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This Is How Empires Collapse

Zerohedge - 1 hour 21 min ago

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

This is how empires collapse: one complicit participant at a time.

Before an empire collapses, it first erodes from within. The collapse may appear sudden, but the processes of internal rot hollowed out the resilience, resolve, purpose and vitality of the empire long before its final implosion.
What are these processes of internal rot? Here are a few of the most pervasive and destructive forces of internal corrosion:

1. Each institution within the system loses sight of its original purpose of serving the populace and becomes self-serving. This erosion of common purpose serving the common good is so gradual that participants forget there was a time when the focus wasn't on gaming the system to avoid work and accountability but serving the common good.

2. The corrupt Status Quo corrupts every individual who works within the system.Once an institution loses its original purpose and becomes self-serving, everyone within either seeks to maximize their own personal share of the swag and minimize their accountability, or they are forced out as a potentially dangerous uncorrupted insider.

The justification is always the same: everybody else is getting away with it, why shouldn't I? Empires decline one corruptible individual at a time.
3. Self-serving institutions select sociopathic leaders whose skills are not competency or leadership but conning others into believing the institution is functioning optimally when in reality it is faltering/failing.

The late Roman Empire offers a fine example: entire Army legions in the hinterlands were listed as full-strength on the official rolls in Rome and payroll was issued accordingly, but the legions only existed on paper: corrupt officials pocketed the payroll for phantom legions.

Self-serving institutions reward con-artists in leadership roles because only con-artists can mask the internal rot with happy-story PR and get away with it.

4. The institutional memory rewards conserving the existing Status Quo and punishes innovation. Innovation necessarily entails risk, and those busy feathering their own nests (i.e. accepting money for phantom work, phantom legions, etc.) have no desire to place their share of the swag at risk just to improve sagging output and accountability.

So reforms and innovations that might salvage the institution are shelved or buried.

5. As the sunk costs of the subsystems increase, the institutional resistance to new technologies and processes increases accordingly. Those manufacturing steam locomotives in the early 20th century had an enormous amount of capital and institutional knowledge sunk in their factories. Tossing all of that out to invest in building diesel-electric locomotives that were much more efficient than the old-tech steam locomotives made little sense to those looking at sunk costs.
As a result, the steam locomotive manufacturers clung to the old ways and went out of business. The sunk costs of empire are enormous, as is the internal resistance to change.

6. Institutional memory and knowledge support "doing more of what worked in the past" even when it is clearly failing. I refer to this institutional risk-avoidance and lack of imagination as doing more of what has failed spectacularly.

Inept leadership keeps doing more of what once worked, even when it is clearly failing, in effect ignoring real-world feedback in favor of magical-thinking. The Federal Reserve is an excellent example.

7. These dynamics of eroding accountability, effectiveness and purpose lead to systemic diminishing returns. Each failing institution now needs more money to sustain its operations, as inefficiencies, corruption and incompetence reduce output while dramatically raising costs (phantom legions still get paid).

8. Incompetence is rewarded and competence punished. The classic example of this was "Good job, Brownie:" cronies and con-artists are elevated to leadership roles to reward loyalty and the ability to mask the rot with good PR. Serving the common good is set aside as sychophancy (obedient flattery) to incompetent leaders is rewarded and real competence is punished as a threat to the self-serving leadership.

9. As returns diminish and costs rise, systemic fragility increases. This can be illustrated as a rising wedge: as output declines and costs rise, the break-even point keeps edging higher, until even a modest reduction of input (revenue, energy, etc.) causes the system to break down:



A modern-day example is oil-exporting states that have bought the complicity of their citizenry with generous welfare benefits and subsidies. As their populations and welfare benefits keep rising, the revenues they need to keep the system going require an ever-higher price of oil. Should the price of oil decline, these regimes will be unable to fund their welfare. With the social contract broken, there is nothing left to stem the tide of revolt.

10. Economies of scale no longer generate returns. In the good old days, stretching out supply lines to reach lower-cost suppliers and digitizing management reaped huge gains in productivity. Now that the scale of enterprise is global, the gains from economies of scale have faltered and the high overhead costs of maintaining this vast managerial infrastructure have become a drain.

11. Redundancy is sacrificed to preserve a corrupt and failing core. Rather than demand sacrifices of the Roman Elites and the entertainment-addicted bread-and-circus masses to maintain the forces protecting the Imperial borders, late-Roman Empire leaders eliminated defense-in-depth (redundancy). This left the borders thinly defended. With no legions in reserve, an invasion could no longer be stopped without mobilizing the entire border defense, in effect leaving huge swaths of the border undefended to push back the invaders.

Phantom legions line the pockets of insiders and cronies while creating a useful illusion of stability and strength.

12. The feedback from those tasked with doing the real work of the Empire is ignored as Elites and vested interests dominate decision-making. As I noted yesterday in The Political Poison of Vested Interests, when this bottoms-up feedback is tossed out, ignored or marginalized, all decisions are necessarily unwise because they are no longer grounded in the consequences experienced by the 95% doing the real work.

This lack of feedback from the bottom 95% is captured by the expression "Let them eat cake." (Though attributed to Marie Antoinette, there is no evidence that she actually said Qu'ils mangent de la brioche.)

The point is that decisions made with no feedback from the real-world of the bottom 95%, that is, decisions made solely in response to the demands of cronies, vested interests and various elites, are intrinsically unsound and doomed to fail catastrophically.

How does an Empire end up with phantom legions? The same way the U.S. ended up with ObamaCare/Affordable Care Act. The payroll is being paid but there is no real-world feedback, no accountability, no purpose other than private profit/gain and no common good being served.

That's how empires collapse: one corrupted, self-serving individual at a time, gaming one corrupted, self-serving institution or another; it no longer matters which one because they're all equally compromised. It's not just the border legions that are phantom; the entire stability and strength of the empire is phantom. The uncorruptible and competent are banished or punished, and the corrupt, self-serving and inept are lavished with treasure.

This is how empires collapse: one complicit participant at a time.








Categories: blogroll

Biogen Stock Rallies After Admitting Feds Probing "Sales & Promotional Practices"

Zerohedge - 1 hour 38 min ago

Just when the whole congressional pricing debacle has been ignored and the bubble is back on in Biotechs as an "M&A frenzy" is unleashed, Bloomberg reports that Biogen Idec has admitted in its 10-Q that:

  • *BIOGEN SAYS IT RECEIVED FED SUBPOENA ON TIES TO CERTAIN Pharmacy Benefit Managers
  • *BIOGEN SAYS STATE, FEDERAL AUTHORITIES PROBING SALES PRACTICES

Buried quietly on page 27 of the 10-Q, they explain that state and federal governmental authorities are investigating sales and promotional practices... Of course, the small dip in the stock price was a great opportunity to reload and it is now trading higher on the news.

From page 27 of the 10-Q,

Government Matters

 

We have learned that state and federal governmental authorities are investigating our sales and promotional practices and have received related subpoenas.

 

We have also received a subpoena from the federal government for documents relating to our relationship with certain pharmacy benefit managers.

 

We are cooperating with the government in these matters.

And the market reaction...

 








Categories: blogroll

War Makes Us Poor

Zerohedge - 1 hour 41 min ago

 

http://ourgovernmentisbroke.com/wordpress/wp-content/uploads/2013/06/Uncle-Sam-11-e1370881400909.jpg

Image courtesy of Steve Hess

Top Economists Say War Is Bad for the Economy

Preface: Many Americans – including influential economists and talking heads - still wrongly assume that war is good for the economy. Many congressmen assume that cutting pork-barrel military spending would hurt their constituents’ jobs.

As demonstrated below, it isn’t true.

Nobel-prize winning economist Joseph Stiglitz says that war is bad for the economy:

Stiglitz wrote in 2003:

War is widely thought to be linked to economic good times. The second world war is often said to have brought the world out of depression, and war has since enhanced its reputation as a spur to economic growth. Some even suggest that capitalism needs wars, that without them, recession would always lurk on the horizon. Today, we know that this is nonsense. The 1990s boom showed that peace is economically far better than war. The Gulf war of 1991 demonstrated that wars can actually be bad for an economy.

Stiglitz has also said that this decade’s Iraq war has been very bad for the economy. See this, this and this.

Former Federal Reserve chairman Alan Greenspan also said in that war is bad for the economy.   In 1991, Greenspan said that a prolonged conflict in the Middle East would hurt the economy. And he made this point again in 1999:

Societies need to buy as much military insurance as they need, but to spend more than that is to squander money that could go toward improving the productivity of the economy as a whole: with more efficient transportation systems, a better educated citizenry, and so on. This is the point that retiring Rep. Barney Frank (D-Mass.) learned back in 1999 in a House Banking Committee hearing with then-Federal Reserve Chairman Alan Greenspan. Frank asked what factors were producing our then-strong economic performance. On Greenspan’s list: “The freeing up of resources previously employed to produce military products that was brought about by the end of the Cold War.” Are you saying, Frank asked, “that dollar for dollar, military products are there as insurance … and to the extent you could put those dollars into other areas, maybe education and job trainings, maybe into transportation … that is going to have a good economic effect?” Greenspan agreed.

Economist Dean Baker notes:

It is often believed that wars and military spending increases are good for the economy. In fact, most economic models show that military spending diverts resources from productive uses, such as consumption and investment, and ultimately slows economic growth and reduces employment.

The Proof Is In the Pudding

Mike Lofgren notes:

Military spending may at one time have been a genuine job creator when weapons were compatible with converted civilian production lines, but the days of Rosie the Riveter are long gone. [Background.] Most weapons projects now require relatively little touch labor. Instead, a disproportionate share is siphoned into high-cost R&D (from which the civilian economy benefits little), exorbitant management expenditures, high overhead, and out-and-out padding, including money that flows back into political campaigns. A dollar appropriated for highway construction, health care, or education will likely create more jobs than a dollar for Pentagon weapons procurement.

 

***

 

During the decade of the 2000s, DOD budgets, including funds spent on the war, doubled in our nation’s longest sustained post-World War II defense increase. Yet during the same decade, jobs were created at the slowest rate since the Hoover administration. If defense helped the economy, it is not evident. And just the wars in Iraq and Afghanistan added over $1.4 trillion to deficits, according to the Congressional Research Service. Whether the wars were “worth it” or merely stirred up a hornet’s nest abroad is a policy discussion for another time; what is clear is that whether you are a Keynesian or a deficit hawk, war and associated military spending are no economic panacea.

The Institute for Economics & Peace (IEP) shows that any boost from war is temporary at best. For example, while WWII provided a temporary bump in GDP, GDP then fell back to the baseline trend. After the Korean War, GDP fell below the baseline trend:

IEP notes:

By examining the state of the economy at each of the major conflict periods since World War II, it can be seen that the positive effects of increased military spending were outweighed by longer term unintended negative macroeconomic consequences. While the stimulatory effect of military outlays is evidently associated with boosts in economic growth, adverse effects show up either immediately or soon after, through higher inflation, budget deficits, high taxes and reductions in consumption or investment. Rectifying these effects has required subsequent painful adjustments which are neither efficient nor desirable. When an economy has excess capacity and unemployment, it is possible that increasing military spending can provide an important stimulus. However, if there are budget constraints, as there are in the U.S. currently, then excessive military spending can displace more productive non-military outlays in other areas such as investments in high-tech industries, education, or infrastructure. The crowding-out effects of disproportionate government spending on military functions can affect service delivery or infrastructure development, ultimately affecting long-term growth rates.

 

***

 

Analysis of the macroeconomic components of GDP during World War II and in subsequent conflicts show heightened military spending had several adverse macroeconomic effects. These occurred as a direct consequence of the funding requirements of increased military spending. The U.S. has paid for its wars either through debt (World War II, Cold War, Afghanistan/Iraq), taxation (Korean War) or inflation (Vietnam). In each case, taxpayers have been burdened, and private sector consumption and investment have been constrained as a result. Other negative effects include larger budget deficits, higher taxes, and growth above trend leading to inflation pressure. These effects can run concurrent with major conflict or via lagging effects into the future. Regardless of the way a war is financed, the overall macroeconomic effect on the economy tends to be negative. For each of the periods after World War II, we need to ask, what would have happened in economic terms if these wars did not happen? On the specific evidence provided, it can be reasonably said, it is likely taxes would have been lower, inflation would have been lower, there would have been higher consumption and investment and certainly lower budget deficits. Some wars are necessary to fight and the negative effects of not fighting these wars can far outweigh the costs of fighting. However if there are other options, then it is prudent to exhaust them first as once wars do start, the outcome, duration and economic consequences are difficult to predict.

We noted in 2011:

This is a no-brainer, if you think about it. We’ve been in Afghanistan for almost twice as long as World War II. We’ve been in Iraq for years longer than WWII. We’ve been involved in 7 or 8 wars in the last decade. And yet [the economy is still unstable]. If wars really helped the economy, don’t you think things would have improved by now? Indeed, the Iraq war alone could end up costing more than World War II. And given the other wars we’ve been involved in this decade, I believe that the total price tag for the so-called “War on Terror” will definitely support that of the “Greatest War”.

Let’s look at the adverse effects of war in more detail …

War Spending Diverts Stimulus Away from the Real Civilian Economy

IEP notes that – even though the government spending soared – consumption and investment were flat during the Vietnam war:

The New Republic noted in 2009:

Conservative Harvard economist Robert Barro has argued that increased military spending during WWII actually depressed other parts of the economy.

(New Republic also points out that conservative economist Robert Higgs and liberal economists Larry Summers and Brad Delong have all shown that any stimulation to the economy from World War II has been greatly exaggerated.)

How could war actually hurt the economy, when so many say that it stimulates the economy?

Because of what economists call the “broken window fallacy”.

Specifically, if a window in a store is broken, it means that the window-maker gets paid to make a new window, and he, in turn, has money to pay others. However, economists long ago showed that – if the window hadn’t been broken – the shop-owner would have spent that money on other things, such as food, clothing, health care, consumer electronics or recreation, which would have helped the economy as much or more.

If the shop-owner hadn’t had to replace his window, he might have taken his family out to dinner, which would have circulated more money to the restaurant, and from there to other sectors of the economy. Similarly, the money spent on the war effort is money that cannot be spent on other sectors of the economy. Indeed, all of the military spending has just created military jobs, at the expense of the civilian economy.

As Austrian economist Ludwig Von Mises pointed out:

That is the essence of so-called war prosperity; it enriches some by what it takes from others. It is not rising wealth but a shifting of wealth and income.

We noted in 2010:

You know about America’s unemployment problem. You may have even heard that the U.S. may very well have suffered a permanent destruction of jobs.

 

But did you know that the defense employment sector is booming?

 

[P]ublic sector spending – and mainly defense spending – has accounted for virtually all of the new job creation in the past 10 years:

The U.S. has largely been financing job creation for ten years. Specifically, as the chief economist for BusinessWeek, Michael Mandel, points out, public spending has accounted for virtually all new job creation in the past 1o years:

Private sector job growth was almost non-existent over the past ten years. Take a look at this horrifying chart:

 

longjobs1 The Military Industrial Complex is Ruining the Economy

 

Between May 1999 and May 2009, employment in the private sector sector only rose by 1.1%, by far the lowest 10-year increase in the post-depression period.

 

It’s impossible to overstate how bad this is. Basically speaking, the private sector job machine has almost completely stalled over the past ten years. Take a look at this chart:

 

longjobs2 The Military Industrial Complex is Ruining the Economy

 

Over the past 10 years, the private sector has generated roughly 1.1 million additional jobs, or about 100K per year. The public sector created about 2.4 million jobs.

 

But even that gives the private sector too much credit. Remember that the private sector includes health care, social assistance, and education, all areas which receive a lot of government support.

 
***

 

Most of the industries which had positive job growth over the past ten years were in the HealthEdGov sector. In fact, financial job growth was nearly nonexistent once we take out the health insurers.

 

Let me finish with a final chart.

 

longjobs4 The Military Industrial Complex is Ruining the Economy

 

Without a decade of growing government support from rising health and education spending and soaring budget deficits, the labor market would have been flat on its back. [120]

***

 

So most of the job creation has been by the public sector. But because the job creation has been financed with loans from China and private banks, trillions in unnecessary interest charges have been incurred by the U.S.

And this shows military versus non-military durable goods shipments: us collapse 18 11 The Military Industrial Complex is Ruining the Economy [Click here to view full image.]

 

So we’re running up our debt (which will eventually decrease economic growth), but the only jobs we’re creating are military and other public sector jobs.

 

Economist Dean Baker points out that America’s massive military spending on unnecessary and unpopular wars lowers economic growth and increases unemployment:

Defense spending means that the government is pulling away resources from the uses determined by the market and instead using them to buy weapons and supplies and to pay for soldiers and other military personnel. In standard economic models, defense spending is a direct drain on the economy, reducing efficiency, slowing growth and costing jobs.

A few years ago, the Center for Economic and Policy Research commissioned Global Insight, one of the leading economic modeling firms, to project the impact of a sustained increase in defense spending equal to 1.0 percentage point of GDP. This was roughly equal to the cost of the Iraq War.

 

Global Insight’s model projected that after 20 years the economy would be about 0.6 percentage points smaller as a result of the additional defense spending. Slower growth would imply a loss of almost 700,000 jobs compared to a situation in which defense spending had not been increased. Construction and manufacturing were especially big job losers in the projections, losing 210,000 and 90,000 jobs, respectively.

 

The scenario we asked Global Insight [recognized as the most consistently accurate forecasting company in the world] to model turned out to have vastly underestimated the increase in defense spending associated with current policy. In the most recent quarter, defense spending was equal to 5.6 percent of GDP. By comparison, before the September 11th attacks, the Congressional Budget Office projected that defense spending in 2009 would be equal to just 2.4 percent of GDP. Our post-September 11th build-up was equal to 3.2 percentage points of GDP compared to the pre-attack baseline. This means that the Global Insight projections of job loss are far too low…

 

The projected job loss from this increase in defense spending would be close to 2 million. In other words, the standard economic models that project job loss from efforts to stem global warming also project that the increase in defense spending since 2000 will cost the economy close to 2 million jobs in the long run.

The Political Economy Research Institute at the University of Massachusetts, Amherst has also shown that non-military spending creates more jobs than military spending.

 

So we’re running up our debt – which will eventually decrease economic growth – and creating many fewer jobs than if we spent the money on non-military purposes.

High Military Spending Drains Innovation, Investment and Manufacturing Strength from the Civilian Economy

Chalmers Johnson notes that high military spending diverts innovation and manufacturing capacity from the economy:

By the 1960s it was becoming apparent that turning over the nation’s largest manufacturing enterprises to the Department of Defense and producing goods without any investment or consumption value was starting to crowd out civilian economic activities. The historian Thomas E Woods Jr observes that, during the 1950s and 1960s, between one-third and two-thirds of all US research talent was siphoned off into the military sector. It is, of course, impossible to know what innovations never appeared as a result of this diversion of resources and brainpower into the service of the military, but it was during the 1960s that we first began to notice Japan was outpacing us in the design and quality of a range of consumer goods, including household electronics and automobiles.

 

***

 

Woods writes: “According to the US Department of Defense, during the four decades from 1947 through 1987 it used (in 1982 dollars) $7.62 trillion in capital resources. In 1985, the Department of Commerce estimated the value of the nation’s plant and equipment, and infrastructure, at just over $7.29 trillion… The amount spent over that period could have doubled the American capital stock or modernized and replaced its existing stock”.

 

The fact that we did not modernise or replace our capital assets is one of the main reasons why, by the turn of the 21st century, our manufacturing base had all but evaporated. Machine tools, an industry on which Melman was an authority, are a particularly important symptom. In November 1968, a five-year inventory disclosed “that 64% of the metalworking machine tools used in US industry were 10 years old or older. The age of this industrial equipment (drills, lathes, etc.) marks the United States’ machine tool stock as the oldest among all major industrial nations, and it marks the continuation of a deterioration process that began with the end of the second world war. This deterioration at the base of the industrial system certifies to the continuous debilitating and depleting effect that the military use of capital and research and development talent has had on American industry.”

Economist Robert Higgs makes the same pointabout World War II:

Yes, officially measured GDP soared during the war. Examination of that increased output shows, however, that it consisted entirely of military goods and services. Real civilian consumption and private investment both fell after 1941, and they did not recover fully until 1946. The privately owned capital stock actually shrank during the war. Some prosperity. (My article in the peer-reviewed Journal of Economic History, March 1992, presents many of the relevant details.)

 

It is high time that we come to appreciate the distinction between the government spending, especially the war spending, that bulks up official GDP figures and the kinds of production that create genuine economic prosperity. As Ludwig von Mises wrote in the aftermath of World War I, “war prosperity is like the prosperity that an earthquake or a plague brings.”

War Causes Inflation … Which Keynes and Bernanke Admit Taxes Consumers

As we noted in 2010, war causes inflation … which hurts consumers:

Liberal economist James Galbraith wrote in 2004:

Inflation applies the law of the jungle to war finance. Prices and profits rise, wages and their purchasing power fall. Thugs, profiteers and the well connected get rich. Working people and the poor make out as they can. Savings erode, through the unseen mechanism of the “inflation tax” — meaning that the government runs a big deficit in nominal terms, but a smaller one when inflation is factored in.

 

***

 

There is profiteering. Firms with monopoly power usually keep some in reserve. In wartime, if the climate is permissive, they bring it out and use it. Gas prices can go up when refining capacity becomes short — due partly to too many mergers. More generally, when sales to consumers are slow, businesses ought to cut prices — but many of them don’t. Instead, they raise prices to meet their income targets and hope that the market won’t collapse.

Ron Paul agreed in 2007:

Congress and the Federal Reserve Bank have a cozy, unspoken arrangement that makes war easier to finance. Congress has an insatiable appetite for new spending, but raising taxes is politically unpopular. The Federal Reserve, however, is happy to accommodate deficit spending by creating new money through the Treasury Department. In exchange, Congress leaves the Fed alone to operate free of pesky oversight and free of political scrutiny. Monetary policy is utterly ignored in Washington, even though the Federal Reserve system is a creation of Congress.

 

The result of this arrangement is inflation. And inflation finances war.

Blanchard Economic Research pointed out in 2001:

War has a profound effect on the economy, our government and its fiscal and monetary policies. These effects have consistently led to high inflation.

 

***

 

David Hackett Fischer is a Professor of History and Economic History at Brandeis. [H]is book, The Great Wave, Price Revolutions and the Rhythm of History … finds that … periods of high inflation are caused by, and cause, a breakdown in order and a loss of faith in political institutions. He also finds that war is a triggering influence on inflation, political disorder, social conflict and economic disruption.

 

***

 

Other economists agree with Professor Fischer’s link between inflation and war.

 

James Grant, the respected editor of Grant’s Interest Rate Observer, supplies us with the most timely perspective on the effect of war on inflation in the September 14 issue of his newsletter:

“War is inflationary. It is always wasteful no matter how just the cause. It is cost without income, destruction financed (more often than not) by credit creation. It is the essence of inflation.”

Libertarian economics writer Lew Rockwell noted in 2008:

You can line up 100 professional war historians and political scientists to talk about the 20th century, and not one is likely to mention the role of the Fed in funding US militarism. And yet it is true: the Fed is the institution that has created the money to fund the wars. In this role, it has solved a major problem that the state has confronted for all of human history. A state without money or a state that must tax its citizens to raise money for its wars is necessarily limited in its imperial ambitions. Keep in mind that this is only a problem for the state. It is not a problem for the people. The inability of the state to fund its unlimited ambitions is worth more for the people than every kind of legal check and balance. It is more valuable than all the constitutions every devised.

 

***

 

Reflecting on the calamity of this war, Ludwig von Mises wrote in 1919

One can say without exaggeration that inflation is an indispensable means of militarism. Without it, the repercussions of war on welfare become obvious much more quickly and penetratingly; war weariness would set in much earlier.***

 

In the entire run-up to war, George Bush just assumed as a matter of policy that it was his decision alone whether to invade Iraq. The objections by Ron Paul and some other members of Congress and vast numbers of the American population were reduced to little more than white noise in the background. Imagine if he had to raise the money for the war through taxes. It never would have happened. But he didn’t have to. He knew the money would be there. So despite a $200 billion deficit, a $9 trillion debt, $5 trillion in outstanding debt instruments held by the public, a federal budget of $3 trillion, and falling tax receipts in 2001, Bush contemplated a war that has cost $525 billion dollars — or $4,681 per household. Imagine if he had gone to the American people to request that. What would have happened? I think we know the answer to that question. And those are government figures; the actual cost of this war will be far higher — perhaps $20,000 per household.

 

***

 

If the state has the power and is asked to choose between doing good and waging war, what will it choose? Certainly in the American context, the choice has always been for war.

And progressive economics writer Chris Martenson explains as part of his “Crash Course” on economics:

If we look at the entire sweep of history, we can make an utterly obvious claim: All wars are inflationary. Period. No exceptions.

 

***

 

So if anybody tries to tell you that you haven’t sacrificed for the war, let them know you sacrificed a large portion of your savings and your paycheck to the effort, thank you very much.

The bottom line is that war always causes inflation, at least when it is funded through money-printing instead of a pay-as-you-go system of taxes and/or bonds. It might be great for a handful of defense contractors, but war is bad for Main Street, stealing wealth from people by making their dollars worth less.

Given that John Maynard Keynes and former Federal Reserve chair Ben Bernanke both say that inflation is a tax on the American people, war-induced inflation is a theft of our wealth.

IEP gives a graphic example – the Vietnam war helping to push inflation through the roof:

War Causes Runaway Debt

We noted in 2010:

All of the spending on unnecessary wars adds up.

 

The U.S. is adding trillions to its debt burden to finance its multiple wars in Iraq, Afghanistan, Yemen, etc.

Indeed, IEP – commenting on the war in Afghanistan and Iraq – notes:

This was also the first time in U.S. history where taxes were cut during a war which then resulted in both wars completely financed by deficit spending. A loose monetary policy was also implemented while interest rates were kept low and banking regulations were relaxed to stimulate the economy. All of these factors have contributed to the U.S. having severe unsustainable structural imbalances in its government finances.

We also pointed out in 2010:

It is ironic that America’s huge military spending is what made us an empire … but our huge military is what is bankrupting us … thus destroying our status as an empire.

Economist Michel Chossudovsky told Washington’s Blog:

War always causes recession. Well, if it is a very short war, then it may stimulate the economy in the short-run. But if there is not a quick victory and it drags on, then wars always put the nation waging war into a recession and hurt its economy.

(and remember Greenspan’s comment.)

It’s not just civilians saying this …

The former head of the Joint Chiefs of Staff – Admiral Mullen – agrees:

The Pentagon needs to cut back on spending.

 

“We’re going to have to do that if it’s going to survive at all,” Mullen said, “and do it in a way that is predictable.”

Indeed, Mullen said:

For industry and adequate defense funding to survive … the two must work together. Otherwise, he added, “this wave of debt” will carry over from year to year, and eventually, the defense budget will be cut just to facilitate the debt.

Former Secretary of Defense Robert Gates agrees as well. As David Ignatius wrote in the Washington Post in 2010:

After a decade of war and financial crisis, America has run up debts that pose a national security problem, not just an economic one.

 

***

 

One of the strongest voices arguing for fiscal responsibility as a national security issue has been Defense Secretary Bob Gates. He gave a landmark speech in Kansas on May 8, invoking President Dwight Eisenhower’s warnings about the dangers of an imbalanced military-industrial state.

 

“Eisenhower was wary of seeing his beloved republic turn into a muscle-bound, garrison state — militarily strong, but economically stagnant and strategically insolvent,” Gates said. He warned that America was in a “parlous fiscal condition” and that the “gusher” of military spending that followed Sept. 11, 2001, must be capped. “We can’t have a strong military if we have a weak economy,” Gates told reporters who covered the Kansas speech.

 

On Thursday the defense secretary reiterated his pitch that Congress must stop shoveling money at the military, telling Pentagon reporters: “The defense budget process should no longer be characterized by ‘business as usual’ within this building — or outside of it.”

While war might make a handful in the military-industrial complex and big banks rich, America’s top military leaders and economists say that would be a very bad idea for the American people.

Indeed, military strategists have known for 2,500 years that prolonged wars are disastrous for the nation.

War Increases Terrorism … And Terrorism Hurts the Economy

Security experts – conservative hawks and liberal doves alike – agree that waging war in the Middle East weakens national security and increases terrorism. See this, this, this, this, this, this and this.

Terrorism – in turn – terrorism is bad for the economy. Specifically, a study by Harvard and the National Bureau of Economic Research (NBER) points out:

From an economic standpoint, terrorism has been described to have four main effects (see, e.g., US Congress, Joint Economic Committee, 2002). First, the capital stock (human and physical) of a country is reduced as a result of terrorist attacks. Second, the terrorist threat induces higher levels of uncertainty. Third, terrorism promotes increases in counter-terrorism expenditures, drawing resources from productive sectors for use in security. Fourth, terrorism is known to affect negatively specific industries such as tourism.

The Harvard/NBER concludes:

In accordance with the predictions of the model, higher levels of terrorist risks are associated with lower levels of net foreign direct investment positions, even after controlling for other types of country risks. On average, a standard deviation increase in the terrorist risk is associated with a fall in the net foreign direct investment position of about 5 percent of GDP.

So the more unnecessary wars American launches and the more innocent civilians we kill, the less foreign investment in America, the more destruction to our capital stock, the higher the level of uncertainty, the more counter-terrorism expenditures and the less expenditures in more productive sectors, and the greater the hit to tourism and some other industries. Moreover:

Terrorism has contributed to a decline in the global economy (for example, European Commission, 2001).

So military adventurism increases terrorism which hurts the world economy. And see this.

Postscript: Attacking a country which controls the flow of oil has special impacts on the economy. For example, well-known economist Nouriel Roubini says that attacking Iran would lead to global recession. The IMF says that Iran cutting off oil supplies could raise crude prices 30%.

 








Categories: blogroll

Putin Gets Paid? IMF Agrees $17bn Loan To Ukraine

Zerohedge - 2 hours 2 min ago

It seems Russia won't have to wait too long for the billions that Ukraine owes it for energy supplies past, present, and future pre-billings. Bloomberg reports that:

  • *IMF STAFF SAID TO BACK $17B UKRAINE LOAN
  • *IMF STAFF SAID TO SEEK APRIL 30 BOARD MEETING ON UKRAINE LOAN

The always-accurate staff at the IMF project a mere 5% contraction in Ukraine's economy (so that means more like 15%).

 

As Bloomberg reports,

International Monetary Fund staff endorsed a $17 billion loan to Ukraine to help the government pay its bills amid a projected economic contraction of 5 percent this year, according to government officials who have seen the recommendations.

 

The staff’s report was delivered to members of the IMF’s 24-seat board late yesterday, according to the officials, who spoke on condition of anonymity to discuss internal documents. The staff proposed an April 30 board meeting to consider the loan package, they said.

 

Conny Lotze, a spokeswoman for the IMF, declined to comment.

 

After weeks of talks with the government in Kiev, IMF staff concluded that Ukraine needs financing from the fund that’s at the higher end of the $14 billion to $18 billion range initially announced. The IMF loan will clear the way for additional aid from the European Union and other donors.

We await the small-print to see just how much is "allowed" to be spent on paying bills to Russia vs paying off interest on bonds due to Western banks...








Categories: blogroll

Man Eats Twelve Gold Bars To Avoid Taxes ! Tell Nouriel

Zerohedge - 2 hours 7 min ago

Today’s AM fix was USD 1,283.50, EUR 927.38 and GBP 763.76 per ounce.                                     

Yesterday’s AM fix was USD 1,290.75, EUR 935.19 and GBP 767.34 per ounce.


Spot gold bullion prices ticked fractionally lower today and bullion remained below the $1,300/oz psychological level and not far off yesterday’s two-and-a-half-month lows.




Spot gold stood at $1,283.75/1,284.55 per ounce, up just 20 cents from Tuesday, when prices briefly dipped below technical support to hit $1,276.35, the lowest since February 11.
 

Silver bullion ticked 0.5% higher to $19.45/oz and the dollar, which touched a two-week high against the euro in the previous session, retreated somewhat to around 1.3845. Asian shares were mixed and European shares were lower after three days of gains.


Gold in U.S. Dollars - YTD 2014 - (Thomson Reuters)

Increasing geopolitical risks due to the very unstable situation in Ukraine is being ignored for now. There is also increasing geopolitical tension between China and Japan after China seized a Japanese trading vessel, resurrecting a World War II dispute.

Business Man Found With 12 Gold Bars In Stomach In India
You’ve heard of people described as having hearts of gold. But what about someone with a belly full of gold? That’s what doctors in New Delhi found, when a man arrived from overseas in severe discomfort.

CNN reports on the curious incident of the man with the golden belly in Delhi:


New Delhi, India (CNN) -- When a team of Indian surgeons opened up the stomach of a patient complaining of abdominal pain, they had no idea they'd extract a fortune.

The patient, whose name was not released, was hiding 12 gold bars in his belly. He apparently smuggled them into India to evade import duty, police and doctors said Tuesday.


Each bar weighed 33 grams, said C.S. Ramachandran, who conducted the surgery at a hospital in New Delhi on April 9. The 63-year-old patient, an Indian citizen, visited the hospital a day before with severe stomach pain and nausea.


"He told us he had accidentally swallowed the cap of a plastic bottle," Ramachandran said.


Investigations could not confirm his claim. "We couldn't (either) make out they were gold bars," the doctor said. "But yes, X-Rays showed there was intestinal blockage, which required surgery."

On the day of surgery, stunned doctors pulled out the yellow metal from his stomach. "It was unexpected," Ramachandran said.

The hospital handed over the precious extraction to local police. The bars have since been sent to customs, which is conducting a probe, said Alok Kumar, a deputy commissioner of police.

He didn't disclose the name of the patient. Nor did he reveal which country he smuggled the gold from. The patient was discharged after the surgery, and is doing fine. CNN story here


The gold bars are now in the care of Indian customs and the patient is under investigation for tax evasion, which certainly takes the shine off his import experiment. Fortunately for him, the export experiment under the surgeons knife was a success.
 

The gold bars are valued not just by the owner but by the Indian government. In total they’d command an import duty of $17,000 dollars. It’s little wonder some people would go to extreme lengths to try to avoid that.

Yes, this is what the process of removing twelve gold bars from the stomach of a 63-year-old looks like. Each of the objects weighs 33 grams, which might not sound much. A warning here, some of what you’ll see next, may upset your stomach.


VIEWER DISCRETION ADVISED DUE TO GRAPHIC NATURE OF IMAGES OF SURGERY

It is not known if the man intended selling the gold bars on or keeping them as a store of value.

It is interesting to note that while thousands of Indians have engaged in gold smuggling in recent months, smuggling in the western world consists primarily of drugs. This says something about the values system of India and Eastern societies versus that of the western world.

This is the lengths that people in Asia will go to own gold and also to avoid punitive taxes on gold. Middle class and wealthy Indian and people all over Asia are choosing to escape financial repression by owning gold, including gold in vaults overseas and allocated gold storage in Singapore is attractive to them due to the lack of punitive taxes and the safety of Singapore as a jurisdiction.

India remains the world's second largest gold market after China and despite a punitive tax of 10%  levied on gold imports in India, Indian investment in gold bars recorded an increase of 16% in 2013, according to the World Gold Council.


Official demand surged as did unofficial demand in the form of a massive wave of gold smuggling.
The World Gold Council estimates that a huge 200 tonnes of gold may have been smuggled into India in 2013 - in flower pots, stomachs and other orifices…on ships, trains, planes and automobiles.

 

Gold is the metal most precious to the peoples of India, China and much of Asia. It is a symbol of wealth, power and beauty and the ultimate store of value. This is in contrast to people in the West, the majority of whom do not understand gold and it’s value.

This will change in the coming years.


P.s. Can someone please tell Nouriel that contrary to his assertion - you can eat gold.

 








Categories: blogroll

Emerging Markets vs Domestic Markets

Emerging Money - 2 hours 12 min ago

Emerging Markets have traded back against SPX over the last 4 sessions on the back of slower China (FXI ,quote) and better SPX earnings with a sprinkle of M/A mania.

//www.everystockphoto.com/photo.php?imageId=2025495&searchId=5f295bce38d311f26a96eb811192f391&npos=12We would be Login to read more

Categories: blogroll

What Google Autocomplete Tells Us About America

Zerohedge - 2 hours 13 min ago

Submitted by Simon Black via Sovereign Man blog,

“Why does Obama suck?”

If you’re not sure, ask Google. It seems that millions of Americans already have asked this question, along with:

“Why does the government want to kill us?”, and

“Can the government take your gold?”

These are among the jewels of Google autocomplete– instantly displaying results from the most popular searches.

Try it yourself. The results vary slightly based on geography, but if you type, for example, “Obama is “, I get the following:

obama is Check out what Google autocomplete tells us about America

Not exactly the hope and change he was looking for I suppose.

(Canadians and Brits, don’t feel left out. Google tells us that Stephen Harper is “the anti-christ” and David Cameron is “a lizard”.)

While I’m sure we can all appreciate the humor, the reason these searches show up instantly in Google is because so many people are looking.

For example, when I type “Is America”, Google completes it with the most popular hit– “Is America doomed”…

is america Check out what Google autocomplete tells us about America

Typing in “Why does the government” conjures all sorts of interesting queries, ranging from:

- need to collect taxes?
- want to kill us?
- lie?
- restrict seditious speech?

Or, typing “Why does the Federal Reserve. . . “, Google asks, “still exist?” Good question.

On the topic of the dollar, Google tells us “the dollar is” collapsing, dead, crashing, dying, devalued, not backed by gold, losing value, etc.

The dollar is Check out what Google autocomplete tells us about America

Apparently more and more people are starting to question the value and worth of their currency.

They’re starting to have second thoughts about a system in which we award a tiny banking elite with totalitarian control of the money supply.

And they’re starting to realize that that their government is corrupt, far too powerful, and overrun with liars and thieves.

In fact, for proof, I typed “does homeland s”, and Google completes with:

“Does Homeland Security pay well?” – and -
“Does Homeland Security hire felons?”

does homeland s Check out what Google autocomplete tells us about America

So it seems that convicted felons are looking for highly paid government employment. Perfect.

This is rather fitting given that typing “Will Ob” (not even the full word) returns “Will Obama declare martial law?”

Will Ob Check out what Google autocomplete tells us about America

People are certainly wondering.

Getting to this point of mistrust has taken years of endless warfare. The embarrassing failures of Obamacare. NSA and IRS scandals. Constant stories of police brutality. Higher taxes. Higher consumer prices.

It didn’t happen overnight. But over time, people have lost confidence not only in individual politicians, but in the system itself.

The institution of government is now viewed as the problem, not the solution. And this represents a complete breakdown in the social contract.

From the Romans to the Ottoman Empire to the Venetians, history is full of examples which show that once societies lose confidence in the system, substantial change and turmoil often follows.

I suspect that if Google had been around in the mid-1780s, autocomplete would probably tell us things like “Why does the King Louis” suck? And, “Will France” collapse?

It did. And when the French stormed the Bastille in 1789, they entered a 26-year period of revolution, civil war, hyperinflation, and genocide.

I’m not suggesting that we’re in for exactly the same fate. But we would be foolish to presume that this lost confidence and mistrust is a consequence-free environment.








Categories: blogroll

Starbucks Earnings – Global Company With Lots To Do and Stock Offering Solid Entry

Emerging Money - 2 hours 16 min ago

Starbucks (SBUX, quote) reports 2Q ’14 after the bell tomorrow.  Earnings estimates from the street are 0.557c, and despite some heaviness in the stock, the overall outlook for the company remains impressive. starbucks2Starbucks is a global company with a brand presence that allows it to compete anywhere.  The stock has been mired in a five month  slump since peaking on November 5th, 2013 at $82.00.

The challenges for the stock do not reflect the opportunities for the company.  Starbucks is quietly growing in developed and developing markets globally and in many cases has higher margins and higher growth abroad than in the USA.

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Categories: blogroll

Housing Bubble Pop 2.0: Remodeling Collapses To 1 Year Low

Zerohedge - 2 hours 42 min ago

On the way up, every sell-side strategist points to remodeling as a leading indicator for the housing recovery as confidence in the value of their home prompts real people to "invest" in upgrades and remodel their homes. That has been the story... until now. As NARI reports, the Remodeling Business Pulse (RBP) data of current and future remodeling business conditions show current condition ratings fell significantly in March - in fact they fell from multi-year highs to one-year lows as "homeowners remain slow to make the decision to move ahead with higher-priced projects." Of course, weather is blamed, and they are 'optimistic' about the future, but one look at the chart below and it is clear something changed...

 

 

As NARI reports,

Business conditions during the first three months of 2014 dropped to 6.07, down from 6.51 in December.

 

There was a decline in all but one of the sub-components that drive the overall current rating. Conversion of bids and sales value of jobs had the largest dip.

 

Growth indicators in the first quarter of 2014 are as follows (rating is from 1 to 9, where 1 is much worse than a year ago and 9 is much better; 5 is about the same as last year):

  • Current business conditions fell to 6.07 (from 6.51 last quarter)
  • Number of inquiries remained flat at 6.24.
  • Requests for bids had a slight drop to 6.16 (down from  6.22 last quarter)
  • Conversion of bids fell significantly from 6.03 to 5.71.
  • Sales value of jobs sold declined to 5.84 (down from 6.27 from last quarter).

More certainty about the future moved down to the No. 3 spot, at 39 percent.

h/t @CalConfidence








Categories: blogroll

The Chinese Housing Ponzi Exposed: "As We Sell Our First Apartments, We’ll Have Cash Flow To Build The Next Stage"

Zerohedge - 3 hours 16 min ago

Much has been said here and elsewhere about not only China's ghost cities - that final resting place where trillions in Chinese GDP "fixed investment" goes to quietly die but no before contributing to over half of China's GPD - over the past five years, but also about the bursting of the Chinese housing bubble in the past several months now that the Beijing Politburo has drastically slowed down the pace of loan creation and the country has shocked its bond investors by admitting failure is an all too real possibility. This post will therefore hardly reveal anything new, however it will provide some perspective on how from one of the most important industries for China's suddenly cooling economy, housing has becoming nothing more (or less) than one giant Ponzi scheme.

Here are some of the soundbites of a recent Bloomberg piece showing how "Xi’s Squeeze Leaves China’s Heartland Missing Boom" covering such exciting topics as:

... Bubbles:

Cities in China are facing some serious real estate bubbles, and the bubbles in third-, fourth-tier cities have the risks of total collapse,” said Tao Ran, director of the China Center for Public Economics and Governance at Renmin University in Beijing, in a phone interview on March 31. “The central government and banks tightened credit in the property market because they realized the risks.”

... Collateral

That makes it harder for Zhu Houlun, 43, who took over as Laohekou party secretary in August 2012 with plans to merge with neighboring Gucheng by building a new urban center on 70 square kilometers (27 square miles) of farming communities between the two. The project would create a city of 700,000 by 2020, more than double Laohekou’s existing urban population, according to a Xiangyang government report.

 

Zhu must rely on private developers like Liu Pingfeng, from neighboring Hunan province, who is building a 5 billion yuan project north of Laohekou called the Red River Valley Eco-Tourism Resort that includes apartments, a five-star hotel, a theme park and a polo club.

 

Raising funds is very difficult,” said Liu, 47, who has been building in Hunan for a decade. “I used to use land as collateral -- as long as I got the land certificate I could get the loan. Now it’s almost impossible.”

... Musical fountains:

In Red River’s muddy construction site by the river, there are clusters of concrete skeletons that Liu says are due to open in October as shops, cafes, bars and a fitness center. Nearby is a hole in the ground the size of a football field that will be a musical fountain.

... KFCs:

Downtown Laohekou shows how far the city has lagged behind development in the east. Rows of weather-stained four- and five-story buildings line the streets, with shopfronts selling liquor, cheap household goods and clothes. There’s no department store, no passenger railway station, no KFC -- the Yum! Brands Inc. (YUM) chain found in 900 other Chinese cities and townships. The nearest civilian airport is an hour’s drive away.

... Social problems:

“Local government officials are still very fixated on economic growth,” said Lynette Ong, an associate professor at the University of Toronto who wrote the 2012 book “Prosper or Perish: The Political Economy of Credit and Fiscal Systems in Rural China.” “Without growth, a lot of social problems like unemployment will surface.”

... from ashes to ashes, from ghost town to ghost town:

The expansion on the coast was largely fed by immigrants from provinces like Hubei that are now struggling to lure them back. On a February morning in Laohekou’s cavernous and unheated labor exchange, a single jobseeker scans the vacancies posted on the back wall, while five female staff clutch thermoses of hot drinks to keep warm.

 

“It’s hard to hire people here,” said Zhang Hongju, one of the staff. “The young people have all gone to Guangdong and those who haven’t need to stay home to take care of elderly family or kids.”

 

In Chen Genxin’s village, slated to be demolished to make way for China Dreamland, he says everyone is over 50. His sons left during the boom to get jobs in other cities. “If the country wants us to tear it down, we’ll tear it down,” said Chen, 71, as he harvests spinach from his small plot with his wife in the afternoon sun. “The earth will bury me wherever I go.”

... and, of course, the fact that it is all one massive Ponzi scheme:

In Red River’s muddy construction site by the river, there are clusters of concrete skeletons that Liu says are due to open in October as shops, cafes, bars and a fitness center. Nearby is a hole in the ground the size of a football field that will be a musical fountain.

 

The soaring cost of loans means Liu will build and sell Red River in stages. “As we sell our first batch of apartments, we’ll have cash flow to build the next stage,” he said in an interview in February in Laohekou.

Finally, some pictures:

A construction-site hoarding displays an artist's impression of a development containing Tiffany and Louis Vuitton shops in Luying village on the outskirts of Laohekou, Hubei Province, China

Chen Genxin, farmer, and his wife stand for a photograph at their plot of land which is going to be requisitioned to make way for the China Dreamland residential and tourism project by Sichuan Hengxinyuanda Investment Group on the outskirts of Laohekou, Hubei Province, China

 

The new Laohekou Number 1 Middle School stands under construction on the outskirts of Laohekou, Hubei Province, China, on Thursday, Feb. 20, 2014.

China Dreamland residential and tourism project by Sichuan Hengxinyuanda Investment Group stands under construction on the outskirts of Laohekou,








Categories: blogroll

Central Banks Have Realized Their Worst Nightmares Are Approaching

Zerohedge - 3 hours 21 min ago

 

 

 

Central Bankers will never openly admit that they or their policies have failed. Moreover, they do not rush into sudden tightening (more on this in a moment). But one can begin to notice subtle changes in their language and actions that indicate they have noticed what’s happening in Japan (the failure of the BoJ’s “shock and awe” QE program to generate growth).

 

Nowhere is this more clear than at the US’s Federal Reserve or Fed. Indeed, starting in August 2013, various Fed officials began questioning the efficacy of QE.

 

First came the San Francisco Fed with a study revealing that QE generally doesn’t appear to generate economic growth:

 

Asset purchase programs like QE2 appear to have, at best, moderate effects on economic growth and inflation. Research suggests that the key reason these effects are limited is that bond market segmentation is small.

 

Moreover, the magnitude of LSAP effects depends greatly on expectations for interest rate policy, but those effects are weaker and more uncertain than conventional interest rate policy. This suggests that communication about the beginning of federal funds rate increases will have stronger effects than guidance about the end of asset purchases.

 

http://www.frbsf.org/economic-research/publications/economic-letter/2013/august/large-scale-asset-purchase-stimulus-interest-rate/

 

A few months later, the former Fed official in charge of the Fed’s first round of QE, penned a Wall Street Journal article stating that QE was in fact a Wall Street bailout.

 

I can only say: I'm sorry, America. As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed's first plunge into the bond-buying experiment known as quantitative easing. The central bank continues to spin QE as a tool for helping Main Street. But I've come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time…

 

It wasn't long before my old doubts resurfaced. Despite the Fed's rhetoric, my program [QE] wasn't helping to make credit any more accessible for the average American. The banks were only issuing fewer and fewer loans. More insidiously, whatever credit they were extending wasn't getting much cheaper. QE may have been driving down the wholesale cost for banks to make loans, but Wall Street was pocketing most of the extra cash.

 

http://online.wsj.com/news/articles/SB10001424052702303763804579183680751473884

 

Around this time, the Fed began to taper QE first by $10 billion in December… and another $10 billion in January. By this point even uber-dove Fed President Bill Dudley (he formerly claimed inflation is low because iPads are getting cheaper) even admitted the following:

 

We don't understand fully how large-scale asset purchase programs work to ease financial market conditions—is it the effect of the purchases on the portfolios of private investors, or alternatively is the major channel one of signaling?

 

http://www.ny.frb.org/newsevents/speeches/2014/dud140104.html

 

At this point, Ben Bernanke handed off the reins for Fed Chairman to Janet Yellen. Yellen has since continued Bernanke’s tapering projects, reducing the monthly QE spend from $65 billion to $55 billion.

 

The failure of the Bank of Japan’s massive QE program and the Fed’s decision to taper are not unrelated. Take a look at the timeline.

 

·      April 2013: Japan announces a “shock and awe” QE program.

·      August 2013: San Francisco Fed economists (where future Chairman of the Fed Janet Yellen is President) write a study showing QE is ineffective at generating economic growth.

·      November 2013: Former Fed officials admit QE was not meant to help Main Street.

·      December 2013: the Fed begins to taper its QE programs by $10 billion

·      January 2014: Bernanke’s last FOMC as Fed Chairman, Fed announces another $10 billion taper

·      March 2014: Janet Yellen takes over at the Fed and announces another $10 billion QE taper.

 

This represents a tectonic shift in the financial markets. It does not mean that Central Banks will never engage in QE again. But it does show that they are increasingly aware that QE is no longer the “be all, end all” for monetary policy.

Investors take note. One of the primary market props of the last five years is being removed. What happens when the markets finally catch on?

This concludes this article, swing by www.gainspainscapital.com for a FREE investment reports Protect Your Portfolio, which outlines how to protect your portfolio from bear market collapses.

 

Best Regards

 

Phoenix Capital Research

 

 








Categories: blogroll

China Slowdown? Don’t tell U.S. Multinationals!

Emerging Money - 3 hours 43 min ago

Last night, China printed 48.3 on the HSBC Flash PMI, but don’t tell U.S. corporations who call China a major market that China is slowing.

china map flagLuxury sales are alive and well, auto sales are alive and well…and even Yum (YUM, quote) saw a turn in its volatile China data series. If you ask Jeff Immelt at General Electric (GE, quote), China remains one of his top markets and he has seen zero falloff in the order book, in fact his China order book is growing.  In fact, most CEOs shake their hands in disbelief when asked why people think China is a problem for them.

Tonight Apple (AAPL, quote) and tomorrow Amazon (AMZN, quote), Starbucks (SBUX, quote) and General Motors (GM, quote) will give additional insight into China sales which we expect will be solid. GM has already indicated China sales were soaring and now over 40% of sales globally. 

So far some earnings season China highlights include: 

  • Nike (NKE, quote) has seen China revs go from 8.22% of sales in fiscal Q1 ’14 to 10% of sales in fiscal Q3 ’14.  
  • McDonalds (MCD, quote) said China sales were +6.6% and a nice offset to slower U.S. growth.  They plan to overhaul all of their China stores.  
  • Yum last night said China sales (53% of sales) recovered to +9% y/y. 
  • Coca-Cola (KO, quote) , who is under pressure in North America from declining CSD sales, said China sales last quarter were +12% while global sales only 2%. 
  • Boeing (BA, quote) earnings were out today and China’s Shandong Airlines just announced a $4.6Bn order that is indicative of the demand the company is seeing form Chinese customers. 
  • United Technologies (UTX, quote) is seeing strong demand from Chinese housing and infrastructure segments. 

The list goes on and on…

China macro headlines should not be accused with a reversal in the generational transition to a consumption economy.  Cyclicality should not be confused with regression for U.S. companies who need Chinese growth at the center of their global growth strategies.  These are not strategies that were built overnight nor will they be challenged by the macro headlines that seem to confuse so many investors who have not made the same commitment.

Categories: blogroll

Cost Of "Breakfast In America" Soars To Highest In Over 2 Years

Zerohedge - 3 hours 48 min ago

Another day, another indication that 'real' inflation - the kind that reduces standards of living and leeches away purchasing power for 'real' people - is anything but under control... and anything but stable. With the Oz-ians in the Eccles Building pulling levers to run the world based on their "inflation" measures, it seems that if the price of 'things that matter' soars but the Fed doesn't see them, there is no need to tighten. Last week we discussed the surge in the price of beef, pork, eggs, and shrimp, but this week, as Bloomberg notes, the price of breakfast is soaring. Between droughts affecting coffee prices and insects spreading disease in Florida, the "breakfast beverage" index is at its highest in over 2 years.

 

 

Source: Bloomberg








Categories: blogroll

Emerging Money Audio Call – April 23

Emerging Money - 4 hours 3 min ago

Welcome to the Emerging Money Audio Call for April 23. Emerging Markets down 1.2% three day move against the S&P underperforming coming back on emerging market vs. domestic market spread, something to look at. We have several charts on the site to explain some opportunities at this point.

456px-AudiopaletteWe will review the China data last night and visit what it means for U.S multinationals corporate’s that have exposure to China (FXI, quote).

We are noticing some interesting stuff it’s not in concert with what the headline numbers are telling you. Tune into your account today to listen to full audio call. We will also getting to Apple and China Mobile’s deal.

Don’t miss out on another day of emerging market insight and trades from Tim Seymour.

Subscribe Now as Tim helps Emerging Money Subscribers navigate emerging market events around the globe while taking advantage of Tim’s 17 years of trading Emerging Markets.

Be first to hear what Tim is trading as he lays out his strategies, below is snap shot on what Tim will be covering in the audio call.

Mobile Users Please Click on Mobile Icon.

 

Not a member yet? Plans & Pricing

 

 

 

 

 

 

Categories: blogroll

Emerging Money Audop Call – April 23

Emerging Money - 4 hours 27 min ago

Welcome to the Emerging Money Audio Call for April 23.  Emerging Markets down 1.2% three day move against the S&P underperforming coming back on emerging market vs. domestic market spread, something to look at.  We have several charts on the site to explain some opportunities at this point.

456px-AudiopaletteWe will review the China data last night and visit what it means for U.S multinationals corporate’s that have exposure to China (FXI, quote). 

We are noticing some interesting stuff it’s not in concert with what the headline numbers are telling you.  Tune into your account today to listen to full audio call.  We will also getting to Apple and China Mobile’s deal.

Mobile Users Please Click on Mobile Icon.

 

 

 

Categories: blogroll

This Is "Why" Caterpillar Is Trading At Two-Year Highs

Zerohedge - 4 hours 28 min ago

Moments ago CAT stock touched 52 week highs, or a level not seen since April 2012. Why? The chart below which shows Caterpillar dealer retail sales by region surely has something to do with it. With global sales sliding again now that the third consecutive dead cat bounce is over, and dumping the most since February of 2013 or 12% from a year ago, when sales had in turned dropped 11% from 2012, driven by a collapse in Asian-Pacific, Latin American and EMEA sales, all of which crashed by more than 20%, we can only assume the company is well on its way to an epic collapse in its top and bottom lines as well.

And since this is nothing short of the bizarro, insane new normal, it is only a matter of time before the crash in retail sales sends the stock to plus infinity.








Categories: blogroll

BoToX ACTiViSM...

Zerohedge - 4 hours 39 min ago








Categories: blogroll

Russia Warns West "Remove Forces"; Begins Military Exercise On Ukraine Border

Zerohedge - 4 hours 41 min ago

UPDATE: Dutch fighter jets were scrambled after Russian bombers approached Dutch airspace; the Russian planes turned away

With both sides appearing to have entirely un-de-escalated and the truce deal now a thing of the past (besides a few hundred Dow points), the Russians are speaking up today - and are not happy:

  • RUSSIA IS EXTREMELY SURPRISED BY KIEV AND WASHINGTON'S "DISTORTED" INTERPRETATION OF AGREEMENT REACHED IN GENEVA LAST WEEK ON DE-ESCALATION OF UKRAINE CRISIS - FOREIGN MINISTRY
  • RUSSIAN FOREIGN MINISTRY SAYS KIEV AND WASHINGTON "CLOSING THEIR EYES" TO PROVOCATIVE ACTIONS BY NATIONALIST FORCES IN UKRAINE

And, on the heels of Turchynov's official restart of the so-called anti-terrorist operation, Russia is calling on Ukraine to pull back military from Ukraine's southeast... and rattles its sabre by undertaking a military exercise on the border.

 

Bloomberg reports,

Russia is surprised by distorted interpretation of Geneva accord from govts of Ukraine, U.S., RIA Novosti reports, citing Russia’s Foreign Ministry.

 

*RUSSIA CALLS ON UKRAINE TO REMOVE MILITARY FROM SOUTHEAST: RIA

 

Russia says Ukraine, U.S. closing eyes to provocations by right-wing extremists: RIA

 

Russia still believes partners are serious about resolving crisis in Ukraine: RIA

and in addition

  • RUSSIAN MILITARY CONDUCTS MILITARY EXERCISE IN ROSTOV REGION, BORDERING UKRAINE - DEFENCE MINISTRY OFFICIAL

All of this sets the scene for an important set of meetings next week...

Russia ready to host EU, Ukraine energy officials in Moscow or consider other cities for talks, Russian Energy Ministry spokeswoman Olga Golant says by phone.

 

Golant confirms EU Energy Commissioner Guenther Oettinger invited Russia to gas talks

 

Slovakia planning talks on use of gas pipeline in reverse to supply Ukraine on Apr. 28 in Bratislava, Eustream pipeline operator spokesman Vahram Chuguryan says by phone

So to sum it all up:

  1. The truce deal is dead
  2. Russia blames Ukraine/West for breaking deal and misunderstanding it
  3. Ukraine/West blame Russia for not unilaterally pulling back its forces
  4. Russia is warning Ukraine to pullback military from Russia-held southeast Ukraine ("or there will be retaliation")
  5. Russia is rattling its sabre by military exercises on the Ukraine border (after US sends another warship into the Black Sea)
  6. Against all this tension, gas pipeline talks are set to begin shortly.

Still buying the fucking dip on the back of Ukraine 'calming down'?








Categories: blogroll

CANADIAN PACIFIC RAILWAY LTD (CP.TO) TSX – Apr 23, 2014

Advisor Analyst - 5 hours 4 min ago

SIA Charts Daily Stock Report (siacharts.com)

The SIA Daily Stock Report utilizes a proven strategy of uncovering outperforming and underperforming stocks from our marquee equity reports; the S&P/TSX 60, S&P/TSX Completion and S&P/TSX Small cap We overlay these powerful reports with our extensive knowledge of point and figure and candlestick chart signals, along with other western-style technical indicators to identity stocks as they breakout or breakdown. In doing so we provide our Elite-Pro Subscribers with truly independent coverage of the Canadian stock market with specific buy and sell trigger points.

Note: Subscribers can screen all Canadian and U.S. stocks and mutual funds, or as components of equally weighted mutual fund sectors indices, and fund groups by issuer (eg. AGF, Dynamic, Franklin Templeton), all Canadian Exchange Traded Fund, and Funds by issuer (iShares, Horizons, BMO) or as components of Equally Weighted Fund Sector Indices (e.g. 2020+ Target date, Cdn Equity Lg Cap), and create and monitor their own, or SIA’s existing model portfolios. Finally, subscribers benefit from being able to generate BUY-WATCH-SELL Signals on demand with SIA Charts proprietary Favoured/Neutral/Unfavoured, SMAX scoring algorithm (see green-yellow-red graph 1 below).

CANADIAN PACIFIC RAILWAY LTD (CP.TO) TSX – Apr 23, 2014

GREEN – Favoured / Buy Zone
YELLOW – Neutral / Hold Zone
RED – Unfavoured / Sell / Avoid Zone

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CANADIAN PACIFIC RAILWAY LTD (CP.TO) TSX – Apr 23, 2014

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Who Made More, Facebook VCs or Its Founder: The True Cost of the VC Preferred Stock Control Premium

Zerohedge - 5 hours 8 min ago

So, I'm off to the races to raise money for UltraCoin, my uber-disruptive startup, and I come across the resistance of certain parties to take common stock. Now, the standard in the professional VC community is to take preferred stock with a stack of anti-dilutive measures, control premiums and liquidation preferences. VCs and their lawyers say this is the only way to do it because it protects them on the downside and allows them to maintain control of their investment and manage dilution on the upside. Basically, the say, it a hedge. I have some very prominent, very successful and experienced investors coming in doing the right thing. The reason is because they "get it". My task is to educate the rest. 

Marc Andreesen characterized VC start-up stock as an out-of-the-money call option on the success of the company. Well, I agree with this in part. The founders common stock is more like an OTC ATM call, or warrant, on the success of the company. The preferred stock, which is what most VCs go for, is more akin to a straddle consisting of an ATM long-dated OTC call paired with a long dated ATM put. This put is not free. It's not even cheap, and it is not as necessary if the deal is properly sourced and underwritten.

Now, I'm not the typical Fintech entrepreneur. I'm a little older than most, I'm probably better than forensic valuation than the vast majority (see Who is Reggie Middleton?), and I'm more than willing to point out when and where I think the establishment is doing something wrong. "Because everyone else is doing it" or "Because that's the way we've always done it" are not acceptable reasons.

Case in point, the preferred stock myth. Let's address the reasons given for demanding preferred stock.

  1. It protects them on the downside - This is true, but venture capital is a very high risk, high return asset class. Its much more additive to the risk/reward proposition to manage downside risk primarily through the investment selection and underwriting process, ex. spend your resources selecting and vetting the best management team and investment prospect rather than trying to manage downside before you even get a stab at the upside. Think about the groom that puts more time into the pre-nup than he does into finding out what his bride to be is actually about.  
  2. They say, it a hedge. Well, in the investment world hedges aren't free. They have a real cost and the determination of the effectiveness of any hedge has to take into consideration the cost of said hedge. If it's too expensive then the risks of the hedge may well outweigh the rewards. This is particularly true for investments that go well from a capital appreciation perspective.
  3. It allows them to maintain control of their investment and manage dilution on the upside and downside. The energies, time and resources dedicated to and consumed by the competition to gain and maintain control and proportionate share in a company materially detracts management from running the company as well as pitting multiple factions (equity holding management, common shareholders and founders, Series A, B, C [& X, Y and Z] shareholders and executives) against each other. If there was one uniform, common share class these factions could be fighting for the betterment of the company as a whole versus the betterment of their own individual positions (often to the detriment of fellow security holders and management and/or the company as a whole).  

These costs and detriments are real. Let's take the case of the very successful example of Facebook's VC funding and eventual IPO. Who do you think made more money in this deal, the founders/original common shareholders or the VCs who chose the preferred/hedged/put-call straddle route?

Just to make things interesting, I included one of the most prominent of Facebook's VCs in on the discussion via Twitter: 

@ReggieMiddleton Sure, often true when the work :-).

— Marc Andreessen (@pmarca) April 22, 2014

The True Cost of the VC Control Premium  Here is the spreadsheet that generated the chart. Feel free to play with it yourself. Hopefully, more people will realized the value of going after a strong management team with a strong product amongst a disruptive opportunity. Focus more on the attainment of reward. Proper reward underwriting is its own risk management.

 








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