Sunday, November 30, 2014

Today's Links

1--OPEC Presents: QE4 And Deflation, Illargi

Some may say and think deflation is a good thing, but I say deflation kills economies and societies. Deflation is not about lower prices, it’s about lower spending. Which will down the line lead to lower prices, but then the damage has already been done, it’s just that nobody noticed, because everyone thinks inflation and deflation are about prices, and therefore looks exclusively at prices....

Lasting deflation would force more companies out of business, reduce already stagnant wages and raise unemployment further [..] The inevitable rise in its public debt could eventually lead to a default and a forced exit from the euro.

2--Mexican President Peña Nieto announces police-state plan as more bodies are discovered, wsws

Since 2008, over 27,000 have been reported missing in Mexico. The National Bank of Genetic Data contains 25,884 DNA samples, yet only 542 bodies have been positively identified.
Under these conditions, president Peña’s new proposal would give Congress the authority to dissolve city and state governments that are deemed infiltrated by drug gangs and give states control over municipal police forces that are likewise supposed to be corrupt. As if pretending to be a leopard changing his spots, Peña made it clear that his proposal was in response to the Ayotzinapa killings and disappearances: “its cruelty and savagery have shocked Mexico.” In reality, this incident is by no means an isolated one. A recent report by the French magazine FRANCE24 uncovered the kidnapping of 31 high school students on July 7 in Cocula, Guerrero.

With this proposal, the Mexican ruling class is moving toward a police state. In addition to giving Congress the authority to interfere with elected governments and to militarize police forces under federal control, the government would create a national identity card that all Mexicans would be required to carry.

To begin with, federal police and security forces are to be sent to the states of Guerrero, Michoacán, Jalisco and Tamaulipas, considered the most violent. Federal troops and special security forces already operate in Michoacán and Guerrero at will. While it is not entirely known how much they knew, infantry forces (the 27th Battalion) stationed in Guerrero refused to come to the aid of injured students, and took a hands-off attitude toward the massacre. The 27th Battalion has a sinister history of repression and human rights violations that go as far back as Mexico’s “dirty war” of counterinsurgency in the 1970s and 1980s. In addition to atrocities, the army carried out the “forced disappearance of hundreds,” according to a recent report in the Mexico City daily La Jornada .

Peña Nieto would put such forces in charge in cities and states deemed too corrupt or unsafe. It is no coincidence that the Mexican president announced his police state-plan the day after a telephone conference with US president Obama. Following the telephone call, a US government press spokesman used nearly the same phrase (“a tragic and barbaric crime”). One could expect that Peña received Obama’s backing on his police-state measures, and advice and support for measures already taken.

3--Coming: The End of Fiat Money, Barrons

Stephanie Pomboy, founder of MacroMavens, sees the world hurtling toward a day in which money will again be backed by gold or other hard assets. Until then, she also sees plenty of trouble...

Economics is so dull! You have to inject a little levity when you can. We know that the Bank of China, India, and major emerging-market economies have been slowly diversifying out of their dollar reserves into hard assets. When you get to the point that the Bank of Kazakhstan is thinking: "We really need to figure out a way to diversify out of dollars," it is a pretty profound statement about the quality of the dollar. Here in the U.S., it doesn't seem like any investor is concerned about the risk of the demise of fiat money. I'm sure most people think I should be fitted for a straitjacket.

The real urgency for QE is not the economic outlook, but that the Fed has made itself the only natural buyer of Treasuries; during QE2 they were 61% of the market. At the peak of the housing bubble and globalization nirvana, foreigners absorbed 82% of Treasury issuance; today, it's 26%. While we are enjoying a short flight-to-safety bid, courtesy of Germany's Angela Merkel and the euro-zone crisis, that's not a sustainable financing strategy. Now people are paying for the privilege, after inflation, of owning that paper. We have over $1 trillion annually in Treasury issuance, and our foreign creditors are buying $300 billion. That's being absorbed by the flight-to-safety bid, as hedge funds cover short positions and bond managers extend duration.....

I don't see it in the next 12 months. I think a five-year time horizon is very, very realistic. I envision a gold-backed currency system. We are going back to hard money, rather than a fiat system where debtors can silently default by inflating their debts away....

 the rules of prior recoveries don't apply anymore. We've got secular deleveraging and a slower pace of consumer spending, a broad deceleration in nominal spending growth, for as long as it takes households to feel more comfortable with their balance sheets. It's a muddle-through scenario. On the corporate side, if they can no longer pass on higher prices, the margin squeeze intensifies. If the Fed at the same time introduces quantitative easing again, commodity price pressures might reaccelerate, squeezing margins further. Right now, the estimates for growth, even as they come down, are probably too high. Ditto for profit growth.....

4--Stephanie Pomboy: The Fed Will Have to Reverse Course, Barrons

unbeknownst to many, the reason why Treasury yields are 2.6% is in part due to the economy, but it is largely due to the fact the Fed has just been sopping up all of the surplus supply that foreigners are leaving behind. ....

It is scary to imagine, because if you look at a chart of nominal consumer spending, which is 70% of GDP [gross domestic product], it has continued to decelerate, even in this period of unprecedented monetary accommodation and rampant financial-asset inflation....

One chart that really summarizes my entire view compares net worth with consumer spending. Of the $25 trillion expansion in household net worth since March 2009, $21 trillion was financial assets, and $3 trillion was real estate. So the $21 trillion helps a very small segment of the population, while the $3 trillion has a much broader impact. But it is a massively disproportionate benefit for the high end. Even though people in that group are the marginal drivers of the economy because they spend a lot more, overall consumer-spending growth has continued to slow. In the past 50 years, we have never seen household net worth increase this much without spending growth accelerating materially as well. This time, though, spending growth has decelerated, and each year it takes another step down. With asset prices still not girding spending, we need income gains. And unfortunately, employment isn't ready to take the handoff. While the latest employment figures have fueled the hope that things are returning to normal, the numbers are skewed by people holding more than one job. Jobs have increased, but hours have not. This is reflected in the gap between the household survey—where they ask if you are employed—versus the payroll survey, which adds up each payroll.

What are some of your key concerns about consumers?
The increase in spending—punk as it is—is almost entirely due to higher prices—not higher demand or unit sales. Fully 90% of the increase in discretionary spending from the precrisis level is explained by inflation. In other words, people aren't spending more because they want to. They are spending more because the price of all the stuff they buy has gone up—hardly a sign of consumer strength....

 I was right on interest rates. What I missed was the flight to risk against a backdrop of weakening growth, and I admittedly worshipped at the altar of the fundamentals. Liquidity can only take you so far, and at some point, the fundamentals win out, as they did ultimately in 2008. You could have asked me that question in 2006 or 2007, and I would have said, "Look at what all the economic data are telling you–people are defaulting on their mortgages, etc., and the hit is coming." And, eventually, it did. At some point, the fundamentals will be undeniable, especially at a time when the Fed is taking away liquidity by tapering....

And the Fed can't continue to taper Treasury purchases, considering that foreign purchases of Treasuries have collapsed in the past several years. We used to rely on foreign financiers to fund our borrowing, but those days are long gone. They are buying Treasuries at a rate not much above $100 billion a year, down from $800 billion 3½ years ago

When all else fails, central-bank monetization of debts is the usual answer -- but not a good one...

According to the Journal's crunching of the numbers, dollar assets comprised 54% of Beijing's $3 trillion-plus reserves as of last June 30, down from 74% as recently as the end of 2006. That's based on data on China's foreign-exchange reserves and the U.S. Treasury's latest survey international holdings of U.S. securities. Those numbers show an outright increase in China's holdings of U.S. securities, by $115 billion in the latest 12 months, to $1.726 trillion.....

But more recent Treasury data show China has been selling Treasuries outright. And while the markets have been complacent to the point of snarkiness, MacroMavens' Stephanie Pomboy thinks that's wrong. Unlike other Cassandras, she's been right in her warnings -- notably in the middle of the last decade that the U.S. financial system was dangerously exposed to a bubble in U.S. real estate. Hers was a lonely voice then because everybody knew, of course, house prices always rose.
As for the present conundrum, there's an $800 billion gap between the $1.1 trillion the Treasury is borrowing to cover the budget gap and the roughly $300 billion overseas investors are buying, Pomboy calculates. Banks, corporations and households have been doing little to fill that gap, preferring higher-yielding securities, so "it would appear the heavy lifting has been done by long-only bond managers extending duration and specs rushing to cover their shorts," she writes.
But Pomboy has little doubt that the Fed will step in to fill the gap left by others. In other words, debt monetization, a fancy term for printing money to cover the government's debts, which in polite circles these days is called "quantitative easing."...

"Having pushed interest rates to zero, launched QE1 and QE2, there's no reason to believe that the Fed is going to allow free-market forces to destroy the fragile recovery it has worked so hard to coax forth now. And make no mistake, at $800 billion, allowing the markets to resolve the shortfall in demand would send rates to levels that would absolutely quash this recovery…if not send the economy in a real depression."
But her real concern is a bigger one. "The Fed's 'need' to take on an even more active role as foreigners further slow the purchases of our paper is to put the pedal to the metal on the currency debasement race now being run in the developed world -- a race which is speeding us all toward the end of the present currency regime." That is, the dollar-centric, floating exchange-rate system of the past four decades since the end of Bretton Woods system, when the dollar's convertibility into gold was terminated.

7--Taliban brings war to Afghan capital, threatening stability and endangering foreigners, WA Post
13 years of war and the US still cannot secure the Capital

8--AP: U.S. Mercenaries Working With Al-Qaeda No Scandal - Just A "Difficulty, MOA

US openly working with al Qaida

9--QE in one chart, Burning Platform
Proof the QE works....for the 1 percent

10--Mexican President Peña Nieto announces police-state plan as more bodies are discovered, wsws

11---UN report documents torture, police violence in US, wsws
"We tortured a few folks" "We pulled out a few folks fingernails"

Washington; Capital of global torture
The report subjected a major country to a wide-ranging critique, indicting it for a long list of human rights violations including:
  • Refusal to prosecute officials who engage in or sanction torture of prisoners
  • Detaining prisoners indefinitely without trial or other judicial proceeding, or any hope of release
  • Kidnapping individuals overseas and torturing them in secret prisons
  • Approving a manual for interrogation of prisoners that includes methods classified as torture under the Geneva Conventions
  • Imprisoning immigrants under degrading conditions and refusing to acknowledge their claims as refugees fleeing persecution
  • Imposing the death penalty on hundreds of prisoners, many of them from oppressed racial and ethnic minorities, many of them demonstrably innocent or unfairly tried
  • Widespread use of solitary confinement, considered a form of torture, at all levels of the prison system
  • Severe abuse of juveniles, pregnant women and other vulnerable groups both in police custody and in prisons
  • Maintaining a regime of police violence, particularly against young men from racial and ethnic minorities, and refusing to restrain or punish police who kill, wound or torture
6---OPEC might get the last laugh on oil , marketwatch

13--Could oil collapse cause next credit crisis?, cnbc

14--Oil price slump to trigger new US debt default crisis as Opec waits, Telegraph

15--There's Trouble In US Energy Junk Bonds, BI

16--Beer Watch, Newspapers take sides on ‘Abenomics’, JT

attempting to show how Abenomics really worked. Explaining that 99.7 percent of Japanese companies are small or medium-sized and that these companies employ 70 percent of Japan’s workers, Asahi talked to a small factory owner in Fukuoka who makes car parts. Encouraged by the prime minister’s zeal he boosted the wages of his 20 employees by ¥10,000 a month in anticipation of the fruits of Abenomics, but on balance has been losing money while his clients, Toyota and Nissan, enjoy record profits, and for the same reason: The low yen that makes his materials so expensive helps the big automakers sell their products.
For contrast, the Asahi went to the city of Toyota in Aichi Prefecture, where everyone works for Toyota and local retailers are reaping the windfall. The town’s economic well-being is exceptional, the implication being that only huge export-driven companies do well under Abenomics, since the promised trickle-down effect is limited. Many of these companies moved production overseas when the yen was high and, as the president of Panasonic told reporters last April, they aren’t coming back.

Tokyo Shimbun did something similar with regard to the investor class, which consists of people who are already well off and buy stocks as a matter of course. In 2013, the number of people with assets of more than ¥120 million increased by 420,000, while everyone else faces declining prospects. Nonregular employees now account for 37 percent of the work force, their number increasing by 930,000 from 2012 to 2013.

It is these people, most of whom are younger members of Japan’s vast middle class, who need to comprehend what’s at stake in this so-called referendum, and the Asahi tried to reach them with language they could understand. Columnist Takayuki Yasui’s Nov. 23 piece quoted the president of Kirin Beer, Yoshinori Isozaki, who, unlike other business leaders, was not surprised when Japan’s GDP registered negative for two quarters in a row. He had seen over the summer how sales of premium beer rose while those of every other beer and beer-like beverage dropped. Since the premium-beer market is small and the regular-beer market big, “I could tell the economy was bad,” he said. In other words, the haves had it good, while the have-nots didn’t. Even a 10-year-old could see that.

17---Abenomics exposed, JT

What is the point of this gambit other than to divert attention from Abe’s accumulating failures and unpopular policies? .....Abenomics has disappointed most Japanese and is now in intensive care, with life-support provided by the Bank of Japan.

All he has done is ignite the stock market, but it is hard to campaign on delivering welfare for the wealthy....
Many experts were surprised when the economy slipped back into recession, but it didn’t come as a surprise to most Japanese, who have seen household incomes fall. Additionally, almost all new employment is in poorly paid, dead-end jobs with little job security. The public reaction has been harsh with polls indicating that 75-85 percent think Abenomics is a flop.
Then there was the fiasco surrounding the Cabinet reshuffle, leading to two ministers’ resignations, followed by Okinawans’ repudiation of Abe’s U.S. Marine air base deal. Moreover, an overwhelming majority of Japanese oppose the prime minister’s signature policies on collective self-defense, nuclear reactor restarts, state secrecy legislation and arms exports. Empty pledges, unpopular policies and a sputtering economy are finally catching up with Abe, his popularity plunging by 8 percent in a November poll....

Abe wants to cut a deal on the Trans-Pacific Partnership — certainly big business hopes he will — and with elections behind him he will have more leeway to make concessions that will anger farmers.

18--Japan slides back into recession, wsws

preliminary figures showed a contraction at an annualised rate of 1.6 percent. Coming on top of the 7.1 percent fall in the second quarter, the new figures mean that Japan is officially in recession.
This is the fourth recession experienced by the world’s third largest economy since the global financial crisis of 2008-2009. Together with near-zero growth in the euro zone, it signifies that the tendencies toward stagnation and outright recession in the world economy as a whole are intensifying.

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