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What Parenting Has in Common with Raising Capital

By: Chris at

Fathers and mothers everywhere recall with a certain fondness the years BC. For the average pre-family adult, life was starkly different before children (BC). Responsibilities ended at the individual level and oh, the freedom. Money was yours, time was yours, and you could do with it all as you damn well pleased.

Come home late? Sure!

Not come home at all? Of course!

Take off on a whim? Hell yeah!

Spend silly money on things you don't need? All the time!

Being a parent changes this. Sure, there are parents who ignore responsibilities but that's why they're called bad parents, scowled at by their peers, and the neighbors secretly all expect to see their children end up on Jerry Springer.

When that little ball of screaming flesh drops out of... oh, never mind. You know how it all works. As soon as you become a parent that child is your responsibility. Period, end of story. No going back. If you don't like it you should have thought more about what you were taking on, or more precisely what you were putting where and the potential ramifications. After all, a vasectomy could solve the problem and you get to walk around like John Wayne for a week. A win win if that's what you're after.

After children everything you do going forward is done with the knowledge that there is this underlying responsibility. It can be a burden, or it can act as a massive awesome driving force - this all depends on temperament. The question then becomes what temperament are we dealing with?

Starting and running a company with your own capital is still like being a bachelor. It's your baby, your problem and you answer to nobody but yourself.

You wanna blow money on expensive office space? Sure!

Business class travel and high end hotels? Sure, why not!

When a founder raises capital it's akin to having your wife give birth. Everything changes. No more late night drinks with the boys, no more dragging yourself out of bed at 10 AM on a lazy Sunday. Hell no, you've got others to think about and take care of and guess what - they come first. They're called shareholders and they've worked hard to acquire the money you as a founder are now taking.

 In a recent email exchange with one of the Seraph's portfolio company CEOs the particular gentleman mentioned half jokingly that he's the indentured servant of his shareholders. This CEO has an immense amount of experience in both public and private companies and he "gets it". He knows that the responsibility is his, is large and can't be taken lightly.

Not all founders think like this. Some raise money thinking that its somehow a given and that once they have the money that this is now "their" money with which to build "their" company.

I like to see a company run where founders have a meaningful stake in the business and I want to see them treating the company as their own. The fact that should not be lost however is that shareholder funds are of course company money entrusted to founders in their position of managing the company. As a matter of due diligence this is a distinction I like to determine. It's dangerous to place capital with founders who can't tell the difference.

As soon as you sell equity in your business a piece of that business is NO LONGER YOURS and your responsibility is now to shareholders. Directors in a business, whether founders or equity holders, or as the case typically is, usually both, also have a responsibility for looking after the interests of a company's shareholders. One way to ensure this takes place is to ensure that there is a separation of roles between the board of directors and management. This structure can help ensure good corporate governance.

Annual and medium term objectives for management need to be laid out. There is a large risk where a company who's management are majority shareholders perform poorly or even destroy shareholder value out of sheer incompetence, lack of adequate skills or in some instances by fraud. The board's responsibility is to be able to ensure that corrective measures are taken.

In discussions with our many advisors who collectively have decades of experience working with companies right from start-ups through to multi-billion dollar enterprises the consensus is that at a minimum at least half of managements compensation needs to be tied to their achievement. This compensation can be in way of equity or salary or a combination of the two.

Results should be measured by results such as EBITDA, return on capital and/or revenue growth.
It's the board's responsibility to ensure that management are executing on the business plan which includes ensuring managements performance and the ability to remove management in the event metrics are consistently not met.

When investors see mismanagement, incompetence, breach of fiduciary duties and abuse of funds then watch out. It can quickly turn into carnage for founders who've not taken responsibilities seriously and where recourse is available, either by means of step in rights being used or by legal means. For irresponsible founders this can be as dangerous as spilling an Englishman's pint.

- Chris


"A hero is someone who understands the responsibility that comes with his freedom." - Bob Dylan

The Saudi Succession: Its Impact On Oil, Markets And Politics

As reported earlier, several hours ago Saudi Arabia announced that its 91-year-old King Abdullah had passed away, in the process setting off what may be a fascinating, and problematic, Saudi succession fight which impacts everything from oil, to markets to geopolitics, especially in the aftermath of the dramatic political coup in neighboring Yemen. As a reminder, it is Saudi Arabia whose insistence on not cutting oil production with the intent of hobbling the US shale industry has led to the splinter of OPEC, and to a Brent price south of $50. Which is why today's event and its implications will be analyzed under a microscope by everyone: from politicians to energy traders.

Here, courtesy of Ecstrat's Emad Mostaque, is an initial take at succession, the likely impact on oil, then the Saudi market & currency and finally regional politics.


The process of succession appears to have run smoothly with Prince Salman (79), Abdullah’s half-brother, being announced king and another half-brother and the youngest of his generation (at 69) Prince Muqrin being anointed the new Crown Prince as expected. King Salman has significant financial and power backing as one of 7 sons of Hassa al Sudairi (known as the “Sudairi Seven”) and King Abdulaziz and as such is unlikely to be challenged. Salman is commonly known for his charitable giving and conservative nature, please contact us for other details.

While Salman has the ability to change succession (indeed under Saudi Basic Law and given his family backing he has the power to do anything he wishes), it is likely that Muqrin will remain the next in line. After this, it will skip a generation, with the two main candidates for the throne still the defense minister Mohammad bin Nayef (55), the son of Salman’s full brother departed Crown Prince Nayef and head of the National Guard Mutaib (62), son of Abdullah. As with the announcement of Prince Muqrin as Deputy Crown Prince, we may see an announcement in this regard sooner rather than later to assuage fears of potential rapid succession, although we are in a period where any agreements made under King Abdullah’s reign may be put to the test


With oil prices under $50, the feeling on the ground in Saudi Arabia has been one of concern. After 19 years with of rule by Abdullah (9 as regent and 10 as King), there is significant pressure for the new King to secure the support of the populace through populist measures such as public sector wage increases with  90% of Saudis employed in the public sector (90% of the private sector is foreign) and additional handouts. These may well include expensive measures such as free housing for young married couples and a potential consumer debt jubilee, where the government takes over payments (billions have already been shifted in this manner over the last few years).

The current Saudi budget balances at around $63 (see here:  and the Kingdom has ample cash assets of around $800bn and the ability to raise huge amounts of debt. It should also be noted that while the budget balances in the $60s, historical spending has been significantly above budget in the last few years, $30bn in excess in 2014. Additional spending may be similar to the Arab Spring, meaning we could see an overspend of $50bn or more this year depending on the measures taken.

Saudi Arabian rhetoric has been firmly guiding the oil price down since the OPEC meeting, with officials pointing out quite sensibly that it is up the market to set prices and not for Saudi to underwrite unconventional oil producers. I discussed why this made the market particularly vulnerable here: and was one of the key reasons I was negative on oil prices (although I did see $70 as a floor as I thought OPEC would cut!).

In reality, rhetoric is about all Saudi has been doing to impact oil prices, with the latest figures for production and exports actually down 300kbpd YoY and price differentials to the US down versus the summer, but still at multi-year highs.

From comments at the WEF in Davos, the rhetoric is already calming with guidance that oil prices should correct over the next year, albeit not too high and moves to focus on the long-term potential for oil prices as unconventional sources come under continued pressure would increase local sentiment and potentially boost the oil price given the current structure.

The current structure of the oil curve is hugely overextended, with almost a 20% spread between 1m and 12m WTI, a scenario that is truly bizarre in a world of negative nominal Eurozone yields. To put this in context, this has only occurred twice in the last few decades, at which time storage was more expensive and interest rates much higher. Oil doubled in the following year both times.

This is also a key reason that inventories at Cushing are spiking and the Brent-WTI spread closed (as WTI is easy to store there), giving a false signal of oversupply when in fact demand figures are likely to be significantly higher (1.5-2mbpd by my estimation) over the last period than the market expects. In addition, 40mb of floating storage have been hired to take advantage of this arbitrage, further reducing the probability of it continuing.

The back end of the curve is where the real story is, having disconnected completely from spot oil prices in terms of correlation as it remains near $80. The super-contango we see now could continue for a period due to some curious structural details, but it is likely that into 2016 we will see a resumption of backwardation, with the spot price above the backend price, which will be higher due to the E of E&P being slashed.

In the medium term, there are several geopolitical events that the oil market may also respond to given the heavy net shorts, from the complex situation in Yemen, where Shia Houthis have ousted Saudi ally Hadi to impending violence in Nigeria, which typically loses 300kbpd of production during elections (due for Valentine’s day), with 1,000 dying in the violence last time around and likely many more this year given the sharp divisions that exist within the country (more here: Libya remains a wreck with reconciliation unlikely absent a significant external force intervening and Iraq is coming under heavy pressure as it looks to run a 20-30% deficit due to lower oil prices.

On the flipside, we are likely ~2 months away from an Iran deal, which would cause the market to price in additional supply coming online rapidly.

Market length is resolutely short, having flipped hard from a record long position last summer and the possibility of a near-term squeeze is high, particularly as crude has consolidated just under $50. In the medium term the likely economic and “fundamental” news may cause the rally to fade, but the long-term outlook remains strong and I retain my view oil will be $130 in a few years absent China blowing up completely

Market & currency

The Tadawul has proved remarkably resilient in the face of lower oil prices – down just 4% over the last 12 months even as oil fell 55%. If you had put that scenario to any market observer a year ago, the likely response would have been that we would be 30-40% lower at least.

This increased resilience may have been aided by a patriotic hand, but the lack of significant downgrades in earnings are also indicative of the fact that the Saudi market may be driven by spending based on oil, but most stocks, petchems aside, aren’t beta to oil as in other markets. Even petchems run with fixed, below market price feedstock prices, meaning they are consistently profitable even at current levels of oil, although the offshore operations of companies such as SABIC do add an element of beta to oil.

The overall impact of the succession is likely to be positive for the Tadawul as wealth transfer to the populace is increased and spending maintained over the next few years no matter what the oil price is. Retail participation in the Saudi stock exchange remains above 90% as it trades billions of dollars each day as it remains one of the main sources of entertainment in the kingdom. It would not be surprising to see some favourable privatizations be introduced ahead of the market opening to foreigners in a few months to fulfil its other main role of wealth redistribution, with retail IPO participation remarkably high.

Credit conditions are likely to be loosed over the coming year to fill some of the gap from lower oil revenues and after banks were disintermediated in the spending boom following the Arab Spring. Capital adequacy ratios remain high with Tier 1 ratios in the teens and asset quality remains high, particularly as the government is likely to continue spending. This should increase overall monetary velocity and potentially stoke inflation, which should increase asset prices. We can also expect a focus on mortgage lending as part of the new policies, particularly to young Saudis. Given this is in effect lending to the government given the high level of public sector employment, this could expand faster than many have figured. It is also likely that the transition to an Islamic economy will be accelerated, building on the NCB experience..

As such, the trade is to buy retail-heavy Islamic banks, which also benefit from higher US interest rates due to their significant zero-cost deposits, leading to rapidly expanding NIMs, retail names, which although expensive match up well to EM peers and will benefit from increased discretionary spending power and real estate stocks, which will benefit from general asset inflation (which should also cause the Saudi market to rerate further despite current oil prices as monetary velocity picks up).

The downside appears limited here as it is difficult to see a scenario where the government wouldn’t step in should retail confidence be lost.

On the Saudi Rial, there has been interesting activity on forwards as a devaluation of the currency would be a quick and easy way to fix any budget issues, much as Russia has done in maintaining the Ruble oil price, hurting importers and consumers. In Saudi the elasticity of demand and ability to withstand inflation is very different to Russia, but it is likely that we would see other Gulf states move first to devalue, with Bahrain and Oman (where succession is not quite so clear cut per my recent note) prime candidates. The first stage is likely to be a move to a Kuwait Dinar-style basket, particularly given increase exports to Asia and the decreasing importance of US crude flows, but any move in this regard from Saudi is unlikely in the next 6 months as they look to stabilize things, but this will grow more likely the longer oil prices stay low.

We may see some debt issuance however to bridge near-term spending spikes, a key measure to developing a yield curve as part of the package of reforms I have suggested Gulf countries should carry out to take advantage of low oil prices here:

Regional geopolitics

The order of the day is stability after a tumultuous few years.

To the north there is the threat of ISIS, but significant strides seem to have been made in patching Iraq-Saudi relations under the rule of new PM Abadi after a somewhat tense relationship with Maliki. Iran looks to be coming out from the cold with Obama actively pushing for a peace deal and increasingly looking like he will accept Assad as an alternative to ISIS, but despite the historical acrimony, the interests of Iran and Saudi Arabia are somewhat more in alignment now than in previous years.

The key exception to this is Yemen, which is a terribly strange situation, but one in where the Shia Houthis (known as “fiver” Shias, closer to Sunnis than the “twelver” Iranians/Iraqis and more a tribe than religious group) who Saudi Arabia has fought for a number of years in north Yemen, have now effectively taken over with President Hadi resigning. Curiously the Houthis are the tribe of former President Saleh and virulently anti al-Qaeda, but it is quite a change on the southern border of Saudi Arabia.

Elsewhere the Arab Spring has turned into an Arab Winter with the challenge of Islamist groups soundly defeated, even if some more virulent forms have popped up but are now largely contained.

It is likely that Saudi may well pursue a less aggressive foreign policy in the near-term as it focuses on internal matters, particularly after certain initiatives did not work out quite as planned.

In conclusion the succession in Saudi Arabia may prove a filip to oil prices in the near-term, even if the medium term outlook looks challenging and should be overall positive for a market used as a barometer for popular feeling. We should expect the focus to be on internal consolidation versus external expansion, but the way that they treat the developing situation in Yemen should provide strong guidance to how foreign policy will be in the future.

Chinese Stocks Recover From Biggest Plunge In Years As 'Still-Contracting' Manufacturing Industry Improves

Following the biggest crash in Chinese stocks in 8 years on Monday (following regulator's crackdown on margin trading), The Shanghai Composite has now retraced all those losses as China's Manufacturing PMI rises and beats modestly (though remains technically in contraction at 49.8 for the 2nd month). HSBC notes marginal domestic demand improvements but employment and prices continued to deteriorate hinting at a continued manufacturing slowdown (which stocks love - bad news is good news). The problem for the reflexive equity market gamblers is that the higher stocks go, the less likely a broad-based RRR cut is to happen. Along those lines, the CNY Fix was weakened by the most in 10 months today and yesterday the first reverse repo liquidity injection in a year as Chinese year-end liquidity concerns once again move front-and-center...


Manufacturing PMI improved marginally but remains in contraction...


As HSBC notes:

“The HSBC China Manufacturing PMI rose to 49.8 in the flash reading for January, up from 49.6 in December.


Domestic demand improved marginally while external demand remained solid.


The labour market weakened and prices fell further. Today's data suggest that the manufacturing slowdown is still ongoing amidst weak domestic demand.


More monetary and fiscal easing measures will be needed to support growth in the coming months.”

Which stocks apparently love - moar stimulus please... completely retracig the losses from Monday's crash...


The CNY Fix was weakened by themost in 10 months and USDCNY is moving higher (CNY weakness)...


and liquidity injections are back on the table as Reverse Repo started again yesterday fpor the first time in a year


As Chinese New Year liquidity fears raise their ugly head once again.

*  *  *


Now Begins The Greatest Heist Since Bernanke Bailed Out Wall Street In September 2008

Submitted by David Stockman via Contra Corner blog,

Well, he finally launched “whatever it takes” and that marks an inflection point. Mario Draghi has just proved that the servile apparatchiks who run the world’s major central banks will stop at nothing to appease the truculent gamblers they have unleashed in the casino. And that means there will eventually be a monumental crash landing because the bubble beneficiaries are now commanding the bubble makers.

There is not one rational reason why the ECB should be purchasing $1.24 trillion of existing sovereign bonds and other debt securities during the next 18 months. Forget all the ritual incantation emanating from the central bankers about fighting deflation and stimulating growth. The ECB has launched into a massive bond buying campaign for the sole purpose of redeeming Mario Draghi’s utterly foolish promise to make speculators stupendously rich by the simple act of buying now (and on huge repo leverage, too) what he guaranteed the ECB would be buying latter.

So today’s program amounts to a giant bailout in the form of a big fat central bank “bid” designed to prop up prices in the immense parking lot of French, Italian, Spanish, Portuguese etc. debt that has been accumulated by hedge funds, prop traders and other rank speculators since mid-2012. Never before have so few—-perhaps several thousand banks and funds—-been pleasured with so many hundreds of billions of ill-gotten gain. Robin Hood is spinning madly in his grave.

The claim that euro zone economies are sputtering owing to “low-flation” is just plain ridiculous. For the first time in decades, consumers have been blessed with approximate price stability on a year/year basis, and this fortunate outbreak of honest money is mainly due to the global collapse of oil prices—not some insidious domestic disease called “deflation”. Besides, there is not an iota of proof that real production and wealth increases faster at a 2% CPI inflation rate compared to 1% or 0%.

Nevertheless, Draghi had no problem gumming the following absolute gibberish in announcing that his big monetary bazooka would be soon firing at will on the hapless citizens of the E-19.

Today’s monetary policy decision on additional asset purchases was taken…..(because) the prevailing degree of monetary accommodation was insufficient to adequately address heightened risks of too prolonged a period of low inflation.

This assertion is blatantly contradicted by the facts.  Outside of the commodities and industrial materials complex, where prices are being weakened by the rapid cooling of China’s construction madness, it is still”creeping inflation as usual” in the EU-19 economies. There is flat out no emergency that could possibly justify an ECB action which will result in the creation out of thin air of what amounts to fraudulent credit equal to nearly 10% of euro zone GDP in less than two years.

And folks, it is fraudulent credit——really dangerous, toxic stuff. The $1.2 trillion of debt securities to be purchased by the ECB (and its constituent national central banks) in the secondary market originally financed that amount of labor, material and capital consumption. Can you actually pay such massive sums to vendors of real goods and services with central bank manufactured digital credits and still pretend that the economy is functioning on the level? If so, why not manufacture $5 trillion or even $15 trillion of ECB credit and buy up the entire euro bond market?

In short, Draghi is presiding over a gargantuan fraud and can’t be so stupid as not to recognize it.  Indeed, the dictionary definition of a “charlatan” could not more aptly describe his current gambit:

“….a person falsely claiming to have a special knowledge or skill; a fraud”.

A few weeks ago, I called out the lame case on which Draghi’s “low-flation” humbuggery is based. Nothing has changed since then—so it is self-evident that the ECB’s new bond buying binge is designed to relieve financial speculators of hot merchandize, not long suffering euro zone citizens of the stone cold economies that their overlords in Brussels and the national capitals have confected.

 Well, of course the CPI has momentarily weakened. Crude oil has experienced a monumental plunge of more than 50% since mid-2014. That has temporarily dragged down the euro zone’s reported CPI and the math isn’t all that complex. During the last 12 months, euro zone energy prices have fallen by 6.3%, and everything else is still 0.6% higher than a year ago.


So what’s the emergency? This is the very same CPI blip that occurred when oil collapsed in the second half of 2008. As is evident below, that episode did not generate some cascading plunge into economic darkness. In fact, the Eurozone CPI was back running above 2.5% in no time.


The truth of the matter is that the EU-19 is in clover because it’s consumers get a big break; and, on the other side of the economic equation, it produces almost no oil. Europe’s production is mainly in the UK and Norway and they have their own currencies. Accordingly, the ECB should be putting its printing presses on an extended sabbatical and declaring victory on the achievement of its “price stability” objective.


Indeed, the notion that the hairline puncture of the zero inflation line shown above is a precursor of a deflationary calamity amounts to economic voodoo. There has been no structural change whatsoever in the Eurozone economy since 2008 when the last oil-driven CPI drop occurred, and therefore no empirical basis for the notion that wages and prices are about to descend into an accelerating downward spiral. If anything Brussels’s dirigisme regime has made prices and wages even more “rigid” and “sticky” owing to it’s avalanche of new regulations, subsidies and other economic interventions.


The plain fact is that the euro zone like the rest of the DM has an inflationary bias that is embedded in six decades of history during which the euro and its predecessor currencies lost purchasing power month-in-and-month-out. So households are finally getting what will undoubtedly be a short respite from the inflation tax, but that is the extent of it. There is not one rational reason to believe that the relentless upward march of the price level shown below will not presently resume its well-worn path.

The euro zone deflation story is pure cock and bull, and that proposition doesn’t take much investigation to document. First and foremost, there is no sign of a wage collapse, yet how do you get a deflationary spiral if wages continue to rise?


As shown below, owing to heavy unionization and protectionist labor laws, euro zone wage rates have been on a long-running one-way escalator, and show no sign of “deflation”. Total compensation per worker is up 1.3% during the last twelve months—-an identical rate to the 1.3% recorded during the year before that, and not much below the 1.7% annual rate of gain that has been recorded since mid-2010.



If you take purely euro zone produced items the story is the same. In the case of total services, the December LTM price change is 1.25%—-a figure that has been visited twice before this century without untoward effects.


In the specific case of housing services and rentals, the LTM inflation rate is not much under 2%—-a level which has prevailed for the past several years.


Likewise, the inflation rate for euro zone produced recreation and personal services shows no signs of plunging into the abyss. It’s LTM rate of increase is about 1.5%, and is in the general zone that has prevailed for most of this century.


The same is true of transport services. The index is still rising at a 1.5% rate, and while below the 2.5% trend of the last decade or so, the larger point is self-evident. Isn’t it a good thing for productivity and growth that the euro zone’s inflation rate for transport of people and goods is abating slightly? Where’s the fire?


In short, the euro zone’s momentary spat of year-over-year price stability is almost entirely owing to the global decline of commodities since the China bubble driven peaks of 2012; and also the lagged effect of the Euro’s strength prior to mid-2014.


In the case of non-food commodities including energy, for example, the producer price index is down about 25% from it 2011/12 peak.  Since the euro zone imports a heavy share of its energy and industrial commodities, isn’t this decline a welcome development?


And there’s more. Commodity prices are still double their pre-2005 level. In other words, the giant global commodity bubble generated by the runaway credit boom in China, the BRICs and their EM satellites has finally started to cool, and this relief is now washing through the euro zone price indices. Rather than an existential crisis, the cooling of euro zone inflation is mainly a welcome surcease from the utterly aberrational credit bubble that was foisted on the global economy by central banks over the past decade.



Even in the case of food commodities, the sharp decline since 2012 is a menace only to the French farmers, at worst. How can it be said that a 20% reduction in food costs is harming the living standard of 350 million euro zone consumers or is a causing the macro-economy’s chronic underperformance?



Finally, where prices are falling outside of imports, commodities and the processed industrial goods which embody them, this result has nothing to do with short-term monetary policy. The price index for euro zone communications services, for example, is negative 2.5% on an LTM basis—–but that is nothing new. Owing to the communications technology revolution and a modest degree of deregulation, prices in this sector have been falling for the better part of two decades, and its been a boon for economic growth and consumer welfare, too.



In short, the euro zone deflation scare has nothing to do with empirical reality or common sense economics. Instead, it is pure propaganda emanating from the policy apparatchiks in Frankfurt and Brussels, and aped and amplified by the casino’s stock peddlers who claim to be “economists” and “strategists”.

It goes without saying, of course, that the evidence for Draghi’s QE that you can’t find in the inflation curves is screamingly apparent in the bond price curves. They have gone damn near parabolic in the 30 months since Draghi’s “whatever it takes” ukase. The windfall profits which have accrued to riders on the Draghi curve are flat out obscene.

This morning all euro zone sovereign debt is trading at absurdly low yields.  Even as Draghi foams at the mouth about the ECB’s determination to get inflation back close to its arbitrary 2% target, the Italian 10-year bond is trading at 1.56%, the Spanish 10-year at 1.42% and the French bond at the nearly insane level of 0.70%.  Or as one wag recently noted, European debt yields has not traded this low since the black plague leveled the people and their sovereigns, alike.

Now self-evidently, the speculators who have ridden the Italian bond down from 7% don’t see any contradiction between Draghi’s pledge of 2% inflation come hell or high water and today’s nominal yield of 1.56%. They don’t care, they don’t discount, and they most certainly do not engage in “price discovery”. Instead, they hover with their finger on the “sell” button ready to unload at any moment their vastly over-priced stash on the stupid apparatchiks who run the ECB.

Exactly, the same can be said for the Spanish and French curves below.  The fast money traders, of course, do not recognize that Spain’s public debt ratios continue to soar despite the phony “austerity” claimed by the crooks who run its government, and the insurgent anti-austerity political party and Catalonian succession movement that are likely to make it ungovernable in the near future. They just don’t care because there is a patsy in Frankfort ready to relieve their downside risk.

But the most absurd case of price discovery destruction fostered by Draghi’s foolish promise, and now action, is the French 10-year bond yield. French socialism and dirigisme have finally strangled its private economy and sent capital and its best enterprenurial talent scrambling for foreign shores, thereby leaving its bloated public sector—- now at 57% of GDP—-high and dry.

Yes, the above juxtaposition makes all the sense in the world. It is entirely reasonable that a state drifting toward insolvency and/or ruinous taxation should be able to borrow 10-year money at 0.70%. That is, when the fix is in, the central bank printing press is open to buy, the apparatchiks are terrified and one of history’s greatest monetary charlatans is in charge——the speculators have nothing to do but harvest their haul.

So now begins the greatest heist since Bernanke bailed out Wall Street in September 2008.

How China Deals With Deflation: A 60% Pay Raise For 39 Million Public Workers

While the rest of the developed world, flooded with re-exported deflation as a result of now ubiquitous money printing, scrambles to print even more money in hopes of stimulating the economy when all it is doing is accelerating a closed deflationary loop (at least until the infamous monetary helicopter drop), China - which still has the most centrally-planned economy in the world even if the US is rapidly catching up - has a more novel way of dealing with the threat of deflation: a massive wage hike across the board for all public workers. Two days ago, at a press conference, the Chinese vice minister of human resources and social security Hu Xiaoyi said that China’s 39 million civil servants and public workers will get a pay raise of at least 60% of their base salaries as part of pension plan overhaul.

The hope is that just like in the US where the Federal government would love to be able to do just that and more, surging wages would stimulate the Chinese economy which over the past year has had to content with the double whammy of surging bad loans and the collapse of shadow banking, as well as the burst housing market.

The pay raise “will make sure that the overall incomes for most of these workers will not decrease after the reform, and some of them could actually earn a bit more,” Ziaoyi said, even if he did not provide details of the plan, which will cover civil servants and public workers, such as teachers and doctors.

According to Caixin, top civil servants, including President Xi Jinping and Premier Li Keqiang, will see their monthly base salaries rise to 11,385 yuan from 7,020 yuan (to $1,833 from $1,130), starting in October. Of course, both are billionaires with hidden money around the world, but the raise is all about optics and boosting confidence. The base salaries of the lowest civil servants would more than double to 1,320 yuan. It is unclear if the plans Caixin saw are final.

The impact of the pay raise will be dramatic: according to China's State Administration of Civil Service, China had nearly 7.2 million civil servants and more than 31.5 million public-sector workers employed by institutions such as schools and hospitals at the end of 2013. Those workers do not contribute to their pension fund, meaning taxpayers fund their retirements.

Caixin has more details on the parallel pension reform:

A reform announced on Jan. 14 by the State Council, China’s cabinet, will see civil servants and public workers start to contribute to the pension program in October. They will make contributions similar to those private-sectors workers, who have been paying in since the late 1990s.


Government agencies and public institutions will pay 20% of their workers’ base salaries to the pension fund on behalf of their employees. The employees will contribute 8% of their salary.


The reform plan says government agencies and public institutions should also introduce an income annuity program for employees. That change will see employers contribute 8% of their employees’ salaries to an annuity fund, while employees pay 4%. The annuity program will provide retirees with another monthly payment.

And while the pre-funding of pensions from current income will provide a small offset to the wage hikes, the net effect will still be one of significant increase in disposable Chinese income. 

Hu Jiye, a professor at the Center for Law and Economics at the China University of Political Science and Law in Beijing, said the annuity program and pension scheme will ensure government employees and public workers enjoy the same level of benefits after the reform. That assurance will help the reform make smooth progress, Hu said.


Data from the China Statistical Yearbook show that in 2011 the average government pension paid 2,175 yuan a month per retiree. A private-sector pension paid 1,508 per month.


Pension reform is partly aimed at closing this gap. However, the version of the annuity program for private-sector employees will only cover 6% of them because it is not compulsory, Zhang Chewei, a labor economics expert at the Chinese Academy of Social Sciences, told the Oriental Morning Post.


Some analysts say that the gap will remain an issue in the near term, but over a longer period the authorities could narrow it by pushing more employers to join the annuity program.

What is left unsaid, is that while this wage boost is masked as part of pension reform, what it really is, is an under the radar stimulus for some 39 million Chinese, the bulk of whom will end up with a big net take home pay when all is said and done.

A far more important question is how this move will impact not only inflation in the coming months, but wages for the private sector, whose workers will likewise clamor for a comparable pay rise, and also what the consequences on internal labor migration will be in the near future, now that China's Lewis Point is assured to be hit far sooner than most had expected.

Last but not least, if China has decided to tackle the inflation, and thus growth, problem from the bottom up instead of top down via rate cuts, this may mean that all those sellside notes that even the smallest drop in the Shanghai Composite means an imminent RRR-rate cut, can be used for kindling.

When This Ends, Everybody Gets Hurt (And The End Is Uncomfortably Close)

Submitted by Chris Martenson via Peak Prosperity,

Central banks around the globe have taken us all into unchartered territory, where the possible paths boil down to a binary outcome: either it all works out or it doesn’t.

Unfortunately, the ‘it all works out’ outcome has a very low probability of actually happening; so the binary outcome isn't equally weighted like a coin toss.  By ‘working out’, here’s what the central banks all striving (praying?) for:

  • Inflation of 2% to 3% per year
  • Economic growth of at least 6% per year (nominal) and a real (inflation adjusted) rate of 3% per year.

The reason that the central banks want all of this growth and inflation isn't because it's good for you, me, or anybody we know. Instead, the bankers need it because that’s what our exponential money system requires.

Slaves To The System

It bears repeating, inflation is not rising prices -- those are symptoms of inflation -- but instead is the expansion of the existing stock of money and credit.  If we observe the symptom of 'rising prices', then that means the underlying mechanism of expansion of credit (mainly) and money (less important because the money supply is a only fraction of the volume of credit) is functioning.

Think of it this way: it’s like the central banks want a slightly feverish patient and so they track the patient's temperature. They tell everyone that 100 degrees, perhaps 101, is the perfect termpurature...slightly elevated, but not too much.  But the patient's temperature is merely a symptom.  The underlying reason for having an elevated temperature is having too many foreign bodies living within the patient, like having too much money and credit in an economic arena.

With increasing levels of credit in our monetary system, the system functions reasonable well and enough new loans are being made to service both the principal balances of prior loans plus their interest payments.  But with stagnant or falling levels of credit, the exact opposite is true and the entire financial system slips into collapse mode.

We are now in service to our system of money, not the other way around. That is, we have a money system to which we are now slaves. It's either expanding or collapsing, but has no stable state; no easy equilibrium that it can inhabit. 

The tragedy in all this is that we can easily have a different system of money that does not make such unreasonable demands of us. But virtually nobody in power is (yet) discussing this idea.

  The Folly Of Endless Growth

Getting back to the central bank wish list, nominal GDP of at least 6% with real growth of 3% allows governments to expand their debt loads by 3% per year without them ever getting larger in proportion to the underlying economy. That way, they never have to be paid back. They only grow larger, and this means more borrowing/credit in the system which is part of requirement #1, above.

So the entire central bank playbook, in slavish devoted service to an obviously dysfunctional system of money, boils down to endless credit growth coupled to endless economic growth.

Endless growth. When you hear of how central bankers are ‘battling deflation’ or ‘seeking price stability of at least 2% inflation’, just think to yourself What they really want is endless growth.

The next thought you should have is Hey, is that even possible? Or even, advisable?

The answers, clearly, are No and NO!

Every day, we have further confirmation of the idea that the world has limits and that economic growth requires more resources. Water, soil, fisheries, forests, ore bodies, and energy sources are all being overtaxed and rapidly depleted at even today’s level of economic activity.

If resources are finite but economic growth has to be endless (again, to support our chosen system of money, and for no other reason), then there’s a gigantic conflict brewing. And that's the subtext to the entire confusing array of political and monetary actions and reactions of late. 

A Simple Example

The idea that endless growth isn't realistic needs to be explored as often as possible simply to counteract the huge volume of spoken and written words that profess it’s exactly what we both want and need.

For most people indoctrinated with the endless growth narrative, we have to engage in a bit of deprogramming before we can have a proper conversation.

So let’s start with a simple example that lays this all bare.

China has been on a very impressive program of economic expansion. Of late, that’s slowed down just a tiny bit and it’s causing quite a bit of worry among the Chinese leadership, which believes that fast economic expansion supports social stability:

Chinese economy posts lowest growth rate since 1990

Jan 20, 2015


BEIJING — China’s economy last year slumped to its lowest rate of growth in 24 years, the government announced Tuesday.


China’s gross domestic product grew 7.3% in the last quarter of 2014, and 7.4% over the whole year, the slowest rate since 1990 and below the official target of 7.5%.


Now, let’s examine that 7.4% rate of growth using the handy ‘rule of 72’, which will answer the question: How long will it take, in years, for something expanding annually at 7.4% to double?

The answer is simply 72/7.4 which equals 9.7 years.  That is, if China continues to expand at 7.4%, its economy will be fully twice are large as it currently is in just under ten years.

Twice. As. Large.

Think about that for a minute. That means (roughly speaking) twice as much energy consumed, twice as many cars on the road, twice as many factories churning out twice as much stuff. Twice as much economic activity in less than a single decade from now. That’s what a GDP growth rate of 7.4% means.

Of course, you won't encounter any such dot-connecting in any of the articles you will read about China’s growth -- desired or actual -- because the implications of being ‘twice as large’ are not yet part of the global dialog about economic growth. Yet.

So let’s explore just one of those implications by looking at China’s coal consumption. Energy and economic activity are very tightly linked. If you want to have more economic activity, you're going to use more energy. Coal is heavily used in China to generate electricity, which is a critical form of energy for economic expansion.

In fact, when we look at China’s energy consumption over these past few decades, we note one period between 2002 and 2009 where its energy use fully doubled, with coal being, by far, the largest component of that doubling:


In just 7 years, energy use doubled!  Again returning to our handy ‘rule of 72,’ but in an opposite direction, we can divide 72 by 7 years and calculate that China’s energy use was growing by 10.3% per year during this period.

How does this compare to China’s reported GDP growth during the same period?  Well, according to The World Bank, between the years 2002 and 2009 China sported an average rate of GDP growth of 11%.

As expected, the growth rates for energy consumption (10.3%) and economic expansion (11%) were very tightly coupled.

Now let’s take note that, in 2012, China consumed 49% of all the coal consumed in the world. How much of the world’s coal will China consume if it doubles in the next 10 years?

Well, a doubling is a doubling: China’s current 7.4% GDP growth rate implies that in just 10 years, give or take a little, China will consume as much coal by itself as the entire world does today.

But then what? What about the next 10 years after that?  Eventually, we all have to come to the same conclusion: it's just not possible for China to double its coal consumption forever. Sooner or later, real physical and environmental limits apply.

It's Already 'Later'

My argument is that it’s already ‘later’. We're living through the period of time when that dawning recognition of limits will finally burst over the horizon, shining a very bright spotlight on a frightening number of our global society's unsustainable practices.

The most urgent of them all, as far as everyone reading this is concerned, is the very uncomfortable fact that it is our system of money that is most likely to break first and hardest because its very design demands endless growth, without which collapse ensues.

As the China example illustrates, the prospect of endless economic growth is simply not a workable plan because resources are not infinite. Our global obsession with growth is the very definition of unsustainable. Someday reality is going to intrude and ruin the party and very few are actually prepared for that future.

A very big problem we all share is that the world’s central banks have been vigorously defending the status quo (of endless growth) and that means we all face a very bad period of adjustment when their efforts finally fail.

That moment of failure is coming closer and closer. Recent actions by central banks have exposed their increasingly desperate mindset and have even called into question the one thing that absolutely cannot ever be questioned: the ability of the central banks to deliver on the promise of endless growth.

Central bank credibility (as fictitious as that may be) is essential to maintaining the current narrative, BUT central banks are rapidly losing their credibility (which should have happened simply via deductive reasoning a long time ago) and the strains are showing. Their actions are increasingly wild and extreme (SNB, anyone?), and it's our view that 2015- 2016 will mark the end of this long run of overly-ambitious central bankers and over-complacent markets.

When credibility in central bank omnipotence snaps, buckle up. Risk will get re-priced, markets will fall apart, losses will mount, and politicians will seek someone (anyone, dear God, but them) to blame.

In Part 2: The Consequences Playbook we spell out what will happen next and how you should be preparing today for what might happen tomorrow. Suffice it to say, a tremendous amount of wealth will be lost if (really, when) the central banks lose control. And standards of living for many will be impacted.

A little preparation today can make a huge difference in your future.

Click here to access Part 2 of this report (free executive summary; enrollment required for full access)


Obama Issues Statement On The Death Of Saudi King Abdullah, Praises "Vision", US-Saudi Relationship

Just released by the White House:

Statement by the President on the Death of King Abdullah bin Abdulaziz


It is with deep respect that I express my personal condolences and the sympathies of the American people to the family of King Abdullah bin Abdulaziz and to the people of Saudi Arabia.


King Abdullah’s life spanned from before the birth of modern Saudi Arabia through its emergence as a critical force within the global economy and a leader among Arab and Islamic nations.  He took bold steps in advancing the Arab Peace Initiative, an endeavor that will outlive him as an enduring contribution to the search for peace in the region.  At home, King Abdullah's vision was dedicated to the education of his people and to greater engagement with the world.


As our countries worked together to confront many challenges, I always valued King Abdullah’s perspective and appreciated our genuine and warm friendship.  As a leader, he was always candid and had the courage of his convictions.  One of those convictions was his steadfast and passionate belief in the importance of the U.S.-Saudi relationship as a force for stability and security in the Middle East and beyond.  The closeness and strength of the partnership between our two countries is part of King Abdullah’s legacy.


May God grant him peace.

And while Obama was impressed by Abdullah's vision to the "education of his people" he had no comment on the one US "ally" which has beheaded a record number of people in recent years making even ISIS blush by comarpison, as reported in US Ally, Saudi Arabia Beheads 87 In 2014, Up Over 10% From 2013 and also Record Beheadings And The Mass Arrest Of Christians.

The Truth About The Monetary Stimulus Illusion

Authored by Tadashi Nakamae of Nakamae International Economic Research,

Perhaps economic policymakers, including Federal Reserve Chair Janet Yellen and the Bank for International Settlements, should take a closer look at Japan, China, and yes, the United States, when debating the limits of monetary stimulus and the dangerous nature of financial bubbles. The discussion is happening too late to be anything more than an intellectual exercise.

Since its inception in 2008, easy monetary policy has created very few positive effects for the real economy—and has created considerable (and in some cases unforeseen) negative effects as well. The BIS warns of financial bubbles. Quantitative easing has already created asset price bubbles in the United States and elsewhere, and an investment bubble (this includes capital expenditure and real estate) in China and other emerging markets.

Meanwhile, this policy has failed to have a positive impact on the real economy partly because central banks have adopted very aggressive monetary easing at a macro level while restricting banks from increasing the size of their balance sheets at a micro level (macro-prudential policy). As a result, easy money has flowed into asset markets through shadow banks and overseas through carry trades.

China has been the main recipient of this bounty. Yet unlike global asset market bubbles, China’s expanding bubble is less well understood. China’s economy has grown at a rapid clip this century. Industrial production, based on the value of the dollar in 2005, increased five-fold from $800 billion in 2000 to $4 trillion in 2013. China averaged an annual growth rate of 33 percent during this period while global production grew 3.1 percent and the United States barely grew at all (averaging 0.5 percent). Not surprisingly, China’s share of global production increased from 4.5 percent to 22 percent between 2000 and 2013.

Take cement production. In 2013, China produced 2.4 billion metric tonnes of cement, 60 percent of the 4 billion metric tonnes produced globally that year. The scale of China’s cement production is astonishing. Over the past two years, it has produced more than 4.2 billion metric tonnes of cement, more than the United States produced in the twentieth century. China matched a century’s worth of infrastructure (plus capital expenditure) in just two years. But China cannot continue to produce cement at this pace. It will probably take several decades of adjustment for this to reach a rate that is sustainable, creating deflationary consequences for the global economy.

China exports deflation. Its GDP growth rate has fallen to 7.3 percent after peaking at 12.1 percent in the first quarter of 2011 (when aggressive stimulus measures were in place). As its economy stalled, it led industrial commodity prices, energy prices, and shipping freight rates to decline.

The ultra-easy monetary policies that fueled China’s bubble have magnified the deflationary effects of China’s economic slowdown. This is because China financed most of its recent fleeting recovery with imported foreign capital. For example, cheap money created by American and Japanese quantitative easing policies was placed in offshore centers, notably Hong Kong, and sent to China in the form of carry trades. These funds were first converted to Hong Kong dollars, which are pegged to the U.S. dollar, and then invested in renminbi-denominated high-yield investment products. According to Hong Kong banking statistics, international claims and liabilities of Hong Kong banks were HK$9.5 trillion and HK$7.2 trillion respectively, resulting in HK$2.3 trillion of net foreign claims as of June 2014. In the beginning of 2010, net claims by Hong Kong banks vis-à-vis China were zero; today they total HK$2.6 trillion, indicating that most of their lending was to China.

The end of quantitative easing would reverse the trend of money flowing into China and hasten its economic decline. The collapse of China’s investment bubble is likely to have myriad adverse effects worldwide. International commodity and energy prices are already falling. Industrial products will also face downward pressure as China seeks to export its excess supply as domestic demand wanes. And companies, such as those in the mining industry, which assumed that China’s economy would continue to grow and invested accordingly, are facing excess supply and over-capacity problems too. Considering all these deflationary pressures on the global economy, it is ridiculous for central banks to aim for a 2 percent inflation target.

Japan provides a good example of how inflation-targeting and quantitative easing policies can backfire. The Bank of Japan, prodded by advocates of so-called Abenomics, implemented an ultra-easy monetary policy to weaken the yen and bolster exports. But even though the yen depreciated over 20 percent from ¥78 to ¥105 versus the dollar between October 2012 and September 2014 and Japan’s exports increased nominally, real exports continued to decline because Japanese companies had moved so many factories overseas.

Domestic carmakers have shifted two-thirds of global production abroad, thus blunting the effects of a weaker yen. And even as Japan’s exports remain fragile, a weaker yen has increased the value of imports and exacerbated the trade deficit.

Instead of boosting the economy, a weaker yen has pushed up the prices of energy, food, and other consumer staples. The rising cost of basic commodities is a triple blow, reducing the purchasing power of consumers and raising costs for employers, which leaves them with even less room to raise wages. Thus deflationary pressure from China has resulted in negative real income growth for Japanese households and created another consumption-led recession.

Japan’s aggressive monetary policy also sought to shore up the stock market. This, in turn, was supposed to create a so-called “wealth effect” and stimulate consumption. However, according to a survey by the Bank of Japan, only 15 percent of households held equities in 2012. Thus, only a fraction of households would have profited from a stock market rally. Instead, a rising stock market (though it has fallen back quite a bit over the since the end of September) merely increased the inequality levels for wealth and income in Japan.

Across the Pacific, ultra-easy monetary policy has led to a drop in the United States’ potential growth rate. Over the past five years, labor participation rates have fallen steeply and the labor force has almost stopped growing. Productivity growth has also slowed, resulting in a lower potential growth rate (the combination of productivity growth and labor force growth). The potential growth rate, which was 4 percent in 2000, is now less than 2 percent.

Productivity has declined because zero-percent interest rates are propping up companies that would have failed if they had to pay interest on their loans, leading the market to become inefficient. Take an industry that has only room (given the overall level of demand) for seven companies, but instead has ten (with several surviving only because interest rates are so low). If three companies fold—an unfortunate but natural consequence of operating in a market economy—productivity and profitability at the surviving seven companies will increase by roughly 40 percent.

Zero interest rates prevent the economy from allocating resources efficiently. Market efficiency and labor productivity would improve if laid-off workers in the above scenario were retrained and rehired by industries with greater potential for demand. In Japan, these new industries are agriculture and predominantly service industries such as healthcare and old-age care, which are currently riddled with red tape. Structural reforms (long promised by but so far not forthcoming from the Abe administration) in regulations and financing would open these industries to potential demand. However, interest rates would have to rise as well. Without higher interest rates, financial markets cannot execute the basic function of allocating money.

Zero interest rates also hurt savers. Twenty years ago, when deposit rates were around 5 percent, consumers had ¥50 trillion of interest income (the equivalent of 20 percent of Japan’s total household consumption). But as interest rates fell to zero, this income disappeared as did the consumption it generated.

These are only some of the drawbacks of Japan’s twenty-year ultra-easy monetary policy. The Federal Reserve should take heed. If it delays plans to raise to interest rates after halting its program of asset purchases, the United States can expect to face even more of the problems that Japan is suffering.

*  *  *

h/t Sean Corrigan

Saudi King Abdullah Has Died; Crude Prices Jump

After first falling ill  and being hospitalized in December, Saudi Arabia officials have announced:


As we noted previously when considering this possibility, "a new King can do (almost) anything he wants, including changing oil policy." 79-year-old Crown Prince Salman has been named succesor (and has his own health issues). Oil prices popped around 80c on the news.



As we detailed before, Abdullah's 79-year-old half-brother has his own health issues and leaves larger questions over the line of succession in one of the world’s most important oil producers remain unanswered.



Originally posted at Reuters,

In his annual “state-of-the-kingdom” address on Jan. 6, Saudi Arabia’s King Abdullah hoped to reassure the world that his country is prepared to absorb the economic shock of plummeting oil prices and to deal with the worsening conflict in its two neighbors, Iraq and Yemen. The message might have been more effective had the 90 year-old king delivered it personally, but Abdullah has been hospitalized since Dec. 31 for pneumonia.


Instead, Crown Prince Salman delivered the speech on the king’s behalf. That image — of an aging heir with his own health troubles standing in for a nonagenarian king — did little to address concerns about whether Abdullah is still fit to lead. Larger questions over the line of succession in one of the world’s most important oil producers remain unanswered.


The 79-year-old Salman, a half brother of the king and his designated successor, has taken on a larger public role in recent months, standing in for Abdullah at a summit meeting of Persian Gulf leaders in Qatar last month. But Salman himself is in poor health, and reportedly suffers from dementia. If Abdullah dies or is incapacitated, and Salman ascends to the throne, he might not be king for long. It’s also unclear who Salman would designate as his crown prince — and that crucial decision could destabilize the royal family.


Prince Muqrin, 69, who has served as head of Saudi intelligence and in other senior positions, was installed last year by Abdullah into the newly created post of deputy crown prince, making him second-in-line to the throne. But any new king has the right to choose his own crown prince. If Muqrin is passed over by Salman, that could set off a succession battle within the House of Saud at a time of regional crisis and instability in the global oil markets.


Beyond Salman’s expected ascension to the throne, the Saud dynasty faces a larger challenge over succession within its system of hereditary rule. The kingdom was founded in 1932 by Abdulaziz al-Saud, and he left behind a system where the throne is passed from older son to younger son (the king had 35 surviving sons when he died in 1953). With the old generation of Abdulaziz’s sons dying off or passing into senescence, the kingdom has no clear plan to hand power to the “new” generation of royals — Abdulaziz’s grandsons, of which there are at least 30 who could be in line for the throne.


Muqrin is the youngest surviving son of Abdulaziz who is still in the running for the throne (he has several older siblings who have been passed over). If Muqrin becomes king, he would have to appoint a crown prince from the third generation of royals. Muqrin does not have strong enough support within the royal family to appoint one of his sons to the post. One theory is that Abdullah positioned Muqrin as second-in-line so that he would be beholden to Abdullah’s sons, one of whom could become king once the generational shift takes place.

Aside from the king’s illness and questions over succession, Saudi Arabia is faced with a series of regional and economic threats.

Most prominently, the kingdom must cope with plunging oil prices. On Jan. 7, Brent crude, the international benchmark, fell below $50 a barrel for the first time since May 2009 — a drop caused in part by Saudi’s refusal to cut high production levels. At the last OPEC meeting in late November, the Saudis led the charge to prevent the cartel from cutting production, which would have driven prices up. Instead, the kingdom is trying to gain more control over the global market, and to drive out U.S. shale oil, which requires higher prices to remain competitive.


So far, Saudi leaders have been able to withstand the economic shock by increasing oil production to make up for falling prices, or by accessing some of the kingdom’s $750 billion stashed in foreign reserves. But those are not long-term solutions.


The other challenge for Abdullah’s successor will be containing Iran, the kingdom’s regional rival. Saudi Arabia is engaged in proxy battles with Iran in several arenas: Syria, Iraq, Lebanon and Yemen. The kingdom is using oil as a weapon to punish Iran, and Russia, for their support of Bashar al-Assad’s regime in Syria. Facing Western sanctions and economic isolation, the Iranian regime is dependent on oil remaining at $100 a barrel or more to meet its budget commitments.


The proxy war has played out most intensely in Syria and Iraq. After the American invasion of Iraq in 2003, neighboring Sunni regimes backed Sunni militants, while Iran supported the Shi’ite-led government and Shi’ite militias. When various Middle Eastern regimes realized that the United States would — in their view — lose its war in Iraq, they began maneuvering to protect their interests and to gain something out of the American withdrawal. Saudi Arabia, which saw Iraq as a bulwark against Iranian influence, tried to destabilize the Shi’ite-led government in Baghdad.


The Saud dynasty views itself as the rightful leader of the Muslim world, but Iran has challenged that leadership for several decades. Although Saudi Arabia has a Sunni majority, its rulers fear Iran’s potential influence over a sizable, and sometimes-restive, Shi’ite population concentrated in the kingdom’s oil-rich Eastern Province.


Any new leader is unlikely to change the larger contours of Saudi foreign policy — or the kingdom’s use of oil to enforce its interests and try to keep Iran at bay. But the new king and his inner circle will face decisions on succession that could reshape the ruling family and the monarchy’s future for generations to come.

*  *  *

But, given the almost plenipotentiary powers of the King  (see article 44 of the Basic Law), Prince Salman could realistically decide to do almost anything he wants if he deems it in the best interests of Saudi Arabia.

This includes matters of spending, where significant sums are likely to be spent on succession to ensure it goes smoothly and the social contract in Saudi Arabia is maintained and, more pertinently for global markets, on oil.


In the oil market Saudi Minister of Petroleum and Mineral Resources Ali al-Naimi has in recent weeks, with the support of King Abdullah, emphasized a shift in Saudi Arabian policy to not cut production and allow the market to determine where the oil price should go, even if it means oil falling further from here.


In our opinion, this is not another step in Saudi Arabia “flooding the market” for political reasons as a look at collapsing Saudi exports and premium seasonal differential prices shows, but rather them captalising on a scenario caused by structural factors causing the oil price to fall to try to take out significant amounts of oil investment and ensure a higher price in the future as other producers can no longer rely on a “Saudi put” to stabilize oil prices on the downside.


They have significant flexibility in their budget should they choose as we outlined here: and there are a number of measures they could take (eliminating subsidies, raising short-term debt for more independent monetary policy) to weather the storm and improve the economy long-term.

However, oil prices are now at levels that cause real concern on the streets of Saudi Arabia, with the prospect of succession the icing on top that has caused retail investors to take the market down another leg.

This policy may not make it through a succession period, where public support and good will is essential, particularly as it has nearly been 20 years since the last change.

The new regent could decide to keep existing policy, change it completely or anything he decides. Similarly he has free reign to realign Saudi Arabia’s foreign policy as he wishes, which is a discussion for another time and place, but could have significant regional impacts.

This uncertainty should normally increase oil prices, but instead we see them down again today, just as Libyan civil war over resource control (as discussed here:, p 13) where production looks to be back at year lows of 200kbpd versus the 900kbpd that apparently kicked off this rout, actually saw prices fall again.

It seems that we are in a complete capitulation period now in oil, as the sharp decrease in CTFC in the last report shows and with producers scrambling to try to make up for revenue shortfalls by selling any stock they can now they feel they can no longer rely on the GCC, increasing flow to the market and keeping the curve in backwardation. Consumer demand is elastic, but not instantaneous (they don’t keep spare tankers for storage being mostly just in time), leading to a perilous period of dead space.

Given the lack of availability of credit for anything oil related unless you’re BP, this may continue for a period, but the lack of investment and potential shifts in the Middle East over the next year, coupled with the recent rise in long-dated oil back towards $80 augur for higher prices into 2016 unless we see a significant slowdown in China next year as JP expects, in which case the path will be more painful (JP sees $60 as the new normal for oil, a level he predicted a few years ago)

The Saudi Tadawul stock exchange is likely to stay under pressure, but we have previously seen intervention in the market if it falls too far, something that is likely to be repeated.

With a likely opening to foreign investors in April, the focus must be on “value” stocks above all else, with oil names providing the beta despite their curious earnings profile as unlike global energy names their feedstock is heavily subsidized, so it’s mostly a question of how much profit they will make versus swings from losses to profits.

* * *

What Mario Draghi Said When Asked If His QE Will Unleash Hyperinflation

Without a question the best exchange during today's historic Mario Draghi presser, during which the ECB unveiled its own QE, was between SkyNews journalist Ed Conway who first asked Draghi which is more important, the Flow or the Stock - a key argument we had with the Fed when we said back in 2012 that the Flow reigns supreme when we forecast open-ended QE 6 months before its announcement, only for both Goldman and the Fed to agree subsequently and for Citi to conclude that $250 billion in central bank printing, i.e., Flow per quarter is necessary to avoid a market crash - but more importantly, explicitly asked if Draghi's money printing overture will lead to hyperinflation.

The exchange can be found 1:12:45 into the press conference:

The transcript:

QUESTION: There's a big debate at the moment as to whether quantitative easing what matters most is the flow or the stock: the buying of assets or what is already held on the balance sheet. I'm curious as to where you come out on that particular debate?


And second of all what would you say to those who are concerned that when the ECB buying up bonds, electronically printing money, whatever one calls it, is the first chapter in a story that leads inevitably towards hyperinflation. What is your response to that?


DRAGHI: On the first point, the way the introductory statement reads it says that both things are important, the overall amount but also the scale. The scale of these purchases, the monthly flows are quite meaningful as it is meaningful the overall amount.


The second question, well the second question I think the best way to answer to this is have we seen lots of inflation since the QE program started? Have we seen that? And now it's quite a few years that we started. You know, our experience since we have these press conferences goes back to a little more than three years. In these 3 years we've lowered interest rates, I don't know how many times, 4 or 5 times, 6 times maybe. And each times someone was saying, this is going to be terrible expansionary, there will be inflation. Some people voted against lowering interest rates way back at the end of November 2013. We did OMP. We did the LTROs. We did TLTROs. And somehow this runaway inflation hasn't come yet.


So the jury is still out, but there must be a statute of limitations. Also for the people who say that there would be inflation, yes When please. Tell me, within what?  

And so yet another central bank confirms the key tenet of central bank dogma, that only the Stock matters, is now null and void and monthly flows are indeed "quite meaningful" - and with Citi having calculated the bogey of $200 billion per quarter, there should be no surprise that between the ECB and the BOJ this threshold is safely reached. In fact, one can be assured that never again will central bank flow, as in money printing, be less than roughly $70 billion per month among the three biggest money-printing entities.

As to the hyperinflation question, Draghi's answer is simple: we have now thrown the kitchen sink at the deflation problem and there has been no inflation (he conveniently forgets to mention that the world is now caught in a vicious spiral in which every single central bank is printing money just to export deflation to its peers, with more and more printing necessary each year just to stay in one place). In other words, just because hyperinflation hasn't materialized so far, it never will.

Or, as Bernanke would say: "Hyperinflation is contained."

As for Draghi's comment at the end, one can respond just as snydely: for the people who say printing money will create growth, yes "when" please. And for those who say that money printing will lead to economic improvement, "tell me, within what?"

As for Draghi's "statute of limitations" comment, he may be right, but one thing is also becoming clearly obvious: as central banks are poised to monetize a record amount of debt this year, 7 years into the "recovery", and as the amount of eligible collateral dwindles to a point where the functioning of the entire market is becoming impaired (see the TBAC's complaints from the summer of 2013), the moment of "hyperinflationary containment" is coming to an end.

17,600 Laid-Off Canadian Target Workers Stunned At Ex-CEO's "Walk-Away" Package

Earlier this month, Target announced it would close all of its 133 stores in Canada, laying off the 17,600 employees north of the border.

As CBC reports, Target's "employee trust" package for its Canadian workers, announced last week, amounts to around $56 million, providing each worker with 16 weeks of pay.



But - what is perhaps more stunning is that, depending on who’s doing the calculation, the golden handshake "walk-away" package handed to ex-CEO Gregg Steinhafel last May is in roughly the same ballpark at around $61 million, including severance of $15.9 million.


It appears underperforming is the new killing it...

Deflation Is A Problem For The Fed

Submitted by Lance Roberts via STA Wealth Management,

The biggest worry of the Federal Reserve, and frankly every Central Banker on the planet, is deflation. The reason is that deflation, as an economic pressure, is dangerous and once entrenched becomes difficult to break. For the Fed, the fear of inflation is far less worrisome. Conventional monetary policy tools, mainly interest rates, can be used to some degree of success to stymie inflationary pressures. The problem is that such actions, as shown below, have ALWAYS led to an economic recession or negative financial consequence.

However, as can be witnessed in both Japan and the U.S., Central Bank monetary policy tools have little effect in reversing deflationary pressures.

For several years, there have been repetitive screams that inflation was imminent due to deficits, a fiat currency and expanding debt levels. Yet, the opposite has been true. The lack of inflation has been a construct of the underlying structural dynamics of the economy. Home ownership rates have plunged, technological advances and productivity increases have fostered wage suppression, and high levels of uncounted unemployed (54% of the 16-54 aged labor force) drag on economic strength.

The exceptionally low yields on government treasuries is clear evidence that inflation is not a threat. For all the money that has been spent trying to ignite the engine of economic growth; it has all remained a futile effort at this point.

Velocity Of Money

The velocity of money is defined by Wikipedia as:

"The average frequency with which a unit of money is spent on new goods and services produced domestically in a specific period of time. Velocity has to do with the amount of economic activity associated with a given money supply."

As the velocity of money accelerates, demand rises and inflationary pressures increase. However, as you can clearly see, the demand for money has been on the decline since the turn of the century. 


Even with all the financial stimulation from bailouts, to QE programs, tax incentives and credits, etc., the velocity of money has waned since the end of the last recession as the economy has sputtered along at sub-par growth rates. Of course, much of that can be attributed to sustained levels of high unemployment which has suppressed both wage growth and aggregate end demand which in turn has kept businesses on the defensive.  As discussed previously, the most important segment of the labor force (those between the ages of 16-54) remain largely unemployed.

"Importantly, when the employment-to-population ratio or the labor-force participation rate is discussed, the plunging levels in these ratios are often dismissed simply as a function of the 'baby boomers' heading into retirement. However, if we factor out those individuals by only looking at the employee-to-population ratio of 16-54 aged individuals as a percent of that age group the picture fails to improve."

"While the unemployment rate has certainly plunged to just 5.6%, one would be hard pressed to find that 94.4% of the population that "want to work" are actually working."


Wages are a critical weapon in defeating deflation. Wages have remained not only in a long term downtrend but have also lagged the pace of inflation over time. The median wage level today in the U.S., had it kept pace with inflation, should be closer to $90,000 annually versus $50,000 today. This suppression of wages due to rising productivity levels, and now a large and available labor pool, contributes to the lack of aggregate end demand. The deflationary pressures of declining wage growth remain a major level of concern as the disparity between rich and poor continues to growth. The chart below, from my friend Doug Short, shows the income problem.


The problem with wage deflation for the Fed is that in order for wage growth to occur, the economy really does need to begin to approach "real" full employment. As the supply of labor shrinks, the demand for increases in wages can occur. The problem is that with uncounted masses of individuals residing in the shadows, the demand for labor is swamped by the demand for jobs. This keeps wages suppressed.

The issue for the Fed is that the decline in the "unemployment rate," caused by a shrinking labor force, is potentially obfuscating the difference between a "real" and a "statistical" full employment level.  While it is expected that millions of individuals will retire in the coming years ahead; the reality is that many of those "potential" retirees will continue to work throughout their retirement which will inflate the labor pool and keep a lid on future wage growth.

The Fed's repetitive "QE" programs were aimed at the very heart of the deflationary problem. The Fed was convinced that by stimulating a "wealth effect," the consumer would begin increasing consumption which would then spiral demand out into the economy. While the Fed certainly inflated asset prices higher, it has done little to translate across the broad economy. As I discussed in "For 90% There Has Been No Recovery:"

"Furthermore, the structural transformation that has occurred in recent years has likely permanently changed the financial underpinnings of the economy as a whole. This would suggest that the current state of slow economic growth is likely to be with us for far longer than most anticipate. It also puts into question just how much room the Fed has to extract its monetary support before the cracks in the economic foundation begin to widen."

While the Fed's efforts created a short term wealth effect in the stock market, the excess reserves created by the QE programs remained bottled up at the banks rather than flowing through the system. Before the 2008 financial crisis, excess bank reserves remained constant going back to 1980 averaging just $18.9 billion. Today, those excess reserves are near record levels $2.75 Trillion. 

The threat of a deflation, more than six years after the last recession, remains an imminent threat. It is not just a domestic issue, but a global one. The Eurozone, Japan, and even China are all wrestling with slowing economic expansion despite success rounds of interventions. 

The continued hope, of course, is that the next round of interventions will be the one that finally sparks the inflationary pressures needed to jump start the engine of economic recovery. Unfortunately, that has yet to be the case, and the rate of diminishing returns from each program continue to increase.

The collapse in commodity prices, interest rates and the surge in dollar are all clear signs that money is seeking "safety" over "risk." Maybe you should be asking yourself what it is that they know that you don't?  The answer could be extremely important.

Top Counter-Terrorism Agency: Citizens Should Be Armed To Stop Terror Attacks

The head of the world’s international police agency (Interpol) – which is very active in counter-terror efforts – said last October that arming citizens might be the best way to stop terrorism.

ABC News reported:

Interpol Secretary General Ronald Noble said today the U.S. and the rest of the democratic world is at a security crossroads in the wake of last month’s deadly al-Shabab attack at a shopping mall in Nairobi, Kenya – and suggested an answer could be in arming civilians.


In an exclusive interview with ABC News, Noble said there are really only two choices for protecting open societies from attacks like the one on Westgate mall where so-called “soft targets” are hit: either create secure perimeters around the locations or allow civilians to carry their own guns to protect themselves.


“Societies have to think about how they’re going to approach the problem,” Noble said. “One is to say we want an armed citizenry; you can see the reason for that. Another is to say the enclaves are so secure that in order to get into the soft target you’re going to have to pass through extraordinary security.”




The secretary general, an American who previously headed up all law enforcement for the U.S. Treasury Department, told reporters during a brief news conference that the Westgate mall attack marks what has long been seen as “an evolution in terrorism.” Instead of targets like the Pentagon and World Trade Center that now have far more security since 9/11, attackers are focusing on sites with little security that attract large numbers of people.




“Ask yourself: If that was Denver, Col., if that was Texas, would those guys have been able to spend hours, days, shooting people randomly?” Noble said, referring to states with pro-gun traditions. “What I’m saying is it makes police around the world question their views on gun control. It makes citizens question their views on gun control. You have to ask yourself, ‘Is an armed citizenry more necessary now than it was in the past with an evolving threat of terrorism?‘ This is something that has to be discussed.”




“For me it’s a profound question,” he continued. “People are quick to say ‘gun control, people shouldn’t be armed,’ etc., etc. I think they have to ask themselves: ‘Where would you have wanted to be? In a city where there was gun control and no citizens armed if you’re in a Westgate mall, or in a place like Denver or Texas?'”

If you are for gun control – as I used to be – you may want to note that a top liberal Constitutional law scholar, Ghandi and the Dalai Lama are all  for the right of citizens to bear arms.

Perhaps more importantly, look at the alternatives

Would you rather let the government keep on waging its virtually endless, counter-productive , freedom-destroying and ruinously expensive War On Terror?

Or would you rather arm yourselves and take your chances?

I know a native American man who has a bumper sticker on his truck which reads:

Open Hunting Season on Terrorists

I think he’s got the right attitude.

Postscript:  For those who think that guns are “unhealthy” or “disgusting”, please note that Freud disagreed.  Specifically, he argued that when men give up the primal drive to protect ourselves, our families and our communities – and that power is transferred to standing armies – it disempowers us and makes us weak psychologically.

And see this.

""Whatever It Takes" Or "Make It Stop""

"Whatever it takes" appears to have 'worked' to crash the currency of the Eurozone... but - unlike the Keynesian 'exports-are-awesome' textbook plan of competitive currency devaluationists (just ask Japan) - economic growth expectations continue to collapse... Perhaps it's time to say "make it stop" before all central bank credibility is entirely destroyed...




Source: @Not_Jim_Cramer

"Government Is Waging A Perpetual War Against Human Nature... They Can Never Win"

Submitted by Martin Armstrong via Armstrong Economics blog,

The one war that never ends is how people constantly try to fight the trend. The ECB will buy bad government debt they created instead of doing what was necessary from the start – consolidate all state debt. That would have enabled the Euro to be a viable currency creating a reserve base that does not exist today. Instead, leaving each country with its own debt that was then reserve quality for the banking system was the greatest mistake in history. European banks are really in trouble. They do not mark-to-market sovereign debt. Government PRESUMES they are always the best.

Europe is a failure for they just will not reform Euroland. Instead, this is like a Chinese Water torture or an NSA Waterboarding vacation – a slow gradual and painful process. This Euro Crisis cannot be resolved in such a manner. Buying in sovereign debt is DEFLATIONARY for it is effectively retiring the debt that is worthless. It is bailing out banks, not inflating the economy, since the banks will not lend that money out again. The banks will crumble to dust for their reserves are worthless. This is a very interesting problem that nobody wants to discuss publicly for it is the biggest political manipulation in history gone really, really bad.

Government has NEVER accepted the economy or free markets. They assume they have the ability and the right to manipulate society. They have failed each and every time. They cannot just recognize the natural order of things driven by human nature (character). They constantly work against the business cycle and attempt to change what cannot be changed. Therein, they are engaging in a perpetual war they can never win.


The Romans tried to outlaw prostitution by saying you could not pay them with a coin that bore the image of the emperor when all coins displayed the image of the emperor. Solution, they created private coinage. You cannot outlaw human nature. It never works. There will always be prostitutes as there will always be people who drink or do drugs. All you can do is regulate the trade for you will never eradicate human nature no matter what the subject might be. Government cannot win against the business cycle. All they ever do is aggravate the cycle and increase the velocity resulting in panics.

Draghi-geddon Collapses Euro & Crushes Crude; Stocks Soar But Bonds & Bullion Bid

There's only one clip that seemed to sum up today's trillion dollar printfest exuberance...


But it wasn't all shits and giggles... inflationists may have been disappointed by only a 3bps jump in 5Y5Y Fwd Euro inflation expectations, weakness in European sovereigns, a tumble in US Treasury yields, and a plunge in crude oil...


For a few minutes there, everything was not awesome... but stocks staged a late-day panic-buying "everything is awesome" melt-up (on no new catalyst at that point) moving into the green year-to-date to "prove" central planners have it all worked out...


As cash indices gapped open higher, retraced to fill the gap - ripped to the European close - stabilized - then melted upo in the afternoon on the back of JPY weakness


Which lifted stocks into the green year-to-date... But The Dow lost Green right at the close


Financials were the day's big winners in stocks (even though the yield curve flattened even more, and credit markets - which did rally today - remain flashing drastically red). Energy stocks rallied 0.4% even as crude oil crashed 4-5%


USDJPY was fully in charge of stocks... (as JPY and EUR battled for shittiest currency in the world)


EURUSD was baumgartnered... almost 300 pip drop


Which smashed the USD 1.5% higher... its biggest single-day rise in 18 months


To new 11-year highs...


But the USD strength did not affect gold or silver which surged post-ECBQE (as copper and crude were clubbed)... with gold closing above $1300 at 5-month highs


With crude crashing to a $45 handle after QE (USD strength) and EIA inventory build...


Treasury yields saw a massive swing  - with 30Y dumping 15bps after the ECB QE news before leaking back higher...


Quite a decoupling from stocks...


Rather oddly, Russian stocks soared today... despite the renewed carnage in crude oil... (after tracking in a highly correlated manner for days)


Year-to-date, Silver and Gold are the major winners, stocks now unch and oil remains the biggest loser still..



Charts: Bloomberg

Danish Central Bank Just Cut Rates For A Second Time This Week; Intervenes In Market To Preserve Peg

It was just on Monday when the Danish central bank, clearly panicking about the peg of the Danish Krone to the EUR, surprised the world when in an unexpected rate cut it went NIRPer, sending its deposit rate from -0.05% to 0.2%. Moments ago it doubled down with its second rate cut for the week, this time sending the rate from -0.20% to -0.35%. At this rate we should hit -0.5% next Tuesday and be well into the -1% territory two weeks from today. And not only that, but as Bloomberg observes, "The Danish central bank “also seems to have been intervening in the market prior to the ECB meeting,” Jes Asmussen, chief economist at Svenska Handelsbanken AB in Copenhagen." In other words, the Danish Krone's peg days are most likely numbered.

From Bloomberg:

Governor Lars Rohde delivered his second rate cut in less than a week today, lowering the deposit rate by 15 basis points to minus 0.35 percent. The move follows a 15 basis-point cut on Monday and comes as the European Central Bank unveils an historic bond-purchase program.


The Danish central bank “also seems to have been intervening in the market prior to the ECB meeting,” Jes Asmussen, chief economist at Svenska Handelsbanken AB in Copenhagen, said by phone. “Whether there’ll be further pressure for the krone to appreciate after the rate cut remains to be seen.”

And from the source:

Effective from 23 January 2015, Danmarks Nationalbank's interest rate on certificates of deposit is reduced by 0.15 percentage point. The lending rate, discount rate and the current account rate are unchanged.


The interest rate reduction follows Danmarks Nationalbank's purchase of foreign exchange in the market.


Danmarks Nationalbank's interest rates are:


Lending rate: 0.05 per cent


Certificate of deposit rate: -0.35 per cent


Current account rate: 0.00 per cent


Discount rate: 0.00 per cent

2015: the year currency wars got real.

*  *  *

So far things aren't working out so well...