshot and hundreds were injured. But the interior ministry said that five of the dead policemen had died of identical wounds from sniper fire to the head and neck. Journalists saw some hardline protesters manning barricades armed with rifles, including one with a telescopic sight.”