2012-09-28

It always pays to look into who is paying the bills

Due to the public's concern for the environment, environmentalists are often used by business interests to block competition. I've seen it up close in regional debates about development, where the developed region finances environmentalists who block further development. Wealthy people use this strategy to protect home prices all the time.

Now this: Matt Damon’s Anti-Fracking Movie Financed by Oil-Rich Arab Nation
All of this suggests a direct financial interest on the UAE’s part in slowing the development of America’s natural gas industry. Pop culture can be a powerful means to sway public opinion. While Promised Land, like anti-fracking documentary Gasland, appears to inflate the dangers of hydraulic fracturing, it may have an impact on the public’s view of the practice.
Too often both sides in a debate accuse each other of being mercenaries, delivering the message their financiers want. Sometimes that happens, but more often, money simply finds its way to people making the argument. Where they make the argument though, what town happens to have a development shut down, may depend entirely on who was footing the bill.

Dongguan is Greece update: Dongguan bankruptcy goes international

At the end of August I wrote a post called Cash crunch for local governments in China: Dongguan is Greece, with stories of unpaid contractors and one individual going so far as to call Dongguan "Greece."

Now the story has made it into English language press.

Boom city Dongguan faces bankruptcy as village debts soar
Experts have found Dongguan's village debt woes stem from two factors: a tightly-bound landlord economy, plunged into crisis by failing factories in the global downturn, and political pressure on local village chiefs to pay generous "dividends" to voters under the immature rural election system.

"The financial problems of the villages are much more serious than expected," said Shao Gongjun, the owner of a printing company who blogs on Dongguan's economy. Shao attributed much of the crisis to the local authorities' dependence on rental incomes.
I haven't seen articles about gold dividends in Dongguan, but maybe some of those generous dividends in other cities are being paid with debt......
The fall in rental values forced 60 per cent of the 584 villages in Dongguan into budget deficits, the study by Professor Lin Jiang of the finance and taxation department of Lingnan College at Sun Yat-Sen University found.

......"In some rare cases, the leader-elect promised to give each household 10,000 yuan per month," Lin said. The money would come from the village community "investment" - effectively, the rent they collected from factories.

Lately, village chiefs have found it difficult to fulfil such election pledges. But instead of reneging on their promises and sparking the anger of villagers, they turn to the rural credit co-operatives - the de facto local banks - for short-term loans at interest rates as high as 30 percentage points.

......The Dongguan government is in poor shape to handle a crisis. Its GDP growth slowed to 2.5 per cent in the first half of the year. The average growth in the past eight years was about 11 per cent.
Blame democracy! The debt is smaller, but the concept is the same: keeping unrealistic promises made to voters.

ZeroHedge has coverage as well in A Chinese Mega City Is On The Verge Of Bankruptcy.

2012-09-26

Saudi SARS-like virus has broken out globally....or not?

Two conflicting reports.

Five in Denmark contract SARS-linked virus
“The five have a fever, coughing and influenza-like symptoms,” he added.
Petersen said those admitted were a family of four where the father had been to Saudi Arabia, and an unrelated person who had been to Qatar. Two of those with symptoms were under the age of five.
The five contacted their doctors following a Danish health authority advisory on Monday recommending that those who had travelled to Qatar and Saudi Arabia seek medical help if they experienced a fever, coughing, shortness of breath and difficulty breathing.

Deadly virus won't spark Hong Kong Sars epidemic, scientists say
Separately, doctors yesterday said five people at a Danish hospital are suffering from a typical influenza strain and not the new Sars-like illness as feared.

The five, three adults and two children, tested positive for Influenza B, , the Odense University Hospital said, and were recovering. They were to be released later in the day.

The new Sars-like virus, which causes a serious respiratory infection, took the life of a 60-year-old Saudi Arabian man earlier this year, and a 49-year-old Qatari man is in critical condition after he visited the Saudi kingdom. It sparked fears of a recurrence of the Sars epidemic - also caused by a coronavirus - that killed 774 worldwide including 299 in Hong Kong. But the likelihood was dismissed by the WHO and Hong Kong's Health Department.

Hong Kong wants independence; so does Catalonia

Hong Kongers are waving British colonial flags and Spanish separatism is heating up.
‘De-Sinofication’ debate re-emerges in HK
But Chin, who has a PhD in folklore studies from Germany’s Goettingen University, said Hong Kong has a quality of “purity” that it should not lose. He now teaches Chinese studies at Lingnan University.

His latest book, which calls for Hong Kong to become a city-state, has been adopted as a guiding philosophy by campaigners pushing for increased independence from the mainland.

Spanish Military Threatens Treason As Catalonia Seeks Secession Referendum
The traditionally separatist-minded province has decided, according to ANSAmed, has decided to pull a Greece - and escalate with a move to secession. A resolution, on the right of the Catalan people to cut off ties with the Spanish state, will be voted on Thursday by the regional parliament.
All signs of the current social mood, as predicted by socionomics.

QE3's fast failure?

In Why QE3 Will Completely Fail, I laid out the case that the amount of monetization by the Fed isn't enough to turn the credit market around.

I didn't make a short-term technical forecast because technical analysis is not my strength, but I did expect the QE3 rally would be shorter than QE1 and QE2. I anticipated a rally into or around the election, before turning south. Instead, the market may be on the cusp of falling lower. One can only guess as to the psychological effect of the stock market falling below pre-QE3 levels, but I'm guessing it won't be good for the bulls.

Here's a couple charts from Daneric's Elliot Waves, Elliott Wave Update ~ 25 September



Deflationists believe the Fed will be shown to be powerless and a less than two-week rally in the market following the QE3 announcement should strengthen the deflationist case.

Divorce in China

Divorce falls in the United States when the economy weakens because household income declines. Women initiate about 70% of divorces and a smaller household income, plus lower home values, makes for less money from divorce proceedings.

In China, the economy remains strong, but what's probably occurring is similar to the earlier changes in the West. Communist China has no religious or moral prohibition against divorce and now that peoples' incomes have risen, they can afford divorce. Thus, we see the divorce rate exploding upwards among younger Chinese.
Mainland's soaring divorce rate spurs speculation on causes
One internet user in Shanghai noted that the city's average housing prices surged to 25,778 yuan (HK$31,540) per square metre last year - up from 10,574 yuan in 2009, an increase that parallels the rise in the local divorce rate, according to the Modern Express.
It's not that home prices make it hard to buy a home, leading to divorce. It's that high home prices create a valuable asset that can be split 50/50.

2012-09-25

Mysterious illness in Saudi Arabia

Negative social mood increases the risk of a disease outbreak, for example SARS arrived in late 2002 at the tail end of recession.
Mysterious Virus Emerges in the Middle East
Global health authorities are hunting for cases of a mysterious viral respiratory illness that killed at least one person in Saudi Arabia and left another who traveled there in intensive care in a U.K. hospital.

Health officials said the source of the virus infecting both is unknown, though they have identified it as a coronavirus, part of a large family of viruses that in most cases cause common colds, but also have caused SARS.

Severe acute respiratory syndrome erupted in China in late 2002 and spread to a number of countries, infecting more than 8,000 people and killing about 775 before it disappeared in mid 2003.

2012-09-23

American social mood: suicides outpace car crashes

People commit suicide when they are depressed. When the overall social mood is negative, more people feel depressed and the suicide rate increases.

More Americans now commit suicide than die in car crashes as miserable economy takes its toll
The results were compiled using National Centre for Health Statistics data gathered from 2000 to 2009.
Researchers noted a 25 per cent decrease in car accident deaths, medicalxpress.com reported, while deaths from falls rose 71 per cent, from poisoning 128 per cent and from suicide 15 per cent.

...The shift makes suicide the most frequent cause of injury deaths, followed by car crashes, poisoning, falls and murder.
According to the article, the suicide rate is likely under counted because overdoses and falls include some misidentified suicides.

2012-09-21

Hong Kong to Mainlanders: get lost!

Hong Kongers Raise British Flag, Tell Mainlanders to Get Lost

Beijing real estate continues slump for third week; steel rebounds

Shanghai rebar in steepest fall ever on data, outlook
Shanghai steel futures fell more than 4 percent on Thursday in their biggest single day drop ever, after data showing an 11th month of contraction in China's manufacturing activity clouded the outlook for steel demand in the world's top market.
Futures are down, but some steel prices are picking up this week. The transaction index I track has popped significantly:

Beijing's 2nd-hand home sales drop to 3-year low
9月份中上旬新房二手房成交均下降 金九难达旺季预期

Beijing sales volume for new homes are down about 30%, while existing homes are down about 10%, both against August numbers. With supply picking up for the Gold September Silver October period, we may see big price cuts next month.

2012-09-20

When Greece finally sees the dawn, will it be Golden?

It goes without saying that social mood is extremely negative in Greece. It can get worse, but I think Greece is at the point where social mood is negative enough to be background (except if it suddenly rebounds). Now is the time where the actual events take over. In other words, Greece now has enough potential energy to go radical at any moment and events will depend on human action.

Support for Golden Dawn on the Rise
Golden Dawn’s rhetoric is often offensive. According to Andy Dabilis of the Southeast European Times, they have referred to the disabled as “undesirable” and have put up “hate” flyers around Greece’s gay districts. Dabilis also reports that Golden Dawn members have pushed for Greek to serve only Greeks.

Still, support for the party continues to increase. Part of the reason for this may be that Golden Dawn party members have given Greek citizens free food – a welcome gesture during Greece’s long recession. According to Derek Gatopoulos of The Associated Press, Golden Dawn members passed out “milk, pasta, potatoes and olive oil” to Greek citizens who showed them ID cards, proving that they were in the country legally.
Golden Dawn is clearly a fascist party, but people are so used to hearing right-wing politicians called fascists that the effect has weakened, as in the Boy Who Cried Wolf. What Greeks see is a party helping the people, even when it is not in power, against the ruling classes that are sending the country deeper into the abyss while tossing around the same worn out phrases. And the radicalism of the party is a plus: Golden Dawn's behavior is a clear signal that if handed the reigns of power, they would not suddenly do an about face and kiss the ass of the EU, ECB and IMF. The Greek people know Golden Dawn's foot would be firmly kicking their asses out of Greece. The net result is that despite all their flaws, and even because of a few of them, they are growing in popularity. To wit:

Greece's Golden Dawn party embracing extremist role
But its leaders have been anything but parliamentarian after taking their seats. Several of its MPs took part in a party raid, smashing immigrants' stalls at a local fair, causing some to call for authorities to pull their political immunity.

The neo-Nazi party embraces an extremist ideology. They promised to rid the country of illegal immigrants and plant landmines on the borders to make sure no more came in. They put up hate flyers around Athens' gay club district. They said people with disabilities were undesirable. They even threatened to unleash "stormtroopers" on Greece.

...George Tzogopoulos, a research fellow at the Hellenic Foundation for European and Foreign Policy in Athens, said the party's popularity should not be a surprise.

"Its rise is a normal phenomenon in a time of crisis," he told SETimes. "When people suffer, they tend to endorse the rhetoric of extreme parties."

Yiorgos Tsalikis, 45, a clerk at a fast food outlet in an Athens neighborhood said many Greeks who support Golden Dawn don't like what it stands for, but have given up on the country's leaders. "It's because of the despair people feel, they are desperate and don't trust politicians," he told SETimes.
For all Golden Dawn's extremism, it is also tapping into a far more moderate section of the electorate that is upset at the policies of those in power. Golden Dawn is a radical party, but it would be radical for any party to propose actually deporting illegal immigrants, or reducing/halting immigration. It would be radical for any party to propose getting out of the euro. The popularity of Golden Dawn has a lot to do with their lack of competition on these issues.

Golden Dawn in Greece
Last week, a new wave of attacks shocked politicians and citizens alike. A Golden Dawn deputy assaulted, inside the Parliament building, a delegate of Syriza, the left-wing party and main opposition. Several more Golden Dawn parliamentarians, leading two groups of neo-nazi thugs, attacked foreign-born street vendors in the Athens suburb of Rafina during a church festival and in a farmers’ market in the town Missolonghi.

Missolonghi is a potent symbol that resonates strongly in Greece: the heroic exodus of its besieged inhabitants against an overwhelmingly stronger Ottoman army in 1826, during the Greek War of Independence, inspired the poem that became Greece’s national anthem.

After the Greek media expressed indignation, Parliament was mobilized and the Government decided to take action. The subject was brought before the Parliament’s Ethics’ Committee which condemned the attacks, though the parties of the Left expressed their disapproval, because the resolution’s wording was not stringent enough.

The Minister of Public Order Nikos Dendias asked the Police to come up with a strategy in order to deal with right-wing extremists and racist attacks. According to media reports, police commissioners were given the go-ahead to arrest even Members of Parliament in case they commit offenses such as usurpation of authority or aggravated assault. Security Police were ordered to have Golden Dawn headquarters and local branches under observation, while websites carrying racist and fascist propaganda will be under surveillance by the Cyber Crime Unit.

Yet many think this will not be enough, and the problem will get more severe as long as conditions in Greece continue to get worse: salaries and pensions have been reduced dramatically and public spending has been slashed while unemployment and crime have gone up. The country is facing at once an economic, a social and a political crisis. Some analysts, looking at the current situation, even detect shades of Weimar, Germany’s failed first republic.
The key point here is that Greece doesn't have a Golden Dawn problem, Greece has an economic problem and refuses to deal with it. The more Golden Dawn causes the government to attack it, no matter whether their antics are deserving of attention or not, the more Golden Dawn will point to the worsening crisis and the government's focus on them, rather than the economy.

New poll shows popularity of Greece's Golden Dawn at 22 percent
Whilst politicians are held in low regard and more than half of Greek citizens are so disillusioned with the political process that 54 percent no longer trust any political party, there are a few notable changes in the political landscape.

A report in Skai.gr shows that the popularity of the the ultra-nationalist Golden Dawn has risen 10 points since May, winning the party a popularity score of 22 percent. Moreover, their share of the vote as evidenced in polls for September, now stands at 13 percent.
Golden Dawn is on the verge of going mainstream. Moving forward, it will depend on whether the government can satisfy the Greek peoples' demands. Bold policy moves, such as exiting the euro, will diffuse Golden Dawn's support. Staying the course could catapult them into power.

August bounce in pictures

The yuan, money supply, steel and real estate prices bounced in August. The stock market moved lower and PMI slipped. Here's a look at money supply and the foreign currency loan-to-deposit ratio.






2012-09-19

Capital outflows continued in August

China records sharp rise in capital outflows
The central bank and commercial banks sold a net 17.4 billion yuan (HK$21.3 billion) in foreign exchange last month, compared with net sales of 3.82 billion yuan in July.

However, economists say the trend may reverse after the Federal Reserve launched the third round of quantitative easing to stimulate the US economy, which may weaken the US dollar and prompt funds to flow into emerging markets such as China.
That is the $64 trillion question.

The market is propped up by billions of fleas

People still refer to the May 2010 stock market crash as a flash crash and explain it away as algorithms gone bad. I believe the crash was real and it was the response to it that turned the market around. It wasn't a mistaken crash, it was a crash that was met with heavy buying. Now we have evidence of another market "flash crashing": the oil market.

Kilduff: Oil's 'Flash' Fall Is a Warning to All Markets
We have made the point that the actions by the Fed and the ECB are in response to a global economy that is floundering not flourishing. The equity and other markets have rallied due to all of the announced and expected easing measures, predicated on a belief that consumption and economic growth will necessarily follow due to extremely low interest rates and/or the positive effect of inflation on asset values.

Still, it was an odd epiphany that struck the energy market in a moment.

Prices seemed to collapse of their own weight, due to a buyer's strike. The demand outlook for next year has deteriorated markedly, and just this morning FedEx (FDX) has reduced its outlook for the all-important Holiday quarter.
Social mood is negative, but global central banks and global governments are pulling out all the stops to support the economy and financial markets. If at any moment, investors suddenly realize that things aren't going well, that the Federal Reserve and U.S. government aren't all powerful and can no longer prop up the markets, financial marktets could rapidly crash again.

The most important comment in the above: a buyer's strike. Over 70% of stock market volume is due to algorithmic trading, some of which have holding periods measured in milliseconds. Stocks are being supported by billions of micro-transactions. Micro-transactions usually refer to a trade of a small amount, but in this case I refer to a trade of extremely short duration.

Imagine a man holding up a heavy weight. He must use his own strength and he cannot lift too much, but he also can continue supporting this weight using only his own energy. He is the long-term investor who holds his position through thick and thin.

Now imagine a different scenario. Every 1 minute, another man comes and takes his place. Then 30 seconds later, then 5 seconds later, then 1 sec......each time the individual man's strength is less and less important, he only needs to hold the weight for a second. Then imagine that thousands of new men are supporting it every second, each man only needs to contribute a tiny amount of effort. In the abstract, we could imagine billions upon billions of fleas supporting a large weight, with each flea contributing a tiny amount. These are the high-frequency traders, who make millions of transactions per minute. Like a game of hot potato, stocks flutter from one buyer to another.

The energy expended to support the weight is the buyer's desire to hold a stock. A long-term investor who opens a position with the intent to hold for years and buy on the dips, has great desire for the stock. A high-frequency trader who wants to buy and sell the stock 100 times in one second has extremely little desire for the stock.

When more people want to buy (support the weight), the market is pushed higher, when the buyers dry up, it falls. In a healthy market, the long-term investors are the Atlas providing stability in the market. The fleas jumping around add liquidity and support the market.

Today, Atlas has shrugged. There is little long-term investor support in the market; the fleas dominate. They have grown into such a large swarm that no one has noticed Atlas left. But when the music stops, when the traders shut off their algorithms and the fleas disappear, there is nothing supporting asset prices and they rapidly collapse. Risk of extreme volatility has increased—whereas a bear market might have take several months to play out before, it now may only require a few hours.

2012-09-18

Putin pushes American front groups out

The United States seeks to mold Russian society in an American image, but Putin has other ideas.
US aid agency told to shut Moscow office
Mr Putin’s Kremlin has repeatedly claimed that the US state department helped sponsor the protests that broke out last December over allegations of vote-rigging in parliamentary elections. Protesters have continued to target the president and his government.

Mr Putin has since forwarded a new law that could threaten the activities of non-governmental organisations receiving funding from foreign governments or organisations, forcing them to register as “foreign agents”. The Kremlin is deeply suspicious of democracy groups such as Golos, the election monitoring organisation that helped to publicise fraud in the December parliamentary poll.

Among the groups to be affected by the withdrawal of USAID from Russia are Golos, which has been majority funded by the American body, the human rights group Memorial and the National Democratic Institute, a senior US government official said.
Putin is tightening control of Russian society, but is it blind authoritarianism or not? The article goes on:
“Over the coming weeks and months the Obama administration will be looking for ways to advance our old foreign policy objectives using new means,” the official said.
The Kremlin is deeply suspicious of American organizations that are carrying out U.S. foreign policy objectives. No kidding!

Good coverage of the anti-Japan protests in China

The diaper brigade
Spasmodic
Slogans

2012-09-17

Euro shorts scrambling for cover; steel and renminbi bounce

The euro is overbought here though, I expect at least a small pullback.



I'm waiting for the numbers from the PBOC, but August should show a positive shift away from U.S. dollar debt repayment.

Beijing real estate's not so golden September

Gold September is getting off to a bad start in Beijing. Transaction volume was down 20% from August in the first half of the month.

9月上半月北京楼市成交回落约两成

Why QE3 will completely fail

This article is neither intended as support or a critique of quantitative easing policy in general. My argument here is only that it will fail due to its small size, just as the D-Day invasion of Normandy would have failed if it consisted of one army division.





Excessive Debt

Total credit in the United States is about $55 trillion: The private sector has debt of almost $40 trillion, while state, local and federal government combine for more than $14 trillion (this figure uses the federal public debt number, not the $16 trillion figure that includes intragovernmental debt). Even if there was no federal debt, private sector debt (consumer debt, mortgages, banking sector debt, etc.) is unsustainable at roughly 250% of GDP and requires deleveraging.

The private sector began deleveraging in 2008, as the third chart shows. Debt is being destroyed, either through repayment or default―a lot was defaulted on by banks in 2008. Many homeowners defaulted on their mortgages or credit card debt. Since 2009, much of the deleveraging has happened because people slowly repay their debt over time (each monthly mortgage payment is for interest and principal) and they have not been taking out new debt.

In contrast, federal deficit spending has offset the deleveraging in the private sector, helping push total credit market debt up about $1 trillion since 2008, to $54.6 trillion. If the federal government did not offset this deleveraging, economic growth would have been negative over this period.

Put another way, the bulk of the deleveraging took place in 2008 and 2009―the crisis―and this was stopped by massive federal government and Federal Reserve intervention. The financial sector still needs to repay or default on trillions upon trillions in debt and that's why the risk of a crash is constantly in the background―if it happens in a “disorderly” manner, we get 2008 again.

Why QE3 will fail: it isn't big enough

The economy is going to return to a position where total credit is a much smaller multiple of M2 (and GDP and M1).

To return to the ratio of credit/M2 seen at the start of the 1980s, the U.S. needs to deleverage to the tune of $25 trillion or M2 needs to increase by $8 trillion. (See fourth chart above) At the current pace of M2 growth, that will take between 10 and 15 years, assuming no recessions or deflationary periods that cut credit growth.


If the U.S. were to experience a Japan scenario where nominal GDP growth is 0% after 20 years and the federal government offsets private sector deleveraging, the Federal Reserve may well be running QE3 into the 2030s.

These figures are not hard estimates, but they do portray the depth of the crisis. I don't have an exact figure for a QE that would cause inflation to spike up and stay up, but it is definitely in the multiple trillions of dollars, or hundreds of billions per month, far larger than the announced policy.

Conclusion

The U.S. is in a debt crisis. This crisis exploded in 2008 and was relatively quickly halted by federal government and Federal Reserve emergency policies. In the ensuing years, the U.S federal government ran large fiscal deficits and the Federal Reserve engaged in various policies designed to stimulate the economy. The result has been stasis at a lower level of economic activity, with consistently high unemployment.

The impact of QE3 will be a short-term bounce in financial markets and commodities, a portion of which was anticipated by investors ahead of the QE3 announcement. When QE3 fails, the Federal Reserve will announce an increase in the amount of debt purchases or the economy will sink into recession, with very negative results for the financial and commodity markets. That said, while deflation is the overriding concern today, investors should be hedged with precious metals.


2012-09-16

Why Chinese companies are susceptible to fraud charges

What's happening to Chinese stocks is that Chinese attitudes about their own government and businesses are spreading to the Western markets. However, nothing has changed with these companies, China has always been like this. What's changed is social mood: China has gone from darling to goat.

In China, Silvercorp critic caught in campaign by police

Must read: Pettis on commodities

By 2015 hard commodity prices will have collapsed
But rebalancing means, by definition, that for the next few years consumption growth must outpace GDP growth, and so also by definition investment growth must be less than GDP growth. Even if China is able to achieve 5-7% growth rates over the next decade, which I think is almost impossible, this implies that consumption growth will rise to 7-10% annually, and so from 25% growth in the last few years Beijing will be able to allow investment to grow no more than 2-4% annually, and much less if GDP growth rates are as low as I expect.

Signs of the social mood in China

The news will focus on the anti-Japan protests, but look at this: Protesters rally in Sheung Shui against cross-border parallel traders
"Reclaim Sheung Shui! Protect our homes!" they chanted, echoing slogans written on the placards they were waving. They said the numbers of parallel traders buying goods in the neighbourhood and travelling through the station had been creating a nuisance for years. Parallel traders buy goods in one market to smuggle into another, where they sell them without authorisation.

The protests also drew about 300 onlookers - including some parallel traders - who stood around the station and on a footbridge.

It did not take long for clashes to break out after two young protesters held up a sign reading: "Chinese people eat s***!", together with a modified colonial-era Hong Kong flag.
Different reasons, but the same action. Social mood is driving the protests, not the underlying issue.

2012-09-15

Riots explode across China

Here's photos from Qingdao riots. The Chinese at the top says "Beautiful Qingdao Calm Down"

2012-09-14

Chinese TV stops airing ads for Japanese products

To go along with the boycotts, Chinese TV stations are pulling all advertisements for Japanese goods.

央视等多个频道今日起停播日企广告

Machiavelli News Network on this week's events

MNN Reports: Earlier this week, Al-Qaeda launched planned attacks on U.S. embassies across the Middle East, resulting in several deaths, including that of the U.S. ambassador to Libya.

Republican presidential candidate Mitt Romney blasted President Obama's Middle East policy, including the initial response by the American embassy in Egypt, which said it agreed with the protesters (quickly taken down and criticized by the White House).

In New York, Federal Reserve chairman Ben Bernanke ostensibly launched a new, open-ended round of quantitative easing in response to the weakening economy. It was also a response to comments by Mitt Romney, who said he wants to find a new Fed chief. New QE should temporarily boost the economy and markets enough to get Obama reelected.

MNN has learned that Federal Reserve officials also discussed Middle East policy. Several Fed governors argued that QE2 is clearly a failed policy now. The rising food prices sparked by QE2 led to riots in the Arab world that ultimately turned into the Arab Spring, which have morphed into extremist and anti-American violence across the region. Chairman Bernanke pointed out that while the first round of food price increases didn't work, the next one will work because it will really cause chaos in the Middle East, especially for Egypt, which will exhaust its foreign reserves and be unable to pay for imported food.

Russian President Putin also weighed in on the chaos:
"I very much hope this tragedy will push all of us together to intensify the joint - and I want to emphasise, joint - struggle against extremism and terrorist threats," he told reporters in the Black Sea resort city of Sochi.

2012-09-13

Fed announced QE3; at this pace of QE will continue for a decade or more; Fed has turned Japanese

Fed QE3
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
They would need to continue this policy for more than a decade for it to have any effect.


Here's a picture of the latest Fed meeting, held at the early morning in the Hudson river.

Socionomic headline of the week: An epidemic of epidemics

Does the West Nile outbreak signal an epidemic of viral epidemics? Yes and no.
The outbreaks of so many viruses in recent weeks, years and decades — including hantavirus, swine flu, bird flu, SARS, ebola and the great global scourge of HIV — raise an obvious question: Are we seeing an epidemic of viral epidemics?

The experts give a complicated, nuanced answer: yes and no. The bottom line is that virologists are hardly in a panic.

“I think it would be over-exaggeration to think that there are millions of viruses ready to jump on us and bring us back to the 14th century,” says Anthony Fauci, director of the infectious-disease center at the National Institutes of Health. “That would be looking over a ledge that isn’t there.”

...Lyle Petersen, director of the CDC’s division of vector-borne diseases, said this year’s West Nile season is on pace for a record number of severe infections, such as brain inflammation. These infections are considered the best indicator of the epidemic’s scope because they are most consistently reported to health authorities. Most people who are bitten by infected mosquitoes don’t develop symptoms, and their cases are not reported.

Meanwhile, thousands of Yosemite National Park visitors have been warned that they may have been exposed this summer to rodent-borne hantavirus. Of the eight people known to have contracted the virus, three have died.

The appearance of another rare but potentially deadly mosquito-borne virus, one that causes Eastern equine encephalitis, has spurred Massachusetts officials to ask residents in some communities to cancel evening outdoor events until the first hard frost. And two men in northwest Missouri were hospitalized in 2009 with a virus never before seen and possibly carried by ticks. Scientists named it the Heartland virus, after the hospital where it was identified.
During periods of negative social mood, when people are more likely to feel stressed and depressed, they are more prone to illness. Human systems also weaken, making people more susceptible to mistakes and errors. Warfare and social breakdowns spread disease and weaken healthcare systems. People also become more fearful and worry about diseases more than before, hence the greater media attention.

Good roundup on China shadow banking

Shadow Bankers Vanishing Leave China Victims Seeing Scams

H/T: Mish.

Yuan could be convertible by 2015

but probably not.

China to 'allow full yuan convertibility' by 2015
China will probably take the groundbreaking step of making the yuan a fully convertible currency as early as 2015, former central bank governor Dai Xianglong said.

"If nothing unusual takes place, there will be a breakthrough in three to five years," Dai said in a panel discussion at the World Economic Forum in Tianjin yesterday, referring to the liberalisation of the country's capital account.
If everything goes smoothly, the yuan might be convertible by the end of that time frame, around 2017. A crisis could force convertibility much earlier, since a crisis could cause losses and volatility regardless of the currency policy. Convertibility could be used to cool a crisis because it would protect foreign reserves, if for example there was a run on the renminbi.

2012-09-12

Mood improving in Europe

The Dutch turn pro-Europe.

Pro-Europe parties lead in Dutch vote - exit polls

Dutch exit poll predicts narrow election victory for VVD party of Prime Minister Mark Rutte
For the Dutch, the elections are something of a return to normalcy after a decade of upheaval.

For the first time since the 2004 murder of filmmaker Theo van Gogh by a Muslim radical, television debates and the national discussion focused on economic policies such as mortgage deductions and the retirement age, rather than Muslim integration and immigrant crime.

Why did Republicans nominate a man they hate?

Now that Republicans are turning on their nominee, an obvious question to ask is, why did Republican nominate a candidate they hate? Why did they nominate a candidate who "lost" 3 of the 4 major elections he ran in (Mass Senate race 1994, 2008 Presidential Primary and he chose not to run for relection as governor due to incredibly low approval)? Part of the reason was the fracturing of the conservative base. Romney defeated Gingrich, Santorum and Paul, each of whom laid claim to a different part of the party's base.

In this video, political analysts discuss the Romney campaign. Pat Caddell, who managed the Carter campaign, calls it the worst run campaign in his lifetime. Here's a video from RealClearPolitics:

video

Why would a party choose a self-destructive path? The answer is negative social mood. People are in a mood to fight and they are already fighting with their own nominee! Earlier this week, conservative talk radio host Laura Ingraham said the entire GOP should shut down and start fresh.

While Democrats may relish this turn of events as helpful in reelecting Barack Obama, it foretells a doomed 2nd term. Consider Bob Woodward's new book exposes the president as a failed leader who cannot even command respect from his own party. Obama may have no support, from either party, should he be relected. Should Romney win, he will have a honeymoon of maybe 3 months before the conservatives in the GOP start attacking him.

2012-09-11

Dutch election

The Dutch go to the polls today.

Polls set to open in Dutch election
Wednesday's vote is shaping into a battle between the Liberal VVD party of Mark Rutte, the current prime minister, and Diederik Samsom's centre-left PvdA Labour party. But neither will be able to govern alone.

The latest opinion polls predict a middle-of-the-road coalition government involving the pro-austerity VVD and pro-stimulus PvdA will emerge after an expected 12.5 million voters cast their ballots.

Fiscally prudent Rutte's government has been allied to German Chancellor Angela Merkel, while Samsom's calls for stimulus echo those of France's Socialist President Francois Hollande, elected this year on similar promises.

Analysis: Post-election Dutch may be awkward EU partners

Most important: the party positions on Greece.

Dutch Election: Party Profiles
VVD – Liberal Party: The EU should not become a “super state.” No more aid for Greece.
PvdA – Labor Party: Favors giving Greece more breathing space to meet its fiscal targets.
SP – Socialist Party: No more aid for Greece — the country’s debt should be further restructured.
PVV — Freedom Party: The Netherlands should become an independent country again, and should therefore exit the euro zone and the European Union.

Hong Kongers reject Mainland national education, oppose brainwashing

Black day for national education as Tamar site is swamped
Campaign leaders insist Chief Executive Leung Chun-ying withdraw plans to introduce national education - branded a brainwashing tool to be used by Beijing to indoctrinate future generations - but agreed to a meeting proposed by Leung yesterday afternoon provided it was held in public. Leung's office informed protesters that he was willing to resolve the crisis through "dialogue without preconditions".


National education curriculum guide to drop references to 'modern China'

Hong Kong sees surge of democratic fervor after 'patriotic education' showdown

Vote to maintain Hong Kong's identity
Emphasising Hong Kong's identity is not anti-national. It simply acknowledges that it has special characteristics derived from history and Cantonese traditions that it wants to preserve. It is hard to see how Hong Kong can retain its own legal and other systems once the border with Shenzhen dissolves. Hong Kong's special position is based on relations with the outside world, not on its most immediate neighbour. Integrated, Hong Kong will be a second- or even third-tier city in China, the Trieste or Tangier of the nation. Go vote against that.

Updated: Xi Jinping disappears, but Li Keqiang is in the spotlight

(Update below)
I don't make much of the fact that Xi Jinping has missed four public appearances (yet). The only thing it confirms is that his snub of Secretary of State Clinton wasn't a snub. However, it is indicative of social mood, as rumors have started swirling.

While Xi is out of the spotlight, Li Keqiang is making news.

Chinese vice premier confident in economy
"The measures taken by the Chinese government for macro economic adjustment and control will play a conducive role in optimizing the Chinese economy's structure and therefore achieve stable and long-term growth," Li said, while conferring in Beijing with a delegation of the International Business Council headed by Klaus Schwab, executive chairman of the World Economic Forum.

...Li noted that China remains a developing nation, and will stay that way for quite a long time despite the fact that the total volume of its economy has become the second largest in the world, adding that more and more consumption needs have been created when the country is embracing further industrialization and urbanization.

"The consumption, on the other hand, will help the industrialization process in various sectors, especially the service sector," Li told the guests.
There isn't much news in the story, but what is notable is that this story appeared near the front of the newspapers today, complete with photo. There may be questions about Xi Jinping, but Li Keqiang is moving up.

Li has been talking about economic reform for several years now and he is the more important figure in terms of pushing reform. That said, if Xi is really out of the running for the leadership, it means there are behind the scenes negotiations and a new leader, opposed to Li's reforms, would probably replace Xi.

Update: The back injury story is gaining more ground. Here's Reuters: China's Xi not seen in public because of ailment: sources

2012-09-10

The War Between the States

In the hunt for more revenue, Congress is looking to streamline the tax code, closing loopholes and deductions. One way to do that is allow more Americans to fall under the Alternative Minimum Tax (AMT). A feature of the AMT is that is doesn't allow for the deduction of state and local taxes. Since the Northeast has far and away the highest local taxes, the rest of the states can dump a larger share of the tax burden on them.
D.C. Finalizing Plan for Assault on Metro NYC

Beijing and Shanghai end tenure

Beijing, Shanghai scrap tenure for teachers
Professor Chu Zhaohui of the National Institute of Education Sciences said that while mainlanders increasingly subscribe to a market-oriented economy in which people must compete for jobs, teacher recruitment remains a remnant of the planned economy, promising an "iron rice bowl" regardless of performance.

Chu said a review regime for schoolteachers was a major step towards fostering motivation through competition. But he also cautioned that it would work only if teachers were duly rewarded for doing a better job.

Social mood in the headlines

The Brazilian Ego Falters Along With Country’s Economy
The news deflated hopes that Brazil had pulled out of the doldrums. Beyond that, it was a blow to the nation's collective ego. Ordinary Brazilians are unusually obsessed with their economy, until recently a source of great pride. The euphoria felt in December when Brazil overtook the UK to become the world’s sixth-largest economy turned to disappointment when the Economist Intelligence Unit wrote that the countries had again swapped positions.

...Commentators fretted about Brazil's losing its status as the dominant economy in Latin America to its northern rival, Mexico, which is now being discussed as the hot economy on the block.

Writing online for the business magazine Exame, economics reporter Beatriz Olivon pondered whether Brazil or Mexico would prevail. Olivon cited a blog by American investor Mark Mobius, a longtime champion of Brazilian growth, talking up Mexico’s prospects. Quoting a report by the Japanese bank Nomura putting odds on Mexico's outperforming Brazil, Olivon wrote that if that came to pass, "it would be the victory of a country with liberal economic policies and manufacturing production over a commodities exporter.”

2012-09-09

Golden Dawn still rising in Greece

It is as I've said previously on this blog: voters want change and they will keep voting until they get it. If the party in power fails to deliver change, the voters will change the party in power. Since the centrist parties continue to pursue the policies of the past, with only slight changes, voters increasingly will turn to fringe parties. It isn't enough to have new rhetoric, there must be real policy shifts that radically change course. Socialists offering more socialism or capitalists offering more capitalism are out of luck: voters don't want extreme versions of existing policies, they want new policies.

Changes can come to any policy area as long as they signal a change in direction, and with nationalism rising, immigration is a perfect area for change. Due to radical immigration policies in force across the Western world and the almost unanimous defense of these laws by the Western elite, a rejection of immigration laws signals a party has no problem opposing the Western elite that dominate the EU, IMF, ECB and other supranational organizations directing the crisis response. In the case of Greece, if Golden Dawn is willing to take an unpopular stand on immigration that will draw condemnation from leaders across the West, it's not a stretch to think they'll also have no problem taking similarly unpopular action with regards to a Greek euro exit or Greek default on euro debt.

Greece's Main Opposition Syriza Leads in Polls
Greece's anti-bailout leftist Syriza party would win if elections were held today, while ultranationalists Golden Dawn would become the third-largest party in parliament, a poll showed Friday.

According to a survey prepared by VPRC polling agency and published in Ellada Avrio newspaper, the opposition Syriza party would garner 30% of the vote, while conservatives New Democracy--who lead the coalition government--got 28% of the support.

Euro shorts steady ahead of short-covering rally on Friday


2012-09-07

LG's 2001 iPAD; Apple runs out of luck

Karl Denninger exposes Apple's claim to be an innovator by showing an LG created "Digital iPAD" invented nine years before the iPad.
LG demonstrates wireless Linux Web pad at CeBIT

Apple has sown the wind with its patent lawsuits, and now it may reap the whirlwind.

HTC Patents Challenged by Apple Probably Valid, Judge Say
HTC accuses Apple of infringing two patents it owns for ways to reliably transmit a larger amount of data. Taoyuan, Taiwan-based HTC said the patented methods are critical to the 4G technology known as LTE, or long-term evolution, that allow faster downloads.

A victory could let HTC seek an import ban of the latest iPad and even the newest iPhone, if it uses LTE when it’s unveiled as early as next week. That could give the Taiwanese handset maker leverage to force a settlement with Apple, which has made its own patent-infringement claims against HTC.
Apple's rise follows the typical Elliot Wave pattern. It appears to have peaked in popularity (maximized its popularity) and the tide of public opinion is quickly turning against the firm.

Ben Bernanke childhood video unearthed


H/T: Joe Salerno at Mises.

China's steel ponzi

Here's Caixin on the steel ponzi. Remember this anytime someone says China's steel slowdown will be contained (and recall Bernanke's similar statement about subprime).

Bank Loan Tricks Stain, Strain Steel Sector
Some steel manufacturers and trading firms used product inventories as collateral for bank loans, then increased their money in hand by convincing another bank to exchange the lenders' acceptance bills for cash.

The strategy worked apparently because bankers between 2007 and 2010 too often failed to verify that acceptances were specifically tied to trading, said a Bank of China loan officer. The oversight apparently "fueled risky and speculative activities on the part of steel companies," he said.

Some steelmakers and traders, not satisfied with their own business realm, used stretched-out loans to buy speculative real estate in hopes of raising even more money, said Zhang Changhe, manager of the trader Beijing Ruisen Steel Co. Ltd.

Shanghai steel companies were especially busy investing in property with money raised by manipulating bank loans, said Wei Zheng'an, a steel analyst at Guotai Junan Securities.
Take out multiple loans on a single asset and use it to fuel speculation in real estate.
Steel traders alone last year borrowed about 1.89 trillion yuan from banks, accounting for 3.5 percent of the nation's 2011 loans in all categories, said Zhou Huarui, chairman of the Shanghai Steel Service Trade Association.

The strategy started unraveling, though, when steel prices fell and the value of collateralized steel products declined.

Moreover, a real estate market cooldown since 2010 has trapped speculators including steel companies without cash needed to repay loans.

"Their money is tied up in the property market," Wei said.
I'm a long-term bull on China, but there is a storm coming first.
Like many other steel company executives, Zhang faces a common predicament now that the good times for the steel sector have ended: His company can't meet its loan obligations and might file for bankruptcy.

What's keeping Zhang afloat, however, is that his bank is afraid that it might lose the entire unpaid portion of the loan. Bankers have told him to hang on and "repay as much as you can afford," he said.

钢贸融资劫

China bear market rally

Hong Kong and Mainland exchanges are hopping on stimulus news. Unfortunately, these projects aren't new and they are a drop in the bucket compared to the decline in real estate. They also will do nothing to plug the revenue holes facing local governments, nor the souring loans on bank balance sheets. What is happening is a bear market rally after weeks of shares slowly churning lower.
China adds highways to stimulus plan
China’s top economic planners on Thursday approved another batch of major infrastructure-investment projects, bolstering the more than two dozen subway and urban-rail initiatives announced a day earlier.

In the latest round of Keynesian-style stimulus designed to rekindle economic growth, the National Development and Reform Commission gave the go-ahead to 13 highway projects and other municipal and port projects, according to reports citing documents posted on the commission’s website.

Estimates on the size of the stimulus varied, with some reports putting the total number of projects at 20, while a separate report by Reuters had the figure at 30.

The measures follow Wednesday’s announcement of 25 new rail projects worth an estimated 800 billion yuan ($127 billion) over the next three to eight years. See related story on China’s new rail initiatives

Nomura economists said the value of the projects approved this week totaled 1 trillion yuan, or about 2.1% of the size of the Chinese economy last year.

2012-09-06

Will Spain break up?

Separatism threatens the future of Spain
Next Tuesday, Catalans celebrate their national day, or Diada, in a year when the clamour for independence for the first time commands the support of more than half the population – including figures such as Jordi Pujol, the mainstream nationalist who ran the restored Catalan autonomous government from 1980 to 2003, and Pep Guardiola, the former manager of Barcelona’s football team.

Next month, Basques go to the polls with the separatist Bildu coalition going head-to-head with the mainstream Basque Nationalist party (PNV). After a decade-long ban for links to Eta, the separatist group that recently ended its 50-year campaign of violence, political separatists won more seats than the PNV in municipal and general elections last year. Separatism has gone mainstream, in a Spanish state being shaken to its foundations.
Read the whole thing.

Putin interview with Russia Today

Putin: Using Al-Qaeda in Syria like sending Gitmo inmates to fight

Text here.
On Syria:
RT: Understood. Mr. President, another question I'd like to ask you – a number of Western and Arab nations have been covertly … with supporting the FSA, the Free Syrian Army – indeed, some of them are doing it openly now. Of course the catch here is that the FSA is suspected of hiring known Al-Qaeda fighters amongst their ranks. So the twist in this tale is that a lot of those countries are actually sponsoring terrorism, if you like, in Syria, countries that have suffered from terrible terrorism themselves. Is that a fair assessment?

Putin: You know, when someone aspires to attain an end they see as optimal, any means will do. As a rule, they will try and do that by hook or by crook – and hardly ever think of the consequences. That was the case during the war in Afghanistan, when the Soviet Union invaded in 1979. At that time, our present partners supported a rebel movement there and basically gave rise to Al Qaeda, which later backfired on the United States itself.

Today some want to use militants from Al Qaeda or some other organizations with equally radical views to accomplish their goals in Syria. This policy is dangerous and very short-sighted. In that case, one should unlock Guantanamo, arm all of its inmates and bring them to Syria to do the fighting – it's practically the same kind of people. But what we should bear in mind is that one day these people will get back at their former captors. On the other hand, these same people should bear in mind that they will eventually end up in a new prison, very much like the one off the Cuban shore.
I would like to emphasize that this policy is very short-sighted and is fraught with dire consequences.

On the jailed punk band:
RT: Ok and now I’d like to talk about the trial and jailing of Pussy Riot, that punk group band. There’s been much criticism that the sentence handed down was too strong, too much and that the whole case was too big a deal off and that it actually back fired and has brought more people to their cause with the publicity. With hind sight , always a beautiful thing, but with hindsight do you think the case could have been handled differently?

Putin: You’ve been working in Russia for a while now and maybe know some Russian. Could you please translate the name of the band into Russian?

RT: Pussy Riot the punk band,I don’t know what you would call them in Russian Sir, but may be you could tell me!

Putin: Can you translate the first word into Russian? Or maybe it would sound too obscene? Yes, I think you wouldn’t do it because it sounds too obscene, even in English.

RT: I actually thought it was referring to a cat, but I’m getting your point here. Do you think the case was handled wrongly in any way, could some lesson have been learned?

Putin: I know you understand it perfectly well, you don’t need to pretend you don’t get it. It’s just because these people made everyone say their band’s name too many times. It’s obscene – but forget it.

Here’s what I would like to say. I have always felt that punishment should be proportionate to the offence. I am not in a position now and would not like, anyway, to comment on the decision of a Russian court, but I would rather talk about the moral side of the story.

First, in case you never heard of it, a couple of years ago one of the band’s members put up three effigies in one of Moscow’s big supermarkets, with a sign saying that Jews, gays and migrant workers should be driven out of Moscow. I think the authorities should have looked into their activities back then. After that, they staged an orgy in a public place. Of course, people are allowed to do whatever they want to do, as long as it’s legal, but this kind of conduct in a public place should not go unnoticed by the authorities. Then they uploaded the video of that orgy on the internet. You know some fans of group sex say it’s better than one-on-one because, like in any team, you don’t need to hit the ball all the time.

Again, it’s okay if you do what you like privately, but I wouldn’t be that certain about uploading your acts on the internet. It could be the subject of legal assessment, too.

Then they turned up at Yelokhovo Cathedral, here in Moscow, causing unholy mayhem, and went to another cathedral and caused mayhem there, too.

You know, Russians still have painful memories of the early years of Soviet rule, when thousands of Orthodox, Muslim, as well as clergy of other religions were persecuted. Soviet authorities brutally repressed the clergy. Many churches were destroyed. The attacks had a devastating effect on all our traditional religions. And so in general I think the state has to protect the feelings of believers.

I will not comment on whether the verdict is well-grounded and the sentence proportionate to the offence. These girls must have lawyers who defend their interests in court. They have the right to file an appeal and demand a new hearing. But it’s up to them, it’s just a legal issue.

Your last chance to sell Chinese real estate; China's three strategic errors

Liu Jun Luo writes that the April 2011 bounce to 3607 level for the Shanghai Composite was your last chance to escape Chinese stocks (the Shanghai Composite peaked in August 2009 and is currently at 2051). The current bounce in real estate is your last chance to escape from housing.
3067点是最后的逃命机会和房地产的最后逃命
目前,他们被美国骗了,干了3个战略性错误的事情,(一)4万亿财政扩张;(二)大量购买了欧洲债券;(三)2010年6月,让人民币继续升值。为了,弥补这些战略性错误,中国央行未来会选择牺牲股市和房地产。
Presently, they've (Chinese central bankers) been deceived by America, adopting three strategic errors, (1) the 4 trillion yuan stimulus, (2) massive buying of European debt, (3) allowing the renminbi to continue appreciating in June 2010. In order to make up for these strategic blunders, the central bank with choose to sacrifice the stock and real estate markets.

The response to China's debt problem will be large scale debt purchases and renminbi devaluation.

To wit: Is the PBoC starting to liberalise its rate regime?
Since July 2012, this has clearly changed, likely in recognition of the shift in liquidity impact of the PBC’s fx operations. The PBC is now comfortable conducting frequent reverse repo operations (grey bars on Chart 1) to quickly offset any imminent liquidity squeeze.
To which FT Alphaville replies:
In short, it’s acting increasingly like western central banks.

Although there's another idea:
Another theory for why the reverse repos have been used so far, rather than an RRR cut, is that the Party is waiting until after its congress, which is happening either in October or November, before making a major easing move.

Baoshan Steel Index falls to lowest level since October 2009

And if it falls another point (which it likely will tomorrow), it will hit levels last seen in June 2009. This index bottomed out in April 2009.


2012-09-05

Parti Québécois returns to power on divisive ethnic theme; victory marred by bombing

Another election fitting the current social mood occurred in Quebec.

Shots, blast disrupt PQ victory celebration in Quebec
TV footage outside showed flames burning at the back of the club and a heavyset, bespectacled man wearing shorts and with a balaclava over his head.

"The English have woken up. That's enough," the arrested man said in French, with a heavy accent, as he was walked away in handcuffs. Montreal police later said a 50-year-old suspect was arrested on suspicion that he fired and critically injured two people.

In her speech, Ms. Marois, who had been severely criticized for campaigning on identity and language themes, had some conciliatory words for Quebec's anglophone and native communities, speaking of their shared history and, in a rare move for her, speaking in English to say their rights would be respected.

However, she struck a tougher stance towards the rest of Canada.

"As a nation, we want to take ourselves the decisions that affect us. We want a country. And we'll have it."

Marois wins minority in Quebec election, security scare cuts speech short
The minority PQ government may alleviate some fears of an impending referendum on Quebec’s independence, which Marois said she would only call under the “right conditions."
But Marois remained defiant in her victory speech, saying: “The future of Quebec is to become its own country.”

...Now, for the first time since 2003, Quebec has a sovereigntist government that’s poised to revive tensions with Ottawa and other provinces.

Marois has said that she will contact Prime Minister Stephen Harper shortly after taking office to discuss the transfer of powers in areas like immigration, language and employment insurance from Ottawa to Quebec. If Harper refuses, Marois said that will only boost her case for an independent Quebec.

But as a minority government, the PQ will face tough challenges pushing its independence agenda. The party has won four majorities in previous elections, avoiding having to forge alliances in parliament.
This situation mirrors the one in the United Kingdom, where Scotland's push for independence has stalled and the debate has turned to a devolution of powers. Quebec has a stronger case for independence since there's no EU to complicate matters, but Canada (and the United States, if secession talk heats up there) also has a more decentralized system that can sate the desire for local control.

Whether Quebec stays or goes depends on local factors, but also social mood. If the mood becomes extremely negative, they may choose to exit. In 1995, the vote was split almost 50/50 , with no votes barely defeating a vote for sovereignty. A similar vote lost 60/40 in 1980. If Quebecois want independence, they should study socionomics to time their next sovereignty vote.

Quebec independence will have an effect on the rest of Canada and the United States. Assuming Canada stays united, the country would make a strong political shift to the right. In the past, breakup scenarios usually involved the Western energy-rich provinces leaving for the United States, but today's U.S. doesn't seem as friendly a destination. The largest impact would be psychological though, in that it would make separatism a reality.

2012-09-04

Stick a fork in Spain?


Fears Rising, Spaniards Pull Out Their Cash and Get Out of Spain
In July, Spaniards withdrew a record 75 billion euros, or $94 billion, from their banks — an amount equal to 7 percent of the country’s overall economic output — as doubts grew about the durability of Spain’s financial system.

The withdrawals accelerated a trend that began in the middle of last year, and came despite a European commitment to pump up to 100 billion euros into the Spanish banking system. Analysts will be watching to see whether the August data, when available, shows an even faster rate of capital flight.

See also: Nomura: "Spain Will Need Full-Blown Bailout"
Is Spain Running Out Of Cash?

Socionomic headline of the summer

Mental Illness Rises as Euro Debt Crisis Intensifies
A growing number of global and European health bodies are warning that the introduction and intensification of austerity measures has led to a sharp rise in mental health problems with suicide rates, alcohol abuse and requests for anti-depressants increasing as people struggle with the psychological cost of living through a European-wide recession.

"No one should be surprised that factors such as unemployment, debt and relationship breakdowns can cause bouts of mental illness and may push people who are already vulnerable to take their own lives," Richard Colwill, of the British mental health charity Sane, told CNBC.
Negative social mood is sending the economy lower and also manifesting in unhealthy attitudes and behaviors, not the other way around.

California circles the drain and the end of immigration in America

There is very little anti-immigration sentiment in the United States, although polling data shows public opinion is very far from that of political leaders. While amnesty for illegal aliens is the most discussed reform, the public favors enforcement. As social mood declines, the public mood will shift slightly, but the public policy is likely to undergo a "radical" shift because the political sphere is holding to an extreme position.

The public is less trusting of government and believes politicians and bankers pull the wool over their eyes or deceive them on various issues. Immigration remains part of American mythology, but statistics such as the one below may change minds. The solution to America's demographic problem is said to be immigration, but according to the data, immigration is actually dragging America deeper into the red. Immigration as it currently exists is a problem for America, not a solution.

California's Greek Tragedy
California's rising standards of living and outstanding public schools and universities once attracted millions seeking upward economic mobility. But then something went radically wrong as California legislatures and governors built a welfare state on high tax rates, liberal entitlement benefits, and excessive regulation. The results, though predictable, are nonetheless striking. From the mid-1980s to 2005, California's population grew by 10 million, while Medicaid recipients soared by seven million; tax filers paying income taxes rose by just 150,000; and the prison population swelled by 115,000.
67 new welfare recipients for every new taxpayer is not a recipe for success. Americans will face a choice: immigration or welfare. I suspect they will choose to preserve welfare/entitlements and halt immigration, especially if the economy weakens and the true cost of immigration is impossible to hide.

2012-09-03

The repo man cometh in China

All types of bubbly behaviors are uncovered in this article, including 3% of Shanghai GDP generated by steel traders. Well worth a read.

China's steel traders expose banks' bad debts
But those steel loans, after offering a quick fix, became excessive, poorly managed, or a combination of the two. Government officials insisted more money was needed to prop up the industry. Steel executives said the money flow was too heavy, and they had to put the money to work in real estate and the stock market.

"After the financial crisis, when the government released its stimulus, banks begged us to borrow money we didn't need," Li Huanhan, the owner of Shanghai Shunze Steel Trading, told a judge at a recent hearing. "We had nothing to do with the money, so we turned to other investments, like real estate."

2012-09-02

Chinese PMI falls below 50; 5 banks earn more than 272 Fortune 500 manufacturers

Chinese PMI hits 9-month low
The official purchasing managers index (PMI), dipped below the 50 mark – where a reading above 50 indicates growth – to 49.2 in August from 50.1 a month earlier.

Advance warning of manufacturing industry hollowing out, 5 bank's profits exceed 272 companies (报告预警制造业空心化 5银行利润超272家企业)

272 manufacturing firms account for 42% of revenue in the Fortune 500, but only 25% of profits. The 5 largest commercial banks earned 5% of operating income and more than 30% of net profits. These numbers have changed considerably over the past 5 years as manufacturing profits decline and bank profits steadily rose, and this had led to fears that the manufacturing industry is being hollowed out.

In some respects, the decline of the manufacturing sector is the natural result of economic development. In contrast, the rise of the banks is entirely a story of the 2008 global financial crisis and stimulus plan, executed through the banks. It is the banking sector that should scare economists, not the manufacturing sector.

There is no such thing as hyperdeflation

ZeroHedge has a post up: The Monetary Endgame Score To Date: Hyperinflations: 56; Hyperdeflations: 0

First off, the title is a tautology. You can't have a monetary endgame from "hyperdeflation" because cash is the most valuable asset in the economy. It's absurd when you think about it. Second, if you measure in gold or a foreign currency, almost every hyperinflation is accompanied by a "hyperdeflation" as the value of other money rises. In other words, hyperinflation is the abandonment of the "currency of record" and what takes place in that currency is indeed hyperinflation, but what's occurring at the same time is also "hyperdeflation" priced in other currencies and gold.

The response of any government experiencing the hyperdeflation of its currency would be hyperinflation (see Switzerland's response to the euro collapse). Therefore, to experience a true "hyperdeflation", one would probably need to be on a hard gold standard that only used gold coins as money. There needs to be no escape from the deflation; there is no way to inflate because the core currency is gold. But if there's no way to inflate (or hyperinflate), then there is not enough inflation in the first place......

Second, if hyperinflation is the decrease in value of the currency to a rate of "effectively zero," then a "hyperdeflation" would mean the rise in the value of the currency to "effectively one" as in the whole economy. The value of all the goods and services would be "effectively zero"; the money supply would shrink to almost nothing and the cash in the economy could buy all goods and services. Velocity would be zero though, so there'd be no transactions at the end of a hyperdeflation.

In what situation would people be trying to dump goods and services the way they dump currency in a hyperinflation? Can you imagine someone driving a tractor trailer filled with bread or shoes in order to collect $1? This would need to happen, and at the end, the guy with the $1 would refuse to buy. Everyone wants currency and no goods, services or assets. It's absurd, and so is hyperdeflation taken to the extreme. The point being, unlike hyperinflation, hyperdeflation has a quick end date: total abandonment of debt, not the total abandonment of the currency. "Hyperdeflation" terminates with the end of debt.

The above is a theoretical exercise. In common parlance, "hyperdeflation" means a rapid collapse in prices. As we know from history, deflationary periods are extremely brief relative to inflationary periods. Stocks go up for years and crash in weeks or months (or even one day). A simple reason for this is the same reason shorting is harder that going long: if the value falls 100%, game over. But the value can rise and rise to infinity. Were an actual hyperdeflation to take place, it would happen extremely fast and would terminate when debt levels collapsed. It would be recognized by most people as a financial collapse, not a "hyperdeflation".

Of course, the total economy would be collapsing and people would eventually fear the destruction of the currency even if the currency properly managed........which could lead to hyperinflation. If the whole banking system collapses and financial markets are shut down, even though cash has a very high value in the crisis, people may start asking whether the government would survive. If hyperdeflation does happen, you would want to get out of cash, load up on debt if at all possible, and get into productive/hard assets. This would be a good strategy in any case: either the society will attack itself and change the political system and probably the currency, or it will survive and rebound.

In the end, we come back to the point in my earlier post Mish talks sense on hyperinflation, that hyperinflation occurs during societal collapse. A major deflationary event could set the stage for hyperinflation, but not necessarily.

So when does deflation occur?

There is major deflation at the end of hyperinflations. Look at Wiemar Germany, some investors went to cash a month or two before the new currency was introduced and became wealthy overnight. At the end of hyperinflation, prices collapse and those with cash can buy up everything on the cheap. The argument of deflationists is that we already had the "hyperinflation", if you look at the rise in debt and the financial sector, it parallels the growth of the financial sector during the Wiemar episode.

Right now the Fed is holding deflation at bay because it found the borrower of last resort: USG. It is US deficit spending that keeps the deflation at bay.

By one estimate, the Fed needs to monetize $8 trillion of debt to get ahead of the deleveraging. The figure is even larger if one considers a debt jubilee. If one needs to implement a policy that would be called hyperinflation under other cases, but it leads to no inflation or low inflation, there must be a serious case of deflation.

"Hyperdeflation" is at worst a completely meaning less term and at best the description of an extremely large collapse in debt and asset prices whose size is matched by its speed. There probably can be no "hyperdeflation" over the course of weeks or months because the end game comes suddenly via bankruptcy. The event ends as cheap assets attracting buying, risk taking and once more, the use of credit. Deflation is the story of the survival of the currency regime, not its destruction.

Signs of the negative social mood: blogs close the comments section

More blogs are closing their comments section as the desire to retreat from society advances. Here's Walter Russell Mead's exit:

The End of an Era: Comments Are Closed
We apologize to the readers who participated in or valued the comments section on the blog, and especially to the well mannered and thoughtful contributors who never tried to hog the microphone, launch flame wars, smuggle hate speech into the comment page, rant about personal pet peeves repeatedly and predictably, let partisan or ideological animus run wild or otherwise abuse what at its best was a forum for reflection and thoughtful debate. To such belongs the Kingdom of Heaven, and your insights were appreciated, your praise cherished and your thoughtful censure was a cause for reflection. You know who you are, and this would be a much poorer world without you.

For the rest, we wish you well, and are confident that you will find many opportunities both in cyberspace and in the meat world for the kind of exchanges and conversations you seek.
Comments are an essentially free service for a website to provide. Of course there's a lot of noise in the comment section, but the point is that people go to that site to discuss the particular ideas of a blog. If there's no place for the conversation, it might take place elsewhere, but most likely, it won't take place at all.

2012-09-01

Now France's leader sinks in the polls

I covered this phenomena here, with Japan as the test case. Every prime minister since the mid-2000s starts with a high approval rating and immediately sinks due to negative social mood. The spike is a reflection of a brief moment of hope, which is overwhelmed by the main trend in social mood within weeks or months af taking office.

Now France is the same:
French pessimism nears all-time high -poll
The French are bleaker about their country's future than at any time since 2005, a new poll showed on Saturday, with 68 percent saying they are "rather" or "very" pessimistic, the highest level ever in the initial months of a new presidency.

The poll's findings jibed with a survey released last weekend which found that Socialist President Francois Hollande's approval rating had slipped to 54 percent, continuing a steady decline since he took office in May.

Euro shorts still lightening up on their positions