Blog Archives

The Global Distortions of Doom Part 1: Hyper-Indebted Zombie Corporations

It’s funny how unintended consequences so rarely turn out to be good. The intended consequences of central banks’ unprecedented tsunami of stimulus (quantitative easing, super-low interest rates and easy credit / abundant liquidity) over the past decade were:

1. Save the banks by giving them credit-money at near-zero interest that they could loan out at higher rates. Savers were thrown under the bus by super-low rates (hope you like your $1 in interest on $1,000…) but hey, bankers contribute millions to politicos and savers don’t matter.

2. Bring demand forward by encouraging consumers to buy on credit now.Nothing like 0% financing to incentivize consumers to buy now rather than later. Since a mass-consumption economy depends on “growth,” consumers must be “nudged” to buy more now and do so with credit, since that sluices money to the banks.

3. Goose assets based on interest rates by lowering rates to near-zero. Bonds, stocks and real estate all respond positively to declining interest rates. Corporations that can borrow money very cheaply can buy back their shares, making insiders and owners wealthier. Housing valuations go up because buyers can afford larger mortgages as rates drop, and bonds go up in value with every notch down in yield.

This vast expansion of risk-assets valuations was intended to generate a wealth effect that made households feel wealthier and thus more willing to binge-borrow and spend.

All those intended consequences came to pass: the global economy gorged on cheap credit, inflating asset bubbles from Shanghai to New York to Sydney to London. Credit growth exploded higher as everyone borrowed trillions: nation-states, local governments, corporations and households.

While much of the hot money flooded into assets, some trickled down to the real economy, enabling enough “growth” for everyone to declare victory.

But the unintended consequences also came to pass: 

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Gresham’s Law and Bitcoin

Gresham’s law holds that “bad money drives out good money,” meaning that given a choice of currencies (broadly speaking, “money” that serves as a store of value and a means of exchange), people use depreciating “bad” money to buy goods and services and hoard “good” money that is appreciating or holding its value.

As this dynamic plays out, eventually there is little “good money” in circulation and the economy suffers accordingly.

Correspondent AK recently submitted an insightful discussion of Gresham’s law and bitcoin:

1: Discussions surrounding Bitcoin and Gresham’s law immediately devolve into a debate about historical formulation or wording of Gresham’s law. Gresham’s law includes the notion that one or several currencies must be accepted at a defined value under legal tender law. However, the wider economic phenomenon that “powers” Gresham’s law is a universal phenomenon that is independent of any particular legal or cultural context.

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Why Is the US Dollar Rising?

On October 3rd I asked Is the U.S. Dollar Set to Soar? It seems the answer was yes. Here’s the weekly chart of the USD I posted on October 3rd:

And here’s the current weekly chart of the USD:

Note the apparent breakout above 100 and the constructive similarities to the 2014 breakout that was followed by a 20% increase in the purchasing power of the USD relative to other currencies.

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The “Nuclear Options:” Oil Pinned Below $30/barrel, US Dollar Rising

The “nuclear option” is the extreme-measures button you push when conventional approaches have failed and you’re facing certain defeat. In terms of upsetting the global economy’s precarious balance, there are two nuclear options short of actual nuclear war: pinning oil to $30/barrel or even lower for an extended period, and triggering a sustained rise in the US dollar. (USD)

Let’s glance at weekly charts of oil (WTIC) and the USD:

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Is the U.S. Dollar Set to Soar?

Hating the U.S. dollar offers the same rewards as hating a dominant sports team: it feels righteous to root for the underdogs, but it’s generally unwise to let that enthusiasm become the basis of one’s bets.

Personally, I favor the emergence of non-state reserve currencies, for example, blockchain crypto-currencies or precious-metal-backed private currencies–currencies which can’t be devalued by self-serving central banks or the private elites that control them.

But if we set aside our personal preferences and look at fundamentals and charts, odds seem to favor the U.S. dollar (USD) making a major move higher in the next few months. Let’s start with a national index of finance-power which combines GDP, military spending, banking, foreign direct investment (FDI) and foreign exchange:

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Cheap Oil, the U.S. Dollar and the Deep State

That oil fell off a cliff once the U.S. dollar (USD) began its liftoff in mid-2014 is, well, interesting. Causation, correlation or coincidence? There are a variety of opinions on this, as there should be. What we do know is the soaring USD blew up a bunch of carry trades that borrowed money denominated in USD and invested the cash in emerging markets paying much higher yields. Here’s WTIC oil:

And here’s the USD Index:

We also know the Saudis announced that the kingdom would pump every barrel it could “to maintain market share,” which is generally understood to mean crush competitors such as Russia and U.S. shale producers.

We also know that storage facilities are almost full up (Oil Fundamentals Could Cause Oil Prices To Fall, Fast!).

We also know that global growth is slowing, so demand could weaken sharply going forward.

And lastly, we know that many oil exporters are heavily dependent on oil revenues to fund their oligarchy/monarchy/ruling elites, their military and their vast social welfare programs, which keep the restive masses from overthrowing the oligarchy, etc.

Here is the U.S., heavily indebted producers must pump or die, as they need every dime of revenue to service their vast debts.

If we add all this up– carry trades blowing up, weakening demand and heavy pressures to maintain production–we get a perfect set-up for a continued decline in oil.

Many observers are expecting the Federal Reserve to pull out all the stops to weaken the dollar. They think this because a strong dollar hurts U.S. exports. If oil and the USD are indeed correlated, a weaker dollar would trigger a boost in oil prices–a welcome “saved by the bell” for indebted U.S. producers, and the bankers who lent tens of billions of dollars to them.

If you glance at the above chart of the dollar index, you’ll note the Bollinger Bands are tightening. This usually presages a big move up or down. We don’t know which way the USD will move, but since it’s in a Bull market, we might surmise the move will be a continuation of the current trend, i.e. up.

Technically, a 20% gain to the 120 level would be quite typical of a long-term uptrend.

What would an additional 20% gain in the USD do to oil? If the correlation holds (and perhaps it won’t–there are no guarantees), it would very likely crush oil to new and breathtaking lows. Analyst Art Berman recently suggested a target of $16.50/barrel, and this corresponds rather neatly with USD at 120 (a 20% gain).

Lower oil prices are not an unalloyed “win” for the U.S. The U.S. energy sector is getting pummeled, and soon its lenders will start booking staggering losses. The decline in petrodollars also means there is less demand for U.S. Treasuries from oil exporters.

Enter the U.S. Deep State, which is only marginally interested in Wall Street bankers’ losses or petrodollar recycling into Treasuries. Global hegemony ultimately rests on issuing the reserve currency in size, and the sheer magnitude of financial resources that can be brought to bear to do what is viewed as necessary.

The collapse in oil has led to an unprecedented transfer of wealth from producers to consumers. Oil exporters (the number of which is diminishing, as populations and domestic consumption levels soar throughout the oil-producing world) have far fewer USD to spend on military adventures, social welfare, the tallest buildings in the world, and so on.

If global bankers wise up (and they are smart gals/guys), lending to oil producers is about to dry up like the proverbial mist in Death Valley. Why loan money to someone with $35/barrel oil in the ground if oil is heading to $20 or lower?

Who goes broke/goes home/is overthrown at sustained $20/barrel oil? You can make your own list, but it pretty much includes every oil exporter.

So who wins in a scenario in which the USD gains another 20% and pins oil to new, sustained lows? Consumers, of course, but as Zero Hedge and others have explained, this windfall isn’t leading to robust consumer spending. Rather, households are saving the proceeds, hunkering down in the recessionary winds they see rising.

The U.S. oil sector will take some serious lumps, along with every other producer. We can anticipate huge writedowns of uncollectible debt, bankruptcies, and all the other collateral damage (pun intended) of a bust.

But who is left relatively unscathed in terms of financial power and hegemony? The U.S. Should the USD soar another 20%, China would be forced to devalue its currency, causing massive capital flows out of China and an immediate loss of trillions of dollars of purchasing power for all who hold yuan/RMB. Not much of a win there.

All this is to suggest that those expecting a major weakening in the USD to push oil higher shouldn’t hold their breath awaiting this outcome. Maybe the USD will weaken 20%, but why would it do so when every other central bank is weakening its currency? Wouldn’t it make much more sense to drain wealth and geopolitical leverage from oil exporters?

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China, the Hollow Dragon

It is widely assumed that manufacturing (a.k.a. the world’s workshop) is the source of China’s wealth. But how can this be true, given that manufacturing profit margins are razor-thin in China, and have been since the early 2000s?

Given that as little as $10 of the value of every iPhone or iPad actually ends up in the Chinese economy, how can anyone claim manufacturing has generated enormous profits?

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Travis Purrington’s USD Proposal Stemmed From Knowledge About Central Banks

Travis Purrington became popular as an artist for his USD proposal, in which he, for his masters thesis at the Basel School of Design, redesigned the US banknotes as we know them today. He chose this project because of the hold that money has over the collective mind of humanity.

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Gold +14.3%, 12.3%, 5.8% and 0.4% in JPY, EUR, GBP and USD 2014 YTD

Gold +14.3%, 12.3%, 5.8% and 0.4% in JPY, EUR, GBP and USD 2014 YTD
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Despite the worst sentiment towards gold we have seen since the brief 30% price fall in 2008, gold continues to eke out gains in all major currencies. So far in 2014, gold is 14.3%, 12.3%, 5.8% and 0.4% higher in japanese yen, euros, sterling and dollars respectively (see chart).

Gold is again acting as a hedge against currency weakness and the ongoing devaluation of currencies as stealth currency wars continue. Overnight, gold rose to over EUR 986/oz and looks set to challenge the significant and important level of resistance that is EUR 1,000/oz due to euro weakness and concerns that Draghi may launch the ECB money printing ‘Bazooka’ in 2015.

There is a perception that gold has performed badly recently and in 2014 due to the recent dip in gold prices in dollar terms and despite the fact that gold is actually higher even in dollar terms in 2014.

This focus on gold solely in dollar terms is misleading. It shows a peculiarly dollar centric way of looking at the world. It is important for investors in the UK, EU, Japan and elsewhere to always consider performance in local currency terms.

Gold is not “priced in dollars” solely as is frequently, simplistically asserted.

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When a surge isn’t a surge

Stacy Summary: I do appreciate a little context.

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Europe Seeks Alternative To Dollar Dominance – 70 Year Shift

Today’s meeting speaks to the serious misgivings of parties and a breakdown in trust. There is a legitimate concern that this trust is now being abused for political purposes. This is misguided and not in the U.S. national interest and could backfire spectacularly. After a period of relative calm, currency wars look set to escalate and will make owning gold important again in the coming months.

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