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Angst Over Argentina Upends Alpine Complacency in Davos – Bloomberg

Angst Over Argentina Upends Alpine Complacency in Davos – Bloomberg.

Over a three-hour lunch in Davos yesterday, Carlyle Group LP (CG) co-founder David Rubenstein told a group of investors and bankers his biggest worry: nobody appeared to be worried about anything at all.

Less than 24 hours later, the devaluation of the Argentine peso accelerated the worst selloff in emerging market stocks in five years, unnerving delegates at the World Economic Forum in Switzerland. As they shuttled from meetings to meals, losses were piling up by the minute as developing nation currencies slid with equities.

“I don’t want to look,” Daniel Loeb, billionaire founder of hedge fund Third Point LLC, said of the financial markets as he walked between meetings at the Congress center in Davos.

After recent gatherings were dominated by crises from Lehman Brothers Holdings Inc. to Greece, this year’s had begun to reflect a mood of optimism as economies and stock markets recovered. That enthusiasm waned today as the rout in emerging markets exacerbated concern that the engines of global growth since the crisis have now stalled.

Special Report: 2014 World Economic Forum in Davos, Switzerland

Attendees at the Davos lunch included Larry Fink, chief executive officer of Blackrock Inc. (BLK), the world’s largest money manager, Blackstone Group LP (BX)’s Steve Schwarzman andUBS AG (UBSN) Chairman Axel Weber. They were briefed by Treasury Secretary Jacob J. Lew and Bank of Japan Governor Haruhiko Kuroda.

Photographer: Jason Alden/Bloomberg

David M. Rubenstein, co-founder and co-chief executive officer of the Carlyle Group LP,…Read More

‘Black Swans’

“Over the last couple of years people have gotten a lot less worried, but there are always things like black swans that come around,” Rubenstein said in an interview today. “I just wanted to make sure everybody remembers that and that we are likely to have some bumps along the road.”

Emerging market stocks have suffered their worst start to a year since 2009 as signs of weakness in China’s economy add to concern about the impact of cuts to the U.S. Federal Reserve’s stimulus program. The MSCI Emerging Markets Index fell 1.5 percent today, extending this year’s slump to 5.3 percent.

Argentine policy makers devalued the peso by reducing support in the foreign-exchange market, allowing the currency to drop the most in 12 years to an unprecedented low. Turkey sold dollars to prop up the lira and South Africa’s rand declined to a five-year low.

Goldman Sachs Group Inc. (GS) CEO Lloyd Blankfein told Bloomberg Television’s Erik Schatzker and Stephanie Ruhle today he would “wait a while before saying there is a complete reversal” in markets, noting they were due a consolidation having “gone up very far in a single direction.”

Davos Man

“Davos Man is probably right in thinking 2014 will be a nice year, with more growth than last year,”Jean-Claude Trichet, former president of the European Central Bank, said in an interview. “But of course risks are still there.”

Forcing the reappraisal is the Fed’s tapering of monetary stimulus, which had previously covered all ills by prompting investors to chase returns in emerging markets.

With the U.S. central bank now cutting its monthly asset purchases from $85 billion, money managers are refocusing on the fundamentals of economies, punishing those with weak policies or imbalances such as large current account or budget deficits.

The shift was underscored this week by the International Monetary Fund, which released new forecasts showing emerging markets will outpace advanced nations by the smallest margin this year since 2001.

‘Overly Complacent’

“Investors have been overly complacent in emerging markets,” Davide Serra, founder of London-based Algebris Investments LLP, said in Davos. “In 12 to 18 months, as real rates rise in the U.S. we’ll see which emerging markets were swimming naked.”

Other emerging economies are displaying faultlines, with investors mainly focused on the so-called fragile five of Brazil, India, Indonesia, South Africa and Turkey.

China is also struggling to contain $4.8 trillion in shadow-banking debt, while Brazil is trying to rein in inflation fuelled up by a falling currency and higher public spending. A corruption investigation is embroiling Turkish Prime Minister Recep Tayyip Erdogan’s cabinet and deadly protests in Ukraine and Thailand are eroding confidence in their stability.

“We’re in a volatile era and anyone who doesn’t think that is overly complacent,” said Tim Adams, president of the Institute of International Finance, which represents more than 400 financial firms, and the U.S. Treasury’s former undersecretary for international affairs. “The re-pricing of risk will continue and there will be peaks of convulsions and complacency.”

To contact the reporters on this story: Jesse Westbrook in Davos atjwestbrook1@bloomberg.net; Simon Kennedy in Paris at skennedy4@bloomberg.net

To contact the editors responsible for this story: Edward Evans at eevans3@bloomberg.net; John Fraher at jfraher@bloomberg.net

Davos delegates warned of imminent oil crisis  |  Peak Oil News and Message Boards

Davos delegates warned of imminent oil crisis  |  Peak Oil News and Message Boards.

(Pic: Shell)

(Pic: Shell)

By Alex Kirby

A British businessman will tell world leaders meeting in Switzerland today that it is dangerous to argue that fracking for shale oil and gas can help to avert a global energy crisis.

Jeremy Leggett, a former Greenpeace staff member who founded a successful solar energy company, has been invited to the annual World Economic Forum meeting in Davos from 22 to 25 January. The theme of the meeting is The Reshaping of the World: Consequences for Society, Politics and Business.

Leggett told the Climate News Network: “The WEF likes to deal in big ideas, and last year one of its ideas was to argue that the world can frack its way to prosperity. There are large numbers of would-be frackers in Davos.

“I’m a squeaky wheel within the system. I’m in Davos to put the counter-arguments to Big Energy, and I’ll tell them: ‘You’re in grave danger of repeating the mistakes of the financial services industry in pushing a hyped narrative.”

This refers to the way in which banking leaders had “their particular comforting narrative catastrophically wrong, until the proof came along in the shape of the financial crash”.

Leggett founded Solarcentury, the UK’s fastest-growing solar electric company since 2000. He also established the charity SolarAid which aims to eradicate the kerosene lamp from Africa by 2020, and chairs the Carbon Tracker Initiative.

His book Half Gone: Oil, Gas, Hot Air and the Global Energy Crisis was published in 2005, and his latest, The Energy of Nations: Risk blindness and the road to renaissance, in 2013.

‘Sunset industry’

Leggett says the conventional oil industry is facing an imminent crisis, because existing crude oil reserves are declining fast, it is having to find the money for soaring capital expenditure, and the amount of oil available for export is falling.

“Big Oil is still extremely powerful and well-capitalised”, he says, “but it is fast approaching sunset. The profitability of the big international groups – like Exxon, Shell and BP – is a real worry for investors, and they’ve been largely locked out of the easy oil controlled by national companies – just look at BP and Russia.

“Gas? Unless the price goes up, the whole US shale gas industry is in danger of becoming a bubble, even a Ponzi scheme. All but one of the biggest production regions have peaked already, and losses are piling up. This is an industry that’s in grave danger of committing financial suicide.”

A linked message that Leggett will deliver is that there is a growing danger of a carbon bubble building up in the capital markets. He says investors who think governments may agree stringent and strictly-enforced limits on greenhouse gas emissions might decide their investments in oil and gas are at risk of becoming worthless.

Crunch next year?

There is little sign yet that such limits are likely any time soon. But Leggett says that is to miss the point: “You don’t have to wait until agreement is close, or even probable. You have to believe only that there’s a realistic chance of policymaking which means assets might be stranded.”

He will also tell his audience “to take out insurance on the risk of an oil crisis, by accelerating the very things we need to deal with climate change”. Chief among these, he says, is the need to channel funds withdrawn from oil, gas, and coal into clean energy instead – though he acknowledges that, as a renewable energy entrepreneur himself, he may be accused of self-interest.

Leggett fears a world oil crisis could occur as early as 2015. And when it comes, it will certainly mean “ruinously high prices”, for a start. But it will mean something more, he says.

Last December he worked with a US national security expert, Lt-Colonel Daniel Davis, to organise the Transatlantic Energy Security Dialogue. Leggett has a regard for the views of people like Davis. “The military are better than your average politician or consultant to Big Energy at spotting systemic risk”, he says.

Leggett says military think-tanks have tended to side with those who distrust “the cornucopian narrative” of the oil industry.

One 2008 study, by the German army, says: “Psychological barriers cause indisputable facts to be blanked out and lead to almost instinctively refusing to look into this difficult subject in detail. Peak oil, however, is unavoidable.”

RTCC

Davos 2014: Larry Summers attacks George Osborne’s austerity programme | Business | theguardian.com

Davos 2014: Larry Summers attacks George Osborne’s austerity programme | Business | theguardian.com.

Larry Summers and George Osborne

Larry Summers, Bank of Japan governor Haruhiko Kuroda and George Osborne. Photograph: Denis Balibouse/Reuters

George Osborne‘s handling of the economy was strongly attacked byLarry Summers as the former US Treasury secretary poured criticism on the UK’s austerity programme, its welfare cuts for poor people and its strategy for preventing a housing bubble.

Summers, a long-running critic of the coalition government, said the chancellor was wrong to blame the eurozone crisis for the weakness of business investment and that governments should be spending more on infrastructure to tackle the threat of “secular stagnation”.

“I see less need to impose cuts on people who are vulnerable in the US context than the chancellor sees in the European context”, Summers said in a session on the future of monetary policy at the World Economic Forum in Davos.

Making it clear that he believed Britain would have done better to follow the US approach in which tackling the budget deficit has been seen as less important than restoring growth, Summers said: “It’s several years since the US exceeded its peak GDP before the crisis – that still hasn’t happened in the UK.”

The chancellor put up a staunch defence of his approach, noting Britain was creating jobs, had sound economic policies and a new system for controlling the City that was the envy of the world. Osborne said businesses had been sitting on their cash while the euro was going through “a near-death experience” but predicted that investment spending was now about to start to rising.

The chancellor responded to Summers’s charge that Britain, unlike the US, had failed to raise national output above its pre-recession levels by saying that the UK had suffered a deeper slump and was more dependent on the financial sector for its growth.

“We did have a much bigger fall in GDP [than in the US], and the impact of the crisis was even harder because our banking sector was a larger share of the economy than in America.

“The great recession in the UK had an even greater effect – and we were one of the worse effected of any of the western economies.”

But Summers, the man once a front-runner to succeed Ben Bernanke at the Federal Reserve responded to Osborne’s claim that the Bank of England had tools to rein in the property market by pointedly rubbishing the initiative.

“I worry about macro-prudential complacency”, Summers said, a reference to the notion that central banks can head off problems before they arise by actions to restrain the animal spirits of lenders.

Noting that policymakers had failed to spot the stock market crash of 1987 and the sub-prime mortgage crisis, Summers said he was unclear about how macro-prudential policies would work and said tougher measures were needed to make markets safe from “ignorance and error”.

Osborne said he agreed with the need for more infrastructure spending, but added there was no “free lunch”. Governments needed to take tough decisions elsewhere in your budgets, in areas such as welfare spending.

“Without a credible fiscal policy, as many other countries learned in this crisis, you don’t have a credible monetary policy and your market rates go up.

“So while infrastructure spending is needed, you need to make hard choices as finance minister as how to pay for it.”

Summers rejected Osborne’s argument that high borrowing costs in troubled eurozone countries were the result of governments over-spending and losing the trust of financial markets.

He said high borrowing costs were due to the specific nature of the eurozone currency – the fixed exchange rate and the inability of individual countries to tailor their economic policies to their own needs.

Trust in Governments Slides to Record Low Amid U.S. Spy Programs – Bloomberg

Trust in Governments Slides to Record Low Amid U.S. Spy Programs – Bloomberg.

Photographer: Alex Wong/Getty Images
Governments are struggling to maintain public trust amid the disclosure of U.S. spy programs by former contractor Edward Snowden and record unemployment in Europe. Confidence in government in the U.S. plummeted 16 points to 37 percent.

Trust in governments fell, making them the world’s least-trusted institutions for a third year, according to a survey published before policy makers and executives gather for the World Economic Forum in Davos, Switzerland.

Faith in governments fell to 44 percent from 48 percent in 2013, according to the 2014 Trust Barometer survey published by Edelman, a public-relations firm. Trust in business held steady at about 58 percent, bringing its lead over government to the widest in the 14 years the poll has been taken.

Governments are struggling to maintain public trust amid the disclosure of U.S. spy programs by former contractor Edward Snowden and record unemployment in Europe. Confidence in government in the U.S. plummeted 16 points to 37 percent, Edelman said.

“This is a profound evolution in the landscape of trust from 2009 where business had to partner with government to regain trust, to today, where business must lead the debate for change,” Richard Edelman, the firm’s chairman and chief executive officer, said in a statement.

Trust in CEOs is at 43 percent, above the 36 percent score for government officials, according to the survey. Confidence in the media slipped 5 percentage points to 52 percent.

Banks and financial services were the least-trusted industries for the fourth year, scoring 51 percent, up 1 point from 2013, the survey shows. Technology companies topped the ranking again at 79 percent, up two percentage points from the previous year.

Edelman polled 6,000 individuals in 27 countries with a college education and with household income in the top quartile for their age and country. The ages of those surveyed ranged from 24 to 65.

To contact the reporter on this story: Elisa Martinuzzi in Milan at emartinuzzi@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

Guest Post: Bubbles And Central Banks – Is There A Connection? | Zero Hedge

Guest Post: Bubbles And Central Banks – Is There A Connection? | Zero Hedge.

Submitted by Dr. Frank Shostak, via The Cobden Centre blog,

According to the popular way of thinking, bubbles are an important cause of economic recessions. The main question posed by experts is how one knows when a bubble is forming. It is held that if the central bankers knew the answer to this question they might be able to prevent bubble formations and thus prevent recessions.

On this, at the World Economic Forum in Davos Switzerland on January 27, 2010, Nobel Laureate in Economics Robert Shiller argued that bubbles could be diagnosed using the same methodology psychologists use to diagnose mental illness. Shiller is of the view that a bubble is a form of psychological malfunction. Hence the solution could be to prepare a checklist similar to what psychologists do to determine if someone is suffering from, say, depression. The key identifying points of a typical bubble according to Shiller, are,

  1. Sharp increase in the price of an asset.
  2. Great public excitement about these price increases.
  3. An accompanying media frenzy.
  4. Stories of people earning a lot of money, causing envy among people who aren’t.
  5. Growing interest in the asset class among the general public.
  6. New era “theories” to justify unprecedented price increases.
  7. A decline in lending standards.

What Shiller outlines here are various factors that he holds are observed during the formation of bubbles. To describe a thing is, however, not always sufficient to understand the key factors that caused its emergence. In order to understand the causes one needs to establish a proper definition of the object in question. The purpose of a definition is to present the essence, the distinguishing characteristic of the object we are trying to identify. A definition is meant to tell us what the fundamentals or the origins of a particular entity are. On this, the seven points outlined by Shiller tell us nothing about the origins of a typical bubble. They tell us nothing as to why bubbles are bad for economic growth. All that these points do is to provide a possible description of a bubble. To describe an event, however, is not the same thing as to explain it. Without an understanding of the causes of an event it is not possible to counter its emergence.

Defining bubbles

Now if a price of an asset is the amount of money paid for the asset it follows that for a given amount of a given asset an increase in the price can only come about as a result of an increase in the flow of money to this asset.

The greater the expansion of money is, the higher the increase in the price of an asset is going to be, all other things being equal. We can also say that the greater the expansion of the monetary balloon is, the higher the prices of assets are going to be, all other things being equal. The emergence of a bubble or a monetary balloon need not be always associated with rising prices – for instance if the rate of growth of goods corresponds to the rate of growth of money supply no change in prices will take place.

We suggest that what matters is not whether the emergence of a bubble is associated with price rises but rather with the fact that the emergence of a bubble gives rise to non-productive activities that divert real wealth from wealth generators. The expansion of the money supply, or the monetary balloon, in similarity to a counterfeiter, enables the diversion of real wealth from wealth generating activities to non productive activities.

As the monetary pumping strengthens, the pace of the diversion follows suit. We label various non-productive activities that emerge on the back of the expanding monetary balloon as bubble activities – they were formed by the monetary bubble. Also note that these activities cannot exist without the expansion of money supply that diverts to them real wealth from wealth generating activities.

From this we can infer that the subject matter of bubbles is the expansion of money supply. The key outcome of this expansion is the emergence of non wealth generating activities.

It follows that a bubble is not about strong asset price increases but about the expansion of money supply. In fact, as we have seen, bubbles – i.e. an increase in money supply – can take place without a corresponding increase in prices. Once we have established that an expansion in money supply is what bubbles are all about, we can further infer that the key damage that bubbles generate is by setting non-productive activities, which we have labelled as bubble activities. Furthermore, once it is established that formation of bubbles is about the expansion in money supply, obviously it is the central bank and the fractional reserve banking that are responsible for the formation of bubbles. As a rule, it is the central bank’s monetary pumping that sets in motion an expansion in the monetary balloon.

Hence to prevent the emergence of bubbles one needs to arrest the monetary pumping by the central bank and to curtail the commercial banks’ ability to engage in fractional reserve banking – i.e. in lending out of “thin air”. Once the pace of monetary expansion slows down in response to a tighter central bank stance or in response to commercial banks slowing down on the expansion of lending out of “thin air” this sets in motion the bursting of the bubbles. Remember that a bubble activity cannot fund itself independently of the monetary expansion that diverts to them real wealth from wealth generating activities. (Again bubble activities are non-wealth generating activities).

The so-called economic recession associated with the burst of bubble activities is in fact good news for wealth generators since now more wealth is left at their disposal. (An economic bust, which weakens bubble activities, lays the foundation for a genuine economic growth). Note again that it is the expansion in the monetary balloon that gives rise to bubble activities and not a psychological disposition of individuals in the market place.

Psychology and economics

Psychology was smuggled into economics on the grounds that economics and psychology are inter-related disciplines. However, there is a distinct difference between economics and psychology. Psychology deals with the content of ends. Economics, however, starts with the premise that people are pursuing purposeful conduct. It doesn’t deal with the particular content of various ends.

According to Rothbard,

A man’s ends may be “egoistic” or “altruistic”, “refined” or “vulgar”. They may emphasize the enjoyment of “material goods” and comforts, or they may stress the ascetic life. Economics is not concerned with their content, and its laws apply regardless of the nature of these ends.[1]

Whereas,

Psychology and ethics deal with the content of human ends; they ask, why does the man choose such and such ends, or what ends should men value?[2]

Therefore, economics deals with any given end and with the formal implications of the fact that men have ends and utilize means to attain these ends. Consequently, economics is a separate discipline from psychology. By introducing psychology into economics one obliterates the generality of the theory, and renders it useless. The use of psychology is counterproductive as far as economic analyses are concerned.

Summary and conclusions

Contrary to Shiller, in order to establish that a bubble is forming we don’t need to apply the same methodology employed by psychologists. What we require is the establishment of a correct definition of what bubbles are all about. Once it is done, one discovers that bubbles have nothing to do with some kind psychological malfunction of individuals – they are the result of loose monetary policies of the central bank.

Furthermore, once we observe an increase in the rate of growth of money supply we can confidently say that this sets the platform for bubble activities – for an economic boom.

Conversely, once we observe a decline in the rate of growth of money supply we can confidently say that this lays the foundations for the burst of bubble activities – an economic bust.

 

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