The Incompetence of the Federal Reserve and Deep State Is Unavoidable

by Charles Hugh Smith

It's not the managers who are incompetent, it's the organization itself that is incompetent.

I received a number of interesting reader responses to my previous entries on the incompetence of the Federal Reserve and the Deep State:

The Federal Reserve: Masters of the Universe or Trapped Incompetents? (March 21, 2014)
Why Is Our Government (and Deep State) So Incompetent? (March 6, 2014)
Some readers thought I was underestimating the power of these institutions to pursue essentially unlimited money-printing and related global strategies.
While I understand the apparent power of unlimited money-printing and global Empire, my point (poorly articulated the first time around) was this:
The incompetence of these organizations is not a reflection of the competence or intelligence of their managers--it is the intrinsic consequence of their limited control of complex systems. If the system has reached the point of being ungovernable, even the most brilliant and experienced managers will fail because it's not the managers who are incompetent, it's the organization itself that is incompetent.

If we boil down the Fed's vaunted god-like powers, they can be reduced to four
levers: lower interest rates by purchasing interest-bearing assets, create the money to buy the assets, make free money (zero interest or near-zero interest) available to the global banking sector via lines of credit, and support/rig currency, bond and stock markets with purchases made directly or through proxies. (Thank you, correspondent Mike L., for reminding me about the Working Group on Financial Markets and the Exchange Stabilization Fund.)
That's it. Everything else is window-dressing.
Is it even plausible that any organization can control an immensely complex economy with four levers? The Fed's four levers exert no control over how much money is borrowed from the Fed or what insanely risky speculations and malinvestments the borrowed money funds.
The Fed can't even control if the free money stays in the U.S.; by one estimate, fully 60% of the Fed's free money has left the U.S. for higher-interest carry trades and speculations in the emerging economies.
The levers of power wielded by the centralized Fed and Deep State are too clumsy and limited to control a complex system at any useful level. The Fed, the Federal government and the deep State are all the wrong unit size.
This excerpt from Preparing for the Twenty-First Century by Paul Kennedy (1993) explains why:

The key autonomous actor in political and international affairs for the past few centuries (the nation-state) appears not just to be losing its control and integrity, but to be the wrong sort of unit to handle the newer circumstances. For some problems, it is too large to operate effectively; for others, it is too small. In consequence there are pressures for the "relocation of authority" both upward and downward, creating structures that might respond better to today's and tomorrow's forces of change.

All these centralized concentrations of power have moved into the diminishing returns phase of the S-Curve. As the unintended consequences of their efforts to manage complex systems with their clumsy, limited tools pile up, their profound failure of imagination kicks in and they do more of what has already failed.

The structural incompetence of centralized, wrong-unit-size agencies and central banks is global: the centralized strategies of China, Japan, the European Union and yes, Russia, too, will all fail for the same reasons: organizations with a few limited controls are intrinsically incapable of managing complex systems.
The Global Status Quo Strategy: Do More of What Has Failed Spectacularly (April 23, 2013)
The Master Narrative Nobody Dares Admit: Centralization Has Failed (June 21, 2012)
"Do you know what amazes me more than anything else? The impotence of force to organize anything." (Napoleon Bonaparte)

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South Africa platinum strike causing "irreparable" damage: producers

By Xola Potelwa

JOHANNESBURG (Reuters) - Platinum producers Anglo American Platinum, Impala Platinum and Lonmin said on Tuesday a strike now in its ninth week at their South African mines was causing irreparable damage to the sector and local economy.

Wage talks have broken down between the companies and the striking AMCU union, which is demanding a doubling of basic wages, although the world's top three platinum producers said they were open to talks "within a reasonable settlement zone".

In a joint statement, the companies said they had lost nearly 10 billion rand in revenues, but also pointed to the cost to communities around the mines in the platinum belt northwest of Johannesburg.

South Africa's biggest post-apartheid mine strike, which has hit 40 percent of global production of the precious metal, is also seen denting sluggish economic growth and widening the current account deficit as its effects ripple from the platinum communities throughout the wider economy.

"The financial cost ... does not tell the full story," the companies said. "Mines and shafts are becoming unviable; people are hungry; children are not going to school; businesses are closing and crime in the platinum belt is increasing."

South Africa's largest labour grouping COSATU, which includes AMCU's archrival the National Union of Mineworkers, said it supported the call for a "living wage" but accused the striking union of being irresponsible.

"We believe that it is irresponsible to take workers on such a long strike where there are no prospects of achieving the demands," COSATU said in a statement.

COSATU also said the government should intervene to resolve the impasse.

The mining companies have repeatedly stated they cannot afford the demand for a 12,500 rand monthly "living wage", saying many steps have already been taken to remedy historical inequalities in the sector.

South Africa's deputy president will meet with the mining industry and unions on Thursday for a regularly scheduled forum aimed at bringing stability to the sector.

It will be the first meeting between the companies and AMCU since wage talks collapsed almost three weeks ago.

The companies on Tuesday hinted at longer-term restructuring and mass layoffs in an industry that employs more than 100,000 people.

"Sadly, as the industry progresses towards greater mechanisation and higher skills levels, which are aligned with higher earnings and greater productivity, so the number of people employed in the industry will decrease," they added.

South Africa has faced chronic unemployment for over a decade, with one in four people out of work.

Miners near Rustenburg, the main town in the platinum belt, told Reuters last week they were having to sell cattle to make ends meet, while local business owners spoke of collapsing trade because many migrant workers had simply gone home.

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Hundreds rush to rural Chinese bank after solvency rumors: media

by Reuters

SHANGHAI (Reuters) - Hundreds of people rushed to withdraw money from a branch of a small Chinese bank after rumors spread about its solvency, reflecting growing anxiety among investors as regulators signal greater tolerance for credit defaults.

The case highlights the urgency of plans to implement a deposit insurance system to protect investors' deposits in case of bank insolvency, given that Chinese are growing increasingly nervous about the impact that slowing economic growth will have on the viability of financial institutions.

Regulators have said they will roll out deposit insurance as soon as possible, without giving a firm deadline.

Domestic media reported, and a local official confirmed, that ordinary depositors swarmed a branch of Jiangsu Sheyang Rural Commercial Bank in Yancheng in economically troubled Jiangsu province on Monday.

Bank Chairman Zang Zhengzhi was quoted as saying the bank would ensure payments to all the depositors. The report did not say how the rumor originated.

Why Yancheng investors suddenly lost confidence in the security of their bank deposits is not clear, given that the Sheyang bank is subject to formal reserve requirements, loan-to-deposit ratios and other rules to ensure they keep sufficient cash on hand to meet demand.

Bank failures in China are virtually unknown, as Chinese banks are considered to operate under an implicit guarantee from the government.

Finally, the central bank has eased up on money rates since February, and traders say liquidity in the interbank market -- where banks like Sheyang bank can tap short-term funds to meet depositor demand -- remains relatively relaxed.

"It's true that these rumors exist, but actually (the bank going bankrupt) is impossible. It's a completely different situation from the problem with the cooperatives," said Zhang Chaoyang, an official at the propaganda department of the Communist Party committee in Tinghu district, where the bank branch is located.

Zhang was referring to an incident that rattled depositors in Yancheng in January, when some local rural cooperatives -- which are not subject to the supervision of the bank regulator -- ran out of cash and locked their doors.

Local officials say several co-op bosses fled after committing fraud.

China's central bank governor said earlier this month that deposit rates are likely to liberalized in one to two years - the most explicit timeframe to date for what would be the final step in freeing up banks to set their own interest rates.

It is widely expected to introduce a deposit insurance scheme before liberalizing deposit rates to protect savers in case a freed-up market leads to major strains on smaller banks and alarms the public. Analysts also expect the controls on deposit rates to be lifted gradually. Is China's debt nightmare a province called Jiangsu?

DEFAULT FEARS

Local and global investors in China have taken note of Beijing's recent decision to allow China's first domestic bond default by Shanghai Chaori Solar Energy Science and Technology Co Ltd in March. Officials have indicated publicly that they are not worried that more defaults will damage economic stability.

In the past, domestic bond issuers were routinely bailed out by local governments and banks, and the willingness of regulators to let Chaori miss interest payments negatively impacted rates in Chinese offshore credit markets.

More recently, media also reported a heavily indebted real estate developer in Zhejiang province was at risk of defaulting on 3.5 billion yuan ($565 million) worth of loans -- a situation that has yet to be resolved.

When contacted by Reuters by phone on Tuesday, an official at the Jiangsu Sheyang Rural Commercial Bank branch hung up, saying she was busy.

An official at the administrative office at Jiangsu Sheyang Rural Commercial Bank said the bank would publish a statement shortly. On its website, the bank says it is capitalized at 525 million yuan ($85 million) and had total deposits of 12 billion yuan as of end-February,

Officials at the Jiangsu branch offices of the China Banking Regulatory Commission (CBRC) declined to comment. The Yancheng branch of CBRC and the propaganda offices in Yancheng city and Sheyang county did not answer calls seeking comment.

($1 = 6.1888 Chinese Yuan)

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A new high for the Aussie?

By Erik Tatje

Australian Dollar (CME:ADM14)

The Aussie Dollar has been trending higher since late January and the currency appears to be on the verge of a new leg higher. Price broke above a previous high during yesterday’s session and the level that was previous resistance at 9069 has now become support for price. Both near term momentum as well as the intermediate term directional bias in this market remain positive and the highest probability opportunity appears to be on the long side of the Aussie. Continue to use the 9069 pivot as support going forward. Ideally, price should remain above this support pivot; however, in the event of a more significant pullback in the price of the Aussie, look to the 9009 – 9000 area to be the next zone of support. Until price breaks below the 8955 low on the chart, the directional bias will remain positive, and buying corrective pullbacks into support will remain a plausible strategy to implement in the Aussie Dollar.

Australian Dollar, 30-minute Bar Chart, eSignal

Natural Gas (NYMEX:NGJ14)

Natural Gas continues to look weak as price broke below the 4300 level yesterday before eventually finding support at the 4265 suppot pivot on the chart.  Price has has a bit of a corrective bounce off this level in the early mornign session; however, sentiment in this market remains bearish.  Look for the recent corrective rally to lose steam around the 4335 area on the chart. In the event that price is able to push above this level, the 4375 – 4382 resistance band is the next valid upside target. The directional bias in this market is lower and selling corrective rallies into resistance is a valid strategy to implement until price proves otherwise. Keep in mind that Natural Gas is in the process of rolling over from April to the May contract so look for volume in the April contract to dissipate as the week progresses.

Natural Gas 30-minute Bar Chart, eSignal

Cotton (NYBOT:CTK14)

Despite yesterday’s big sell-off in the Cotton market, the technical framework of price action in this market remains firm. Prices have been trending higher nicely for the past few months and the recent corrective pullback could present a valid opportunity for those bullish on Cotton prices to enter the market from a better price. The area from 90.41 – 90.83 appears to be a solid zone of support from which price seems to be respecting at the current time. Any further weakness in price would be expected to find support around 89.20 – 89.60 on the chart. The intermediate term higher high higher low structure will remain valid until a break below the low at 86.12. Although near-term momentum may be unclear, the longer term directional bias remains positive in the Cotton market.  The RSI showed an extremely oversold signal following yesterday’s big move, which is to be anticipated after a large sell-off. The question now for traders will be whether or not yesterday’s price active was merely a corrective pullback or the start of something bigger.

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Bio Tech could be impacted by “Eiffel Tower Power & Gravity!”

by Chris Kimble

CLICK ON CHART TO ENLARGE

The left side of Eiffel tower patterns are fun if long. The right side of Eiffel Tower patterns are not near the fun.... if one remains long. If one harvests longs at the peak or is short on the right side of the Eiffel pattern, that is a different story!

Eiffel Tower Power (right side) could well be felt if Bio Tech ETF (IBB) breaks support!

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How This Central Bank Bubble Ends

by Bill Bonner

Explaining the End

I sometimes get the feeling that somewhere across that huge puddle, in America, people sit in a lab and conduct experiments, as if with rats, without actually understanding the consequences of what they are doing.

• Vladimir Putin, 4 March 2014

We promised to explain how it ends. The world, that is. The world we live in now. The one in the middle of a rapidly inflating central bank bubble.

First, we need to understand that this is a very different world from the world of the 19th and early 20th centuries. It is a world where central bankers play a role somewhere between con artists, mad scientists and God Himself.

They deceive and cheat. They conduct their experiments without any real idea how they will affect people. And they move almost every price in the world – sending investors, householders and business people all running in one direction.

Their experiments change not only prices quoted on the Big Board and the supermarket. They also change the physical world. Jobs are lost to machines that – without such low interest rates – would not have been built.

Monetary Fantasy

Those in the 1% are only as rich as they are today thanks to the Fed’s manipulations. America’s super-sized houses also are largely the result of the Fed’s 2002-07 real estate bubble. And many a mansion has been built in Aspen or the Hamptons with money from Wall Street bonuses, which wouldn’t have been possible without central bankers’ grand designs.

And China is the way it is today – with its gleaming towers, its mega-factories, its empty cities and clogged roads – largely because US officials made it easy for Americans to buy things they didn’t need with money they didn’t have.

Central bankers – along with central governments – have created a kind of monetary fantasy… which depends on ever increasing amounts of credit. But where can all this new money go? Real output can’t keep up with it. So prices must adjust. In the event, they bubble up … first one market, then another … first one sector, then another …

And after the bubble, what? The bust!

That’s what we’re waiting for. A bust in the biggest debt bubble of all time. When the credit inflation ball bounces off the ceiling, it produces an equal and opposite reaction in the other direction. Asset prices fall. This is deflation. It begins with asset prices … and then makes its way into consumer prices.

Making Volatility Your Friend

Most investors think they need to protect themselves from this kind of volatility. Academic studies show that more volatile stocks under-perform less volatile stocks – they call it the “volatility anomaly.” And it is obvious that if your stock goes down 50% you need 100% on the upside to get back to where you started. Losses and gains have “asymmetric” effects on your portfolio.

But at our small family wealth advisory, Bonner & Partners Family Office, one of our principles is that you need to “make volatility your friend.” Because volatility is not the problem. The real problem is risk. There is risk that you will buy the wrong investment at the wrong price. Then you’ll get whacked.

EZ money policies – low rates, QE, paper money – produce an apparent stability. As long as the money flows freely, even some of the worst businesses and the worst speculators can borrow to cover their losses. Stocks go up and up and up. It looks good. But it masks real risk. As the bubble in credit increases the risk of a major blow-up increases… until it becomes a certainty.

This is where volatility can be your enemy and your friend. Just as Fed policies have made stocks too expensive… the equal and opposite reaction of the financial markets will be to make them too cheap. (Stay tuned.)

So, there you have it. The first stage of “the end” will be a major selloff of stocks. At present prices, of course, they’ve got it coming anyway. But the implosion of the debt bubble and the collapse of asset prices are not likely to be the end of the story. Not as long as we have delusional activists running central banks and central governments.

Tune in tomorrow for the second stage of the end.

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