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A 65-mile stretch of the Mississippi near New Orleans remained closed Monday after two vessels collided and caused an oil spill on Saturday in foggy conditions about 30 miles west of New Orleans. As NBC news reports, the Lindsay Ann Erickson crashed with the Hannah C. Settoon, which was pushing two barges carrying barrels of light crude oil that spilled into the river. Clean-up efforts are underway.
In this aerial photo, river traffic is halted along the Mississippi River between New Orleans and Vacherie, La., due to a barge leaking oil in St. James Parish, La., Sunday, Feb. 23, 2014. The collision happened Saturday afternoon near Vacherie.
The U.S. Coast Guard said the source of an oil spill was secured but 65 miles of the Mississippi River including the Port of New Orleans remained closed Sunday.
The Coast Guard said in a news release the oil spill occurred Saturday when a barge collided with another vessel near Vacherie, between New Orleans and Baton Rouge.
“Lightering operations on the damaged barge concluded early Sunday morning and the source of the spill was secured,” the release said. “Oil spill response vessels and recovery equipment are deployed in the river.”
The Coast Guard said the Captain of the Port closed the river from mile marker 90 to mile maker 155 “to avoid possible contamination of passing vessels and to reduce the amount of oil spreading further down the river.”
A unified command including the Coast Guard, the Louisiana Oil Spill Coordinator’s Office, the environmental cleanup company ES&H and the Louisiana Department of Environmental Quality was cooperating on the response to the spill, the Coast Guard said.
The True State Of The Economy: Record Number Of College Graduates Live In Their Parents’ Basement | Zero Hedge
Scratch one more bullish thesis for the housing recovery, and the economic recovery in general.
Over the past several years, optimists had often cited household formation as a key component of pent up demand for home purchases. So much for that.
Recall that last August, the WSJ noted that in a report on the status of families, “the Census Bureau said 13.6% of Americans ages 25 to 34 were living with their parents in 2012, up slightly from 13.4% in 2011. Though the trend began before the recession, it accelerated sharply during the downturn. In the early 2000s, about 10% of people in this age group lived at home.” It concluded, quite logically, that “the share of young adults living with their parents edged up last year despite improvements in the economy—a sign that the effects of the recession are lingering.”
Of course, the “improvements in the economy” were once again confused with the ongoing Fed- and corporate buyback-driven surge in the stock market, which has since been refuted to have any relationship to underlying economic conditions, and instead is merely the key factor leading to record class disparity – a very heated topic among both politicians and economists in recent months.
But going back to the topic of Americans living with their parents, today Gallup reported that 14% percent of adults between the ages of 24 and 34 – those in the post-college years when most young adults are trying to establish independence — report living at home with their parents. By contrast, roughly half of 18- to 23-year-olds, many of whom are still finishing their education, are currently living at home.
While this is an approximation of the Census Bureau’s own results which should be released in a few months, a 14% print in the critical 24-34 age group means that the percentage of college grads (or those otherwise falling into this age group even if uneducated) living in their parents basement has hit a fresh all time high.
As a reminder, this was the most recent visual update from the WSJ as of last year:
Here is what Gallup had to say about this distrubing result:
An important milestone in adulthood is establishing independence from one’s parents, including finding a job, a place to live and, for most, a spouse or partner, and starting one’s own family. However, there are potential roadblocks on the path to independence that may force young adults to live with their parents longer, including a weak job market, the high cost of living, significant college debt, and helping care for an elderly or disabled parent.
A statistical model that takes into account a variety of demographic characteristics indicates that three situational factors are most likely to distinguish the group of 24- to 34-year-olds living at home from their peers:
- They are much less likely to be married.
- They are less likely to be working full time and more likely to be unemployed or underemployed.
- They are less likely to have graduated from college.
Being married may better explain why young adults move out of their parents’ home than why single adults live at home. For those living at home, their situation may have more to do with their job or income status than their marital status. Being single, however, may make living with parents a more feasible option for young adults than it would be if they were married.
Employment status ranks as the second-most-important predictor of young adults’ living situation once they are beyond college age. Specifically, 67% of those living on their own are employed full time, compared with 50% of those living with their parents.
The unemployment rate, as calculated by Gallup, among those in the workforce is twice as high for post-college-aged adults living with their parents as it is for their counterparts who are not living with their parents, 14.6% vs. 7.1%.
The underemployment rate, which combines the percentage unemployed with the percentage working part time but wanting full-time work, is 32.8% among those living at home and 15.4% among those living on their own. In other words, among young adults who live with their parents and are working or actively looking for work, nearly one in three are in a substandard employment situation.
The employment observations are not surprising: after all, one would never voluntarily live with their parents into their thirties, unless one was pathologically lazy and unwilling to branch out on their own of course, if the labor situtation in the economy permitted getting a job which allowed one to at least afford rent.
Neither is it surprising that college grads, saddled with a record amounts of student debt, now well over $1 trillion, or more than the total US credit card debt outstanding, is also crushing college graduate confidence about being able to be cash flow positive once they seek to start lives on their own with the associated cash needs.
However, the marriage observation is more disturbing, and goes to the argument of incremental household formation: namely there is none. In other words, that missing link that at least superficially would provide for some semblance of justification for the rise in house prices that had nothing to do with investor demand and offshore illicit cash laundry using US real estate, is gone.
And while this conforms with Gallup’s own implications of these data, there is more bad news:
A 2012 report from Ohio State University sociologists showed that it is increasingly common for young adults to live at home with their parents. The high costs of housing and a relatively weak job market are key factors that may force, or encourage, young adults to stay at home.… The biggest impetus for leaving home seems to be marriage, easily the strongest predictor of one’s living arrangement among those between the ages of 24 and 34. This indicates that if the marriage rate increases in the future, the percentage living with their parents may decline. Earlier Gallup research suggests that most unmarried Americans do have a goal of getting married someday.
Also, those who have secured full-time employment or have earned college degrees are more likely to have gotten a place of their own to live. An improving job market and economy should lead to a decrease in the percentage of young adults living with their parents.
To sum it up: a record number of college grads are optin not to start a household and instead live with their parents, and just as relevant:
“An improving job market and economy should lead to a decrease in the percentage of young adults living with their parents.“
Considering that the percentage of young adults living with their parents is now an all time high, what does that say about the true state of the job market?
He knows the answer.
Update: just hours after we posted this, Gallup released a follow up report that was largely as expected, and confirms the desolate picture beneath the glitzy surface:
Young Adults Living at Home Less Likely to Be “Thriving”
Young adults between the ages of 24 and 34 who live at home with their parents are significantly less likely to be “thriving” than those in the same age group who don’t live with their parents.
These results are based on Gallup Daily tracking interviews conducted from Aug. 7-Dec. 29, 2013, in which adults younger than 35 were asked about their current living arrangements. Fourteen percent of those between the ages of 24 and 34 report that they live at home with their parents.
Gallup classifies Americans as “thriving,” “struggling,” or “suffering,” according to how they rate their current and future lives on a ladder scale with steps numbered from 0 to 10, based on the Cantril Self-Anchoring Striving Scale. People are considered thriving if they rate their current lives a 7 or higher and their lives in five years an 8 or higher.
… even after accounting for marital status, employment, education, and a number of other demographic variables, those living at home between the ages of 24 and 34 still are less likely to be thriving. This suggests that while living with one’s parents may have some benefits for young people who have not yet found their full footing in society, the net effect of living at home lowers young adults’ perceptions of where they stand in life. In other words, even among young adults who have equal status in terms of being single, not being employed full time, and not having a college education, those who do not live at home are more likely to be thriving than those living at home. Something about living at home appears to drive down young adults’ overall life evaluations.
This research on the well-being of young adults living at home with their parents is the first of its kind at Gallup, although research conducted at Ohio State and elsewhere suggests that living at home is increasingly common among those younger than 35 today.
The data show that those between the ages of 24 and 34 who live at home tend to be unattached — in the sense that they are not married and less likely to have a full-time job — and also to be less well-educated. The research reviewed in this report underscores the idea that living at home may have some emotional costs for young adults — particularly in terms of their perceptions that they are not enjoying the best possible life, beyond those associated with being unemployed or unmarried.
Times may change. If marriage rates rebound, if the job market for young adults improves, and if more young Americans go to college, then living at home may be less common in the years ahead, and if that happens, the overall well-being of young Americans may improve.
Yes indeed: times may change if… Then again, when times change they may get far, far worse.
The Canadian economy is rolling over and their recent jobs situation is worse than the US (and it’s always cold weather-y up there?!) but the last great pillar of the ‘recovery’ in Canada is perhaps about to get crushed. As the WSJ noted recently, Canada’s housing market is the most expensive in the world (60% over-valued by historical standards) and one simple reason explains it – Canada has been very open to foreign investors, which means that in an age of unprecedented global liquidity cash-rich wealthy individuals who are looking for places to park their excess funds can do so in its housing market. Until now… As SCMP reports, Canada’s government has announced that it is scrapping its controversial investor visa scheme, which has allowed waves of rich Hongkongers and mainland Chinese to immigrate since 1986. Soft landing?
Deutsche Banks’s house-price-to-rent index says Canada has the most expensive housing market in the world – 60% over-valued…
“Canada, for example, is very open to foreign investors, which means that in an age of unprecedented global liquidity cash-rich wealthy individuals who are looking for places to park their excess funds can do so in its housing market far more easily than in Japan, with its closed system. ”
As it’s home price index hardly missed a beat while the US plunged… (different scales but point is to illustrate drastic difference when financial crisis started – and where the liquidity went…)
Canada’s government has announced that it is scrapping its controversial investor visa scheme, which has allowed waves of rich Hongkongers and mainland Chinese to immigrate since 1986.
The surprise announcement was made in Finance Minister Jim Flaherty’s budget, which was delivered to parliament in Ottawa on Tuesday afternoon local time. Tens of thousands of Chinese millionaires in the queue will reportedly have their applications scrapped and their application fees returned.
The decision came less than a week after the South China Morning Post published a series of investigative reports into the controversial 28-year-old scheme.
The Post revealed how the scheme spun out of control when Canada’s Hong Kong consulate was overwhelmed by a massive influx of applications from mainland millionaires.Applications to the scheme were frozen in 2012 as a result, as immigration staff struggled to clear the backlog.
“In recent years, significant progress has been made to better align the immigration system with Canada’s economic needs. The current immigrant investor program stands out as an exception to this success,” Flaherty’s budget papers said.
“For decades, it has significantly undervalued Canadian permanent residence, providing a pathway to Canadian citizenship in exchange for a guaranteed loan that is significantly less than our peer countries require,” it read.
Under the scheme, would-be migrants worth a minimum of C$1.6 million (HK$11.3 million) loaned the government C$800,000 interest free for a period of five years. The simplicity and low relative cost of the risk-free scheme made it the world’s most popular wealth migration program.
A parallel investor migration scheme run by Quebec still remains open. Many Chinese migrants use the alternative scheme to get into Canada via the French-speaking province and then move elsewhere in Canada. The federal government has previously pledged to crack down on what it said was a fraudulent practice.
Flaherty also announced yesterday the scrapping of a smaller economic migration scheme for entrepreneurs.
All told, 59,000 investor applicants and 7,000 entrepreneurs will have their applications returned, Postmedia News reported. Seventy per cent of the backlog, as of last January, was Chinese, suggesting more than 46,000 mainlanders will be affected by yesterday’s announcements.
The Immigrant Investor Program, which has brought about 185,000 migrants to Canada, was instrumental in facilitating an exodus of rich Hongkongers in the wake of the 1989 Tiananmen massacre and in the run-up to the handover. More than 30,000 Hongkongers immigrated using the scheme, though SAR applications have dwindled since 1997.
So, the Canadian government is looking a liquidity-splooging gift-horse in the mouth and saying “no, thanks” – an impressive decision to take given the potential weakness in the real economy… we’ll see how long it takes for the decision to be unwound or altered…
Another Conspiracy Theory Becomes Fact: Meet The Men With The Plan Behind Italy’s Bloodless Coup | Zero Hedge
The chart below is very familiar to anyone who was observing the hourly turmoil in the European bond market in November of 2011, when Italian bonds crashed, when yields soared to record levels, and every downtick of the Euro could have been its last.
What the chart may not show are the dramatic transformations in Italy’s government that took place just as the Italian bond spread exploded, which saw the resignation of career-politician Sylvio Berlusconi literally days after yields soared, and the instatement of Goldman technocrat Mario Monti as Italy’s next Prime Minister.
In fact as some, and certainly this website, had suggested the blow out in Italian yields was merely a grand plan orchestrated to usher in a new Italian government that would, with the support of yet another Goldman alum, the ECB’s then brand new head Mario Draghi, unleash a new era in Italian life, supposedly one of austerity (ignoring that two years after Berlusconi, Italy’s debt to GDP ratio has never been higher), and which would give the impression that Europe is being fixed all the while preserving the broken European monetary system for at least another year or two. In other words a grand conspiracy theory of a pre-planned bloodless coup. That all this would take place under the auspices and with the blessing of Italy’s president Napolitano, only made things worse since Italy is not a parliamentary republic but a parliamentary democracy, where such cloak and dagger arrangements are certainly not permitted under the constitution.
And so, as lately so often happens, courtesy of the narrative by Alan Friedman of what really happened that summer, this too conspiracy theory has just become conspiracy fact. Thanks to the FT’s “Monti’s secret summer“, we learn with painful detail (especially for those of our readers who may be Italian), just how the grand conspiracy to out Berlusconi took shape, and how it was deviously executed with the assistance of none other than the European Central Bank.
It all started on In the summer of 2011 when Carlo De Benedetti, the Italian industrial tycoon, hosted Mario Monti, Italy’s then former prime minister and an old friend of De Benedetti’s in the St Moritz-based alpine retreat of the industrialist for dinner, and a private chat to discuss “a development that was to have profound public consequences.” We go to the FT for the full details:
“Mario asked if we could get together, and I chose a typical little Swiss trattoria for dinner, just outside of St Moritz. But at the last minute he said he wanted to talk in private and so I said ‘Sure, stop by my house before dinner’ and so he came by,” Mr De Benedetti says. “And it was then he told me that it was possible that the president of the republic, Napolitano, would ask him to become prime minister, and he asked my advice.”
Mr De Benedetti says the two men “discussed whether he should accept the offer, and when would be the right moment to do so. This happened at my house in August, so in fact he had already spoken with President Napolitano.”
The offer from Giorgio Napolitano, the Italian president, to Mr Monti of the job of prime minister – a post that was still very much occupied by Silvio Berlusconi, the billionaire centre-right politician – is at the core of serious questions of legitimacy in Italy. What happened in Italy that summer and autumn as policy makers battled the crisis gripping the eurozone is still a subject of intense debate.
Here, the story takes a detour to a glimpse of the denouement, by advising readers that the president’s “planning the replacement of the elected Mr Berlusconi by the unelected technocrat Mr Monti – months ahead of the eventual transfer of power in November – reinforces concerns about Mr Napolitano’s repeated and forceful interventions in politics. His outsized role since the crisis has led many to question whether he stretched his constitutional powers to their limits – or even beyond.” Of course, he did – and so did all other European bankers and business tycoons who knew they had to perpetuate the legacy status quo as long as possible or else their fortunes would come crumbling down before their eyes. But we already knew that. What we did not know were the explicit details of how the immaculate plan to wrest control of Italy from the playboy billionaire and hand it over to what essentially were Goldman’s key European tentacles, were conceived. So we read on:
Outside the calm of St Moritz that summer, the eurozone crisis was raging. Market speculation against Italian and Spanish sovereign debt was rampant and the spread between Italian Treasury bonds and German Bunds was rocketing. As its borrowing costs rose there was talk that Italy could default. Italy was in crisis – politically as well as economically.
In Rome, Mr Berlusconi was presiding over a rancorous, unstable coalition and increasingly distracted by allegations over sexual relations with Karim el-Mahroug, a Moroccan nightclub dancer. All of Europe seemed to be lambasting him.
Yet despite the controversy engulfing Mr Berlusconi, he was still the sitting prime minister and his government was legitimate under the rules of Italy’s parliamentary democracy.
How long that might last was a subject of conversation between Mr De Benedetti and Mr Monti that August.
“I told Mario that he should take the job but that it was all a question of timing. If Napolitano formalised the offer in September then that was fine, but if he left it until December then it would be too late,” recounts Mr De Benedetti.
So now we know the timeframe for the upcoming coup: ideally sometime, in October or November of 2011. But before that, it was the turn of another element – this time the European connection Romano Prodi – to give his blessing and to explain to Monti why he would soon be the “happiest man alive:”
Romano Prodi, a former president of the European Commission and another old friend of Mr Monti’s, recalls a similar conversation, but even earlier, towards the end of June 2011. “We had a long and friendly conversation,” Mr Prodi says, “and he asked for my thoughts, and I told him, ‘look here Mario, there is nothing you can do to become prime minister but if the job is offered to you then you cannot say no. So you should be the happiest man alive’.”
Finally, the only missing link was the codification of the “reforms” that Italy would undergo the second Berlusconi was booted out.
Corrado Passera, a leading banker who was to become Mr Monti’s minister for economic development, infrastructure and transport, was meanwhile given the green light that summer by Mr Napolitano to prepare a confidential 196-page document containing his own proposals for a wide-ranging “shock therapy” for the Italian economy. It was a programme of proposed government policies and reforms that went through four successive drafts as Mr Napolitano and Mr Passera discussed it back and forth that summer and into the autumn.
With all that in place, it was time to put the plan into effect.
Italy’s crisis intensified throughout the autumn of 2011. All Italians still remember the smirk of scepticism on the faces of Angela Merkel, the German chancellor, and Nicolas Sarkozy, the French president, when they were asked at a press conference in October if they had confidence in Mr Berlusconi’s ability to cut the deficit or reduce the debt, which was then at 120 per cent of gross domestic product. (The latest figure is 133 per cent.)
So yes, for anyone still confused – since total debt/GDP has risen by 13% in the past two years, the last thing Italy engaged in was austerity designed to moderate its out of control public spending. What it did engage in, was epic capital misallocation, even greater corruption, and gross incompetence. All of these, however, were conveniently scapegoated on the only well-known traditional fallback.
At this point, we should remind readers of a concurrent story, one involving Italy’s then-member of the ECB executive council, Lorenzo Bini-Smaghi, who revealed in a recent book that at just around this time Berlusconi was realizing that the trap was closing. Bini-Smaghi revealed that Berlusconi had “discussed (threatened?) Italian withdrawal from the euro in private meetings with other EMU governments, presumably with Chancellor Angela Merkel and France’s Nicolas Sarkozy, since he does not negotiate with underlings.”
And so the ECB went to task, and under its new boss, yet another Italian, former Goldmanite Mario Draghi, allowed Italian bond yields to crater and take the country, and the Eurozone, and thus the entire developed world, to the edge of collapse. Just so Italy’s president had a pretext to accelerate the demise of Berlusconi and catalyze his replacement with a technocrat crony of the financial establishment. Once again, as a reminder, here is the dynamic of bond yields soaring just as Berlusconi was threatening to end the European dream in which “so much political capital is invested”:
What happened after that moment is part of the public record:
On November 9 2011 Mr Napolitano appointed Mr Monti a senator for life, thus making him a member of parliament. On November 12, at a meeting with the president, Mr Berlusconi resigned, ending his third stint as prime minister. Within 24 hours – rather than call for fresh elections – Mr Napolitano named Mr Monti, the economics professor and former European commissioner who had never held elected office, as prime minister. The full cabinet was sworn in three days later.
Mr Berlusconi’s supporters cried foul and made noisy claims that there had been a “coup”.
They were right, and now – from the horse’s mouth – we know the facts.
In a lengthy videotaped interview with Mr Monti, he confirmed the conversation with Mr De Benedetti in St Moritz. He also acknowledged the conversation with Mr Prodi in June 2011, though at first he played down these talks, saying that the idea of him becoming prime minister “was sort of in the air”.
He recalled with a giggle that “Yes, Prodi came to see me at the end of June and the spread [between Italian and German government bond yields] was then about 220 or 250 basis points, and he told me: ‘Get ready, because when the spread hits 300 you will be called in’. And then the spread hit 550!”
… as if by magic. Supposedly Draghi wasn’t quite willing to do “whatever it takes” just yet.
Mr Monti confirmed that he knew all about the Passera document being prepared for the president. “Corrado Passera told me he was working on this and he said he would show it to me, and he did, and he told me he had given it to Napolitano and would give it to me,” Mr Monti said. “And on one occasion I discussed the Passera document with Napolitano, and then later on, months later, when I was named prime minister, I immediately asked Passera to join the Cabinet.”
But when asked if it was made clear to him in the summer of 2011 in his talks with Mr Napolitano that the president was asking him to be ready to take over from Mr Berlusconi, Mr Monti hesitated. “Well, President Napolitano and I had been talking for a long time, for years, not about this, but then things sort of came to a head.”
When pressed further to explain if Mr Napolitano had explicitly asked him to be on standby during their talks back in June and July 2011 – four to five months before he replaced Mr Berlusconi as prime minister – Mr Monti demurred: “Look here: I will not reveal details of conversations that I had with the president of the republic.”
Pressed again, and asked if he wished to deny on the record that in June and July of 2011 President Napolitano had either asked him explicitly or had made it clear that he wanted him to be available to become the new prime minister, Mr Monti replied falteringly, in a voice that became almost a whisper: “Yes. He, uh, he gave me a signal in that direction.” After this revelation a look of extreme discomfort spread across Mr Monti’s face and he stared off to one side.
Perhaps because Monti had just realized he admitted that Italy had undergone presidentially-blessed government coup – one whose execution stretched far beyond any constitutional powers awarded to the president, and one which involved numerous foreign (and financial) interests (and conflicts thereof).
At this point attention turns to Italy’s president, 89-year old Giorgio Napolitan0, whose direct intervention was instrumental in allowing this carefully laid “bloodless coup” plan of bankers and technocrats to proceed:
Mr Napolitano did not agree to an interview despite repeated requests. His spokesman had no comment on a series of written questions, including one about which month in 2011 Mr Napolitano had first sounded out Mr Monti to become prime minister.
But last week Mr Napolitano commented for the first time on the controversy over his naming of Mr Monti. During a visit to the European parliament in Strasbourg, Mr Napolitano said that while some had described his naming of Mr Monti “as almost invented by me as a personal whim”, in fact he had done so on the basis of indications given to him by parliamentary and political leaders “in the course of consultations as is required”.
This explanation could raise further questions in Italy, where such “consultations as is required” would typically have begun only upon the resignation of the prime minister. In Mr Berlusconi’s case, these would have begun upon his November 12 resignation.
We now know that all such consultations took place well before said resignation. But where it gets better is just how grand the chess game truly was:
The Monti government acted swiftly to introduce harsh austerity measures, spending cuts, a value added tax rise and new property duties as well as reform of the pensions system. Praise was duly heaped on him by the European Commission, the International Monetary Fund and financial markets.
Many Italians still despise Mr Monti for the austerity programme and see him as a pawn of the European Commission or of Ms Merkel. In retrospect he lacked a political touch but was a useful transition figure at a time of crisis.
Mr Monti says his greatest achievement was to jump into electoral politics during the election of February 2013 at the expense of Berlusconi’s party. “Had it not been for my taking votes away from the centre-right,” Mr Monti said in the interview, “Berlusconi today would be either the president of the republic or the prime minister, so I did achieve a concrete result in blocking that.”
Of course, Berlusconi’s star has now faded, and with it the danger that the supposedly irrational politician, who once had threatened to dissolve the Eurozone and thus saddle Germany with a TARGET2 bill amounting to almost $1 trillion. Which meant that the status quo of the “equity tranche” (read – the global banker aristocracy) had been preserved. In this way, Napolitano, Prodi and Monti, assisted by their fourth Italian friend – ECB’s Mario Draghi – effectively subjugated the Italian population to call it austerity, call it gross and premeditated capital misallocation, but certainly call it the will of the bankers. And all without firing a shot.
Which brings up the question of just how constitutional, if at all, was the overthrow of Berlusconi.
Adopted in 1948 after more than 20 years of chaos and brutal fascist rule, Italy’s constitution is one of the few documents universally respected by Italians. It guarantees their most basic rights. It is sacrosanct.
Planning in secret, even as a contingency measure, to appoint a new prime minister when a parliamentary majority is in place may be a prudent and responsible action for a president but it is not an explicit power assigned by the constitution, even if there is a financial crisis under way in half of Europe as was the case in the summer of 2011.
Most ironic, however, is that the only person who seems to care about the trampling of the constitution is… a former comedian.
Whatever one thinks of Mr Berlusconi, serious constitutional questions are raised by the behind-the-scenes manoeuvring that resulted in the appointment of his successor. Perhaps the loudest voice to raise these questions is that of Beppe Grillo, the comedian-turned-politician who garnered 25 per cent of the national vote last year.
Mr Napolitano, an 89-year-old former communist, has reacted with anger at Mr Grillo’s incessant accusations of the subversion of democracy. Mr Grillo has frequently called for Mr Napolitano’s impeachment.
Today, Italy is emerging from recession slowly, with an exceedingly weak and uneven economic recovery. This year is expected to bring less than 1 per cent growth in GDP.
Italy remains sharply divided over the events of 2011 and Mr Napolitano’s role in them. The issue of whether Mr Napolitano went beyond his constitutional powers during the summer and autumn of 2011 can be left to future historians. But what is clear now – thanks to Mr Monti’s own admission – is that he and the president had been discussing the prospect of his taking over from Mr Berlusconi long before his official appointment in November of 2011. For Mario Monti it had been a long and secret summer.
Indeed it had. And now we know that in order to effectuate the banker plan of preserving Europe’s “political capital” which is simply another name of trillions in wealth on paper (and on funny-colored pieces of European currency) that would evaporate if and when the Eurozone inevitably dissolves, it took just four Italians – Monti, Prodi, Napolitano and, of course, Draghi – willing to trample their constitution in order to achieve the goal of perpetuating the status quo no matter the cost.
As for the fallout, namely “youth unemployment is at a record high of 41.6 per cent, nationwide joblessness is 12.7 per cent and almost a third of families are near the poverty line. Productivity and competitiveness have dropped sharply in recent years. Mr Monti’s successor, Enrico Letta, another leader championed by Mr Napolitano, is under fire for his handling of the economy”… well, all those are problems of the “99%”. And as everyone knows by know, the 99% is the last thing on the mind of the global ruling class.
JPMorgan Sued For Crony Justice – Presenting “A Decade of Illegal Conduct by JP Morgan Chase” | Zero Hedge
Earlier today, the non-profit organization Better Markets did what so many others have only dreamed of doing – they sued JPMorgan.
Specifically, as they disclose in the fact sheet posted on their website, they are “challenging the historic and unprecedented $13 billion settlement agreement between the U.S. Department of Justice and JP Morgan Chase (“Agreement”). Better Markets alleges in its complaint that the DOJ violated the Constitution and laws of the United States by using a mere contractual agreement to resolve claims of historic importance without subjecting the Agreement to independent judicial review. In effect, the DOJ acted as investigator, prosecutor, judge, jury, sentencer, and collector, without any check on its authority or actions, even though the amount is the largest in the 237 year history of the United States. Because the DOJ has declared its intention to use the Agreement as a “template” in future similar cases, it is imperative that the DOJ’s unlawful and secretive approach in the settlement process be subjected to judicial review.”
We wish them the best of luck, as in a “crony jsutice” system as corrupt as this one – perhaps best described, paradoxically enough by the fictional movie The International – where the same DOJ previously implicitly admitted it will not prosecute “systemically important” firms like JPM to the full extent of the law and instead merely lob one after another wrist slap at them to placate the peasantry, any hope for obtaining true justice is impossible.
That said, the key aspects of the Better Markets lawsuit deserve attention. They are broken down as follows:
For years leading up to the financial crisis of 2008, JP Morgan Chase allegedly engaged in pervasive fraud in the packaging and sale of thousands of mortgage-backed securities to investors. Those securities were stuffed with subprime loans that failed to meet applicable underwriting criteria. Employees, managers, and potentially high-level executives of JP Morgan Chase knew that the securities were riddled with toxic loans, but they allegedly concealed the truth from investors when they marketed and sold the securities. Investors lost huge but still unknown sums of money as a result of the fraud, and the bank’s illegal conduct contributed directly to the biggest financial crash since 1929 and the worst economy since the Great Depression of the 1930s.
After negotiating the Agreement in complete secrecy, the DOJ announced the $13 billion deal on November 19, 2013, claiming that it was holding JP Morgan Chase accountable for its illegal activities. Under the Agreement, DOJ grants JP Morgan Chase broad civil immunity in exchange for a $2 billion civil penalty, along with $4 billion in “consumer relief” for the benefit of homeowners with problem mortgages. The Agreement also allocates $7 billion to eight other agencies or states to resolve their claims against JP Morgan Chase.
Key Allegations in the Complaint
The Agreement was struck under the most extraordinary circumstances. For example—
- THE HISTORIC CLAIMS: The Agreement resolved claims of pervasive fraud that contributed to the worst financial crash since 1929 and the worst economy since the Great Depression of the 1930s.
- THE LARGEST AMOUNT EVER: The settlement amount was the largest in U.S. history from any single entity by more than 300%.
- THE BIGGEST BANK: JP Morgan Chase is the largest, richest, and most well-connected Wall Street bank in the United States.
- THE HIGHEST-LEVEL NEGOTIATORS: The Attorney General and other senior DOJ political appointees negotiated directly and entirely in secret with the CEO of JP Morgan Chase, someone who was considered a possible Treasury Secretary just a few years ago.
- THE $10 BILLION PHONE CALL: The cellphone of DOJ’s third highest ranking official rang with the “familiar” phone number of JP Morgan Chase’s CEO, who called to offer billions of dollars to stop DOJ from holding a press conference and filing a lawsuit in just a few hours. The call worked, and the press conference and lawsuit were both called off.
- THE UNPRECEDENTED AGREEMENT: DOJ gave complete civil immunity to JP Morgan Chase for defrauding thousands in exchange for $13 billion, via a contract that was negotiated and finalized in secret without any review or approval by a federal court.
?Notwithstanding the historic nature of the settlement, the Agreement was never subjected to judicial review, so there has been no independent evaluation of its terms. Furthermore, the vague settlement documents fail to disclose critically important information about every aspect of the deal. For example, the Agreement fails to identify or explain—
- THE LOSSES: How much did JP Morgan Chase’s clients, customers, counterparties, investors, and others lose as a result of its fraudulent conduct? $100 billion? $200 billion? More?
- THE PROFITS: How much revenue, profits, and other benefits did JP Morgan Chase receive as a result of its fraudulent conduct, and was it all disgorged? $10 billion? $20 billion? More?
- THE BONUSES: Who received what amount of bonuses for the illegal conduct?
- THE INVESTIGATION: What was the scope and thoroughness of the investigation that provided the basis for the Agreement?
- THE FRAUD: What are the material facts of the illegal conduct by JP Morgan Chase and the specific violations of law that were committed?
- THE CULPRITS: What exactly did the individual executives, officers, managers, and employees involved in the illegal conduct actually do to carry out the fraud, and do any of them still work for the bank?
- THE CORRECTIVE ACTION: Why did the contract fail to impose on JP Morgan Chase any obligation to change any of its business or compliance practices, which are standard conduct remedies that regulators routinely require? And how can the sanctions effectively punish and deter JP Morgan Chase, given its wealth and its extensive history of lawless conduct?
- THE LACK OF ADMISSIONS: Why are there no admissions of fact or law by JP Morgan Chase, and what, if any, are the concrete legal implications of their so-called “acknowledgment”?
By entering the Agreement without seeking any judicial review and approval, the DOJ violated the Constitution and laws of the United States.
- The Executive Branch, acting through the DOJ, violated the separation of powers doctrine by unilaterally striking a bargain with JP Morgan Chase to resolve unprecedented matters of historic importance, without seeking any judicial review and approval of the Agreement.
- The DOJ violated the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) by failing to commence a civil action in federal court so that the court could, among other things, assess the civil penalty.
- The DOJ acted arbitrarily and capriciously by, among other things, entering the Agreement without seeking judicial review and approval.
* * *
But perhaps the most informative aspect of the lawsuit fact sheet is simply stepping back and observing the relentless illegal transgressions by Jamie Dimon’s firm. Better Markets summarizes them best as follows:
Highlights From A Decade of Illegal Conduct by JP Morgan Chase
- United States v. JPMorgan Case Bank, NA, No-1:14-cr-7 (S.D.N.Y. Jan 8, 2014) ($1.7 billion criminal penalty); In re JPMorgan Chase Bank, N.A., OCC Admin. Proceeding No. AA-EC-13-109 (Jan. 7, 2014) ($350 million civil penalty); In re JPMorgan Chase Bank, N.A., Dept. of the Treasury Financial Crimes Enforcement Network Admin. Proceeding No. 2014-1 (Jan. 7, 2014) ($461 million civil penalty) (all for violations of law arising from the bank’s role in connection with Bernie Madoff’s Ponzi scheme, the largest in the history of the U.S.);
- In re JPMorgan Chase Bank, N.A., CFTC Admin. Proceeding No. 14-01 (Oct. 16, 2013) ($100 million civil penalty); In re JPMorgan Chase & Co., SEC Admin. Proceeding No. 3-15507 (Sept. 19, 2013) ($200 million civil penalty); In re JPMorgan Chase & Co., Federal Reserve Board Admin. Proceeding No. 13-031-CMP-HC (Sept. 18, 2013) ($200 million civil penalty); UK Financial Conduct Authority, Final Notice to JP Morgan Chase Bank, N.A. (Sept. 18, 2013) (£137.6 million ($221 million) penalty); In re JPMorgan Chase Bank, N.A., OCC Admin. Proceeding No. AA-EC-2013-75, #2013-140 (Sept. 17, 2013) ($300 million civil penalty) (all for violations of federal law in connection with the proprietary trading losses sustained by JP Morgan Chase in connection with the high risk derivatives bet referred to as the “London Whale”);
- In re JPMorgan Chase Bank, N.A., CFPB Admin. Proceeding No. 2013-CFPB-0007 (Sept. 19, 2013) ($20 million civil penalty and $309 million refund to customers); In re JPMorgan Chase Bank, N.A., OCC Admin. Proceeding No. AA-EC-2013-46 (Sept. 18, 2013) ($60 million civil penalty) (both for violations in connection with JP Morgan Chase’s billing practices and fraudulent sale of so-called Identity Protection Products to customers);
- In Re Make-Whole Payments and Related Bidding Strategies, FERC Admin. Proceeding Nos. IN11-8-000, IN13-5-000 (July 30, 2013) (civil penalty of $285 million and disgorgement of $125 million for energy market manipulation);
- SEC v. J.P. Morgan Sec. LLC, No. 12-cv-1862 (D.D.C. Jan. 7, 2013) ($301 million in civil penalties and disgorgement for improper conduct related to offerings of mortgage-backed securities);
- In re JPMorgan Chase Bank, N.A., CFTC Admin. Proceeding No. 12-37 (Sept. 27, 2012) ($600,000 civil penalty for violations of the Commodities Exchange Act relating to trading in excess of position limits);
- In re JPMorgan Chase Bank, N.A., CFTC Admin. Proceeding No. 12-17 (Apr. 4, 2012) ($20 million civil penalty for the unlawful handling of customer segregated funds relating to the bankruptcy of Lehman Brothers Holdings, Inc.);
- United States v. Bank of America, No. 12-cv-00361 (D.D.C. 2012) (for foreclosure and mortgage-loan servicing abuses during the Financial Crisis, with JP Morgan Chase paying $5.3 billion in monetary and consumer relief);
- In re JPMorgan Chase & Co., Federal Reserve Board Admin. Proceeding No. 12-009-CMP-HC (Feb. 9, 2012) ($275 million in monetary relief for unsafe and unsound practices in residential mortgage loan servicing and foreclosure processing);
- SEC v. J.P. Morgan Sec. LLC, No. 11-cv-03877 (D.N.J. July 7, 2011) ($51.2 million in civil penalties and disgorgement); In re JPMorgan Chase & Co., Federal Reserve Board Admin. Proceeding No. 11-081-WA/RB-HC (July 6, 2011) (compliance plan and corrective action requirements); In re JPMorgan Chase Bank, N.A., OCC Admin. Proceeding No. AA-EC-11-63 (July 6, 2011) ($22 million civil penalty) (all for anticompetitive practices in connection with municipal securities transactions);
- SEC v. J.P. Morgan Sec., LLC, No. 11-cv-4206 (S.D.N.Y. June 21, 2011) ($153.6 million in civil penalties and disgorgement for violations of the securities laws relating to misleading investors in connection with synthetic collateralized debt obligations);
- In re JPMorgan Chase Bank, N.A., OCC Admin. Proceeding No. AA-EC-11-15, #2011-050 (Apr. 13, 2011) (consent order mandating compliance plan and other corrective action resulting from unsafe and unsound mortgage servicing practices);
- In re J.P. Morgan Sec. Inc., SEC Admin. Proceeding No. 3-13673 (Nov. 4, 2009) ($25 million civil penalty for violations of the securities laws relating to the Jefferson County derivatives trading and bribery scandal);
- In re JP Morgan Chase & Co, Attorney General of the State of NY Investor Protection Bureau, Assurance of Discontinuance Pursuant to Exec. Law §63(15) (June 2, 2009) ($25 million civil penalty for misrepresenting risks associated with auction rate securities);
- In re JPMorgan Chase & Co., SEC Admin. Proceeding No. 3-13000 (Mar. 27, 2008) ($1.3 million civil disgorgement for violations of the securities laws relating to JPM’s role as asset-backed indenture trustee to certain special purpose vehicles);
- In re J.P. Morgan Sec. Inc., SEC Admin. Proceeding No. 3-11828 (Feb. 14, 2005) ($2.1 million in civil fines and penalties for violations of Securities Act record-keeping requirements); and
- SEC v. J.P. Morgan Securities Inc., 03-cv-2939 (WHP) (S.D.N.Y. Apr. 28, 2003) ($50 million in civil penalties and disgorgements as part of a global settlement for research analyst conflict of interests).
Did we mention that nobody from JPM has gone to prison, and instead as of late last week, one of the biggest JPM culprits was set to become a member of the CFTC’s advisory panel before the people and not the regulators, were forced to step in? Why? #AskJPM
In 1928, just as income inequality was surging, stocks were soaring and monetary distortions were rearing their ugly head, the now infamous words “a chicken in every pot and a car in every garage” were integral to Herbert Hoover’s 1928 presidential run and a “vote for prosperity,” all before the market’s epic collapse. Fast forward 86 years and income inequality is at those same heady levels, stocks are at recorderer highs, the President is promising to hike the minimum wage to a “living wage” capable of filling every house with McChicken sandwiches and now… to top it all off – Maserati unveils their (apparent) “everyone should own a Maserati” commercial. It would seem that chart analogs are not the only reminder of the pre-crash era exuberance and its recovery mirage and massive monetary distortions.
The last time the top 10% of the US income distribution had such a large proportion of the entire nation’s income was the 1920s – a period that culminated in the Great Depression and a collapse in that exuberance.
“Wealth effect” – check
“Today there is a tremendous amount of monetary distortion, on par with the 1929 stock market and certainly the peak of 2007, and many others,” warns Universa’s Mark Spitznagel.
and “a Maserati in every garage”
It’s a great looking car and emotionally imploring but… did they really just suggest (subliminally of course) that such luxury is to be had by all?
Perhaps a gentle reminder of the reality for 99.99% of Americans…compared to the Maserati buyer…
As Mark Spitznagel warned:
The reality is, when distortion is created, the only way out is to let the natural homeostasis take over. The purge that occurs after massive distortion is painful, but ultimately, it’s far better and healthier for the system.
While that may sound rather heartless, it’s actually the best and least destructive in the long run.
Look what happened in the 1930s, when the actions of the government prolonged what should have been a quick purge. Instead, the government prevented the natural rebuilding process from working, which made matters so much worse.
Paul Singer’s “Vision” Of The Coming “Riot Point” And The Fed’s “Formula For Destruction” | Zero Hedge
We sympathize with traditional stock and bond investors, who are faced with extremely poor choices today. QE has distorted the prices of all traditional asset classes to such an extent that none currently promises a fair return with modest risk…. Because the dominant force in securities-price movements today is government policy, particularly the governmental buying of bonds and stocks, there is a vulnerability to all trading and investing prospects that cannot be assessed or measured with confidence… Since there is no history of Americans losing confidence in the basic soundness of their currency and their government, and since monetary policy today is so manipulative and large, it will be hard to parse the reasons for any particular market moves in 2014.
– Paul Singer, Elliott Management
As always, perhaps the best periodic commentary on the state of the “markets” (even if such a thing has not existed for the past 5 years) and global economy comes from the person whose opinion has not been swayed by fly-by-night screechers and book-peddling pundits who fit in CNBC’s octobox and who come fast and are forgotten even faster, and whose 37 year track record at Elliott Management, whose assets he has grown from $1.3 million to $23 billion, speaks for itself: Paul Singer.
Below are the key excerpts from his January letter.
Imagine how mainstream experts would have reacted to the following set of predictions in 2006: “In two years Lehman will be bankrupt; Merrill and Bear will be acquired in distressed takeunders; Citicorp, AIG, Chrysler, GM, Delphi, Fannie and Freddie will be taken over by the government facing possibly hundreds of billions of dollars of losses; and only 13 global megabanks will survive.”
The 2008 crisis had a lasting and profound impact on virtually the entire developed world. The financial system was brought to the brink of collapse; conditions were created for the radical monetary policy of the past five years and a severely distorted recovery; the plans and dreams of hundreds of millions of people were disrupted, in some cases catastrophically; and societal values were significantly twisted away from individual responsibility toward dependency. In fact, the consequences of the bubble, the bust and the policy aftermath are not yet in full historical view. Despite all the pain, policymakers
refuse to take responsibility for the bubble, the distortions of the bubble years, the ensuing failure to lay the groundwork for strong post-bust growth, the continued riskiness and fragility of the major financial institutions, the lack of appropriate policies to deal with the bust, or their total inability to deal with competitive and technological challenges in the labor market.
It is not that the path toward destruction was impossible to see. On the contrary, a number of people saw the disaster coming, even if they did not all see the timing or the shape of it. The strangest part of the whole series of events is that only a few large professional investors noticed the smoke and shouted “fire.” Policymakers, particularly at the Fed and including (importantly) Janet Yellen, paid some small lip service to the building risks, but they were wedded to their primitive “models” and had a completely inadequate grasp of modern financial instruments, leverage and the interconnectivity of financial institutions. Not only did policymakers fail to understand what was happening and how to deal with the crisis and its aftermath, but also many of those same policymakers, and ALL of the structures and assumptions that prevailed pre-crash, are still in place today. No apologies have been issued. There has been a great deal of partisan back-and-forth and successful lobbying, but sadly the financial system is still not sound. This may be impossible to prove until the next crisis, but you could have said the same about conditions leading up to the last one.
Policymakers were and remain asleep at the wheel. The lack of introspection at the Treasury, the Fed, Congress, the White House and other regulatory bodies is astounding. Instead of taking reasonable and conservative steps to strengthen the financial system and to reach consensus on what is necessary to generate growth, there has been a series of cronyist, ideological, punitive steps that have neither catalyzed the growth that this country needs nor made financial institutions safe. At the same time, the Administration has allowed (and encouraged) the Fed to carry the ball all by itself, heaping praise on it for saving the world at the very time that the White House is shirking its own responsibilities. The Fed’s “dual mandate” (to promote “maximum employment” as well as “price stability”) is bunk in today’s context. It seems as if the entire world is acting as if the Fed actually has a “total mandate” and the rest of the federal government gets to stand around and applaud its heroic efforts. In fact, what we have now is a lopsided recovery, gigantic price risk in financial markets because of QE, and unknown but potentially massive risks of inflation and the ultimate loss of confidence in the major paper currencies, all because the federal government is more interested in ideology than in getting the country back on track, and the Europeans are more interested in preserving the euro than promoting the prosperity of the sovereign nations of Europe.
* * *
For private investment firms like hedge funds, leverage in the modern world is a matter of semi-volition. True, it is much more readily available than in the past, but there are credit departments and initial margins limiting the size of positions. The big financial institutions, on the other hand, found themselves in an environment starting a couple of dozen years ago in which leverage was entirely voluntary, subject to no real constraint because they were not required to post initial margins with each other. Since many of their positions were “hedges” in similar securities, they risk-underwrote those trades using models that projected very little possibility of generating losses. As a result, the entire system has become super-leveraged, super-interconnected and very brittle. Given the benefits of hindsight, we do not have to prove the proposition that the limits of leverage were exceeded in the recent past and that the system was improperly risk-managed by governments and by the managements of financial institutions. It is frustrating, therefore, that no meaningful de-risking of the financial system has occurred since the crisis. You will see a system primed for a rerun of 2008, perhaps even faster and more intense this time.
MONETARY POLICY GOING FORWARD
QE has created asset price booms, but historically high excess bank reserves are still generally not being lent, and monetary velocity remains relatively low. But last spring, we witnessed the first tangible sign that the Fed may be trapped in its current posture. The Fed cannot retreat due to excessive debt in the system, the fragility of major financial institutions (still opaque and overleveraged) and the prospect that a collapse of bond prices could lead to a quick, deep recession. This situation may be the early stages of a phase in which the Fed is afraid to act because it has the “tiger by the tail,” and perhaps is beginning to realize that the current situation carries significant risks. QE has not generated a sharp upsurge of sustaining and self-reinforcing growth thus far. What it has done is lift stock and asset prices and exacerbate inequality. If investors lose confidence in paper money, as evidenced by either a hard sell-off in one of the major currencies or a sharp fall in bond prices, the Fed and other major central bankers will be in a pickle. If they stop QE and/or raise short-term rates to deal with the loss of confidence, it could throw global markets into a tailspin and the worldwide economy into a severe new recession. However, if they try to deal with the loss of confidence by stepping up QE or keeping interest rates at zero, there could be an explosion in commodity and other asset prices and a sharp acceleration in inflation. What would be the “exit” from extraordinary Fed policy at that point? The current, benign-looking environment (low inflation and
stable economies) is by no means ordained to be the permanent state of things. At the moment, “tapering” is expected to get underway, but that prospect represents a tentative, slight diminution of bond-buying. It contains no real promise of normalizing monetary conditions. If the economy does not light up, the impact of another year of full-bore QE is impossible to predict. Five years and $4 trillion have created economic and moral distortions but very little sustainable value. Maybe the sixth year will produce the “riot point.” Nobody knows, including the Fed.
As we and others have said, the Fed is overly reliant upon models that do not account for real-world elements of instruments, markets and traders in the derivatives age. Models cannot possibly take into account unpredictable interactions among huge positions and traders in new and very complicated instruments. Thus, the Fed should be careful, humble and conservative. Instead, it is just blithely plowing ahead as if it knows exactly what is going on. Intelligent captains sail uncharted waters with extra caution and high alert; only fools think that each mile they sail without sinking the vessel further demonstrates that they are wise and the naysayers were fools. This is a formula for destruction. The crash of 2008 should have been smoking-gun evidence of the folly of this approach, but every mistake leading up to the crash, especially excessive and “invisible” leverage and interest rates that were too low, has been doubled down upon in the years since.
“The ‘Recovery’ Is A Mirage” Mark Spitznagel Warns, “With As Much Monetary Distortion As In 1929” | Zero Hedge
“Today there is a tremendous amount of monetary distortion, on par with the 1929 stock market and certainly the peak of 2007, and many others,” warns Universa’s Mark Spitznagel.
At these levels, he suggests (as The Dao of Capital author previously told Maria B, “subsequent large stock market losses and even crashes become perfectly expected events.”
Post-Bernanke it will be more of the same, he adds, and investors need to know how to navigate such a world full of “monetary distortions in the economy and the creation of malinvestments.” The reality is, Spitznagel concludes that the ‘recovery is a Fed distortion-driven mirage‘ and the only way out is to let the natural homeostasis take over – “the purge that occurs after massive distortion is painful, but ultimately, it’s far better and healthier for the system.”
Via Investments & Wealth Monitor:
On the “recovery” in the United States…
Spitznagel: The somewhat improved economic activity that we’re seeing is based on a mirage—that is, the illusion created by artificial zero-interest rates.
When central banks lower interest rates in hopes of stimulating the economy, that intervention is not the same as a natural move in interest rates.
A genuine drop in interest rates is in response to an increase in savings, as consumers defer consumption now in order to consume later. In a high-savings environment, entrepreneurs put their capital to work to become more roundabout,1 layering their tools and intermediate stages of production to become increasingly productive. The time to make these investments is when consumers are saving, so that entrepreneurs can be in an even better position to make the products that consumers want, when they want them.
In an artificial rate environment, however, that’s not what’s happening. Instead of consumers saving now to spend later, they are spending now.
But because interest rates are artificially lower, entrepreneurs are being fooled into investing in something now that they will have to back out of later—building up what the Austrians call “malinvestment.” Therefore, the illusion is unsustainable, by definition. The Fed can’t keep interest rates low forever.
From an investor perspective, people are trying to extract as much as they can right now. Consider the naïve dividend investment argument: “I can’t afford to be in cash right now.” Investment managers have to provide returns today.
Whenever investors sell a low dividend-paying stock to buy a higher-dividend stock, some piece of progress is sapped from our economy. (The cash needed to pay that higher dividend isn’t going to capital investment in the company.)
This is the exact opposite of entrepreneurial thinking that advances the economy. Consider the example of Henry Ford, who didn’t care about paying dividends today. He wanted to plow as much capital as possible back into making production more efficient for the benefit of the consumer who would pay less for a higher-quality product.
In summary, a major message of my recent book, The Dao of Capital, is recognizing the distortions that come from central bank intervention. Because of the Fed’s actions, interest rates are no longer a real piece of economic information. If you treat them like they are, you will simply do the wrong thing.
After all, when the government tries to manipulate things, the inverse of what was intended usually happens. On that point, history is entirely on my side.
On The Government & Federal Reserve’s “Interventions”…
Spitznagel: The reality is, when distortion is created, the only way out is to let the natural homeostasis take over. The purge that occurs after massive distortion is painful, but ultimately, it’s far better and healthier for the system. While that may sound rather heartless, it’s actually the best and least destructive in the long run.
Look what happened in the 1930s, when the actions of the government prolonged what should have been a quick purge. Instead, the government prevented the natural rebuilding process from working, which made matters so much worse.
I draw a parallel to forest wildfires. Fire suppression prevents small, naturally occurring wildfires from error-correcting the inappropriate growth, and thus prevents the system from seeking its natural homeostatic balance—its natural temporal structure of production, if you will. Instead, everything is allowed to grow at once, as if more resources exist than actually do, and the forest actually gradually consumes itself. When fire inevitably does break out, it is catastrophic. This is a perfect analogy for the market process. We simply do not understand the great homeostasis at work in markets that are allowed to correct their mistakes.
Suppression that makes the cure that much worse than the initial ill, until exponentially more damage is done, calls to mind the wry observation made by the great Austrian economist Ludwig von Mises: “If a man has been hurt by being run over by an automobile, it is no remedy to let the car go back over him in the [opposite] direction.”
As the Mises protégé Murray Rothbard would say, the catharsis needed to return to homeostatic balance “is the ‘recovery’ process,” and, “far from being an evil scourge, is the necessary and beneficial return” to healthier growth and “optimum efficiency.”
It is unfair to call the Austrians heartless because of these views. The Keynesians are the ones who got us into this mess in the first place—just like those who advocated for the suppression of natural forest fires are the ones who created the tinder box that puts the forest at risk.
On The Yellen Fed… (hint – no change)
Spitznagel: Post-Bernanke it will be more of the same. Therefore, investors need to know how to navigate a distorted world—and post-Bernanke the world is likely to get even more distorted—until the markets, ultimately and inevitably, flush out that distortion. This is why I rely on the Austrian school so much.
Austrian business cycle theory (ABCT) shows us what is really happening behind the curtain, so to speak, from monetary distortions in the economy and the creation of malinvestment. When the economy is subject to top-down intervention from the government and especially the central bank, investors need to read the signs in order to protect themselves—as well as still find a way to own productive assets.
People can avoid becoming trapped into chasing immediate returns along with the rest of the ill-fated crowd.
A far better approach is to wait for the return to homeostasis that will prevail even in the midst of pervasive distortion. In that way, investors can embrace roundabout investing by avoiding the distortion and, thus, have all the more resources later for opportunistic investing.
On investing (for retail inevstors)…
Another option for investors is a very simplistic, “mom-and-pop” strategy that starts with recognizing when you are in a distorted environment. For this I use what I call the Misesian stationarity index, which describes the amount of distortion in the economy.
This simple, back-of-the-envelope strategy would be to buy when the index is low and sell when it is high. In other words, people should stay out of the market when it is distorted and thus preserve their capital to deploy after the inevitable purge and correction, when productive assets become bargain-priced. Such an approach has resulted historically in an annualized 2-percent outperformance of stocks. Logically it makes sense, and when you look at it empirically, it’s incontrovertible.
Yet, admittedly, in the world of investing, sitting with one’s arms folded and not taking advantage of a rising market pumped up with distortion, is difficult—even though avoiding the enticement leads to better intermediate means for positional advantage to be exploited later.
It is difficult to do and may even feel anticlimactic. Nonetheless, the disciplined Misesian approach is healthier for one’s portfolio.
On the worst case scenario…
the Fed keeps winning and the illusion continues. The equity markets keep ripping along.
On extreme monetary distrortion and the Q-Ratio…
In simplest terms, the equity Q ratio is the total corporate equity in the United States divided by the replacement cost. Another way to think about it is the appraised value of existing capital in the United States divided by what it would cost to replace or accumulate all that capital.
This ratio has tremendous meaning from an Austrian standpoint, as it reflects what the markets are saying about the state of distortion in the economy.
This aptly illustrates Mises’s concept of “stationarity.” (In a stationary economy, in the aggregate, balance is achieved between the return and replacement costs.) The farther the ratio moves above “1,” the more monetary distortion there is in the economy. For this reason, and as a tip of the hat to the man who gave us the Austrian business cycle theory, I call this ratio the Misesian stationarity index, or MS index for short. When the MS index is high, subsequent large stock market losses and even crashes become perfectly expected events.
Today there is a tremendous amount of monetary distortion, on par with the 1929 stock market and certainly the peak of 2007, and many others (except the 2000 peak, which got a bit more ahead of itself). And all were caused by monetary distortion. As the Austrians show us, the business cycle is a Fed-induced phenomenon.
First, the Obama administration showed during the course of the GM and Chrysler bankruptcy proceedings, that when it comes to Most Preferred Voter classes, some unsecured creditors – namely labor unions, and the millions of votes they bring – are more equal than other unsecured creditors – namely bondholders, and the zero votes they bring. Five years later we are about to get a stark reminder that under the superpriority rule of a community organizer for whom “fairness” trumps contract law any day, it is now Detroit’s turn to make a mockery of the recovery waterfall. As it turns out, bankrupt Detroit is proposing to favor pension funds at roughly double the rate of bondholders to resolve an estimated $18 billion in long-term obligations, according to a draft of a debt-cutting plan reviewed by The Wall Street Journal.
The breakdown to unsecured stakeholders would be as follows: 40% recovery for pension funds, 20% for unsecured bondholders – all this to the same pari class of unsecured creditors. Because just like in Europe when cashing out on CDS in insolvent nations is prohibited as it would suggest that the entire Eurozone experiment is one epic farce, regardless of how much “political capital” Goldman Sachs has invested in it, so in the US municipal creditors are realizing that in the worst case scenario, they will be layered first and foremost by all those whose votes are critical in keeping this crony administration in power.
According to the WSJ the plan calls for recovery to be divided among the unsecureds amounting to $4.2 billion, more than the originally planned $2 billion to settle claims which included about $11 billion in unsecured debt, including $6 billion in health and other benefits for retirees; $3.5 billion for retiree pensions; and about $530 million in general-obligation bonds.
There is a possibility that final “math” in the Plan of Reorg is changed before the final draft.
It was unclear from the plan reviewed by the Journal whether the city is using all of the same estimates for the money owed to unsecured creditors in its draft plan. A person familiar with the draft plan said the recovery rate for the pension funds could end lower than the balance sheet shows.
Details of the plan sent to creditors on Wednesday have been kept under wraps as the city and its debtholders continue to talk in closed-door mediation. The city sent its working draft to creditors in the hopes that the plan with a richer payout might spur some of them to settle with the city individually or, in the least, offer their own suggestions toward modifying the overall proposal, according to another person familiar with the matter.
The formal plan is expected to be filed in federal court in Detroit within two weeks, officials said. Creditors will vote on the plan, but the final decision rests with the court.
Still, the probability is that Kevyn Orr has finally gotten cold feet on playing hard ball with the unions. “The proposed plan provides the road map for all parties to resolve all outstanding issues and facilitate the city’s efforts to achieve long-term financial health,” Detroit Emergency Manager Kevyn Orr said in a statement Wednesday. Mr. Orr’s spokesman declined Thursday to comment on the plan’s details. Several creditors, who were opposed to the city’s early plans to offer creditors, including bondholders and pension funds, less than 20 cents on the dollars owed to them, also declined to comment.”
One can only imagine the amount of “Steve Rattnering” that must have gone on behind the scenes, and how much more is still set to happen, for such a skewed plan to pass the bankruptcy judge over creditor objections. Which it will once the president makes a phone call.
Then again, with contract law abrogated as was made very clear with this administration’s first steps into the “Fairness Doctrine” back in 2009 and the bankruptcy of GM and Chrysler, nothing can, or should, surprise one any more.
It’s deliciously ironic that emerging market (EM) problems have flared so soon after the meeting of the rich and powerful in Davos. According to the central bankers at Davos, the financial crisis is behind us and brighter days lay ahead. According to these bankers, the EM issues which have since arisen are confined to a handful of developing countries and they won’t impact the West.
If only were that so. What the eruptions of the past week really show is that the system based on easy money created by these bankers remains deeply flawed and these flaws have been exposed by moves to tighten liquidity in the U.S. and China. The system broke down in 2008, and again in Europe in 2011 and now in EM in 2013-2014.
The market reaction to the latest events has been abrupt and violent, particularly in the currency world. In my experience, markets generally cope well when there is one crisis. If the current issue was isolated to Turkey, markets outside of this country would probably shrug their shoulders and move on. But when there are multiple spot fires like the last week, markets don’t cope as well.
What are investors supposed to do now? Well, going into this year, Asia Confidential suggested (here, here and here) being cautious on stocks given increasing deflationary risks from U.S. tapering and a China slowdown. And to go long government bonds in developed markets (the U.S) given these risks and junior gold miners due to the extraordinarily cheap valuations on offer. These recommendations have performed well year-to-date and should continue to out-perform for the remainder of 2014.
Simple explanations for the crisis
Much ink has been spilled (or keyboards worn, in this day and age) trying to make sense of the past week’s event. China’s economic slowdown has copped much of the blame. As has QE tapering. And idiosyncratic issues in Turkey and Argentina have received their fair share of attention.
There have also been more sophisticated explanations such as this one from Kit Juckes at Societe Generale:
“There has been a shift in the balance of growth as Chinese demand for raw material wanes, and as higher wages and strong currencies make many EM economies less competitive. Meanwhile, the Fed policy cycle IS turning, and 4 years of capital being pushed out in a quest for less derisory yields, are ending. This isn’t a repeat of the 1990s Asian crises, because domestic conditions are completely different but it is a turn in the global market cycle. We need to transition from a world where investment is pushed out of the US/Europe/Japan to one where it is pulled in by attractive prospects. When that happens, flows will be differentiated much more from one country (EM or otherwise) to another. But for now, we’re just waiting for global capital flows to calm down.”
Now I have a large issue with the purported attractive prospects of the US, Europe and Japan, but let’s put that aside. The bigger issue is that the explanation here appears to be addressing the symptoms of the crisis (global capital flows) rather than the disease (excess credit and an unstable global economic system).
A more nuanced view
Let me elaborate on this. In a previous post, I echoed the thoughts of India’s new central bank chief in suggesting that there were four main causes for the 2008 financial crisis:
- Rising inequality and the push for housing credit in the U.S.. Growing income inequality in America, exacerbated by technology replacing low-wage jobs and an inadequate education system which failed to re-skill people, led to politicians allowing easier credit conditions to boost asset prices and make people feel wealthier. That resulted in the subprime and housing crisis.
- Export-led growth and dependency of several countries including China, Japan and Germany. The debt-fueled consumption in the U.S. would have been inflationary were it not for these countries not meeting the consumption needs of Americans. In other words, they aided and abetted the consumption binge in the U.S.
- A clash of cultures between developed and developing countries. This relates back to 1997 when the Asian crisis force countries in the region to go from being net importers to substantial net exporters, thereby creating the conditions for a global glut in goods.
- U.S central bank policy pandering to political considerations by focusing on jobs and inflation at any cost. The bank acted in accordance with the wishes of politicians by keeping interest rates too low for too long. They did this to maintain high employment, one of the bank’s two central mandates.
It’s important to note that none of these issues has been resolved. In fact, many of them have worsened. And any hint of adjustments to one or more of these problems results in further crises (like Europe in 2011 and in EM mid-last year and today).
This isn’t to excuse the governance issues in the likes of Argentina and Turkey. But it is to suggest that they are merely symptoms of a deeper malaise.
Deflation is winning battle over inflation
If these adjustments were to happen in full, it would result in plunging global asset prices as excessive debt loads are unwound. De-leveraging, in economic terms. This deflationary action is anathema to the world’s central bankers as deflation is enemy number one. Hence, they’ll do “whatever it takes” to produce inflation. And if that means flushing currencies down the urinal, so be it. The battle between inflation and deflation is ongoing, though the latter has the upper hand right now.
The weapons of choice for central bankers to fight off deflation are QE and zero interest rates. Central bankers tell us that these policies are necessary for economies to heal. I’d suggest this is baloney and they’re exacerbating the aforementioned problems.
To see why, it’s important to understand that interest rates are the central price signal off which all assets are priced. If central banks keep rates artificially low, it distorts these asset prices. And if you keep rates low for long enough, it distorts prices to such an extent that it’s impossible to know what the real value of certain assets are.
Another issue is that by keeping rates low, businesses which should go bankrupt stay alive. That’s why government bail-outs of almost any private company are a bad idea. Keeping zombies businesses alive means economies become less competitive over time. Witness Japan since 1990.
These are but a few of the unintended consequences of the current policies.
There are three possible endgames to the current situation:
- There’s a global deflationary shock where all asset prices fall and fall hard. A la 2008. In this instance, central banks would go in all guns blazing with more money printing on an even grander scale. This would risk inflation if not hyperinflation as faith in currencies is diminished, if not lost.
- You have a gradual global recovery and inflation stays tame enough for a smooth exit from current policies.
- There’s a recovery but central banks are slow to raise rates and inflation gallops, which forces tightening and a subsequent economic slowdown.
My bet remains on the first scenario given intensifying deflationary forces from a China economic slowdown and Japan currency debasement (which aids exporters in being more price competitive).
If I’m right, there may be deflation followed by extreme inflation (or one quickly followed by the other). That makes investing a tough game. Under both of those scenarios, stocks and bonds would under-perform in a big way (my current call to own developed market government bonds is a 6-12 month one, not long-term). That’s why cash (which would out-perform in deflation), gold (which would prosper under extreme inflation) and select property and other tangible assets such as agriculture (which may out-perform under extreme inflation on a relative rather than absolute basis) should be part of any diverse investment portfolio.
This post was originally published at Asia Confidential: