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Probably The Most Important Chart In The World | Zero Hedge
Probably The Most Important Chart In The World | Zero Hedge.
Having discussed the links between economic growth and energy resource constraints, and with the current geo-political fireworks as much about energy (costs, supply, and demand) as they are human rights, it would appear the following chart may well become the most-important indicator of future tensions…
Source: Goldman Sachs
This is not the first time we have discussed “self-sufficiency” – As none other than Bridgewater’s Ray Dalio noted in a slightly different context:
“self-sufficiency encourages productivity by tying the ability to spend to the need to produce,”“Societies in which individuals are more responsible for themselves grow more than those in which they are less responsible for themselves.” The nine-factor gauge of self-sufficiency provides some interesting insights into those nations most likely to experience above-average growth going-forward and those that are not; as European countries, notably Italy, France, Spain, and Belgium, all ranking at the very bottom on self-sufficiency.
And here we discussed, What If Nations Were Less Dependent On One Another?
The ability to survive without trade or aid from other nations, for example, is not the same as the ability to reap enormous profits or grow one’s economy without trade with other nations. In other words, ‘self-sufficiency’ in terms of survival does not necessarily imply prosperity, but it does imply freedom of action without dependency on foreign approval, capital, resources, and expertise.Freedom of action provided by independence/autarky also implies a pivotal reduction in vulnerability to foreign control of the cost and/or availability of essentials such as food and energy, and the resulting power of providers to blackmail or influence national priorities and policies.
…
Consider petroleum/fossil fuels as an example. Nations blessed with large reserves of fossil fuels are self-sufficient in terms of their own consumption, but the value of their resources on the international market generally leads to dependence on exports of oil/gas to fund the government, political elites, and general welfare. This dependence on the revenues derived from exporting oil/gas leads to what is known as the resource curse: The rest of the oil-exporting nation’s economy withers as capital and political favoritism concentrate on the revenues of exporting oil, and this distortion of the political order leads to cronyism, corruption, and misallocation of national wealth on a scale so vast that nations suffering from an abundance of marketable resources often decline into poverty and instability.
The other path to autarky is selecting and funding policies designed to directly increase self-sufficiency. One example might be Germany’s pursuit of alternative energy via state policies such as subsidies.
That policy-driven autarky requires trade-offs is apparent in Germany’s relative success in growing alternative energy production; the subsidies that have incentivized alternative energy production are now seen as costing more than the presumed gain in self-sufficiency, as fossil-fueled power generation is still needed as backup for fluctuating alt-energy production.
Though dependence on foreign energy has been lowered, Germany remains entirely dependent on its foreign energy suppliers, and as costs of that energy rise, Germany’s position as a competitive industrial powerhouse is being threatened: Industrial production is moving out of Germany to locales with lower energy costs, including the U.S.
The increase in domestic energy production was intended to reduce the vulnerability implicit in dependence on foreign energy providers, yet the increase in domestic energy production has not yet reached the critical threshold where vulnerability to price shocks has been significantly reduced.
…
America’s ability to project power and maintain its freedom of action both presume a network of diplomatic, military, and economic alliances and trading relationships which have (not coincidentally) fueled American corporation’s unprecedented profits.
The recent past has created an assumption that the U.S. can only prosper if it imports oil, goods, and services on a vast scale.
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Probably The Most Important Chart In The World | Zero Hedge
Probably The Most Important Chart In The World | Zero Hedge.
Having discussed the links between economic growth and energy resource constraints, and with the current geo-political fireworks as much about energy (costs, supply, and demand) as they are human rights, it would appear the following chart may well become the most-important indicator of future tensions…
Source: Goldman Sachs
This is not the first time we have discussed “self-sufficiency” – As none other than Bridgewater’s Ray Dalio noted in a slightly different context:
“self-sufficiency encourages productivity by tying the ability to spend to the need to produce,”“Societies in which individuals are more responsible for themselves grow more than those in which they are less responsible for themselves.” The nine-factor gauge of self-sufficiency provides some interesting insights into those nations most likely to experience above-average growth going-forward and those that are not; as European countries, notably Italy, France, Spain, and Belgium, all ranking at the very bottom on self-sufficiency.
And here we discussed, What If Nations Were Less Dependent On One Another?
The ability to survive without trade or aid from other nations, for example, is not the same as the ability to reap enormous profits or grow one’s economy without trade with other nations. In other words, ‘self-sufficiency’ in terms of survival does not necessarily imply prosperity, but it does imply freedom of action without dependency on foreign approval, capital, resources, and expertise.Freedom of action provided by independence/autarky also implies a pivotal reduction in vulnerability to foreign control of the cost and/or availability of essentials such as food and energy, and the resulting power of providers to blackmail or influence national priorities and policies.
…
Consider petroleum/fossil fuels as an example. Nations blessed with large reserves of fossil fuels are self-sufficient in terms of their own consumption, but the value of their resources on the international market generally leads to dependence on exports of oil/gas to fund the government, political elites, and general welfare. This dependence on the revenues derived from exporting oil/gas leads to what is known as the resource curse: The rest of the oil-exporting nation’s economy withers as capital and political favoritism concentrate on the revenues of exporting oil, and this distortion of the political order leads to cronyism, corruption, and misallocation of national wealth on a scale so vast that nations suffering from an abundance of marketable resources often decline into poverty and instability.
The other path to autarky is selecting and funding policies designed to directly increase self-sufficiency. One example might be Germany’s pursuit of alternative energy via state policies such as subsidies.
That policy-driven autarky requires trade-offs is apparent in Germany’s relative success in growing alternative energy production; the subsidies that have incentivized alternative energy production are now seen as costing more than the presumed gain in self-sufficiency, as fossil-fueled power generation is still needed as backup for fluctuating alt-energy production.
Though dependence on foreign energy has been lowered, Germany remains entirely dependent on its foreign energy suppliers, and as costs of that energy rise, Germany’s position as a competitive industrial powerhouse is being threatened: Industrial production is moving out of Germany to locales with lower energy costs, including the U.S.
The increase in domestic energy production was intended to reduce the vulnerability implicit in dependence on foreign energy providers, yet the increase in domestic energy production has not yet reached the critical threshold where vulnerability to price shocks has been significantly reduced.
…
America’s ability to project power and maintain its freedom of action both presume a network of diplomatic, military, and economic alliances and trading relationships which have (not coincidentally) fueled American corporation’s unprecedented profits.
The recent past has created an assumption that the U.S. can only prosper if it imports oil, goods, and services on a vast scale.
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Michael Jacobs points to grounds for optimism that a comprehensive emissions-reduction plan can be agreed this year. – Project Syndicate
The Climate-Change Agenda Heats Up
LONDON – For many people around the world this year, the weather has become anything but a topic for small talk. Typhoon Haiyan in the Philippines, America’s record-breaking freeze, California’s year-long drought, and flooding in Europe have put the long-term dangers of climate change back on the political agenda. In response, United Nations Secretary-General Ban Ki-moon has sent an urgent letter to government, business, civil society, and finance leaders, urging them to attend a special Climate Summit in New York in September.
The event will be the first time that world leaders have met to discuss global warming since the UN’s fateful Copenhagen climate-change summit in 2009. Amid high expectations – and subsequent recriminations – that meeting failed to achieve a comprehensive, legally-binding agreement to reduce greenhouse-gas emissions. So, at September’s summit, leaders will be asked to re-boot the diplomatic process. The goal is a new agreement in 2015 to prevent average global temperatures from rising by two degrees Celsius, the level that the international community has deemed “dangerous” to human society.
At first sight, that looks like a hard task. Since Copenhagen, climate change has slipped down the global agenda, as the restoration of economic growth, voter concern about jobs and living standards, and violent conflict in key trouble spots have taken precedence.
But the tide may be turning. More people are grasping the true extent of the dangers ahead. In its latest authoritative assessment, the Intergovernmental Panel on Climate Change (IPCC) concluded last year that scientists are now 95% certain that human activities are the principal cause of rising temperatures. Over the next two months the IPCC will release further reports detailing the human and economic impacts of probable climate change and the costs and benefits of combating it. US Secretary of State John Kerry recently described climate change as “perhaps the world’s most fearsome weapon of mass destruction,” warning of “a tipping-point of no return.” Few serious commentators now dispute the science.
So the key question now is how the world’s leaders will respond. There are grounds for cautious optimism.
First, New York will not be like Copenhagen. Leaders are not being asked to negotiate a new agreement themselves; that job will remain with their professional negotiators and environment ministers. Moreover, the process will not be concluded this year but at the UN climate conference in Paris in December 2015. That provides plenty of time to translate political commitments made in New York into a legally-binding accord.
Second, the world’s two largest greenhouse-gas emitters, the United States and China, are now more committed to action than they were five years ago. US President Barack Obama has announced a far-reaching plan that authorizes the Environment Protection Agency to take dramatic measures in the next few months to limit power-station emissions, virtually ending coal-fired electricity generation altogether.
In China, worsening air pollution and growing concerns about energy security have led the government to consider a cap on coal use and an absolute reduction in emissions within the next 10-15 years. The government is experimenting with carbon pricing, and investing heavily in low-carbon wind, solar, and nuclear energy.
Further, the two countries are actively cooperating. Last year Obama and Chinese President Xi Jinping committed to phase out hydrofluorcarbons, a potent greenhouse gas. In February, they announced their intention to work together on climate policy – a marked contrast to Sino-US tensions over Pacific security and trade issues. With the European Union also preparing to commit to new 2030 climate targets, hopes for a global deal are rising.
A third cause for optimism is the re-appraisal of climate-change economics. Five years ago, policies aimed at cutting greenhouse-gas emissions were seen as a cost burden on the economy. Negotiations were therefore a zero-sum game, with countries seeking to minimize their obligations while asking others to do more.
However, new evidence may be altering the economic calculus. According to research conducted by the Global Commission on the Economy and Climate, far from hurting the economy, well-designed climate policy may actually boost growth. Chaired by former Mexican President Felipe Calderón and comprising former prime ministers, presidents, and finance ministers, the Commission is analyzing how investments in clean-energy infrastructure, agricultural productivity, and urban transport could stimulate sluggish economies. Its conclusions will be presented at September’s summit; if accepted, the Commission’s work could mark a turning point, transforming the way in which climate policy is perceived by the world’s economic policymakers.
None of this guarantees success. Powerful vested interests – not least the world’s fossil-fuel industries – will no doubt seek to limit progress, and most governments are not yet focused on the problem. But one thing is certain: the reality of climate change is making it impossible to ignore.
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‘Cash-On-The-Sidelines’ Fallacies And Restoring The “Virtuous Cycle” Of Economic Growth | Zero Hedge
‘Cash-On-The-Sidelines’ Fallacies And Restoring The “Virtuous Cycle” Of Economic Growth | Zero Hedge.
As we explained in great detail recently, the abundance of so-called cash-on-the-sidelines is a fallacy, but even more critically the we showed the belief that these ‘IOUs of past economic activity’ would immediately translate into efforts to deploy them into future economic activity is also entirely false. Simply put, there is no relationship between corporate cash and subsequent capital expenditure, nor is the level of capital expenditure even well-correlated with the level of real interest rates. At this point, as John Hussman explains, it should be clear that the mere existence of a mountain of IOUs related to past economic activity is not enough to provoke future economic activity. What matters instead is the same thing that always matters: Are the resources of the economy being directed toward productive uses that satisfy the needs of others?
The fallacy of cash piles on the balance sheet meaning strong balance sheets…
US companies are carrying far more net debt than in 2007Another curiosity is this notion that US companies have substantially reduced their debt pile and are therefore cash rich. The latter is indeed true. Cash and equivalents are at historically high levels, but rarely do those who mention the mountains of corporate cash also discuss the massive increase in debt seen over the last couple of years.
In fact, debt levels have been growing to such an extent that net debt (i.e. excluding the massive cash pile) is 15% higher than it was prior to the financial crisis.
and Proposition 1: Corporate cash is high, and therefore, businesses should put that cash to work through capex.
Comments: This is the most obviously deceptive of the four propositions, hence Mark Spitznagel’s incredulous response when asked to address cash balances by Maria Bartiromo last week. As Spitznagel explained, it makes little sense to isolate the cash that sits on corporate balance sheets without netting the credit portions of both assets and liabilities. We last updated corporations’ net credit position here, showing that gradual increases in cash balances are dwarfed by rising debt.
A longer history further disproves the proposition; it shows that there’s no correlation between capex and corporate cash:
So how do we restore growth?
Via Hussman’s Funds’ Weekly Insight,
To the extent that such desirable activities exist – whether as consumption goods or as investment goods like machines, the act of bringing them forward not only engages existing resources (such as factory capacity and labor), but also creates new income that can be used to purchase yet other desirable products. This is what creates a virtuous circle of economic activity and growth. Not quantitative easing, not suppressed interest rates, not speculation. The resources of the economy must be channeled toward activities that are actually productive, desirable, and useful to others.
When this doesn’t occur – when companies produce output that isn’t wanted, when capital investments are made that aren’t productive, when housing is constructed at a pace that exceeds the sustainable demand and ability to finance it – the act of production and the resources of the economy are wasted. That is really the narrative of the past 14 years, and is largely the result of repeated bouts of Fed-induced speculation and misallocation. Robert Blumenthal recently wrote an excellent essay describing the economic costs of such “malinvestment.”
At the moment that a person uses their labor to produce something of value to others, that person’s own income is enhanced, and the ability to purchase the output of others is also created. As economist Jean-Baptiste Say wrote, “A product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value… Thus the mere circumstance of creation of one product immediately opens a vent for other products.”
In a healthy economy, the productive activity of one sector opens a vent for the productive activity of other sectors of the economy. The useful allocation of resources in one area of the economy reinforces the useful allocation of resources in another. Economic growth continues as the efforts of each sector focus on the production of those things that will be of demand and use to others. Each productive act is not simply an event, but contributes momentum to a virtuous cycle.
The difficulty emerges when something is brought into production that is not desired – that fails to align with the actual demand for it. In that event, the value of the product itself may be less than the value of the resources committed to its production. Since it is not consumed, it simultaneously becomes “savings” and “unwanted inventory investment.” Long-term growth is harmed, because economic effort and resources are wasted and fail to open a vent for other production. If this occurs at a large scale, jobs are lost, inventories build, and the economy suffers the long-term effects of misallocated activity.
When we review the economic narrative of the past 14 years, this is exactly what we observe.
The first insult occurred during the excesses of the tech bubble and the severe misallocation of capital that resulted. Next, in response to the economic downturn in 2000-2002, the Federal Reserve held interest rates down in the hope of reviving interest-sensitive spending and investment. Instead, the suppressed interest rate environment triggered a “reach for yield” that found itself concentrated in enormous demand for mortgage securities. Wall Street was more than happy to provide the desired “product,” but could do so only by creating new mortgages by lending to anyone with a pulse.
The resulting housing bubble became a second episode of severe capital misallocation, and led to the economic collapse of 2008-2009. In response to that episode, the Federal Reserve has now produced and largely completed a third phase of speculative malinvestment, this time focused on the equity market. On historically reliable valuation measures, equity prices are now double the level at which they would be likely to provide historically normal returns. As in 2000, three-quarters of the record new issuance of equities is now dominated by companies that have no earnings. The valuation of the median stock is now higher than it was at the 2000 peak. NYSE margin debt as a percent of GDP exceeds every point in history except the March 2000 peak. All of this will end badly for the equity market, but the real insult is what this constant malinvestment has done to the long-term prospects for U.S. economic growth and employment.
The so-called “dual mandate” of the Federal Reserve does not ask the Fed to manage short-run or even cyclical fluctuations in the economy. Instead – whether one believes that the goals of that mandate are achievable or not – it asks the Fed to “maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.”
What the Fed has done instead is to completely lose control of the growth of monetary aggregates, in an effort to offset short-run, cyclical fluctuations in the economy, so as to promote maximum speculative activity and repeated bouts of resource misallocation, and ultimately damage the economy’s long-run potential to increase production and promote employment.
In the face of our concerns about long-run consequences, some might immediately appeal to Keynes, who trivialized prudence and restraint, saying “In the long run, we are all dead.” But we are not talking about decades. The insults to the U.S. economy, to U.S. labor force participation, and to the long-term unemployed are the largely predictable result of policies that have been pursued in the past decade alone.
On the fiscal policy side, there are numerous initiatives that – when properly focused on productivity and labor force participation – could easily be self-financing for the economy in aggregate. Too much of our fiscal deficit has nothing to do with productivity or inducements that reward economic activity. Productive infrastructure (ideally projects that have large distributed effects, as opposed to notions like rural broadband), alternative energy, earned income tax credits, tying extended unemployment compensation to some sort of activity requirement (community, internship or otherwise), small business loans and tax credits tied to job creation and retention, investment and R&D credits, and other initiatives fall into this category. The objective is for the private markets to retain a vested interest and exposure to some amount of risk, so that losses and unproductive decisions remain costly, but also for fiscal initiatives to ease constraints that are binding on private decision-making.
On the monetary policy side, it’s simply time to change course to a far less “elastic,” rules-based policy. With $2.5 trillion in excess reserves within the banking system, even one more dollar of quantitative easing is harmful because it perpetuates financial distortion and speculative activity while doing nothing to ease any constraint in the economy that is actually binding. Fortunately, it actually appears that the FOMC increasingly recognizes this, as attention has gradually focused on questions about policy effectiveness and financial risk, and away from the weak hope for positive effects. We will have to see how long this insight persists, but statements from FOMC officials increasingly reflect the intention to “wind down” QE, and emphasize the “high bar” that would be required to move away from that stance.
The cyclical risk for the U.S. equity market is already baked in the cake, and we view downside potential as substantial. The economy would allocate capital better, and to greater long-term benefit, if interest rates were at levels that rewarded savings and discouraged untethered growth in fiscal deficits. The economy would also allocate capital better if equity valuations were closer to historical norms (unfortunately about half of present levels given the extent of present distortions). While the capital markets are likely to undergo a great deal of adjustment in the coming years, we don’t anticipate systemic economic risks similar to the 2007-2009 period. We do observe a buildup of inventories in recent quarters that, combined with disruptions abroad, seem likely to contribute to economic weakness, but there are numerous episodes in history when stock market losses were not associated with steep economic losses.
The largest economic risks are particularly likely to emerge in Asia, where “big bazooka” central bank policies and speculative overinvestment have also produced large and persistent misallocation. China and Japan are of principal concern, though many smaller developing countries outside of Asia also appear at risk. Policy makers should certainly focus on areas where exposure to foreign obligations, equity leverage, and credit default swaps would produce sizeable disruptions. In any event, I believe it is urgent for investors to recognize the current position of the U.S. equity market in the context of a complete market cycle. As I noted in the face of similar conditions in 2007, my expectation is that any “put option” still provided by the Federal Reserve has a strike price that is way out-of-the-money.
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'Cash-On-The-Sidelines' Fallacies And Restoring The "Virtuous Cycle" Of Economic Growth | Zero Hedge
‘Cash-On-The-Sidelines’ Fallacies And Restoring The “Virtuous Cycle” Of Economic Growth | Zero Hedge.
As we explained in great detail recently, the abundance of so-called cash-on-the-sidelines is a fallacy, but even more critically the we showed the belief that these ‘IOUs of past economic activity’ would immediately translate into efforts to deploy them into future economic activity is also entirely false. Simply put, there is no relationship between corporate cash and subsequent capital expenditure, nor is the level of capital expenditure even well-correlated with the level of real interest rates. At this point, as John Hussman explains, it should be clear that the mere existence of a mountain of IOUs related to past economic activity is not enough to provoke future economic activity. What matters instead is the same thing that always matters: Are the resources of the economy being directed toward productive uses that satisfy the needs of others?
The fallacy of cash piles on the balance sheet meaning strong balance sheets…
US companies are carrying far more net debt than in 2007Another curiosity is this notion that US companies have substantially reduced their debt pile and are therefore cash rich. The latter is indeed true. Cash and equivalents are at historically high levels, but rarely do those who mention the mountains of corporate cash also discuss the massive increase in debt seen over the last couple of years.
In fact, debt levels have been growing to such an extent that net debt (i.e. excluding the massive cash pile) is 15% higher than it was prior to the financial crisis.
and Proposition 1: Corporate cash is high, and therefore, businesses should put that cash to work through capex.
Comments: This is the most obviously deceptive of the four propositions, hence Mark Spitznagel’s incredulous response when asked to address cash balances by Maria Bartiromo last week. As Spitznagel explained, it makes little sense to isolate the cash that sits on corporate balance sheets without netting the credit portions of both assets and liabilities. We last updated corporations’ net credit position here, showing that gradual increases in cash balances are dwarfed by rising debt.
A longer history further disproves the proposition; it shows that there’s no correlation between capex and corporate cash:
So how do we restore growth?
Via Hussman’s Funds’ Weekly Insight,
To the extent that such desirable activities exist – whether as consumption goods or as investment goods like machines, the act of bringing them forward not only engages existing resources (such as factory capacity and labor), but also creates new income that can be used to purchase yet other desirable products. This is what creates a virtuous circle of economic activity and growth. Not quantitative easing, not suppressed interest rates, not speculation. The resources of the economy must be channeled toward activities that are actually productive, desirable, and useful to others.
When this doesn’t occur – when companies produce output that isn’t wanted, when capital investments are made that aren’t productive, when housing is constructed at a pace that exceeds the sustainable demand and ability to finance it – the act of production and the resources of the economy are wasted. That is really the narrative of the past 14 years, and is largely the result of repeated bouts of Fed-induced speculation and misallocation. Robert Blumenthal recently wrote an excellent essay describing the economic costs of such “malinvestment.”
At the moment that a person uses their labor to produce something of value to others, that person’s own income is enhanced, and the ability to purchase the output of others is also created. As economist Jean-Baptiste Say wrote, “A product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value… Thus the mere circumstance of creation of one product immediately opens a vent for other products.”
In a healthy economy, the productive activity of one sector opens a vent for the productive activity of other sectors of the economy. The useful allocation of resources in one area of the economy reinforces the useful allocation of resources in another. Economic growth continues as the efforts of each sector focus on the production of those things that will be of demand and use to others. Each productive act is not simply an event, but contributes momentum to a virtuous cycle.
The difficulty emerges when something is brought into production that is not desired – that fails to align with the actual demand for it. In that event, the value of the product itself may be less than the value of the resources committed to its production. Since it is not consumed, it simultaneously becomes “savings” and “unwanted inventory investment.” Long-term growth is harmed, because economic effort and resources are wasted and fail to open a vent for other production. If this occurs at a large scale, jobs are lost, inventories build, and the economy suffers the long-term effects of misallocated activity.
When we review the economic narrative of the past 14 years, this is exactly what we observe.
The first insult occurred during the excesses of the tech bubble and the severe misallocation of capital that resulted. Next, in response to the economic downturn in 2000-2002, the Federal Reserve held interest rates down in the hope of reviving interest-sensitive spending and investment. Instead, the suppressed interest rate environment triggered a “reach for yield” that found itself concentrated in enormous demand for mortgage securities. Wall Street was more than happy to provide the desired “product,” but could do so only by creating new mortgages by lending to anyone with a pulse.
The resulting housing bubble became a second episode of severe capital misallocation, and led to the economic collapse of 2008-2009. In response to that episode, the Federal Reserve has now produced and largely completed a third phase of speculative malinvestment, this time focused on the equity market. On historically reliable valuation measures, equity prices are now double the level at which they would be likely to provide historically normal returns. As in 2000, three-quarters of the record new issuance of equities is now dominated by companies that have no earnings. The valuation of the median stock is now higher than it was at the 2000 peak. NYSE margin debt as a percent of GDP exceeds every point in history except the March 2000 peak. All of this will end badly for the equity market, but the real insult is what this constant malinvestment has done to the long-term prospects for U.S. economic growth and employment.
The so-called “dual mandate” of the Federal Reserve does not ask the Fed to manage short-run or even cyclical fluctuations in the economy. Instead – whether one believes that the goals of that mandate are achievable or not – it asks the Fed to “maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.”
What the Fed has done instead is to completely lose control of the growth of monetary aggregates, in an effort to offset short-run, cyclical fluctuations in the economy, so as to promote maximum speculative activity and repeated bouts of resource misallocation, and ultimately damage the economy’s long-run potential to increase production and promote employment.
In the face of our concerns about long-run consequences, some might immediately appeal to Keynes, who trivialized prudence and restraint, saying “In the long run, we are all dead.” But we are not talking about decades. The insults to the U.S. economy, to U.S. labor force participation, and to the long-term unemployed are the largely predictable result of policies that have been pursued in the past decade alone.
On the fiscal policy side, there are numerous initiatives that – when properly focused on productivity and labor force participation – could easily be self-financing for the economy in aggregate. Too much of our fiscal deficit has nothing to do with productivity or inducements that reward economic activity. Productive infrastructure (ideally projects that have large distributed effects, as opposed to notions like rural broadband), alternative energy, earned income tax credits, tying extended unemployment compensation to some sort of activity requirement (community, internship or otherwise), small business loans and tax credits tied to job creation and retention, investment and R&D credits, and other initiatives fall into this category. The objective is for the private markets to retain a vested interest and exposure to some amount of risk, so that losses and unproductive decisions remain costly, but also for fiscal initiatives to ease constraints that are binding on private decision-making.
On the monetary policy side, it’s simply time to change course to a far less “elastic,” rules-based policy. With $2.5 trillion in excess reserves within the banking system, even one more dollar of quantitative easing is harmful because it perpetuates financial distortion and speculative activity while doing nothing to ease any constraint in the economy that is actually binding. Fortunately, it actually appears that the FOMC increasingly recognizes this, as attention has gradually focused on questions about policy effectiveness and financial risk, and away from the weak hope for positive effects. We will have to see how long this insight persists, but statements from FOMC officials increasingly reflect the intention to “wind down” QE, and emphasize the “high bar” that would be required to move away from that stance.
The cyclical risk for the U.S. equity market is already baked in the cake, and we view downside potential as substantial. The economy would allocate capital better, and to greater long-term benefit, if interest rates were at levels that rewarded savings and discouraged untethered growth in fiscal deficits. The economy would also allocate capital better if equity valuations were closer to historical norms (unfortunately about half of present levels given the extent of present distortions). While the capital markets are likely to undergo a great deal of adjustment in the coming years, we don’t anticipate systemic economic risks similar to the 2007-2009 period. We do observe a buildup of inventories in recent quarters that, combined with disruptions abroad, seem likely to contribute to economic weakness, but there are numerous episodes in history when stock market losses were not associated with steep economic losses.
The largest economic risks are particularly likely to emerge in Asia, where “big bazooka” central bank policies and speculative overinvestment have also produced large and persistent misallocation. China and Japan are of principal concern, though many smaller developing countries outside of Asia also appear at risk. Policy makers should certainly focus on areas where exposure to foreign obligations, equity leverage, and credit default swaps would produce sizeable disruptions. In any event, I believe it is urgent for investors to recognize the current position of the U.S. equity market in the context of a complete market cycle. As I noted in the face of similar conditions in 2007, my expectation is that any “put option” still provided by the Federal Reserve has a strike price that is way out-of-the-money.
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2 Charts Explain Slowest Economy In History – STA WEALTH
2 Charts Explain Slowest Economy In History – STA WEALTH.
- Written by Lance Roberts | Thursday, March 06, 2014
Earlier this week I discussed the expectations for an increase in reported earnings of 50%over the next two years:
“Currently, according to the S&P website, reported corporate earnings are expected to grow by 20.26% in 2014, and by an additional 20.28% in 2015. In total, reported earnings are expected to grow by almost 50% ($100.28/share as of 2013 to $147.50/share in 2015) over the next two years.“
However, as I also noted, the rise in corporate profitability has come from accounting magic and cost cutting along with a healthy dose of share buybacks. Since there is “no free lunch,”the drive for greater corporate profitability has come at an economic expense. Since 1999, the annual real economic growth rate has run at 1.94%, which is the lowest growth rate in history including the “Great Depression.” I have broken down economic growth into major cycles for clarity.
As I discussed previously:
“Since 2000, each dollar of gross sales has been increased into more than $1 in operating and reported profits through financial engineering and cost suppression. The next chart shows that the surge in corporate profitability in recent years is a result of a consistent reduction of both employment and wage growth. This has been achieved by increases in productivity, technology and offshoring of labor. However, it is important to note that benefits from such actions are finite.”
The latest report on unit labor costs and productivity produced the following two charts which underscore this point and suggests that the current rate of economic growth is unlikely to change anytime soon.
I stated previously, that in in 2013 reported earnings per share for the S&P 500 rose by 15.9% to a record of $100.28 per share. Importantly, roughly 40% of that increase occurring in the 4th quarter alone. The chart of real, inflation adjusted, compensation per hour as compared to output per hour shows a likely reason why this occurred. The sharp increase in output per hour combined with the sharp decline in compensation costs is a direct push to bottom line profitability.
However, it was not just a decrease in compensation costs but in total labor costs as well which includes benefits and other labor related costs. This suggests that the drop off in hiring in the 4th quarter was more than just “weather” related.
Labor costs are one of the largest detractors from net profitability on any income statement. The problem with cost cutting, wage suppression, labor hoarding and stock buybacks, along with a myriad of accounting gimmicks, is that there is a finite limit to their effectiveness.
I say this because of something my friend Cullen Roche recently pointed out:
“We’re in the backstretch of the recovery. We’re now into month 47 of the current economic recovery. The average expansion in the post-war period has lasted 63 months. That means we’re probably in the 6th inning of the current expansion so we’re about to pull our starter and make a call to the bullpen. The odds say we’re closer to the beginning of a recession than the beginning of the expansion. That puts the Fed in a really odd position and not likely one where they’re on the verge of tightening any time soon.”
This is a very important point. While the Fed’s ongoing interventions since 2009 have provided support to the current economic cycle, they have not “repealed” the business cycle completely. The Fed’s actions work to pull forward future consumption to support the current economy. This has boosted corporate profitability at a time when the effectiveness ofcorporate profitability tools were most effective.
However, such actions leave a void in the future that must be filled by organic economic growth. The problem comes when such growth does not appear. With the economy continuing to “struggle” at an anaemic pace, the effects of cost cutting are becoming less effective.
This is not a “bearish” prediction of an impending economic crash, but rather just a realization that all economic, and earnings, forecasts, are subject to the overall business cycle. What the unit labor costs and productivity report suggest is that economic growth remains very weak. This puts current forward expectations of accelerated economic and earnings growth at risk. With asset prices extended, valuations rich and optimism at extremes, such a combination has historically become a rather toxic brew when exuberant expectations fail to align with reality.
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oftwominds-Charles Hugh Smith: Eating Our Seed Corn: How Much of our “Growth” Is From One-Time Cashouts?
We as a nation are consuming our seed corn in great gulps, and there will be precious little left in a decade to pass down to the next generation.
Anecdotally, it seems a significant percentage of our recent economic “growth” is being funded by one-time cashouts of IRAs, 401Ks, sales of parents’ homes, etc. This is the equivalent of eating our seed corn. Once these pools of savings/equity/capital are gone, they aren’t coming back.
I personally know a number of people who have cashed out their retirement account 401Ks (and paid the taxes) to pay for their kids’ college expenses–in effect, cashing out their retirement to lower but not eliminate the debt burden of their offspring who bought the “going away to college” experience.
The cashed-out 401K delighted the government, which reaped huge penalties and income taxes, as the cashout pushed the annual income of the recipient into a high tax bracket. (“Hardship” withdrawals for medical care and education waive the penalties, but the income tax takes a big chunk of the withdrawal.)
The middle-aged person who cashed out their retirement will not work long enough to save an equivalent nestegg. Not only is time against such an accumulation of retirement savings, so is the stagnant economy: companies are slashing 401K contributions to offset rising healthcare (a.k.a. sickcare) expenses, and many workers young and old alike are finding jobs that pay them as self-employed contractors or part-time jobs with no benefits.
Another set of middle-aged people are withdrawing from IRAs (and paying the penalties) just to fill the gap between expenses and income. For a variety of reasons, many people are loathe to cut expenses or are unable to do so without drastic changes in their lifestyle. So they withdraw from the IRA (individual retirement account) to cover expenses that are left after income has been spent.
This “solution” is appealing to those whose incomes have declined in what they perceive as “temporary” hard times.
Another pool of equity that is being drained is the home equity in aging parents’ homes. The government will only pay for one set of medical expenses (long-term care, for example) if the elderly person has assets of less than $2,000 (as I recall). Given this cap, it makes sense for elderly homeowners to transfer ownership of their home to their offspring well before they need long-term care (which can cost $12,000 to $15,000 a month).
A variety of other medical expenses can arise that cause the home to be sold to raise cash–either expenses for the elderly parents or for their late-middle-age offspring who develop costly health issues. Family disagreements over sharing the equity can arise, leading to the sale of the house and the division of the equity among the offspring.
This cash is immediately hit with a variety of demands: a grandkid needs a car, somebody needs money to go back to graduate school (pursuing the fantasy that another degree will provide financial security), and so on–not to mention “we deserve a nice vacation, a new car, etc.”, the temptations in a consumerist culture that we all “deserve.”
Once the family home is sold, the furnishings and other valuables are also sold off to raise cash. In many cases, the expense of transporting the items across the country to relatives exceeds the value of the furnishings.
One common thread in all these demands for liquidation of equity is the short-term need is pressing. A consumerist culture offers few incentives for long-term savings other than life insurance, IRAs and 401Ks, and all of these can be tapped once a pressing need arises.
Though people may want to hang on to their nestegg, they are faced with short-term needs: how else can I pay tuition, or this medical bill?
As incomes have stagnated and costs for big-ticket expenses such as college and healthcare have soared, the gap between income and expenditures has widened every year for the bottom 90%.
Even those in the top 10% are not protected from draw-downs in retirement funds and family equity in homes and other assets.
Retirement funds, home equity, family assets–these are the financial equivalent of seed corn. Once they’re cashed out and spent, they cannot be replaced.
In more prudent and prosperous times, these nesteggs of capital were conserved to be passed on to the next generation not for consumption but as a nestegg to be conserved for the following generation. That chain of capital preservation and inheritance is being broken by the ravenous need for cash to spend, not later but right now.
So how much of the recent “growth” in GDP results from our consumption of seed corn? It is difficult to find any data on this, something which is unsurprising as the data would reveal the entire “recovery” story as a grandiose illusion: we as a nation are consuming our seed corn in great gulps, and there will be precious little left in a decade to pass down to the next generation.
We face not just an impoverishment in consumption but in expectations and generational assets.
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Goldilocks And The Dog That Didn’t Bark | Zero Hedge
Goldilocks And The Dog That Didn’t Bark | Zero Hedge.
Submitted by Ben Hunt of Epsilon Theory
Det. Gregory: Is there any other point to which you would wish to draw my attention?
Holmes: To the curious incident of the dog in the night-time.
Det. Gregory: The dog did nothing in the night-time.
Holmes: That was the curious incident.
— Arthur Conan Doyle, “Silver Blaze”
Goldilocks And The Dog That Didn’t Bark
The market was down more than 2% last Monday. Why? According to the WSJ, CNBC, and all the other media outlets it was “because” investors were freaked out (to use the technical term) by poor US growth data. Disappointing ISM number, car sales, yada, yada, yada. But then the market was up more than 2% last Thursday and Friday (and another 1% this Tuesday), despite a Friday jobs report that was more negative in its own right than the ISM number by a mile. Why? According to those same media arbiters, investors were now “looking through” the weak data.
Please. This is nonsense. Or rather, it’s an explanation that predicts nothing, which means that it’s not an explanation at all. It’s a tautology. What we want to understand is what makes investors either react badly to bad news like on Monday or rejoice and “look through” bad news like on Friday. To understand this, I sing the Epsilon Theory song, once more with feeling … it’s not the data! It’s how the data is molded or interpreted in the context of the dominant market Narratives.
We have two dominant market Narratives – the same ones we’ve had for almost 4 years now – Self-Sustaining US Growth and Central Bank Omnipotence.
The former is pretty self-explanatory. It’s what every politician, every asset manager, and every media outlet wants to sell you. Is it true? I have no idea. Probably yes (technological innovation, shale-based energy resources) and probably no (global trade/currency conflict, growth-diminishing policy decisions). Regardless of what I believe or what you believe, though, it IS, and it’s not going away so long as all of our status quo institutions have such a vested interest in its “truth”.
The latter – Central Bank Omnipotence – is something I’ve written a lot about, so I won’t repeat all that here. Just remember that this Narrative does NOT mean that the Fed always makes the market go up. It means that all market outcomes – up and down – are determined by Fed policy. If the Fed is not decelerating an easy money policy (what we’ve taken to calling the Taper), the market goes up. If the Fed is decelerating its easy money policy, the market goes down. But make no mistake, the Common Knowledge information structure of this market is that Fed policy is responsible for everything. It was Barzini all along!
How do Narratives of growth and monetary policy come together? Well, there’s one combination that the stock market truly and dearly loves – the Goldilocks scenario. That’s when growth is strong enough so that there’s no fear of recession (terrible for stocks), but not so strong as to whip the flames of inflation (not necessarily terrible for stocks, but sure to provoke the Fed tightening which is terrible for stocks).
Over the past few years the Goldilocks scenario has changed. Inflation is … well, let’s be straight here … inflation is dead. I know, I know … our official measures of inflation are all messed up and intentionally constructed to keep the concept of “inflation” and the Inflation Narrative in check. I get that. But it’s the Narratives that I care about for trying to predict market behaviors, not the Truth with a capital T about inflation. If you want to buy your inflation hedge and protect yourself from the ultimate wealth-destroyer, go right ahead. At some point I’m sure you’ll be right. But I’m in a business where the path matters, and I can’t afford to make a guess about where the world may be in 5 to 10 years and just close my eyes. The Inflation Narrative is, for the foreseeable future, dead. It’s a zombie, as all powerful Narratives are, so it will return one day. But today Goldilocks has nothing to do with inflation.
The Goldilocks scenario today is macro data that’s strong enough to keep the Self-Sustaining US Growth Narrative from collapsing (ISM >50 and positive monthly job growth) but weak enough to keep the market-positive side of the Central Bank Omnipotence Narrative in play. That’s the scenario we’ve enjoyed for the past few years, particularly last year, and it’s the scenario that our political, economic, and media “leaders” are desperate to preserve. So they will.
On Monday we had bad macro data on the heels of the Fed establishing a focal point of $10 billion in additional Taper cuts per FOMC meeting, a clear signal that monetary easing is decelerating on a predictable path. This is the market-negative side of the Central Bank Omnipotence coin, which turns bad macro news into bad market news. And so we were down 2%. And so the Powers That Be started to freak out. Did you see Liesman on CNBC after the Monday debacle? He was adamant that the Fed needed to reconsider the path and pace of the Taper.
And then we had Friday. Honest to God, I thought Liesman was going to collapse of apoplexy, what my Grandmother would have called a conniption fit, right there on the CNBC set. The Fed MUST reconsider its Taper path. The Fed MUST do everything in its power to avoid even a whiff of deflationary pressures. Heady stuff. By 10 am ET that morning the WSJ was running an online lead story titled “U.S Stocks Rise as Focus Returns to Fed”, acknowledging and promulgating the dynamic behind bad macro news driving good market news.
It’s not necessary (and is in fact counter-productive from a Narrative construction viewpoint) to switch the Fed trajectory 180 degrees from Taper to no-Taper. What’s necessary is to inject ambiguity into Fed communication policy, particularly after the non-ambiguous FOMC signal of two weeks ago that led directly to Monday’s horror show. The need for ambiguity is also something I’ve written a lot about so won’t repeat here. But this is why Hilsenrath and Zandi and all the rest of the in-crowd are writing that the Taper is still on track … probably. Unless, you know, the data continues to be weak. What you’re NOT seeing are the articles and statements by the Powers That Be placing a final number on QE3, extrapolating from the last FOMC meeting to a projected QE conclusion. And that’s the dog that didn’t bark. It’s the projection that Yellen won’t be asked about in her testimony; it’s the article that won’t be written in the WSJ or the FT. Is the Taper still on? Two weeks ago the common knowledge here was “Yes, and how.” Today, after a stellar bout of Narrative construction, the answer is back to “Yes, but.” That’s the ambiguous, “data dependent” script that Yellen and all the other Fed Governors now have the freedom to re-assert.
If I’m right, what does this mean for markets? It means that our default is a Goldilocks scenario between now and the next FOMC meeting in mid-March. It means that bad macro news is good market news, and vice versa. If the next ISM manufacturing number (no one cares about ISM services) is a big jump upwards, the market goes down. Ditto for the February jobs number. If they’re weak, though, that’s more pressure on the Fed and another leg up for markets.
Place your bets, ladies and gentlemen, the croupier is about to spin the roulette wheel. Pardon me if I sit this one out, though. My crystal ball is broken.
If I’m right, what does this mean for the real world? It means an Entropic Ending to the story … disappointing, slow and uneven growth as far as the eye can see, but never negative growth, never an honest assignment of losses to clear the field or cull the herd. That’s not my vision of a good investment world, but who cares? I’ve got to live in the world as it is, even if it’s a long gray slog.
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RIGZONE – Robust Demand Tightening Oil Market, IEA Says
RIGZONE – Robust Demand Tightening Oil Market, IEA Says.
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LONDON, Feb 13 (Reuters) – Stronger-than-expected demand has drained oil inventories to the lowest level since 2008, tightening the market and defying predictions of a glut, the West’s energy watchdog said on Thursday. The International Energy Agency (IEA) said oil inventories in the developed world plummeted by 1.5 million barrels per day (bpd) in the last three months of 2013, the steepest quarterly decline since 1999. The IEA, which advises most of the largest energy-consuming countries on energy policy, becomes the third major forecaster this week to predict higher oil use as economic growth picks up in Europe and the United States. “Far from drowning in oil, markets have had to dig deeply into inventories to meet unexpectedly strong demand,” the IEA said in its monthly oil market report. The IEA raised its forecast for global oil demand growth this year by 50,000 bpd to 1.3 million bpd. That was boosted by a rebound in demand in North America and Europe after several years of declining consumption. The Paris-based agency increased its estimate of the demand for oil from the Organization of the Petroleum Exporting Countries (OPEC) from last month’s report by 100,000 bpd to 29.6 million bpd . “Demand has been stronger than expected, and we’re operating with low stock levels right now, which has been supportive for prices,” Antoine Halff, head of the IEA’s oil industry and markets division, told Reuters. “Demand for OPEC crude looks stronger.” Both OPEC and the U.S. Energy Information Administration raised their forecasts for 2014 demand in monthly reports this week. NO GLUT Growing oil production in North America had led some to predict international crude prices would fall in 2014, after averaging around $110 a barrel in each of the past three years. But robust demand and supply problems in a number of OPEC countries have kept prices supported, the IEA said. While output from Libya recovered in January to 500,000 bpd, Iraqi output fell by 140,000 bpd to 2.99 million bpd, the IEA said, and warned that exports from Libya were likely to continue to be constrained by political unrest in the country. Output in Saudi Arabia, OPEC’s largest producer, fell by 60,000 bpd in January to 9.76 million bpd, the IEA said. Halff said demand for OPEC crude oil could be even stronger in the coming months as companies moved to rebuild oil inventories to a more comfortable level. The IEA kept its estimate for supply growth from countries outside of OPEC unchanged from last month, forecasting an increase of 1.7 million bpd this year. “We’re going into a period of lower demand as refineries start maintenance after the winter,” Halff said. “We need to rebuild stocks.” Benchmark Brent crude oil prices were down about 0.5 percent on Thursday at $108.24 a barrel, slipping after hitting a month-high of $109.75 at the start of the week. (Reporting by Christopher Johnson and David Sheppard; editing by Jason Neely) |
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The Archdruid Report: The Steampunk Future
The Archdruid Report: The Steampunk Future.
WEDNESDAY, FEBRUARY 05, 2014
The Steampunk Future
That is to say, it’s time to talk about the role of fascism in the deindustrial future. We’ll begin that discussion next week.
Olduvaiblog: Musings on the coming collapse 