Wednesday, July 24, 2013

The Systematic, Unrelenting Deterioration Of Japan’s Trade

by AuthorWolf Richter

The all-out effort by Japanese Prime Minister Shinzo Abe to print money, stir up inflation, devalue the yen, blow asset bubbles, and pile on even more government debt – a newfangled religion called Abenomics – is bearing fruit. But the primary objective, creating a trade surplus to crank up the real economy, is failing miserably.

Exports rose 7.4% in June, but imports jumped 11.8%, and the balance of trade swung from a surplus in June 2012 to a deficit of ¥180 billion ($1.8 billion). By US standards, that would be great: a deficit so small that it would disappear in statistical noise. We’d jubilate because we haven’t seen anything this good since the no-holds-barred offshoring boom took off in earnest in the early 1990s. But Japan’s June trade deficit confirms a terrible trend – for an economy that has become dependent on a trade surplus.

In June 2012, Japan had a surplus of ¥60.3 billion, one of the only two surpluses of the year. In June 2011, it had a surplus of ¥69.3 billion, one of five surpluses that year. By that time, the shutdown of its nuclear reactors had already started. In June 2010, before the shutdowns, the trade surplus was ¥670 billion. Even during the financial crisis, when major trade aberrations occurred, Japan had a trade surplus in June. Since the beginning of the data series in 1979, Japan has always had a trade surplus in June.

So June 2013 became the first modern June on record when Japan ran a trade deficit. It set another record: it was the 12th month in a row of trade deficits. And another record: for the first half of 2013, the trade deficit jumped 70% from the same period last year to ¥4.8 trillion!

Japan has entered a new frontier. June was the worst June ever, May the worst May ever, April the worst April ever..... The deterioration has been systematic, unrelenting, and fierce. The chart, going back to 2011, shows how the trade deficit in each month of 2013 deteriorated from the equivalent month in 2012; and how it had deteriorated in 2012 from the equivalent month in 2011.

Japan Inc. has started digging this hole some time ago by offshoring production, for two primary reasons: the corporate search for the greener grass, namely lower costs of labor; and increasingly the corporate desire to be geographically closer to customers – the same strategies that US corporations have long ago perfected, with brilliant results for the US job market. In that respect, Japan has been a laggard.

The auto industry is a prime example: when Toyota builds a plant in China to produce models for the still booming Chinese market, Japanese suppliers, the lucky ones that haven’t yet lost that business to Chinese suppliers, are under pressure to follow. Some of their products, particularly components, then filter back into Japan. While monkeying around with the yen might jiggle the cost-of-labor equation, it doesn’t alter the strategic desire to be located in the middle of the largest market for cars on the planet.

China is Japan’s largest trading partner. Nearly a quarter of Japan’s exports head to China, nearly a quarter of its imports come from there. The two countries might be at each other’s throats and kick each other in the groin and hate each other as they grapple with island issues, historic massacres, and other debacles, but they do trade.

Trade with China is murky and convoluted. About a third of Japan’s exports to China are transshipped through Hong Kong, while imports from China are not, which skews the numbers. So we have to consider China and Hong Kong together. Combined exports rose 5.7% to ¥1,398.6 billion but combined imports jumped 14.4% to ¥1,341.3 billion, for a  surplus of only ¥57.3 billion – “only” because that’s down 62% from the surplus in June 2012 and down 82.3% from the surplus in June 2007.

Japan’s second largest trading bloc, “North America” – which the Ministry of Finance defines as the US and Canada, while Mexico belongs to “Middle South America” – was one of the bright spots for Japan. Exports soared 14.5%, to ¥1,210 billion, imports jumped 16.9%, but from a measly base, to ¥568 billion. So the trade surplus rose 11.5% to ¥529 billion. Opposite in Japan’s third largest trading bloc: Exports to the EU rose 8.4% (from dismal levels in June 2012), imports jumped 16.1%. The trade deficit more than doubled to ¥89.3 billion.

The usual suspects – imports of crude oil and LNG – have been blamed for Japan’s trade debacle, and they’re up: the category of Mineral Fuels rose 7.3%. But there are other culprits.

Imports of food rose 6.2% and raw materials 8.7% (includes wood, iron, etc. to feed a construction boom in the Tokyo area). Chemicals rose 8%, the subcategory of medical products jumped 19.7%. Manufactured goods were up 9.9%. Machinery soared 22.5%, Power Generators 37.6%. Electrical machinery jumped 19.6%, of which semiconductors skyrocketed 44.8%. Transportation equipment up 31.0%, furniture 20.2%, apparel 25.5%.

Part of it was due to the yen that dropped 22% against the dollar from June last year and thus inflated the value of imports. Part of it was the wealth effect and corporate optimism that induced Japan Inc. and wealthy individuals, flush with freshly printed money, to splurge. Part of it was structural as Japan’s manufacturers accelerated their efforts to offshore production. It supported the economies of China, Thailand, Bangladesh, Europe, etc. – at the expense of the Japanese economy. A crippling birth defect of Abenomics.

On the lighter side, Hashima, a speck of an island, used to be a coal mine where 5,000 people lived and toiled. But in the 1970s, it was abandoned and the concrete structures left to decay, only to resurface in the last James Bond flick. Now Google captured it for Street View – and made an awesome brief video of this eerie industrial wasteland. Read... Eerie Abandoned Japanese Island On Google Street View

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Head & Shoulders topping patterns in Real Estate, due to rising rates?

by Chris Kimble

The Power of the Pattern shared that interest rates were ready to blast off and government bonds could get hurt on 5/3 (See post here)

Since then rates are up 40% and TBF the bond short has made as much as SPY has for the Year (see TBF performance here)

Could the bullish head & shoulders pattern in interest rates be causing bearish Head & Shoulders topping patterns to take place in the Real Estate complex?


The 3-pack above reflects a bullish inverse head & shoulders pattern in yields (left chart) and the potential bearish head & shoulders topping patterns in Real Estate ETF (IYR) and Home Builders ETF (ITB) .

I understand that many didn't believe rates could rise this fast and understand that many will doubt that Real Estate could do the opposite.

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Did Gold Start to Respond to the U.S. Dollar Price Moves?

By: P_Radomski_CFA

Yesterday, gold climbed up to over $1,347 per ounce after the U.S. dollar slipped against other currencies. The American currency dropped to a one-month low slightly below 82 after extending a broad decline for a third session.  Investors are probably wondering if  it will drop any further.

The recent price action suggests that market players are still long the dollar, which could weigh on the greenback, said Hiroshi Maeba, head of FX trading Japan for UBS in Tokyo.

What if he is right?  Will the buyers manage to push the USD Index higher? What impact could such action have on the gold’s chart? Could it trigger a correction?

Today, gold slipped as investors took profits after a sharp four-day rally which pushed prices up to a one-month top in the previous session. Can the yellow metal climb higher in the near term? Is the final top already in? Can we find any guidance in the charts?

In today’s essay we examine the US Dollar Index once again and the gold chart from the perspective of the Australian dollar to see if there’s anything on the horizon that could drive gold prices higher or lower shortly. We’ll start with the USD Index very long-term chart to put this gold chart into perspective (charts courtesy by

As we wrote in our essay on gold, stocks and the dollar on July 22,2013:

The situation in the long-term chart hasn’t changed recently. The breakout above the declining support/resistance line (currently close to 79) was still not invalidated.

From this perspective the situation remains bullish.

Now, let's zoom in on our picture of the USD Index and see the medium-term chart.

When we take a look at the above chart we can see that the USD Index has declined once again. Despite this fact, the recent declines haven’t taken the index below 81, so the medium-term uptrend is not threatened. The reason for this is that the medium-term support line hasn‘t been broken, in fact, it hasn’t even been reached.

From this perspective, the situation remains bullish, and we can expect the dollar to strengthen further in the coming weeks.

Now, let’s check to see if the short-time outlook is also bullish.

It is. From the short-term perspective, we see that earlier this week, the U. S. dollar dropped slightly below the 61.8% Fibonacci retracement level based on the June - July rally. It also declined to slightly above 82 on an intra-day basis on Tuesday. The move below this level is not confirmed, however.

Moreover, when we factor in the Fibonacci price retracement based on the entire February – July rally, we see that the USD Index moved to the 50% Fibonacci retracement level which is at the 82 level. In fact, the existence of this level might explain why dollar moved slightly below the short-term 61.8% retracement.

All in all, from the price perspective, it still seems that a rally will follow.

The most important factor on the above chart supporting the bullish case is the cyclical turning point which is in play right now. It’s quite possible that we will see its impact on the dollar this week, and this can lead to a bigger pullback. This provides us with strong bullish implications from this perspective.

Combining both perspectives - a move to the upside is still likely to be seen. If the buyers manage to push the USD Index higher, we might see an increase to the level of the June top or even to the rising resistance line based on the May high and June peak before another pause is seen. Taking a look at the long-term charts, however, we see that the next significant resistance is currently close to 86 (86.4) – the declining red line in the chart.

Consequently, from the short-term perspective, we see that the recent decline still seems to be a counter-trend bounce. When we factor in the cyclical turning point we could see another rally soon. Taking a look at medium- and long-term charts, both outlooks for the dollar remain bullish. This is a bearish piece of information for metals and miners.

To make the U.S. dollar perspective complete, let’s analyze the impact of the American currency upon the precious metals sector. Let’s take a look at the Correlation Matrix (namely: gold correlations and silver correlations).

We have seen negative correlation between the metals and the USD Index. Taking the short-term, bullish outlook for the USD Index into account, the implications for gold, silver, and the mining stocks are clearly bearish at this time.

Once we know the current situation in the U.S currency and its impact upon the metals, let’s turn to our final chart. Today, we would like to present you an interesting chart which may provides important clues about further gold’s price movements: the chart of gold from the perspective of the Australian dollar.

On the above chart, we see that the price of gold in Australian dollars has moved up and almost reached the declining resistance line. At this point, it’s worth mentioning the previous local top. We saw a pullback to this resistance line in June, but the buyers didn’t manage to push gold above it. This resulted in strong declines which took the price all the way down to the April bottom area. If we see similar price action here, gold priced in Australian dollars will likely decline once again. Such a triple-bottom, in this case, would likely mean a breakdown below the previous lows in the price of gold seen from our regular USD perspective, similar to what was seen in June.

Summing up, the situation in the USD Index is particularly interesting this week. Prices are close to the final Fibonacci retracement level and right at the cyclical turning point (and following a sharp decline). A rally seems quite likely in the cards for the short term, and this will probably have a very negative impact on the precious metals.

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Norway is a Junkie, and Oil is its Heroin

by Pater Tenebrarum

Buying Votes with Oil Money

People usually don't care much about Norway, on account of its relatively small size, population-wise (4.5 million inhabitants). However, as we have noted on previous occasions, its economy is beset by the Scandinavian bubble disease, with household debt growing to the sky and real estate prices exploding into the blue yonder. The central bank, faced with what it deems an overvalued currency, has kept interest rates at rock-bottom, continuing to fuel these twin bubbles. Nothing can possibly go wrong of course.

However, Norway is also quite unique due to being blessed with large oil wealth. Considering the tiny population, this oil wealth has allowed politicians to both save funds for a rainy day (said rainy day will arrive once the oil runs out, or so the theory goes), as well as financing a vast socialistic welfare state. Note that just because the central authority has lots of money to throw around, socialism cannot really be improved upon. It would still be far better for the country if the services provided by the government were provided by the market. And yet, Norway's government wants to throw more money around and enlarge the welfare state even further, in the hope of getting re-elected. As this is what it is going to use some of the accumulated wealth from oil sales for, we can state that saving for the dreaded 'rainy day' has for now given way to the exigencies of elections.

Throwing even more funds on the bubble bonfire that is Norway is not really apt to improve the country's economic risk profile. According to Bloomberg:

“Prime Minister Jens Stoltenberg pledged to build Norway’s welfare system, financed by the nation’s $750 billion oil fund, as he trails in the polls behind an opposition that’s promised tax cuts.

Stoltenberg, who is seeking an unprecedented third four-year term in September elections, said western Europe’s biggest oil producer needs a more developed system of public benefits as his Labor-led coalition raises spending by 19 percent in 2013.

“The main mission of the campaign is to tell voters why ours is the best government to lead Norway in the future, both when it comes to economic challenges and when it comes to further developing the Norwegian welfare state,” Stoltenberg said yesterday in an interview in Oslo. “It’s absolutely possible to win three elections in a row in Norway and that’s what I’m going to campaign for.”

Norway, where survey unemployment was 3.5 percent in April and manufacturing labor costs are almost 70 percent above the European Union average, is grappling with signs of overheating as its oil wealth drives up asset prices. Stoltenberg and his main rival, Conservative Party leader Erna Solberg, have both sought to entice voters with campaign promises that risk stoking demand further in the $480 billion economy.”

(emphasis added)

Let's ignore the Keynesian verbiage and focus on the decisive points: the government has increased spending by 19% this year alone. Should Norway ever be forced to compete with anyone outside of the oil business, it would probably be in for a Greece-like shock treatment given its labor costs.

It has a huge asset bubble, a central bank that exhibits a Greenspan-like abdication of responsibility for the bubbles it fosters, and a government that thinks its most important task is to greatly expand the welfare state – which is already of the cradle-to-the-grave variety. It all sounds a bit like that other golden cage, Denmark (although the latter comes minus the oil).

The Biggest Housing Bubble in the Region

Norway's bubble meanwhile is really in a class of its own. It has far outclassed the likewise impressive housing booms of its less oil-lubricated neighbors. Denmark is already struggling with the air coming out of its bubble, in spite of interest rates remaining near zero. There is a slight wobble visible in Sweden as well. Norway? Up and away!

Norway BubbleHousing bubbles in socialist paradises up North. Norway's is by far the most impressive – via

Even more stunning is however the following chart comparing real house prices in Norway with those in the US:

Real House prices comparedNorway's real house prices compared to the US – the US housing mania looks like a fairly harmless blip by comparison – via

We have taken these charts from an article by Mark Thornton at, who discussed the Oslo bubble earlier this year. Thornton notes that as of the time of writing, Norway's economic data looked so good, they almost looked too good to be true. This continues to be the case (read: the bubble is still expanding).

However, Thornton also points out where the weaknesses are likely to be found:

“We cannot know for certain that Norway is experiencing a bubble. However the reasons we suspect a bubble starts with their economy. Norway’s rosy economy is not the result of good policy, but of oil revenues that subsidize their socialist government. Norway ranks 40th on the Freedom Index, below Belgium (38) and Armenia (39), and only above countries like El Salvador (41) and Peru (42). A steep drop in oil prices would be a severe blow to their economy. However, as oil revenues are continuing to pour into the government budget and sovereign wealth fund, it makes the Norwegian economy look like a good bet.


Instead of allowing the krone to increase in value with this increase in demand, the Norwegian central bank, the Norges Bank, has instead countered with an increase of supply. They have intentionally set interest rates artificial low. The overnight deposit rate has been set at 1.5 percent since last December. They are trying to prevent the krone from appreciating in value, but their efforts have not been completely successful. Preventing this appreciation of the krone is intended to protect exporters, including their national oil company. However, it also helps pump up the housing bubble.

Monetary inflation, as measured by Norway's M2 measure of the money supply, has lately been running at 8%. During the economic crisis, circa 2007, it ran as high as 20%. From 2008 to the present monetary inflation has averaged about 7.5%.”

(emphasis added)

This is like Switzerland on steroids (Switzerland's central bank also pursues an extremely inflationary policy in order to keep the Swiss Franc down). Of course economists everywhere regard the actions of both the Norges Bank and the SNB as perfectly fine. After all, 'what can they do'? No-one seems to think an appreciating currency a good thing, which is utterly bizarre.

Norway not only swims in a sea of oil money – which is fine in principle, but as Thronton notes, also dangerous, as oil prices presumably won't remain high forever (and the government keeps ratcheting up its spending as though high oil prices were set in stone) – it also swims in a sea of krone currency its central bank has created ex nihilo.

Just as Dubai one day found out that trees don't grow to the sky, even if one is surrounded by oil wealth, Norway could come to learn a bitter lesson as well once its bubble bursts.


Norway's socialist prime minister Jens Stoltenberg: provider of welfare-statism financed by oil revenues (a.k.a. 'the pusher').

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Dow 16,000 finds resistance dating back 90 years, in play now!

by Chris Kimble


Do charts have memories? Could an confluence of support and resistance lines dating back as much as 90 years end up being important to the Dow? What would happen if the Dow breaks above this rare line up?

Some key "Emotipoints" (emotional turning points) dating as far back as the 1920's, line up at one price zone, which comes into play around Dow 16,000. As of last nights close, the Dow is less than 500 points/less than 3% away from this confluence of Emotipoints.


This confluence of Emotipoints becomes all the more important when you look at the chart above ( , which reflects that the Dow hasn't made any gains after subtracting for inflation in 13-years! (see post here)

Odds are high we won't know for a while how the Dow will handle this rare situation. At this time the confluence should be viewed as resistance.  If the Dow can break through this cluster of lines, it would be a very positive technical event!

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Oil torn after China manufacturing miss

By Phil Flynn

Oil (NYMEX:CLU13) is torn this morning as we await the Energy Information Administration data today. Last night we saw data from China that disappointed, yet from Europe it seems things are getting better. At the same time you have a storm in the Atlantic that looks like it could be a problem for oil and natural gas transport and production next week.

Yesterday it was more immediate threats that brought oil and products back from an early sell off. First it was when Reuters reported “BP Plc's Thunder Horse oil production platform in the Gulf of Mexico has shut while work is done on a natural gas processing system, traders and brokers said on Monday. The 250,000 barrel-per-day (bpd) platform shut because Destin Pipeline Co LLC on Sunday declared force majeure on an offshore portion of its natural gas pipeline system and said it would not be able to provide service through its processing plant in Pascagoula, Mississippi, the sources said. Destin said in a website posting the event could last up to seven days. The Thunder Horse platform also produces 200 million cubic feet per day of natural gas. The Destin gas pipeline system is majority owned by BP Plc's Amoco Destin Pipeline Co, with Enbridge Inc's Enbridge Offshore owning a 33% stake.  BP was not immediately able to respond to calls and emails requesting comment.” Reuters said that “The lack of trades last week for Thunder Horse crude and the wide gap between bids at $5.00 over the U.S. futures benchmark and offers from sellers at $6.00 over, had traders and brokers speculating that the platform was shut or curbing production.”

Then another mishap in the Gulf when Alison Sider reported “A drilling rig in the Gulf of Mexico was evacuated Tuesday morning after a natural-gas well blew out in shallow water off Grand Isle, La., federal regulators said. Natural gas was leaking from the well, leading to a film on the water, but it was dissipating quickly, according to the Bureau of Safety and Environmental Enforcement.  Walter Oil & Gas Corp., a private company based in Houston, reported the accident about 55 miles offshore, according to the U.S. Coast Guard and BSEE Hercules Offshore, the Houston-based company that owned and operated the jackup rig, said it was working with Walter "to mobilize the necessary resources to regain control of the well and minimize any potential impact on the environment." All personnel were safely evacuated, the company said. Walter did not immediately respond to requests for comment.”

While the market seemed to price these events in quickly the market is mixed on how to react to conflicting data overnight. HSBC Holdings Plc and Markit Economics reported that China’s manufacturing fell to a disappointing 47.7 reading that missed market expectations. This come a day after Chinese Premier Li Keqiang was quoted as saying that the "bottom line for economic growth is 7%."  A bad number may be good because it should increase the chance for Chinese stimulus.

What may also soften the blow is strong data out of Europe. French manufacturing data came in at 49.8, which was the highest level in 18 months and just a smidge below the expansion point. That helped the EU July Markit Manufacturing PMI rises to 50.1 from Jun 48.8 and Services PMI grows to 49.6 from 48.3.  A rebound in Europe should help China going forward and should increase oil demand expectations.

Yet oil has already had quite a run and despite the good news we are still looking very heavy. The market was ready to break but the Gulf platform issues brought us back.  Tropical Depression Number Four also look to be on a dangerous track. The National Hurricane Center says that Tropical Depression Number Four has formed in the far eastern Atlantic just off the coast of Africa and is expected to strengthen slowly as the environment is not too favorable for quick development.  If the storm strengthens it would turn into the next named storm, Dorian.  It is unknown if the weather system will survive slightly cooler waters and wind shear it is likely to encounter during the next couple of days. Yet if it does, the Gulf of Mexico could be its destination at least according to some private forecasters, but it is too early to really tell.

Gas prices have been going up in part because of broken legislation. Dow Jones reports that “Valero says its cost to comply with a federal renewable-fuel mandate more than doubled in 2Q to $125M. Refiners have to blend an increasing amount of ethanol into their gasoline, but the volume requirement has risen higher than U.S. drivers are able to consume, meaning refiners have to pay for the credits necessary to make up the difference. For the year, VLO expects to pay up to $800M for the credits, which would be higher than 2012.”

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Why QE Will Get Even Bigger and Worse

By Gonzalo Lira

Quantitative Easing is no longer just a palliative Federal Reserve policy—it has just become a political issue. Which is why it will get bigger—and worse.
If you’ve been following American political theater since the start of the Global Financial Crisis in 2008, you’ve probably noticed how many (but not all) Republicans line up on the side of fiscal austerity and tight-money policies so as to limit the fiscal deficit and reduce the government debt (at least when it comes to non-military spending. And non-law enforcement spending. And non-bank-saving spending.)—

Who says the Dems don’t like money?

—whereas the Democrats have insisted that the government needs to take on more debt, and spend its way back to prosperity. In the Dems’ worldview, deficits and debt don’t matter: What matters to them is how much is the government going to spend in order to “save the economy”. (“Paging Professor Krugman!”)
But last Thursday, during the testimony Federal Reserve Chairman Ben Bernanke gave to the Senate Banking committee, Democratic senators questioned why Bernanke was thinking of tapering off the bond purchasing programs of Quantitative Easing (QE). They wondered out loud if maybe QE should continue “until the economy further improves”. 
In other words, the Democrats have finally realized that not only does QE mean they don’t have to rein in the deficit—QE also means that they can expand the deficit, confident that additional debt will be bought and paid for by the Federal Reserve. Confident that additional debt will be monetized by the Federal Reserve—because after all, that’s what QE is: Debt monetization, and everybody knows it. 
(What, you really think that the Fed is gonna one day unwind its QE position? Sterilize all that money printing and rein in its balance sheet to less than $1 trillion, as per the status quo antethe Global Financial Crisis? Hue’ón, you buy that, then open your wallet, ‘cause I got a bridge to sell you.)
Which means that, with their calls for more QE, it’s clear that the Democrats have finally embraced flat-out money-printing. 
It took a long time for them to arrive at this place. Before QE, all the Democrats cared about was deficit spending—they essentially did not care about monetary policy per se, except where low interest rates affected home buyers. Whenever they focussed on the Federal Reserve and its chairman, they concentrated on the jobs creation side of the Fed mandate, or else (cosmetically) on the regulatory side. (The Dems are in the pockets of the banksters to the same degree that the Republicans are. The Republicans are just more blatant about it.) 
But even though Quantitative Easing started in 2008, it seems as if Democrats didn’t really “get it”. They viewed it as a way to save the banksters’ collective bacon—they didn’t see it as the way by which the Federal government could go into limitless debt. 
But with last Thursday’s testimony, it’s clear like a bomb blast that the Democrats finally understand what QE really means. This is the reason-why of the Democratic senators’ questions/comments during Thursday's testimony: The Chairman of the Senate Banking Committee, Tim Johnson (D-SD) wondered whether it might be too soon to “taper off” Quantitative Easing. Senator Robert Menendez (D-NJ) later asked, “Isn’t it still way too soon to consider any kind of policy tightening?” Senator Chuck Schumer wondered aloud about more hawkish Fed board members, and how Bernanke’s departure next year would affect QE. 
The upshot of all the questioning was that it revealed how the Democratic senators implicitly realize that it is the size of QE—and not the size of the deficit or the debt ceiling—that restricts how much the government can spend. 
Democrats would probably deny and dismiss this characterization. They might well argue that their concern for the size of QE purchases is so as to ensure low unemployment. But QE does not affect unemployment directly. After all, it’s a bond-buying program. It affects unemployment indirectly—not to say circuitously—by providing price support to Treasury bonds, which thereby allows the Federal government to issue more bonds without fear of rising interest rates, and thereby have more cash to spend in order to soak up the unemployment by way of fiscal spending. 
It is QE and QE alone that is providing price support to the bond markets, and ensuring that the Treasury Department has a buyer of last resort for all those bonds that it is issuing to cover the debt. At this time, QE purchases amount to some $85 billion-with-a-“B” per month—over a trillion dollars per year. Which is the lion’s share of the yearly Federal government deficit. 
So Democrats might claim that they want more QE in order to get more jobs—but those jobs are by way of Keynesian-style Federal government deficit spending. Viewed this way, QE is Paul Krugman’s best friend: QE allows as much deficit spending as the Democrats or Krugman might ever want. 
The B-story to this narrative is the coming nomination and confirmation of Ben Bernanke’s successor. 
Anti-QE advocates, such as some Republicans and most clear-eyed observers of the state of the economy, have been nearly hysterical about how Quantitative Easing creates bubbles in equities and real estate markets, and sets the stage for a serious, perhaps catastrophic debasement of the dollar. These people (myself among them) want the next chairman of the Fed to get out of the QE business altogether, and deflate all these bubbles so that the economy might crash and reset in a more or less controlled manner, as opposed to a currency panic and collapse, which (from hard experience) is much, much worse.
But now, as Democrats come to see how useful QE is in expanding Federal government spending and thereby (in their eyes) “saving the economy”, they will insist on a new Fed chairman who will continue QE, if not expand it. 
Enter Janet Yellin, the vice-chair of the Federal Reserve, and the odds-on favorite to be the confirmed nominee. (Ignore Larry Summers’ surge in the betting pools. Obama despises him, and I think the hash he made with Harvard’s endowment—which a lot of people are all of a sudden reminiscing about as his profile rises in the Fed chairmanship race—will be enough to torpedo his chances.) She is famously dovish with regards to QE, concerned more than anything with full employment. If she becomes the next Fed chairman, she will certainly not taper QE, if unemployment levels are not to her liking. And if the situation continues to deteriorate, employment-wise, she will in all likelihood expand QE, so as to tacitly provide the Federal government with room to expand its deficit, confident that the Fed will buy up all those T-bonds it issues. 
That’s why Janet Yellin will most definitely be the next Fed Chairman. Bonus for the Dems: She’ll be the first woman Chair of the Fed, which will earn them a few silly op-eds that will be missing the real point—the real point about Yellin being that she’s a QE-to-infinity-and-beyonder. 
Anti-QE advocates always thought that the debate about QE-or-not-QE was a strictly economic debate: Technocrats on one side, technocrats on the other, like a super-nerdy version of dodgeball. But now with the Democratic senators questioning why Ben Bernanke is going to taper off QE, and whether he should continue it and/or expand it, the issue of Quantitative Easing has ceased being a technical, inside-baseball, What-would-Gary-Gygax-say debate, and become a political issue. 
Now that the Democrats have realized how essential QE is to the continued Federal government deficits, there is no doubt as to what they are going to demand: More QE. A lot more QE. And to make sure this is the outcome, they will put a Fed Chair who agrees—i.e., Yellin. 
Which means that Quantitative Easing is about to become apolitical issue. The Dems won’t want QE-IV or QE-V, or (as I’ve called it) QE-∞—no, what the Democrats will want is Super-QE. QE-on-Steroids, QE-to-the-friggin’-Moon
And to any anti-QE argument that Quantitative Easing might lead to a collapse of the dollar, the pro-Super-QE Dems will argue that, in five years of QE, there hasn’t been a significant rise in inflation—which they will therefore claim indicates that QE cannot cause inflation and thus the dollar cannot crash because of QE. 
QE? Meet QED. 
The More-QE Dems won’t be alone: The more populist, more irresponsible, more war-mongering Republicans (“Paging Senator McCain!”) will agree with these money-printing Dems—and join the bandwagon of Super-QE. Because more QE means more deficits with which to pay for pork and prisons and wars, without the pain of raising taxes. Which is what McCain Republicans want. 
So for a significant majority of the House and the Senate, more QE—Super-QE—is most definitely in the offing: They will lobby the Fed for it, and they will ultimately vote for a new Fed chair who will explicitly guarantee that QE will not only continue, but will be expanded. Which is what Janet Yellin tacitly promises. 
Once the Democrats start to seriously push for more QE over and above the current $85 billion per month levels, it will only be a matter of time before the dollar is broken. 
How will the dollar break? I’ve argued since donkey’s ears that all that cash sloshing through the system because of QE will flow to commodities, sending them stratospherically higher, the rise in commodity prices cascading throughout the economy, until rising prices become a self-reinforcing phenomenon. And since the economy is too weak to apply some Volcker-style inflation-fighting interest rate hikes, rising prices will quickly turn from ’70’s style stagflation to hyperinflation. 
You think I’m smoking righteous weed when I say this? Well then think it over a bit, because it’s all right there: Once the markets realize that Super-QE has been implemented, sure, equities, bonds and real estate will blast off—for a while. But the rush by a significant segment of the market will be to get out of every paper asset, and into hard commodities and precious metals. And that, as I have argued repeatedly, is when hyperinflation will take off. 
Democrats—or more properly, Democratic politicians—have always been a little slow when it comes to economics. It only took them five years to figure out what Quantitative Easing really means. But now that they have, the Dems are going to ride that QE pony into the ground—and if that means ruining the dollar and thus breaking the economy, well . . . it was all done in order to “save the economy”.
And aren’t good intentions enough?

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A few reasons to cover the gold shorts

By Austin Kiddle

The U.S. Comex gold futures (COMEX:GCU13) surged 3.33% on Monday, the highest percentage change since June 29, 2012. On Wednesday morning in Asia, the gold futures rose further and traded above $1,340. The Dollar Index fell about 0.8% this week to 81.945 on Tuesday. The S&P 500 index was flat in the past two days while the Euro Stoxx 50 Index rose 0.25%.

A Floor to China's Growth

The gold market has been adjusting to the expectations of the Fed's tapering. A Bloomberg poll shows that 50% of those surveyed expects that the U.S. Fed will reduce its bond purchases to $65 billion a month in September. The market also takes comfort from the news that the Chinese government will put a floor of its GDP growth at 7% because China needs to become a moderately wealthy society by 2020. The July flash China PMI came in weaker at 47.7 compared to an expected 48.2. China has also started to liberalize its interest rates by removing the lower limit of the financial institutions' lending rates. The next important step in China's structural reforms will be the liberalization of the deposit rates.

Support for Gold Prices

The surge in gold has been accompanied by a weaker U.S. dollar. In June, the existing home sales in the U.S. fell to 5.08 million on an annualized basis compared to the median forecast of 5.26 million and 5.14 million in May. On July 22, the gold futures closed above its 50-day moving average for the first time in eight months. Physical demand has been robust in Asia as evidenced by the persistent premiums. The dwindling Comex gold inventory has raised concerns of default by the Comex. Gold traders are increasingly covering their shorts as physical gold delivery is getting a little harder each day. The CFTC data shows that during the week of July 16, the net short positions in gold by speculators fell 10.82% to 121,305 contracts while the net combined positions surged a whopping 47.72%. On the negative front, India has further restricted gold imports by requiring the importers to set aside 20% at the customs warehouses for re-exports. The gold will be made available to jewelers and bullion dealers only. The All India Gems and Jewellery Trade Federation expects the gold imports to drop 63% in the second half of this year, further pressuring gold prices.

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Does not compute

By Ginger Szala

On July 15, the S&P 500 stock index closed at an all-time high of 1677.60. This is shortly after the market had a hissy fit when the Federal Open Market Committee (FOMC) minutes mentioned “tapering” of monthly stimulus, which meant the drive-up window distributing easy money (quantitative easing) was closing (See “Fed headed for tapering, but exit still far away,” page 21). But wait, no, said Federal Reserve Board Chairman Ben Bernanke later, we really aren’t going to ease off that much because the economy still needs help. The reduction of bond purchases continues to be contingent on the labor market and inflation, he said. So, the stock market, relieved that QE’s end was kicked down the road to 2014, went higher, happy in its cheap money bliss.

This is very much what one analyst called a “bizarro market” in our stock and bond outlook piece, Good news: Fed plants seeds for rational markets,” (page 20), in that the market has been reacting to how the Fed responds to economic data, and not to the data itself.  And although some analysts believe the Fed has changed policy, Bernanke says no. The Fed has been and still is watching the labor market and interest rates, and will “taper” QE as it sees fit. An increase in rates is well down the road and may happen only after the spigot has been turned off, he noted.

A return to normalcy with the negative correlation between the bond and stock markets would be welcome as the repercussions of 2008 continue to haunt all aspects of the markets and business.

Another event occurred right around the time Bernanke was clarifying the Fed line. On June 27, the Commodity Futures Trading Commission (CFTC) finally filed charges against MF Global (Inc. and Holdings), Jon Corzine and Edith O’Brien (see “First blood: CFTC files complaint against MF Global, Corzine and O’Brien, finally,” page 42).

These charges are civil only but do come with a significant monetary penalty. It appears the receivers for MF Global have approved the settlement, which basically is making all customers whole and then paying a $100 million fine. At press time, it was awaiting court  approval.

For Corzine and O’Brien, who was assistant treasurer of the firm and — as we see through taped conversations — was in the thick of it, the road will be longer. Corzine’s attorney released a comment saying that all the CFTC’s allegations were without merit, but let’s be clear: they’ve got everyone on tape or e-mail. The CFTC shares conversations Corzine had in which it shows he was playing with seg funds like it was his own money. O’Brien appears to be his henchman in getting the money moved. “Merit” it seems, is in the eye of the beholder.

The anger at Corzine hasn’t subsided and truthfully many people, likely those who were hurt because of Corzine’s actions, want to see more than just a fine leveled at him. Although an anonymous source told the New York Post that the Department of Justice (DOJ) decided to drop its investigation of him, the DOJ has no comment. And there is one New York congressman calling to have Corzine brought up on perjury charges for contradicting what he said on tape vs. what he told Congress on the record.

Bernie Madoff and Russell Wasendorf Sr. both went to jail for stealing people’s money. They were blatant crooks who were clever about covering their tracks. Corzine was a business man who started with a  bad business model and added some bad decisions to it in what was a precarious market. Money being moved around isn’t necessarily criminal, but it is negligent according to the rules. Several lawyers doubt there is enough evidence to send Corzine to jail, but add,  he’ll never work in the financial markets again. That’s good for the financial markets, but doesn’t go far enough to warn future Corzines.

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From QE To Inflation, Deflation or Vortex?

By Gail Tverberg

A question that seems to come up quite often is, “Are we going to have inflation or deflation?” People want to figure out how to invest. Because of this, they want to know whether to expect a rise in prices, or a fall in prices, either in general, or in commodities, in the future.

The traditional “peak oil” response to this question has been that oil prices will tend to rise over time. There will not be enough oil available, so demand will outstrip supply. As a result, prices will rise both for oil and for food which depends on oil.

I see things differently. I think the issue ahead is deflation for commodities as well as for other types of assets. At some point, deflation may “morph” into discontinuity. It is the fact that price falls too low that will ultimately cut off oil production, not the lack of oil in the ground.

Even with little oil, there will still be some goods and services produced. These goods and services will not necessarily be available to holders of assets of the kind we have today. Instead, they will tend to go to those who produced them, and to those who win them by fighting over them.

Up and Down Escalator Economies

It seems to me that economies operate on two kinds of escalators–an up escalator, and a down escalator. The up escalator is driven by a favorable feedback cycle; the down escalator is driven by an unfavorable feedback cycle.

For a long time, the US economy has been on an up escalator, fueled by growth in the use of cheap energy. This growth in cheap energy led to rising wages, as humans learned to use external energy to leverage their own meager ability to “perform work”–dig ditches, transport goods, perform computations, and do many other tasks that machines (powered by electricity or oil) could do much better, and more cheaply, than humans.

Debt helped lever this growth up even faster than it would otherwise ramp up. Continued growth in debt made sense, because growth seemed likely for as far in the future as anyone could see. We could borrow from the future, and have more now.

Unfortunately, there is also a down escalator for economies, and we seem to be headed in that direction now. Such down escalators have hit local economies before, but never a networked global economy. From this point of view, we are in uncharted territory.
Many economies have grown for many years, hit a period of stagflation, and ultimately collapsed. According to research of Turchin and Mefedov documented in the book Secular Cycles, such economies have typically gotten their start by learning to exploit a new resource, such as using land cleared for farming, or learning to use irrigation, or in our case more recently, learning to use fossil fuels. These economies typically start out by growing for many years, thanks to the opportunity for more population and more goods and services from the new resource.

After a while, a period of stagflation is reached. Population catches up to the new resource, and job opportunities for young people become less plentiful. Wage disparity grows, with wages of the common worker lagging behind. The cost of government rises. Because of the low wages of workers, it becomes increasingly difficult to collect enough taxes from workers to pay for rising government costs. To work around these problems, use of debt grows. Needless to say, this scenario tends to end very badly.

Our situation today sounds a great deal like the down escalator situation. As I have discussed previously,wages stagnate as oil prices rise. In fact, most increases in wages have taken place when the real price of oil was less than $30 barrel, in today’s dollars.

Figure 1. High oil prices are associated with depressed wages. Oil price through 2011 from BP’s 2012 Statistical Review of World Energy, updated to 2012 using EIA data and CPI-Urban from BLS. Average wages calculated by dividing Private Industry wages from US BEA Table 2.1 by US population, and bringing to 2012 cost level using CPI-Urban.Figure 1. High oil prices are associated with depressed wages. Oil price through 2011 from BP’s 2012 Statistical Review of World Energy, updated to 2012 using EIA data and CPI-Urban from BLS. Average wages calculated by dividing Private Industry wages from US BEA Table 2.1 by US population, and bringing to 2012 cost level using CPI-Urban.

As oil prices rise, wage-earners hit a second problem–higher outgo for fuel and food, since fuel is used in growing and transporting food.  Thus, wage-earners are hit on two sides–flat income and higher outgo for necessities, leading to less discretionary income.  Governments find that they need more taxes to pay for increased benefits for the many who no longer have jobs. These higher taxes place another burden on those who are still working. Businesses find their profits pinched by higher oil prices, and respond by outsourcing to a low wage country, or automating processes to cut costs, lowering the amount local citizens earn in wages further. Furthermore, even apart from oil issues, globalization tends to pull US wages down.  All of these issues tend to add to the down-escalator phenomenon for the US economy.

In past years, governments and businesses have made promises of many types, such as bank account balances, pensions, Social Security, Medicare, insurance policies, stock certificates, and bonds. The question becomes: what happens to these promises, as we step off the up escalator, and onto the down escalator? All of these promises could be paid when we were on the up escalator. The amount that gets paid is much less clear, if we are on the down escalator.  In this post, I would like to examine what happens.

The General Price Trend: Downward, with Discontinuities

Each year, an economy produces various kinds of goods and services. It grows crops, and extracts minerals. It uses energy products to process the crops and minerals into finished goods, and to transport them to their final destination. The amount produced depends on the amount of goods and services potential buyers can afford. If wages are stagnant, and the government’s share keeps rising, the amount wage-earners can afford (in inflation adjusted dollars) keeps falling.

Since the early 2000s, the cost of extracting oil products has been rising, because the oil that was cheapest to extract was extracted first, and the “easy oil” is now gone. There tends to be a relatively small amount of a resource available cheaply, and increasing amounts available at higher and higher prices (Figure 2, below).

Figure 2. Resource triangle, with dotted line indicating uncertain financial cut-off. Figure 2. Resource triangle, with dotted line indicating uncertain financial cut-off.

In fact, minerals of all types tend to follow the same pattern as oil for two reasons: (1) Mineral extraction follows the same pattern–cheapest to extract first, moving to the more expensive to extract, and (2) Oil is generally used in extraction. If the cost of oil is rising, its cost tends to get passed on. Of course, in some instances, technological improvements can offset rising prices, but for most of the time since the year 2000, cost of commodity extraction has tended to rise.

There has been a lot of publicity recently about more oil being available, and more natural gas being available. This additional availability is because of high price. It doesn’t bring the cost of extraction down. In fact, if price drops, extraction is likely to drop. This drop will not occur immediately, because much of the cost has already been paid on wells that have already been drilled, so extraction from these wells tends to continue. But future investment is likely to drop off quickly if prices drop, bringing supply down, with a lag.

Because of the downward escalator the economy is on, wage-earners don’t really have enough money to pay the higher prices that are needed for increasingly costly extraction of oil and other minerals. Instead, prices tend to be volatile. The general trend can be expected to be downward, because even if  oil prices rise when the economy is functioning fairly well, at some point, the higher price leads to adverse feedbacks, such as consumers defaulting on debt and cutting back on discretionary purchases. The result can be expected to be recession, and again lower oil prices.

The big danger is that lower oil prices will lead to lower oil production, and this lower oil production will become a problem for business and commerce around the world. The United States is likely to be one of the countries whose oil production will be affected most by lower oil prices, for three reasons:

(1) We tend to have most tight oil production, and tight oil production tends to be high-priced production. It also drops off quite quickly, if drilling stops.

(2) Shale gas drillers tend to use a lot of debt. Shale drillers will especially be hit if interest rates rise because of debt problems.

(3) Taxes and fees related to oil production in the US (unlike many countries) do not vary with the price of oil. The US government will continue to get most of its revenue (estimated to average $33.29 per barrel on a $80 barrel of US tight oil by Barry Rogers, Oil & Gas Journal, May 2013), even as companies find themselves short of funds for new drilling.

If oil production is down, US oil consumption to be lower as well. The reason for low oil price is likely to be recession and greater job loss. With fewer jobs, less oil is needed for making and shipping goods. Furthermore, the many unemployed cannot afford cars. The pattern of  declining demand in the European Union, and Japan is likely to continue, and get worse. (See my post, Peak Oil Demand is Already a Huge Problem.)

Figure 3. Oil consumption based on BP's 2013 Statistical Review of World Energy.Figure 3. Oil consumption based on BP’s 2013 Statistical Review of World Energy.

In 2008-2009, the economy was able to somewhat recover, so commodity prices increased again. This recovery was not based on US economy fundamentals–a large part of it seems to be related to artificially low interest rates and deficit spending. As interest rates rise, and as deficit spending is eliminated through higher taxes/lower benefits, the US economy seems likely to head back into recession, with more job loss, probably worse than last time.

Countries with low wages to begin with may be spared of some of the down-escalator economy dynamics for a few years, because their low wage levels will continue to make them competitive in a world economy. These countries will attract a disproportionate share of new jobs, allowing them to continue grow for a time, even as the US, the European Union, and Japan continue to lose jobs.  Thus, world oil prices may be able to bounce back, but probably not to as high a level as in the recent past. Eventually, these countries will tend to follow the rest of the world into stagflation and collapse, because of the interconnectedness of the global economy, and the similar dynamics that all countries are subject to.

Chance of Discontinuity

In order for the models to work in the expected way, business as usual must continue. A few obvious problems come into play:

(1) “Demand,” as defined by economists, is what consumers can afford to pay. Therefore, a jobless individual without any type of government compensation, would have no demand for food, clothing or shelter–at least using the term in the way economists use the word. All of us know that in the real world, lack of a job and lack of government benefits causes problems. At some point, marginalized people will riot and  overthrow governments. Civil war may take place, or war against another country.

(2) Part of Business as usual is continuing availability of debt. At some point, it will start to become clear that the economy has gotten off the up escalator, and moved to the down escalator. On the down escalator, much less debt makes sense. It probably still makes sense to use debt on a short-term basis to cover goods in transit, and it may make sense to use debt to finance investments with a high expected rate of return. But in general, debt is likely to become much less common, greatly worsening the down escalator problem.

(3) As long as the economy was on an up escalator, increasing economies of scale were part of what caused a positive feedbacks. When the economy is on a down elevator, we have the reverse effect–higher fixed costs relative to production. This is even an issue when reduction in sales are intentional–for example, increased water conservation tends to lead to higher fixed costs, per unit of water sold, and greater use of high-efficiency light bulbs leads to greater electricity fixed costs (such as grid costs) per kWh sold. These higher fixed costs tend to push up prices for services further, increasing the down escalator effect.

(4) Investment in a capitalistic system does not work on a down economic escalator. Who wants to invest, if it is probable that the economy will shrink, leading to increasing diseconomies of scale?

What Happens to Government and Business Promises?

There are many kinds of promises currently outstanding:

1. Government promises

  • Social Security
  • Medicare
  • Unemployment insurance
  • Continued maintenance of roads
  • Free education for all through high school
  • Government debt (Federal, state, and local)
  • Financial help after hurricane damage
  • Guarantees of bank accounts and pension plans

2. Insurance and bank promises

  • Life insurance policies
  • Annuities
  • Long term care policies
  • Pension plans
  • Auto and homeowners policies, etc.
  • Bank account balances

3. Promises by companies of all types

  • Stock – implied promise it will be worth more in the future
  • Loans borrowed will be paid back (to banks or on bonds)
  • Pension plans
  • Implied guarantee of future 24/7 electricity availability; grid maintenance

What happens to these promises? Over time, it is clear that pretty much all of them will disappear. They are up-escalator benefits that work when there are plenty of fossil fuels and the economy is expanding. They don’t work for very long on a down escalator.

Promises to Individuals

At the level of the individual, one of the implied promises has been is that an individual who gets a good education will be able to get a good paying job. This is one of the promises that is already disappearing.

There is also a second implied promise–people who actually perform the work, will be compensated for it. This promise is falling by the wayside, as wages fall (partly due to globalization, and partly due to other down escalator effects). At the same time, governments need higher tax rates, to pay for all the promises made to those who are retired, unemployed, or have wages that are too low to support a family.

Goods and Services Produced in a Given Year

In any year, there will be a mixture of people buying goods and services:

  • People who are currently in the work force
  • Retirees
  • People who own assets and want to sell them

One thing that may not be obvious without thinking about it, is that all of the people wanting goods and services have to compete for the same set of goods and services that are available at that time.

For example, we grow a certain amount of corn and rice, and we extract a certain amount of oil and coal and copper, and we make a certain amount of electricity in electric power plants. Because of inventories, there is a little flexibility in these amounts, but basically, the amount that is available is determined by market prices and availability of supply lines. If the amount of goods and services produced is decreasing, because we are on a down escalator economy, this smaller quantity of goods and services needs to be shared by the entire population.

If there is relatively little available in total, and those who produced it don’t want to part with it, a person trying to trade accumulated “assets” for current production will not receive very much scarce production in return for his accumulated wealth, no matter what form it may take. In the case of most assets (stocks, bond, gold, silver, etc,) this means that the value of the asset tends toward $0. If currency is viewed as another asset, its value may go to close to zero as well. In fact, if there has been a government change, its value of the currency may be exactly zero.

How about Quantitative Easing?

Quantitative Easing (QE) represents an attempt to reinflate the economy by making more credit available to the economy, at lower interest rates. It also has the effect of reducing the interest rate the government pays on its own long-term debt, thus holding down that taxes the government needs to collect.

In terms of inflation/deflation effects QE has, its primary effect seems to be to artificially inflate asset prices–stocks, bonds, home prices, and agricultural land prices. The announced goal of the Japanese QE attempt was to try to raise the inflation rate (generally) in Japan to 2%, but it has not had that effect. In fact, the same link shows that in general, QE has not led to inflation.

In my view, the primary effect of QE is to create asset price bubbles. The price of bonds is raised, because of the artificially low interest rates.  The price of stocks is raised, because people switch from bonds to stocks, to try to get yield (or capital gains). To get better yield, businesses find it worthwhile investing in homes, with the idea of renting then out on a long-term basis. Very little of QE actually gets through to wages, which is where the major shortfall is.

QE will at some point stop, and the asset price bubble will deflate. (Crunch Time: Fiscal Crises and the Role of Monetary Policy by David Greenlaw, James Hamilton, Peter Hooper, and Frederic Mishkin points out that QE is not viable as a long-term strategy.) This is likely to add to deflation woes. The higher interest rates and the need for higher taxes to cover the higher interest the government needs to pay will add to the down escalator effects, making the trends noted previously even worse.

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Detroit the Beginning of a Trend in Municipal Debt?

By George Leong

“Motor City,” USA is in trouble. Detroit, straddled with close to $20.0 billion in debt, simply could not move forward and was forced to declare bankruptcy late last week—the largest bankruptcy in U.S. municipal history.

The news was not unexpected, as the city had already faced a massive migration of people along with industries. The migration’s end result was a significant decline in revenue base—this means unpaid bills, projects put on hold, mounting interest payments, and just general malaise within the community. Mind you, Detroit wasn’t always like this. My wife grew up in middle-class Detroit when it was beginning to show cracks in its foundation, but nothing like its recent cracks.

You hear about the 45,000 street lights that have to be replaced, but there is no money to do so. There are also the tens of thousands of empty and crumbling houses and buildings.

The bankruptcy move by Detroit was necessary, but this former industrial powerhouse by the lake has many hurdles ahead of it that might make the austerity measures in Greece seem like a walk in the park.

First, the debt holders have to deal with losing the majority of their capital. Next, the city will need to come up with a plan of action that can build a sustainable Detroit, but this will not be easy. Investors in new bonds to rebuild the city will also be needed, but the expected return will likely be insignificant. I just can’t think of many reasons why anyone would take that chance.

The problem with Detroit was created by decades of mismanagement and uncontrolled spending, given the massive migration of tax-paying citizens and companies. This should have been dealt with in a more effective manner in spite of the enormous difficulty of the situation.

But the situation with Detroit may only be the beginning—there will likely be more municipalities that are hurting from debt and seeing bankruptcy as the only way out. The state of California is a prime example of a financial Armageddon waiting to happen—the state is straddled with a mountain of debt, and the real issues will surface when interest rates ratchet higher.

And then there’s the national debt, which is above $16.79 trillion and mounting. Wait until interest rates move higher—the interest payments on the debt could be unbearable.

The reality is that America has become a country of debtors, and even with the recession, we are continuing to see spending rise and savings decline due to the low interest rates. My concern is the mounting debt and that it will need to be paid off—even as rates move higher.

With time, tons of money, a sound strategy, and, of course, some luck, things will get better for Detroit; however, this debt problem isn’t contained within Detroit, as many other municipalities nationwide sit on the edge of bankruptcy.

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US Healthcare Costs a Global Outlier and Monument to Crony Capitalism

by Jesse

I think the Big Pharma/Health and Big Finance sectors have similar cartel like structures where a few large companies dominate the field, exercising considering political power and the ability to obtain subsidies and protections from the system while fending off regulation and price restraints.
There are others of course, like the energy field from exploration to distribution, often known as Big Oil, but which now includes natural gas and electric energy production and distribution.
The recurring myths of the efficient market and 'free trade' are exacting a heavy toll on the general public and the real economy.  They provide ideological cover to a favored elite that is acting in the manner of a privileged and extractive aristocracy while beguiling many with the allure of easy money.
The concentration of ownership in the media has become an inhibiting and directing influence in public discourse that is hard to miss.
The current recovery fueled corporate perks and ZIRP for the financial sector, a fine example of 'trickle down' economics, will be remembered as one of the great policy errors of modern economic history. They pretend ignorance, they feign helplessness, and they know.  But they are getting paid not to act effectively, and even not to see, but to spin some fantasy.
They 'feel your pain.'  They just do not do anything substantial about it.  Even a second term president can still talk as though he is a recently arrived outsider, critiquing the actions of some predecessor and a corrupt system in which is he barely involved.
These are not leaders.  They are like modern CEO's, professional organizers and managers, who talk a great game about their accomplishments but, when the truth comes out, posture that they stand outside the very system for which they have long held the ultimate responsibility.  
But even worse are those who make little pretense to justice and goodness and moral principle, preferring to appeal to the darkest impulses, the fears and hatreds of a society.  Their actions betray their words.
The lack of serious reform, in large part because of the partnership between Big Money and Washington's new political class, and the dormancy of the progressive impulse, will eventually stress the fabric of society to the limit.  And then change will come.
Read the entire story here.

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Will This Commodity Buck The Trend?

by Tom Aspray

The plunge in commodity prices has caused a significant exodus from the commodity markets as assets under management have dropped 21% over the past year. The DJ-UBS UBS -0.57% Commodity Index (DJUBS) may face its third consecutive yearly decline.

This has caused many managers of commodity funds like Pimco’s Nic Johnson to say “I think the supercycle is dead.” Citicorp experts in April said that it “expects 2013 to be the year in which the death bells ring for the commodity supercycle.”

Could this be a contrary indicator? It is possible as the recent technical action in crude oil indicates that not all commodities are going down.

Last week’s EIA report reflected a lower than expected rise in natural gas supplies in reaction to the country-wide heat wave. Late Tuesday’s news of a fire on a natural gas rig off the coast of Louisiana will bring additional focus on this market.

More importantly, the technical action does suggest that traders and investors should take another look at this historically depressed market.

Click to Enlarge

Chart Analysis: The weekly chart of the natural gas futures shows a potential long-term base, line b, that has formed since the early 2012 low.

  • The gradual pattern of higher lows; $3.010 in 2012, $3.257 in early 2013, and then $3.526 last month is positive.
  • The long-term downtrend, line a, that goes back to 2009 was broken in March.
  • Prices have just retested this breakout level, which is a positive sign.
  • The weekly on-balance volume (OBV) broke through resistance, line c, in April, which completed the base formation.
  • The weekly 20-week EMA is at $3.868 with the weekly starc+ band at $4.215.
  • A strong weekly close above the high at $4.534 projects upside targets in the $5.80-$6.00 area.

The daily chart of the natural gas futures shows daily support, line e, in the $3.492 area.

  • The 20-day EMA is trying to flatten out with short-term resistance at $3.835, which was last week’s high.
  • The 38.2% Fibonacci retracement resistance from the April high at $4.534 is now at $3.909.
  • This is just above the quarterly pivot at $3.875.
  • The 50% retracement resistance is at $4.031 with the downtrend (line d) at $4.126.
  • The daily OBV bottomed in February and has formed a clear uptrend, line g, which suggests accumulation.
  • The OBV has resistance at line f, which was tested last week and could break out ahead of prices.
  • There is minor support at $3.607 to $3.640 and then at $3.546.

Click to Enlarge

United States Natural Gas (UNG) is a an ETF with assets of $935 million that seeks to the replicate the performance of natural gas. It has a relatively high expense ratio of 1.08% and an average daily volume of almost five million shares.

  • The daily chart shows that UNG made a high of $24.09 on April 18 and then dropped to a low of $18.69 on June 28.
  • This was a correction of over 22% in just three months.
  • The daily chart shows a potential bottom formation, line b.
  • The daily downtrend, line a, is at $20.51 with the 38.2% retracement resistance at $20.74.
  • The more important 50-61.8% resistance is at $21.38 to $22.02 with the May high at $23.02
  • The relative performance slightly broke its downtrend, line c, last week. A move above the recent high would complete the bottom formation.
  • The daily OBV also shows a potential bottoming formation as a move above the July 18 high will also break the long-term downtrend, line d.
  • The monthly pivot is at $19.79 with the gap support at $19.74 to $19.56. The spike low at $18.78 likely cleaned out most of the stops.

What it Means: The technical action in both the natural gas and in United States Natural Gas (UNG) suggests that a bottom is being formed. Among commodity traders, the natural gas futures are known as the “widow makers” because of their extreme volatility and high risk.

John Person, a pioneer in seasonal commodity analysis, states in his Commodity Traders Almanac that natural gas “has a strong seasonal tendency to bottom in July and then peak in December.”

The technical and seasonal outlooks appear to be in agreement, though new positions in United States Natural Gas (UNG) still have a high risk.

There are several oil and gas stocks, but the most well-known stock, Chesapeake Energy CHK -0.49% Corp. (CHK), is now testing major resistance. The daily relative performance analysis of the energy sector turned positive last Friday, so this could be an important week.

How to Profit: For United States Natural Gas (UNG), go 50% long at $19.67 and 50% long at $19.56, with a stop at $18.73 (risk of approx. 4.4%).

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Flash PMI Shows Steady Improvement

By Cullen Roche

The real-time composite proved right as this morning’s Flash PMI report came in showing slight improvement in the overall data.  The overall index was up to 53.2 from 51.9 in June.  Econoday has the detais:

“Markit’s US manufacturing sample reports solid monthly growth so far in July with the composite index at 53.2, up from 51.9 in the final June reading and compared with 52.2 in the mid-month June reading. New orders are very positive, at 55.1 to show the best monthly growth since March. New export orders are a standout, at 52.3 for a big 6 point gain that points to a rebound in global demand. Backlog orders are also up as is output and, importantly, employment.

Other readings include a drop in inventories that, given the rise in orders and output, points to the need for inventory restocking which will be a plus for future output and employment. Input prices are up in line with increases underway in fuel prices, which may also be a plus given concern among Federal Reserve doves that inflation right now is too low.

This is a good report that extends the run of mostly positive signals from the manufacturing sector which continues to rebound following flat conditions in the early spring. Today’s data will boost expectations for strength in next week’s ISM manufacturing report. Yet whether today’s report will be a plus for today’s session is uncertain given the touchy play underway between economic strength and expectations for Fed tapering.”

Chart via Orcam Investment Research:


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US manufacturing follows the same pattern for the 4th year

by SoberLook

US manufacturing rebounded in July, as it follows the pattern repeated over the past four years.

Source: Markit

Markit's report however emphasized caution:

Chris Williamson, Chief Economist, Markit: - The U.S. manufacturing sector picked up momentum again in July, with output, order books and employment all growing. The goods-producing sector acts as a bellwether of the wider economy, and the upturn in July therefore bodes well for the pace of GDP growth to have picked up again in the third quarter after a likely easing in the second quarter.
The pace of manufacturing growth nevertheless remains well below that seen at the start of the year, in part reflecting weaker demand from many export markets, notably China and other emerging economies. Employment growth is disappointingly weak as a result, as firm focus on cost-cutting to boost competitiveness.

This stabilization in manufacturing will add to the ammunition for the more hawkish members of the FOMC, who will argue for a reduction in securities purchases starting in September.

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China Demand Not Behind Commodities Boom?

By: Frank_Holmes

There’s no denying China’s massive economic growth over the past decade, as the country recorded an average GDP of more than 10 percent per year. In only seven years, China’s economy doubled; in 13 years, it tripled.
With this incredible expansion, China began to import commodities at an incredible pace. In 2000, the country imported only 70 million tons of iron ore; today, it’s more than 10 times that amount, at 763 million tons. Copper imports increased dramatically too, growing from 1.6 million tons in 2000 to more than 4 million tons per year today, according to BCA Research data.

And when it comes to oil demand, 17 years ago, China was a net exporter. Today, it is the second-largest importer, transporting 5.4 million barrels of oil into the country every day.
That’s why it is widely accepted that the Asian giant spurred higher commodity prices in the past decade.
And if the country was the force behind the boom, then the assumption is that China’s lower, but still healthy growth will be a drag on commodity prices.
But recent research challenges this assumption.
According to BCA Research’s Chen Zhao, what is initially an “outrageous proposition” may not actually be. The analyst says the fact that China’s consumption of industrial commodities significantly increased at the same time prices rose may have only created “the impression that China was the main driving force behind the commodities boom. "
Consider that since the substantial growth early in the last decade, China has continued to import commodities at a remarkable pace. Since 2007, the Asian giant buys 2 times more iron ore, 1.5 times more copper and 6 times more coal from other countries.

“The level of Chinese commodity imports obviously reflects the size of its economy,” says BCA. So even if the growth rate has slowed down, “the absolute level of Chinese commodity demand continues to set new records every year.”
Then what’s really driving commodity prices?
If you can’t entirely blame weak commodity prices on Chinese demand, what is the culprit? Take a look at the chart below. The red line plots the 10-year rolling correlation of annual returns on the Thomson Reuters/Jefferies CRB Commodity Index (CRB) with China’s real GDP growth. The correlation between these two numbers has stayed close to 0.4 since the late 1990s.
Now take a look at the blue line, which shows a negative correlation between the CRB and the trade-weighted U.S. Dollar. The correlation since 2010 has hovered around -0.8, implying that “the dollar has much more explanatory power,” says BCA.

The data confirms BCA’s “long-term suspicion that the bull market in commodities last decade was mainly a reflection of a sustained fall in the U.S. dollar.”
This isn’t the only time we’ve experienced this phenomenon. In the 1990s, when the U.S. economy was booming and the dollar was strong, commodity prices were weak and oil prices fell to an all-time low of $10 per barrel.
Today, many emerging market economies that had no global footprint a few decades ago are now growing at a much faster pace than the developed countries. These emerging nations have young, growing populations who are moving to the cities, becoming wealthier, and consuming more goods and services.
However, like I shared recently, Credit Suisse is of the opinion that prices of commodities may no longer rise and fall together in unison, emphasizing that investors will need to focus on individual commodities depending on the supply and demand factors. This is why we advocate that investors hold a diversified basket of commodities actively managed by professionals who understand these specialized assets and the global trends affecting them.

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Gold Intraday

by Jesse

As a reminder, tomorrow is an option expiration for precious metals on the COMEX.
The delivery period for the August contract begins at the end of next week.
I have highlighted the key support levels which will test the slanting W formation on the chart.
What happens will confirm the formation, or not, and help to set a minimum price objective from that formation if it does.


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EU Recession Over? Believe it or not?

By tothetick

When French President François Hollande (aka Mr. Flabby in the French press) announced just a few months ago while on a state visit to Japan that the EU recession was well and truly over (just before France plunged into a recession itself) he was slaughtered both by the French press and the foreign press around the world. But, maybe Mr. Hollande had been consulting the stars or looking into some economic crystal ball somewhere along the road to recovery, since it would seem that the lengthy (over lengthy, even) recession  that has been the everyday living of the EU seems that it may be coming to an end after all.

A survey carried out on thousands of companies in the private sector are showing signs of recovery and that’s the first time in the past year and a half. Long Live François! Perhaps that means now he will pick himself up from the opinion polls that have dragged him into being the least popular President of France (yes, even more so than President Nicolas Sarkozy) with a rating that has been as low as just 25% in recent months. Although, sometimes, the EU might consider joining the snail-racing championships that are taking place in Congham, Norfolk, with added numbered race sticker on their backs (these Brits do quaint things sometimes, don’t they?).

Snail-Pace Recovery in EU

Snail-Pace Recovery in EU

Anyhow, the progress of recovery that is finally here is having just a little trouble getting off to a good start. Still, time might be money and if it is, the EU member states will be spending it together!

Some analysts believe that recession may come to an end completely this Fall according to Markit, which compiles the Purchasing Managers’ Index (PMI) every month. One economist (Chris Williamson at Markit) stated: “The best PMI reading for one-and-a-half years provides encouraging evidence to suggest that the euro area could, at long last, pull out of its recession in the third quarter”.


The PMI rose from 48.7 points in May to 50.4 points in June and that turns out to be the best level since January 2012. 50 is considered to be the figure that sees growth occurring in the economy. So, despite the fact that the progress is pretty slow, it is coming (so we are told). The Eurozone has seen the economies of member states shrink and that has been happening since the last quarter of 2011, but figures that will be published next month will show if the trend is continuing or if it has been halted and turned around.  Economic output was reported to have fallen by Eurostat in the first quarter of 2013 by 0.2%, with Spain and Italy shrinking as well as the economies of France and the Netherlands.

Just a few months ago in May, we were being told that the future of the EU was going to be a dark and bleak one. France had a 0.2% fall in Gross Domestic Product in the first quarter of 2013, while the Netherlands suffered a 0.1%-shrink in its economy. Germany didn’t do as well as had been expected and only grew by a meager 0.1%. But, is that all over now with the new data that has been released? One person will, at least, be rubbing his hands together in gleefully blissful ‘I-told-you-so-attitude’!

EU Recovery?

EU Recovery?


One must not forget that despite the seemingly positive figures, unemployment is still enormously high (especially concerning youth unemployment). Consumers have limited spending power still in the EU and the austerity measures being imposed on countries like Portugal and Greece will not help the growth situation. Although it seems likely that the EU has at long last realized that kicking a man when he is already on his knees will only have the added bonus of completely eliminating him. The EU has freed Italy from fiscal monitoring and France, Spain and the Netherlands saw the EU wave the obligation to have a 3% annual-deficit limit. That might be a clearer sign that things could actually finally improve in the EU.

Despite the report that shows some good signs of the recovery actually checking in at Hotel EU just before the holiday season starts, let’s wait until we see it running through the finish-line tape and being the winner in that race before we crack open the Champagne. But, damn, didn't British Prime Minister David Cameron just agree to hold a referendum on the withdrawal of the U from the EU? Oh, well, Mr. Cameron, I'm sure you can pull this one off and change the 'Yes' into a 'No' for pulling out now the recovery is perhaps here.

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