THE KELLY LETTER OR
Here’s one for all you cynics with eyes wide open. James Howard Kunstler posted his “Bang and Whimper” forecast at Phil’s Stock World, and it’s a humdinger. Some highlights:
The biggest political shock awaiting us is the massive disruption of the major party nominating conventions next summer, when thousands of angry citizens descend on Tampa and Charlotte demanding a reality test. The parties will attempt to go about their ritual business, ignoring the mischief outside the convention centers, and both parties will make the mistake of siccing the cops on the protestors. … The two major parties are completely bankrupt zombie organizations and this election may be their last stand – if they even survive the conventions. Neither of them can come to grips with the reality-based issues of the day: epochal financial and economic contraction, peak energy (and many other resources), climate change, the absence of the rule of law in banking, and generational grievance – or, perhaps more to the point, the manifestations of these giant trends as presented in unemployment, debt slavery, foreclosure, bankruptcy, homelessness, hunger, and X-million family tragedies. Both parties can only promise the return to a bygone status quo that is largely mythical. … Read More »
The biggest political shock awaiting us is the massive disruption of the major party nominating conventions next summer, when thousands of angry citizens descend on Tampa and Charlotte demanding a reality test. The parties will attempt to go about their ritual business, ignoring the mischief outside the convention centers, and both parties will make the mistake of siccing the cops on the protestors. …
The two major parties are completely bankrupt zombie organizations and this election may be their last stand – if they even survive the conventions. Neither of them can come to grips with the reality-based issues of the day: epochal financial and economic contraction, peak energy (and many other resources), climate change, the absence of the rule of law in banking, and generational grievance – or, perhaps more to the point, the manifestations of these giant trends as presented in unemployment, debt slavery, foreclosure, bankruptcy, homelessness, hunger, and X-million family tragedies. Both parties can only promise the return to a bygone status quo that is largely mythical. …
Read More »
Here in Japan, people are dour as the Bank of Japan cut its growth outlook for fiscal 2012 to +2.0 pct from its October estimate of +2.2 pct. It cited heightened concern about the eurozone crisis crimping the global economy, and the strong yen.
Shortly after that, the government said it’s likely to fail in its goal of balancing the budget by 2020 even if it proceeds with the wildly unpopular plan of doubling the national sales tax. Societe Generale’s chief Japan economist quipped, “To balance the budget, the [sales tax] rate needs to rise further. We’ve passed the point where we can soft-land the fiscal situation. The question is how hard the landing is going to be.”
Pretty hard by the looks of it. Finance Minister Jun Azumi told lawmakers at this year’s first Diet session that letting public finances deteriorate further would present a “significant risk to stable economic growth” and that efforts to contain debt should be made “as soon as possible.” Very convincing — except that it’s what they say every year.
From the Irish Examiner:
The troika warned that a financial “bomb” would go off in Dublin, if Anglo senior bondholders were not repaid, a Government minister has said. He said the troika of EC, ECB and IMF, which is supplying Ireland’s bailout loans, had issued a stark warning to the Government about the consequences of IBRC not repaying the money. “What they’ve said really is that: ‘It’s on your head. We don’t want you to default on these payments. It is your decision ultimately. But a bomb will go off, and the bomb will go off in Dublin, not in Frankfurt.’” Full article
The troika warned that a financial “bomb” would go off in Dublin, if Anglo senior bondholders were not repaid, a Government minister has said.
He said the troika of EC, ECB and IMF, which is supplying Ireland’s bailout loans, had issued a stark warning to the Government about the consequences of IBRC not repaying the money.
“What they’ve said really is that: ‘It’s on your head. We don’t want you to default on these payments. It is your decision ultimately. But a bomb will go off, and the bomb will go off in Dublin, not in Frankfurt.’”
Full article
Hat tip: David
From yesterday’s Kelly Letter comes the following excerpt from the January Policy Brief from The Peterson Institute for International Economics:
Faced with the reality of failing adjustment programs, difficult politics, and rising risks that one or more peripheral nations may rebel, or Germany may rescind its support, investors may simply decide that the cumulative risks mean the euro area has a moderate risk of failing. If investors decide there is a low but significant probability that the euro area might fail, we believe Rudiger Dornbusch’s observation that crisis happens “much faster than you would have thought” would be realized. Here’s why: The failure of the euro area will be a calamitous financial event. If one believes the euro might fail, one should avoid being invested in European financial institutions, and in euro-denominated assets, until the outcome of the new pattern of currencies is clearer. As a result, a large swathe of euro-denominated assets would quickly fall in value. The euro itself would cheapen sharply, but so would the value of European bank debt and European shares, and most sovereigns would see their bonds trade off sharply. This in turn would make it expensive for even the Germans to raise finance in euros. Despite their impeccable credit record, they would be attempting to issue bonds in what is perceived as a flawed currency. A small risk of the euro “breaking up” would have great importance for the euro swap market. This market is used by Europe’s insurance companies, banks, and pension funds to hedge their interest rate risk. A swap contract allows, for example, a pension fund to lock in a long-term interest rate for their investments, in return for promising to pay short-term interest rates to their contract counterparty. It is an important market that underlies the ability of insurance companies, pension funds, and others to make long-term commitments to provide society with annuities, pensions, and savings from insurance policies. The notional value of these swaps is many times euro area GDP. The trouble is, the euro swap market could quickly collapse if markets begin to question the survival of the euro. Euro swap rates are calculated as the average interest rate paid on euro-denominated interbank loans for 44 of Europe’s banks. Approximately half of these banks are in “troubled nations.” So the interest rate will reflect both inflation risk and credit risk of the participating banks. If investors decided that the euro may not exist in several years’ time, swap interest rates would naturally rise because people would be concerned that banks could fail and that the “euro” interest rate could turn into something else — for example, the average of a basket of new currencies with some, such as the Greek drachma, likely to be highly inflationary. If euro swap interest rates start to reflect bank credit risk and inflation risk from a euro breakup, then the market would no longer function. A pension fund could no longer use it to lock in an interest rate on German pensions since it would not reflect the new German currency rates. The holders of these contracts would, effectively, have little idea what they would be in a few years’ time. Hence, investors would try to unwind their swap contracts, while the turmoil from dislocations in this massive market would cause disruptive and rapid wealth transfers as some holders made gains while others lost. If the euro swap market ran into trouble, Europe’s financial system would undoubtedly face risk of rapid systemic collapse. This example illustrates why a small perceived risk of a euro area breakup could rapidly cause systemic financial collapse. The swap market is only one mechanism through which collapse could ensue. … Many financial collapses started this way. … At the least, we expect several more sovereign defaults and multiple further crises to plague Europe in the next several years. There is simply too much debt, and adjustment programs are too slow to prevent it. … When we combine multiple years of stagnation with leveraged financial institutions and nervous financial markets, a rapid shift from low-level crisis to collapse is very plausible. European leaders could take measures to reduce this risk (through further actions on sovereign debt restructurings, more aggressive economic adjustment, and increased bailout funds). However, so far, there is little political will to take these necessary measures. Europe’s economy remains, therefore, in a dangerous state.
Faced with the reality of failing adjustment programs, difficult politics, and rising risks that one or more peripheral nations may rebel, or Germany may rescind its support, investors may simply decide that the cumulative risks mean the euro area has a moderate risk of failing.
If investors decide there is a low but significant probability that the euro area might fail, we believe Rudiger Dornbusch’s observation that crisis happens “much faster than you would have thought” would be realized. Here’s why: The failure of the euro area will be a calamitous financial event. If one believes the euro might fail, one should avoid being invested in European financial institutions, and in euro-denominated assets, until the outcome of the new pattern of currencies is clearer.
As a result, a large swathe of euro-denominated assets would quickly fall in value. The euro itself would cheapen sharply, but so would the value of European bank debt and European shares, and most sovereigns would see their bonds trade off sharply. This in turn would make it expensive for even the Germans to raise finance in euros. Despite their impeccable credit record, they would be attempting to issue bonds in what is perceived as a flawed currency.
A small risk of the euro “breaking up” would have great importance for the euro swap market. This market is used by Europe’s insurance companies, banks, and pension funds to hedge their interest rate risk. A swap contract allows, for example, a pension fund to lock in a long-term interest rate for their investments, in return for promising to pay short-term interest rates to their contract counterparty. It is an important market that underlies the ability of insurance companies, pension funds, and others to make long-term commitments to provide society with annuities, pensions, and savings from insurance policies. The notional value of these swaps is many times euro area GDP.
The trouble is, the euro swap market could quickly collapse if markets begin to question the survival of the euro. Euro swap rates are calculated as the average interest rate paid on euro-denominated interbank loans for 44 of Europe’s banks. Approximately half of these banks are in “troubled nations.” So the interest rate will reflect both inflation risk and credit risk of the participating banks. If investors decided that the euro may not exist in several years’ time, swap interest rates would naturally rise because people would be concerned that banks could fail and that the “euro” interest rate could turn into something else — for example, the average of a basket of new currencies with some, such as the Greek drachma, likely to be highly inflationary.
If euro swap interest rates start to reflect bank credit risk and inflation risk from a euro breakup, then the market would no longer function. A pension fund could no longer use it to lock in an interest rate on German pensions since it would not reflect the new German currency rates. The holders of these contracts would, effectively, have little idea what they would be in a few years’ time. Hence, investors would try to unwind their swap contracts, while the turmoil from dislocations in this massive market would cause disruptive and rapid wealth transfers as some holders made gains while others lost. If the euro swap market ran into trouble, Europe’s financial system would undoubtedly face risk of rapid systemic collapse.
This example illustrates why a small perceived risk of a euro area breakup could rapidly cause systemic financial collapse. The swap market is only one mechanism through which collapse could ensue. …
Many financial collapses started this way. … At the least, we expect several more sovereign defaults and multiple further crises to plague Europe in the next several years. There is simply too much debt, and adjustment programs are too slow to prevent it. …
When we combine multiple years of stagnation with leveraged financial institutions and nervous financial markets, a rapid shift from low-level crisis to collapse is very plausible. European leaders could take measures to reduce this risk (through further actions on sovereign debt restructurings, more aggressive economic adjustment, and increased bailout funds). However, so far, there is little political will to take these necessary measures. Europe’s economy remains, therefore, in a dangerous state.
From Michael Kahn’s Jan. 19 column at Barron’s:
It appears the stock market is finally firing on all burners despite a raft of problems still facing the global economy. … But don’t get complacent or enthusiastic about this rally. While stocks have pushed above short-term technical resistance levels, they are far from being in the clear. And I see no reason to alter my longer-term analysis that pointed to a tumble into the middle of the year. … Market cycles point lower while the ratio of buying-to-selling pressure suggests inherent weakness. The current short-term rally … does not look sustainable. It may be premature to sell the market, but preserving capital is still a good idea. Better buying opportunities still lie ahead.
From Anthony Mirhaydari’s Jan. 18 column at MSN Money:
It’s a false dawn not unlike the one seen in early 2008 before the meltdown started. The volatility behind all this is set to continue for at least a year. The good news is that we could see the return of a 1980s-1990s style secular uptrend for the stock market as soon as 2013.
From Mark Hulbert’s Jan. 18 column at MarketWatch:
Bullishness over the last 106 days has risen more rapidly than was the norm from past bull markets. … It’s worrisome when 3 out of 4 sentiment measures suggest that the bulls are jumping back on the bullish bandwagon at such an above-average pace. They reinforce the picture of complacency that the sentiment data have been painting in recent weeks.
The Obama administration rejected the Keystone XL oil pipeline yesterday, a project intended to move Canadian tar sands oil through the US to the Gulf of Mexico. While environmentalists jumped on the decision as a victory for the climate, it was not so much a green move by the White House as it was a reaction to a 60-day time limit imposed by Republicans on the decision. The president said he didn’t have enough time to properly consider the issue, and thus denied the permit.
While the pipeline is an important environmental issue to win, it serves as a better example for why the environment will not win in the long haul. Two things immediately happened in the wake of the decision:
In other words, regardless of whether or not the initial proposal for the pipeline eventually receives its permit or not, the oil will be processed, shipped, and burned by somebody somewhere. The global nature of the environmental challenge, and the unwillingness of any nation to give up growth for the nebulous goal of saving the planet, means that no policy-level changes will happen in time to avert the disasters that environmental scientists warn about. We will cause them.
In his new book, The End of War, John Horgan of the Stevens Institute of Technology in New Jersey claims that exceptions to the rule of violence in the wild prove that violence is not an inherent part of human nature. He presents cases of bands of chimps and orangutans that live peacefully in contrast to cases of groups that practice violence.
He told Haaretz in an interview that some people will consider his book “a bunch of naive, hippie hogwash” because “the vast majority of people think that war is a permanent part of the human condition,” but he insists that “we will surely end war someday. The only question is how and when.”
While everybody feels the basic appeal of peace, but it’s not a love of war that keeps violence with us, nor an instinct, but just events unfolding in a way that forces people to fight. It doesn’t take geopolitics to illustrate this. Horgan himself may be a pacifist, but he would undoubtedly fight an intruder in his home to protect his family. He might even use violence to get food for his family if there weren’t enough to go around town. The theory of peace in all circumstances falls apart quickly in the reality of life.
It works similarly on a national scale. Horgan told Haaretz: “In a way, the United States is the problem when it comes to the persistence of war in the world today. We are engaged in two large-scale conflicts overseas, in Iraq and Afghanistan. We’re the largest arms dealer in the world. We have a massive military budget. China’s military is minuscule compared to ours, I think their army is about one-sixth or one-seventh the size of ours in terms of defense spending. Yet we say that we are a people of peace. And, you can of course make a moral case for some of our conflicts. But if your goal is to move the world to a state beyond militarism, you have to find other ways of dealing with problems.”
It’s a little disingenuous to use the unnecessary, politically motivated, and widely criticized wars in Iraq and Afghanistan as the only examples. Saying that we can move beyond such obviously ill-conceived wars is reasonable, but that’s not the same as saying we can move beyond all wars.
The reason is more practical than philosophical. No nation’s goal is to move the world to a state beyond militarism. All nations seek to protect their interests. That’s why militaries exist in the first place. The only nations that would celebrate an official pacifist policy from the United States are its rivals. Its allies and citizens would not. The proper reply to Horgan from Washington would go something like this: “It’s not that we want war, it’s that we want resources. So does everybody else. When we can’t agree on who gets what’s left, war will break out. No high-minded appeal for peace will answer the question of who gets a limited supply of vital commodities. War will.” Clausewitz was right: “War is the continuation of policy by other means.”
That’s why it won’t end.
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