January 31, 2014

Economist's Sad Analysis of Obama's State of the Union

Deal or no deal? American politics may be becoming a bit less dysfunctional. In big annual speech to Congress, Barack Obama made several promises. He pledged to raise the minimum wage for those contracted to the federal government, to create a new tax-free savings bond to encourage Americans to save, to work for the closure of the Guantánamo Bay prison, to push immigration reforms and to veto any sanctions that Congress might pass designed to derail his deal with Iran over its nuclear programme. But for anybody listening from abroad, his most startling promise to America's legislature was to bypass it. – The Economist 

Dominant Social Theme: President Barack Obama was a little more assertive about government activism – and that's a good thing.

Free-Market Analysis: The editors of The Economist magazine gazed upon Barack Obama's state of the union message and decided it was good.

The reason it was good is because the US president gave indications that he would try to "get more done" over the next year or two than previously.

Of course, from a free-market point of view, the idea of Obama getting "more done" sounds a bit like a threat. When laws are passed in the US or anywhere else, they mostly retard the prospects of some worthy businesses at the expense of others.

 Here's more from the article:

 "Wherever and whenever I can take steps without legislation to expand opportunity for more American families, that's what I'm going to do," he vowed. This year, he said, will be "a year of action". 

That in America this pledge was not regarded as the most remarkable element of the speech shows how inured the country has become to dysfunctional government. 

After years of gridlock, Americans have got used to the idea that the gerrymandering of the electoral system and the polarisation of their two political parties have set the branches of government against each other, and that the checks and balances originally intended to keep the country's polity healthy have condemned it to sclerosis. 

Government shutdowns, fiscal cliffs and presidents who promise to do their best to ignore the legislature are no longer much of a surprise. Yet Americans may have become too gloomy: Mr Obama's speech could be the latest in a series of small signs that things are getting better. 

Last year's shutdown was such a public-relations disaster for politicians in general and the Republicans in particular that it is unlikely to happen again. The Tea Party's kamikaze tactics have been discredited; that is why, without much fuss, Congress recently managed to pass a budget. ... 

Take inequality, Mr Obama's new theme. Higher minimum wages are a less effective way to help poorer Americans than expanding the earned income tax credit (a negative income tax for workers on low pay). Several Republicans are open to this idea. Senator Marco Rubio, a rising star, recently said so; a fact Mr Obama alluded to in a speech that was uncharacteristically—and encouragingly—short of partisan sniping.

On immigration, too, a deal is doable. House Republicans are about to release a list of principles for reforming a system everyone agrees is broken. 

Mr Obama said he wants to sign a bill this year; if he handles Congress delicately, he may get his wish. 

The same goes for his request for lawmakers to give him "fast track" authority to negotiate trade deals. This is an essential tool for promoting free trade: if Asians and Europeans think Congress will rewrite trade pacts after the haggling is over, they will not take Mr Obama seriously as a dealmaker. 

It is still sad that this is the best that can be said of the world's most powerful democracy. It is hard to imagine the citizens of emerging economies looking at these compromises and finding them inspiring. But they are a start—and the political winds may be changing.

 The Economist article mentions three areas that lend themselves to presidential activism: inequality, immigration and trade.

Interestingly, two of these three areas advance a globalist agenda. This makes sense if you believe that Washington generally is in thrall to globalism. In fact, even the "inequality" meme lends itself to bigger government.

So, start at the beginning. The Economist would like to see a minimum wage raise of some significance, but standard neo-classical economic theory informs us that raising minimum wages via government mandates actually retards hiring. Instead of hiring more individuals, businesses may be apt to hire fewer – even though such an employment stance may eventually retard business prospects.

Thus, those who want to see a more vibrant private sector lose twice with this sort of approach: Businesses don't hire as much nor expand as quickly. Some solution. That The Economist could tout it only shows the current unseriousness of the magazine.

Second comes immigration. Last we looked, a tiny percentage of US citizens regarded immigration as an issue crying out to be remedied. "Immigration" is a preoccupation of the legislative class – and one that Republicans will further damage themselves with if they support the current "remedies" on the table.

The real reason – as we have explained before – for immigration reform may have to do with a growing alignment between the US, Mexico and Canada. While the so-called North American Union is denied at the highest levels, the pattern of the merger remains clear.

A US-sponsored drug war is destabilizing Mexico, various secret security pacts are homogenizing the civil and military forces of the three countries, health care policies are being brought into alignment and the immigration issue, if resolved in a way that allows further legislative easing of employment conditions, will create a kind of industrial merger.

Finally, there is so-called free trade, another issue that is well down on the list of US civil preoccupations but is an issue beloved by the internationalist crowd.

One can see the international influence simply based on the misnomer utilized: Free trade is anything but free. These vast 1,000-page treaties are MANAGED trade – and as such never accomplish anything remotely "free." Each treaty merely drains competitiveness from US workers generally while providing healthy incentives for the further spread of US corporatism throughout the world.

None of these three areas cited by The Economist as places where Obama can have a legislative impact are remotely positive from the standpoint of the average US worker – or even the average entrepreneur who should be able to make up his or her own mind about whom to trade with and where ... and how much to pay workers, as well.

The Economist magazine wants government to interfere yet again with worker pay scales in the name of equality, supports further industrial and worker mergers with Mexico and wishes to generate a system where the US president has significant or even sole authority over important managed trade pacts masquerading as free-trade negotiations.


 The article concludes by noting that these are meager and even "sad" goals given the extent of what could and should be accomplished by the US legislative system in the early 2000s. But we would argue that what is really sad is an article in a supposedly free market-oriented publication that suggests these are worthy goals to begin with.


January 30, 2014

JPMorgan Warns "Avoiding China Defaults Now Will Amplify The Future Problem"

Investors in China have been running scared of a default on a high risk trust product; but, as Bloomberg's Tom Orlik notes, they should embrace it. The implicit guarantee that no investments will go sour is one of the key problems with China’s financial system as Orlik adds it encourages reckless lending often to borrowers whose only merit lies in backing from a deep-pocketed government. Crucially, as JPMorgan warns in a recent note, "avoiding defaults is not the right answer, as it will only delay or even amplify the problem in the future."

A default that encourages lenders to price in risk would be a positive development and the CEG#1 was an ideal product to 'fail' with its 11% yield and clear idiosyncratic company problems. However, regulators won't have to wait long for a second chance as JPM warns "There will be a default in China’s shadow banking industry this year as economic growth momentum slows."

Via Bloomberg's Tom Orlik,
Investors Should Embrace Defaults in China’s Fragile Financial System...

In the years before the 2008 financial crisis, nominal growth outstripped the lending rate. Outstanding credit relative to GDP was low, keeping a lid on the burden of repayment. Against that backdrop, most borrowers were able to cover their costs and the chances of a default were low.

The situation today is different. Nominal growth has more than halved to 9 percent in 2013 from close to 23 percent in 2007.

Borrowers from trusts and other parts of the shadow financial system face interest rates in excess of 20 percent. An explosion in lending has increased the burden of repayment to more than 30 percent at the end of 2013 from about 19 percent of GDP at the end of 2008.

Lower growth, higher borrowing costs and mounting repayment costs mean defaults by borrowers and even bankruptcy at some small lenders are likely. After initial turmoil, that could actually be beneficial....
And JPMorgan adds:
  • China may narrowly escaped the first default in its shadow banking industry
  • Absence of default has become a major market distortion
  • The challenge is to contain the contagion risk if a default happens 
...local media reported that the China Credit Trust has reached a last-minute agreement with investors, with all principal and most accrued interest to be repaid. That means China will again narrowly escaped the first default in its shadow banking. However, the worries remain.

The absence of default has become a major distortion in China’s shadow banking, and we believe that default will happen in 2014 amid economic slowing. The concern is that, if a default occurs, whether investors will walk away and put the whole shadow banking market into a liquidity-driven credit crisis.
But contagion is possible...
The concern about the contagion risk is not groundless. In the past several years, non-bank financing (or the so-called shadow banking) has grown rapidly.

We estimate that the gross amount (i.e. with possible overlapping among sub-components) of non-bank financing in China reached RMB 36 trillion by the end of 2012 (or nearly 70% of GDP), compared to RMB 18.3 trillion in 2010 (or 46% of GDP).

Non-bank financing continued to grow fast in 2013. An update of our estimate suggests that nonbank financing has further increased to RMB 46.7 trillion by September 2013 (or 84% of GDP). The increase was most dramatic for trust assets (an increase of RMB 2.66 trillion in the first nine months of 2013), wealth management products (an increase of RMB 2.82 trillion), entrust loans (an increase of RMB 1.8 trillion) and bank-security channel business (i.e. banks use security firms as a channel to extend loans, which more than doubled in the first three quarters in 2013 and reached RMB 2.79 trillion).

The rapid growth in non-bank financing activities, especially for trust loans, WMPs and banksecurity channel business, has been driven by the perception of implicit guarantee from product issuers and distributors. The absence of default confirmed such perception....

In addition, there is substantial overlap between interbank assets and other components, for instance WMPs investing on interbank assets or claims on trust assets being traded in interbank markets. Nonetheless, banks are closely connected to shadow banking activities, hence possible turbulence in shadow banking will also affect the banking system.
We believe that default will happen in 2014 as the growth momentum slows down, and it will help restore market discipline and mitigate the moral hazard problem in the long run. However, the challenge is how to contain the near-term negative impact, as there could be three possible outcomes (in the order of increasing severity) if a default occurs.
The first possibility is that it is perceived as an idiosyncratic event, i.e. no spillover at all. This is the least likely outcome.

The second possibility is that the contagion risk is contained within a manageable level, i.e. only to similar products or sectors. For instance, if "Credit equals Gold No 1" defaults, investors will move away from collectively trust products that are only sold to wealthy individuals (but not affecting WMPs that are sold to retails investors); investors will worry about the credit quality of similar loans (non-SOE borrowers in mining industry), but not spillover to other products (e.g. local government debt, real estate companies and SOEs); investors question about the safety of trust companies but not banks. We can call it "limited spillover".

The third possibility is a “systemic spillover”. In a mild scenario, it will affect the vulnerable components such as trust loans (48% of trust AUM), WMP investment on non-standard credit products (estimated to be 35-50% of total WMPs) and bank-security channel business. In a worse scenario, it will affect the whole trust industry, WMPs and channel business (with a total gross size of RMB 23 trillion). Rollover of trust products (we estimate 30-35% trust products will mature in 2014) and WMP (64% WMPs has maturity less than 3 months) becomes extremely difficult. The liquidity stress could evolve into a full-blown credit crisis.
What can the government do? In our view, avoiding defaults is not the right answer, as it will only delay or even amplify the problem in the future. Meantime, there are measures the government can take to contain the contagion risk.
First, let defaults happen but establish a transparent legal process (rather than under-table arrangements) to resolve the dispute between different parties.

Second, regulators should tighten supervisory and regulatory framework to contain regulatory arbitrage activities, and clarify the responsibilities in various shadow banking products. The uncertainty in regulatory and legal responsibility behind each product is an important caveat in the market, and could amplify the contagion risk.

Third, impose hard budget constraints on local governments and SOEs, so as to avoid crowding out of credit to other business borrowers and establish risk-based pricing practices.

Finally, avoid defaults that could be easily linked to systemic concerns, such as the default of banks (rather than non-bank financial institutions as the perception of government protection on banks is stronger) or local government financial vehicles or SOEs. Similarly, the default of a WMP could have a bigger impact than a trust product, as the latter does not have maturity mismatch problem and are sold to wealthy individuals rather than retail investors. In that sense, China may miss an "ideal” first default if “Credit Equals Gold No 1” gets bailed out.
Investors in China have been running scared of a default on a high risk trust product; but, as Bloomberg's Tom Orlik notes, they should embrace it.
And they are going to get a chance again soon as there are considerably more of these maturing in the next quarter...

Perhaps that is why 3mo SHIBOR has been rising 9 days in a row...

January 29, 2014

Arrest of Bitcoin's Shrem Occurs Amidst Levels of Injustice

Bitcoin Foundation's Shrem Charged in Silk Road Drug Case ... Two men tied to the illicit online market Silk Road, including Bitcoin Foundation Vice Chairman Charlie Shrem, were charged by U.S. Attorney Preet Bharara today in a complaint filed in Manhattan federal court. The vice chairman of the Bitcoin Foundation was charged by federal prosecutors with conspiring to launder more than $1 million in the virtual currency, the latest in a series of charges and forfeitures tied to the illicit online bazaar Silk Road. – Bloomberg 

Dominant Social Theme: These people are criminals and it is good to catch them. 

Free-Market Analysis: As what we call the Internet Reformation expands in terms of its impact, the rationale for many kinds of Western law enforcement diminishes. 

This bitcoin arrest is a case in point. Charlie Shrem was arrested for facilitating the sale of drugs but there is no evidence we know of that drug use – of any kind – is so disruptive to society that it ought to banned. 

A case in point is marijuana, which has been banned throughout most of the West for perhaps a half-century or more. Now marijuana is beginning to be decriminalized or even legalized. 

 But what of the millions whose lives were blighted by arrests and stints in the penitentiary? When one looks at the reality of these laws, it seems they are often developed to grant some lobbying group an industrial advantage. 

Shrem was doubtless arrested on drug-charges with the predictable money-laundering charges that accompany them. Since officials have been so emphatic about his activities it is likely that he was subject to an intensive wiretap effort as well. 

US wiretapping is at this point incredibly invasive and would be deemed unacceptable in a different time and place. But Shrem was no doubt subject to forceful targeting. 

Here's more: 

Charlie Shrem, 24, was arrested yesterday as he arrived at John F. Kennedy International Airport in New York. In addition to his role with the foundation, an industry representative to regulators formed to oversee the currency's software protocol, he was also chief executive officer of BitInstant, a Bitcoin exchange company. 

By charging Shrem, a prominent Bitcoin evangelist in New York, the government has reached into the circle of individuals responsible for the promotion and standardization of the currency. "Bitcoin is in the process of getting institutionalized," said Gil Luria, an analyst at Wedbush Securities Inc. in Los Angeles. 

"Early on it was exploited by bad guys because it was still very raw and accessible," he said. "As more investors and businesses get involved, it's going to get harder and harder to use it for illicit purposes." 

Bitcoin was introduced in 2008 by a programmer or group of programmers under the name Satoshi Nakamoto. It has no central issuing authority, and uses a public ledger to verify encrypted transactions. It has gained traction with merchants selling everything from Sacramento Kings basketball tickets to kitchen mixers on Overstock.com. 

Cameron and Tyler Winklevoss, who are seeking regulatory approval for a Bitcoin exchange-traded fund, invested more than $1 million in BitInstant. The Winklevoss brothers aren't under investigation in the case, a person familiar with the matter said. 

In a statement today, the Winklevoss brothers said BitInstant "made a commitment to us that they would abide by all applicable laws," and that they were passive investors in BitInstant. "

Truly innovative business models don't need to resort to old-fashioned law-breaking, and when Bitcoins, like any traditional currency, are laundered and used to fuel criminal activity, law enforcement has no choice but to act," Manhattan U.S. Attorney Preet Bharara said today in a statement. ... 

They face as long as 20 years in prison if convicted of the most serious charge ... "Working together, Shrem and Faiella exchanged over $1 million in cash for Bitcoins for the benefit of Silk Road users, so that the users could, in turn, make illegal purchases on Silk Road," Bharara said, adding that the probe is "ongoing."

 Please note that this news follows reports that HSBC has settled a money-laundering probe for a record $1.92 billion. Fox tells us the following: 

Settling charges it gave drug lords and terrorists access to the U.S. financial system, British banking giant HSBC (HBC) agreed to pay a record $1.92 billion on Tuesday and accepted responsibility for inadequate anti-money laundering compliance. 

While the settlement shatters records in terms of monetary penalties, HSBC executives are avoiding criminal prosecution even though officials have accused them of helping countries break the law and the bank of becoming the "preferred financial institution" for drug cartels. 

"The record of dysfunction that prevailed at HSBC for many years was astonishing," Lanny Breuer, Assistant Attorney General at the DOJ, said in a statement. "Today, HSBC is paying a heavy price for its conduct, and, under the terms of today's agreement, if the bank fails to comply with the agreement in any way, we reserve the right to fully prosecute it." 

This provides us with a stark comparison. In one case, defendants face decades in jail for facilitating drug transactions. But institutionalized money laundering to facilitate the international drug trade is dealt with via a fine that is no doubt incidental to HSBC's profits. 

There is also significant reporting that Western governments fund part of black ops – intelligence functions – through the drug trade. The CIA especially has been implicated in this; one of the journalists who covered the story eventually committed suicide via not one but two shots to the head. 

So there are at least three levels of law enforcement operating here. At the top level, Intel agencies actively foster the drug trade. At a mid-level banks and financial institutions generally facilitate the lucrative business of drugs but employees rarely go to jail because the "corporate person" is fined instead. 

At a private market level, we have people like Shrem, who will likely serve prison time and whose life is effectively blighted by these charges and the subsequent publicity. 

And yet, in many ways, Shrem seems like an admirable and energetic person. In addition to the business that has now landed him federal charges, he also runs an apparently successful nightclub in New York City – and all this at age 24. 

In another place and time, entrepreneurs like Shrem might well be a welcome addition to society. But in today's environment of hyper "law enforcement," he is seen as a criminal even before the charges against him are "proven." 

As what we call the Internet Reformation expands and informs people about The Way the World Really Works, the lack of logic as regards law enforcement is increasingly noted. 

We've quoted statistics before: One out of every three individuals in the US has an interaction with law enforcement on a potentially criminal matter before the age of 24, according to USA Today. And the US system – effectively a Gulag – has some six million prisoners at any one time and who knows how many on parole? 

The creeping privatization of US law enforcement demands more and more prisoners to keep the system percolating. And often the conditions are abysmal. The US Justice Department just admitted that 50 percent of jail rapes are the result of prison officials. 

There is no doubt over time the wretched penal system created in the West – and liberally propagated around the world – will come in for a good deal of scrutiny and pushback. 

For now, the industry of law enforcement throughout the West runs in an increasingly aggressive manner, using "the war on terror" as justification for increasingly invasive practices. 

But as we have seen over and over throughout history – especially in the West – these sorts of authoritarian movements run their course. 

Conclusion The legal code in the West, especially, is bursting at the seams. It is currently the purview of the state, though in the past there were a variety of judicial formulas, including entirely private ones. The cycle will turn, for it cannot continue as it is. But it will be too late for people like Shrem.


January 28, 2014

Are the Davos Men Getting a Bit Nervous?

Normally I try not to pay much attention to Davos because it is meant to reinforce the idea that plutocracy is simply a manifestation of natural aristocracy. But several media outlets took note of the sudden shift from self-congratulation (as if they were the ones who navigated the ship through the crisis, as opposed to were the big beneficiaries of how the crisis was resolved) to worry as emerging markets swooned on the last day of the conference.

A confident set of aristocrats would not react this way. Richard Whitney, the epitome of 1920s American WASP-dom (tall, handsome, athletic, a bit too often visibly snooty), as head of the New York Stock Exchange did a brief heroic turn by placing a large buy order during the Great Crash and spurring a brief rally. He also had expensive tastes and a bad eye as far the technologies of his day were concerned. He resorted to embezzlement as a way of dealing with his impossibly high debts. When Whitney was caught out, as recounted in Once in Golconda, he took full responsibility for his actions and made sure his staff were not tarred by the scandal. He went to Sing Sing (no Club Feds back then) with his head up and was a model prisoner. His brother eventually repaid all the funds that were pilfered. Contrast that with the usual CEO/top financier found within hailing distance of scandal conduct: they know nothing, remember nothing.

And in a bit of synchronicity, the Wall Street Journal published this letter from Tom Perkins, founder of Kleiner Perkins in the same timeframe (hat tip Yonatan and danny):
Regarding your editorial “Censors on Campus” (Jan. 18): Writing from the epicenter of progressive thought, San Francisco, I would call attention to the parallels of fascist Nazi Germany to its war on its “one percent,” namely its Jews, to the progressive war on the American one percent, namely the “rich.” 
From the Occupy movement to the demonization of the rich embedded in virtually every word of our local newspaper, the San Francisco Chronicle, I perceive a rising tide of hatred of the successful one percent. There is outraged public reaction to the Google buses carrying technology workers from the city to the peninsula high-tech companies which employ them. We have outrage over the rising real-estate prices which these “techno geeks” can pay. We have, for example, libelous and cruel attacks in the Chronicle on our number-one celebrity, the author Danielle Steel, alleging that she is a “snob” despite the millions she has spent on our city’s homeless and mentally ill over the past decades. 
This is a very dangerous drift in our American thinking. Kristallnacht was unthinkable in 1930; is its descendent “progressive” radicalism unthinkable now?
As danny wrote, “Of all the backwards, ill-considered statements coming from San Francisco elites in recent months, this takes the cake.” Perkin’s firm apparently agreed and tweeted that they were “shocked by his views” and disagreed with them. But these super rich guys to have an unseemly fondness for Nazi Germany comparisons. Recall Steve Schwarzman compared a proposal to close the loophole that lets guys like him pay taxes on their labor income at capital gains rate to Hitler invading Poland.

But more telling is the editorial at the Financial Times, which tells us Davos Men are worried about the threat that automation poses to white collar workers….including them!

Now mind you, the bit about even the folks at the very top not being safe from the threat of computers is a mere aside at a couple of points. But it suggests that deep down, somewhere, a decent proportion of the Galt wanabes actually recognize that the reason they are where they are has to do with luck and timing and not some astonishing superior capabilities that they alone possess.

So why doesn’t someone in the NC commentariat do good and make some money by helping this process along? Doesn’t the world really need a digital CEO? We are moving to computerized call centers and even have computers that can simulate therapists. Surely it isn’t hard to write a program that fires people right and left (the Chainsaw Al module) or the more upscale version that hires McKinsey or some less fancy firm to “rightsize” the company. You need a program that has decision rules as to what to do with excess corporate cash flow. Since there are only two choices, buying back stock or paying dividends, it shouldn’t be that hard to work it out. It will also need to be able to detect when questions are taking a legalistic turn and automatically disconnect from the hard disk and work only off an auxiliary drive. And think of all the money you save! No possibility of sexual harassment suits or insider trading scandals. And all the big bonuses the synthetic CEOs negotiate for themselves can be split between the company and the inventors. And of course you can order personality overlays, like arrogant/pushy (the Dimon/Benmosche flavor), smooth and super corporate (Ken Chennault of Amex style), nerdy, and young digiterati.

I’m waiting with bated breath….


January 27, 2014

Are We On The Verge Of A Massive Emerging Markets Currency Collapse?

This time, the Federal Reserve has created a truly global problem.  A big chunk of the trillions of dollars that it pumped into the financial system over the past several years has flowed into emerging markets.  But now that the Fed has decided to begin "the taper", investors see it as a sign to pull the "hot money" out of emerging markets as rapidly as possible.  This is causing currencies to collapse and interest rates to soar all over the planet.  Argentina, Turkey, South Africa, Ukraine, Chile, Indonesia, Venezuela, India, Brazil, Taiwan and Malaysia are just some of the emerging markets that have been hit hard so far.  In fact, last week emerging market currencies experienced the biggest decline that we have seen since the financial crisis of 2008.  And all of this chaos in emerging markets is seriously spooking Wall Street as well.  The Dow has fallen nearly 500 points over the last two trading sessions alone.  If the Federal Reserve opts to taper even more in the coming days, this currency crisis could rapidly turn into a complete and total currency collapse.

A lot of Americans have always assumed that the U.S. dollar would be the first currency to collapse when the next great financial crisis happens.  But actually, right now just the opposite is happening and it is causing chaos all over the planet.

For instance, just check out what is happening in Turkey according to a recent report in the New York Times...
Turkey’s currency fell to a record low against the dollar on Friday, a drop that will hit the purchasing power of everyone in the country. 
On a street corner in Istanbul, Yilmaz Gok, 51, said, “I’m a retiree making ends meet on a small pension and all I care about is a possible increase in prices.”
“I will need to cut further,” he said. “Maybe I should use my natural gas heater less.”
As inflation escalates and interest rates soar in these countries, ordinary citizens are going to feel the squeeze.  Just having enough money to purchase the basics is going to become more difficult.
And this is not just limited to a few countries.  What we are watching right now is truly a global phenomenon...
"You've had a massive selloff in these emerging-market currencies," Nick Xanders, a London-based equity strategist at BTIG Ltd., said by telephone. "Ruble, rupee, real, rand: they've all fallen and the main cause has been tapering. A lot of companies that have benefited from emerging-markets growth are now seeing it go the other way."
So why is this happening?  Well, there are a number of factors involved of course.  However, as with so many of our other problems, the actions of the Federal Reserve are at the very heart of this crisis.  A recent USA Today article described how the Fed helped create this massive bubble in the emerging markets...
Emerging markets are the future growth engine of the global economy and an important source of profits for U.S. companies. These developing economies were both recipients and beneficiaries of massive cash inflows the past few years as investors sought out bigger returns fostered by injections of cheap cash from the Federal Reserve and other central bankers. 
But now that the Fed has started to dial back its stimulus, many investors are yanking their cash out of emerging markets and bringing the cash back to more stable markets and economies, such as the U.S., hurting the developing nations in the process, explains Russ Koesterich, chief investment strategist at BlackRock. 
"Emerging markets need the hot money but capital is exiting now," says Koesterich. "What you have is people saying, 'I don't want to own emerging markets.'"
What we are potentially facing is the bursting of a financial bubble on a global scale.  Just check out what Egon von Greyerz, the founder of Matterhorn Asset Management in Switzerland, recently had to say...
If you take the Turkish lira, that plunged to new lows this week, and the Russian ruble is at the lowest level in 5 years. In South Africa, the rand is at the weakest since 2008. The currencies are also weak in Brazil and Mexico. But there are many other countries whose situation is extremely dire, like India, Indonesia, Hungary, Poland, the Ukraine, and Venezuela. 
I’m mentioning these countries individually just to stress that this situation is extremely serious. It is also on a massive scale. In virtually all of these countries currencies are plunging and so are bonds, which is leading to much higher interest rates. And the cost of credit-default swaps in these countries is surging due to the increased credit risks.
And many smaller nations are being deeply affected already as well.

For example, most Americans cannot even find Liberia on a map, but right now the actions of our Federal Reserve have pushed the currency of that small nation to the verge of collapse...
Liberia's finance minister warned against panic today after being summoned to parliament to explain a crash in the value of Liberia's currency against the US dollar. 
"Let's be careful about what we say about the economy. Inflation, ladies and gentlemen, is not out of control," Amara Konneh told lawmakers, while adding that the government was "concerned" about the trend.
Closer to home, the Mexican peso tumbled quite a bit last week and is now beginning to show significant weakness.  If Mexico experiences a currency collapse, that would be a huge blow to the U.S. economy.
Like I said, this is something that is happening on a global scale.

If this continues, we will eventually see looting, violence, blackouts, shortages of basic supplies, and runs on the banks in emerging markets all over the planet just like we are already witnessing in Argentina and Venezuela.

Hopefully something can be done to stop this from happening.  But once a bubble starts to burst, it is really difficult to try to hold it together.

Meanwhile, I find it to be very "interesting" that last week we witnessed the largest withdrawal from JPMorgan's gold vault ever recorded.

Was someone anticipating something?

Once again, hopefully this crisis will be contained shortly.  But if the Fed announces that it has decided to taper some more, that is going to be a signal to investors that they should race for the exits and the crisis in the emerging markets will get a whole lot worse.

And if you listen carefully, global officials are telling us that is precisely what we should expect.  For example, consider the following statement from the finance minister of Mexico...
"We expected this year to be a volatile year for EM as the Fed tapers," Mexican Finance Minister Luis Videgaray said, adding that volatility "will happen throughout the year as tapering goes on".
Yes indeed - it is looking like this is going to be a very volatile year.
I hope that you are ready for what is coming next.

January 24, 2014

Davos Unburdening as Memes Begin to Fail

Crippled eurozone to face fresh debt crisis this year, warns ex-ECB strongman Axel Weber ... Ex-Bundesbank head Alex Weber expects fresh market attacks on eurozone this year and economist Kenneth Rogoff says the euro was a "giant historic mistake." ... A top panel of experts in Davos has poured cold water on claims that the European crisis is over, warning that the eurozone remains stuck in a low-growth debt trap and risks being left on the margins of the global economy by US and China. – UK Telegraph 

Dominant Social Theme: 

Europe is over its crisis and soon any doubts about recovery will be a thing of the past as well. 

Free-Market Analysis: 

You can tell certain memes are failing when elite bagmen begin to broadcast their doubts. From this article, we determine that even top elites are beginning to worry about upcoming EU difficulties. 

Axel Weber says what is not to be spoken, for instance, though Weber has been speaking out for a while and had to resign from the Bundesbank for his trouble. Perhaps Weber is courageous, or more likely – as he moves in these circles – he is just covering his backside. 

The more of these confessionals we observe, the more certain we are that significant trouble is brewing. We've seen the same kind of thing with global warming. 

 But when it comes to the EU, we're only surprised that there are not many more like Weber. After all, we are in the middle of a bear business cycle. In a "bear" it is not possible to get long-term recoveries. We go back to the 1970s for this information. 

The 1970s – the last real bear cycle – saw numerous sporadic "recoveries." But the struggle was really between those who owned the fiat and wanted to restimulate and the economy itself, which was badly in need of a cleansing. 

It is much the same today. The economy crashed worldwide but instead of allowing the banking system to experience the insolvency it richly deserved, banking officials began to print money in vast amounts – tens of trillions – that were funneled directly to "too big to fail" financial institutions. 

The money flowed from these institutions not into the average man's pocket, but into stocks, commodities, housing and other assets that were sought after from those employed by these institutions or close to them.

These sorts of money flows do not create a "recovery" but they do create asset bubbles and overall price inflation. The bubbles are troublesome, the price inflation over time is intolerable and demands and interest rates rise. 

The interest rate rises of the early 1980s were terrible, but when the cycle finally reaches this point in the 2000s, they will be catastrophic because the economy has been unbalanced for so long. 

Axel Weber is correct. Here is more: 

Weber, the former head of the German Bundesbank, said the underlying disorder continues to fester and region is likely to face a fresh market attack this year. "Europe is under threat. I am still really concerned. Markets have improved but the economic situation for most countries has not improved," he said that the World Economic Forum in Davos. 

Mr Weber, now chairman of UBS, said the European Central Bank's stress test for banks in November risks setting off a new sovereign debt scare, reviving the crisis in the Mediterranean countries. 

"Markets are currently disregarding risks, particularly in the periphery. I expect some banks not to pass the test despite political pressure. As that becomes clear, there will be a financial reaction in markets," he said. 

Weber was not alone at Davos. Harvard's Kenneth Rogoff is quoted as saying in his speech that the euro was a "gigantic mistake." Of course, as we have indicated many times, the euro was NOT a mistake. Those initiating it believed that the stress caused by the euro would eventually lead to a deeper political union. But we'll give Rogoff a gold star for addressing the issue at all. 

Like Weber, Rogoff may be worrying not about the EU so much as his own reputation. Again, think of these statements as a kind of early warning system. The most sensitive of bagmen want to issue "distancing" statements. 

Here's what Rogoff had to say: 

Harvard professor Kenneth Rogoff said the launch of the euro had been a "giant historic mistake, done to soon" that now requires a degree of fiscal union and a common bank resolution fund to make it work, but EMU leaders are still refusing to take these steps. 

"People are no longer talking about the euro falling apart but youth unemployment is really horrific. They can't leave this twisting in wind for another five years," he said. 

Mr Rogoff said Europe is squandering the "scarce resource" of its youth, badly needed to fortify an ageing society as the demographic crunch sets in. While Europe still has great skills in technology and an established rule of law that is the envy of most emerging market states, it risks losing footing as a major player in the global economy. 

"If these latent technologies are not realised, Europe will wake up like Rip Van Winkel from a long Japan-like slumber to find itself a much smaller part of the world economy, and a lot less important." 

Mr Rogoff said debt write-downs across the EMU periphery "will eventually happen" but the longer leaders let the crisis fester with half-measures, the worse damage this will do to European society in the end.

 You see how it works? First come the most outrageous and authoritarian actions. And then, as the predictable debacle takes place, certain individuals whose fates are tied to larger rash gambits begin to worry for various reasons about their individual reputations and credibility. 

Obviously, we are at this point when it comes to the euro and even the EU. As the debacle continues to unfold, there will surely be others who feel compelled to separate themselves from the unfolding catastrophe. 

So think of these elite confessionals as a kind of market indicator, to be considered alongside of other evidence. They can be useful this way. 

We've been writing a good deal about the Wall Street Party, and have been watching the mainstream press for these sorts of indicators – mainstream analysts and academics sounding the warning about Wall Street and markets generally. 

While there are various unburdenings, we haven't yet observed the kind of doomsday commentary that we consider significant. That doesn't mean it won't come. Surely it will. 

So ... in the case of the Wall Street Party, there may be gains aplenty before the punch bowl departs. Not so much for the EU ... 


January 23, 2014

Top 1% Has 65 Times More Wealth Than The Bottom Half And The Global Elite Like It That Way

As we previously noted, the 85 richest people in the world have about as much wealth as the poorest 50% of the entire global population does.  In other words, 85 extremely wealthy individuals have about as much wealth as the poorest 3,500,000,000 do.  This shocking statistic comes from a new report on global poverty by Oxfam.  And actually Oxfam's report probably significantly underestimates the true scope of the problem, because Oxfam relies on publicly reported numbers.

As Michael Snyder examines, the rot goes deeper...

Submitted by Michael Snyder of The Economic Collapse blog,

At the very top of the food chain, the global elite are masters at hiding their wealth.  In fact, as I have written about previously, the global elite have approximately 32 trillion dollars (that we know about) stashed in offshore banks around the world.  That would be about enough to pay off the entire U.S. national debt and buy every good and service produced in the United States for an entire year.  These elitists live on an entirely different planet than the rest of us do.  In fact, according to Oxfam, the richest one percent of the global population has 65 times more wealth than the bottom half of the global population combined.

There is certainly nothing wrong with making money.  In fact, the founders of the United States intended for this nation to be a place where free markets thrived and where everyone could pursue their dreams.  Unfortunately, this country (along with the rest of the world) has moved very much in the opposite direction.  Today, we have a debt-based global financial system which is dominated by gigantic predator corporations and big banks.  Working together with national governments, these corporations and banks have constructed a system that I like to call "Corporatism" in which the percentage of all global wealth that is being funneled to the very top of the pyramid steadily grows over time.

The Founding Fathers were very correct to be very suspicious of large concentrations of power.  In the early days of the United States, the federal government was very small and the size and scope of corporations was greatly limited.  Our nation thrived and a huge middle class blossomed.

Sadly, over the past several decades the pendulum has completely swung in the other direction.  Today, our society is completely and totally dominated by big banks, big corporations and big government.

And of course this is also happening in virtually every other nation on the face of the planet.  The global elite have rigged the game to send just about all of the rewards their way, and it is working.  The following are facts taken directly from Oxfam's latest report...

•Almost half of the world’s wealth is now owned by just one percent of the population.

•The wealth of the one percent richest people in the world amounts to $110 trillion. That’s 65 times the total wealth of the bottom half of the world’s population.

•The bottom half of the world’s population owns the same as the richest 85 people in the world.

•Seven out of ten people live in countries where economic inequality has increased in the last 30 years.

•The richest one percent increased their share of income in 24 out of 26 countries for which we have data between 1980 and 2012.

•In the US, the wealthiest one percent captured 95 percent of post-financial crisis growth since 2009, while the bottom 90 percent became poorer.

Starting on Wednesday, several thousand members of the global elite will gather for the World Economic Forum meetings in Davos, Switzerland.  The following is how USA Today described this conference.
For several days at the end of January, presidents, prime ministers, monarchs and corporate titans jostle with actors, rock stars and major influencers for top billing at the annual meeting of the World Economic Forum. The confab takes place in the Alpine village of Davos, about 90 miles southeast of Zurich, and for a brief spell each year the pristine ski resort half-sheds its Graubünden roots and becomes a ground zero for the political and business elite.
Unless you are independently wealthy, you can forget about going to this conference.  A ticket to Davos is going to cost you about $30,000, and that is on top of the $55,000 that it costs to join the organization.

Needless to say, it is an organization of the elite, by the elite and for the elite.

This year, the theme of the meeting is "The Reshaping of the World: Consequences for Society, Politics and Business".  And the founder of the World Economic Forum says that the time has come to press the "reset" button for the global economy...
It's time to press the "reset" button on the world, the founder of the World Economic Forum said Wednesday, addressing media ahead of the WEF's much ballyhooed annual meeting in Davos-Klosters, Switzerland, that gets underway in a week's time.

"The world is complex, it's fast-moving, it's interconnected, and we in Davos want to provide a mirror to the world as it is. It is not a meeting devoted to one set of issues. It's a meeting that address the complexity of our world," said Klaus Schwab, the WEF's founder and executive chairman.
At first glance, that sounds pretty good.

Personally, I would love to hit a "reset" button for the global economy.

But what the elite mean by "reset" is much different from what most of the rest of us would mean.

The following is an excerpt from the executive summary for the agenda for the 2014 World Economic Forum...
"At an international level, the formal architecture for global governance was not designed for the interdisciplinary challenges and collective action problems of today. As a result, international cooperation has yet to fully enter the information age and capture its associated productivity gains."
For the global elite, the answers to our problems always involve more centralization and more "global governance".  In other words, the answers to our problems always involve giving them more control and more power.

The elite never actually want the pendulum to swing back in the direction of the "little guy".  The elite are generally pleased with how the game is being played because they are winning.

Most people don't even realize that they are participants in a debt-based neo-feudalist system in which money is being used as a form of social control.

As I have written about previously, there is about 190 trillion dollars of debt in the world, but global GDP is only about 70 trillion dollars.

There is no way that all of this debt could ever be paid off at one time.  It is mathematically impossible.  Over time, all of this debt transfers the wealth of the planet away from us and to the global elite.  If this game was allowed to go on long enough, eventually they would have nearly all of it.

And some would argue that we are already getting close to that point.  A study by the World Institute for Development Economics Research discovered that the bottom half of the global population only owns approximately 1 percent of all wealth, and at this point about a billion people throughout the world go to bed hungry every night.

This is one of the reasons why I am so adamant about the fact that the Federal Reserve needs to be shut down.  It is at the very heart of the debt-based system that we have in the United States, and over the past 100 years it has brought us to the brink of economic Armageddon.

Sadly, most Americans do not understand any of these things.  They just assume that the debt-fueled prosperity that we have been enjoying will be able to go on indefinitely.

So is there any hope for the "little guy"?

Well, you could try to win the one billion dollar NCAA tournament bracket contest that Warren Buffett is backing.

Or you could go out and try to win the lottery or try to date a famous professional athlete.

But the odds of any of those things actually happening are so low that they aren't even worth mentioning.

Personally, I would rather spend my time trying to wake people up and help them understand how our global system really works.

I believe that a "great awakening" is coming.

I believe that millions of people are going to start breaking out of the "matrix of control" that has such a tight grip on their lives and are going to start thinking for themselves.

I believe that as the darkness gets even darker that the light is going to get even brighter.  I believe that we are going to see "renewal" on a whole bunch of different levels.

Yes, a great economic collapse is coming.

Yes, there is going to be a tremendous amount of pain.

But it won't all be bad news.

The times ahead are going to be full of adventure and excitement for those who are willing to embrace it.

January 22, 2014

Minimum Wages: The Effects on Employment and Labour-Force Turnover

Economic research finds little evidence in support of the hypothesis that an increase in minimum wages significantly affects employment – either positively or negatively. This column discusses a study of the impact of minimum-wage changes on turnover rates. Minimum-wage increases are associated with a lower probability that a job will end, and with a lower probability that an unemployed person will find work. The former effect is established only for newly hired workers. Increases in the minimum wages are also associated with more stable jobs for all low educated workers. Thus, the trade-off between fewer jobs with higher wages and more job stability versus easier access to jobs should be taken into account in the minimum-wage policy debates.

On 14 January 2014 a group of 75 economists, including seven Nobel laureates, released a letter calling for an increase in the US minimum wage (Woellert 2014). At the same time, George Osborne, the Conservative Chancellor of the Exchequer in the UK, has called for the minimum wage in that country to rise by more than the rate of inflation this year (BBC 2014). In both cases, the key argument for an increase concerns a need for fairness in insuring that the lowest paid workers share in the benefits of post-recession economic growth.

Are minimum-wage debates economically meaningful?

Opposing arguments, of course, are based on concerns that increasing the minimum wage will reduce employment for the very people the policy is intending to help. Assessing the extent of employment effects from minimum wages is the focus of a voluminous literature that includes studies of effects in many developed countries (see Card and Krueger 1995, and Neumark and Wascher 2007 for comprehensive surveys of the literature). The debate in that literature, which has been heated at times, has centred on the question of whether increases in the minimum wage have positive or negative effects on employment.
• But the American letter writers, and others assessing the literature, conclude that whether the sign is negative or positive, the impact of minimum wages on employment rates is small.
• Moreover, fewer than 5% of workers in countries like Canada and the US earn the minimum wage, implying that any direct negative effects of a minimum-wage increase are unlikely to be widespread (e.g. Neumark et al. 2004).
That conclusion is reinforced by the fact that studies of minimum-wage changes on the wages of workers earning just more than the minimum tend to find little or no effect.
• In addition, studies of employment effects of minimum-wage changes focus mainly on teenagers. Even for young adults (age 20 to 24), minimum-wage effects tend to be statistically insignificant and not economically substantial. Effects for older adults are so small that few papers bother to report them. Again, the conclusion is that minimum-wage hikes are directly relevant for a small subset of the workforce.
Given this, one might be forgiven for concluding that debates over the minimum wage are more about political sound and fury than about anything economically meaningful.

Minimum Wages and Turnover Rates

This latter conclusion, though, is challenged by a small set of new papers examining the impact of minimum wages on labour force turnover rates (hiring rates, quit rates, and layoff rates). The question these papers try to address is somewhat different from the large existing employment effects literature. While the latter examines whether workers are either laid off or not hired at the time of a minimum-wage increase, the point of the turnover papers is to ask whether turnover rates are different in high versus low minimum-wage regimes. The first paper examining this was a study of the effects of a 1987 increase in the Portugese minimum wage using matched worker and firm data (Portugal and Cardoso 2006). These authors look at job separation and hiring rates for teenagers before and after the 1987 minimum wage increase, using older workers as a comparison group. They find that hiring rates were lower after 1987 than before, as one might expect. But, more strikingly, the separation rate also declined after 1987. Similarly, Dube et al.(2012) in work carried out contemporaneously with our own, used comparisons across US state borders to examine separation rates, and also found that separation rates decline after minimum-wage increases. As with Portugal and Cardoso (2006), their work focuses on impacts for teenagers and restaurant workers.

In our own work (Brochu and Green 2013), we investigate the impact of minimum wage changes on turnover rates using Canadian Labour Force Survey (LFS) data. The Canadian LFS is the monthly representative survey the primary purpose of which is to collect the data underlying official unemployment and employment rates. Its structure is comparable to both the US Current Population Survey, and the UK’s Labour Force Survey. Using it conveys three main advantages.
• First, it allows us to take advantage of the substantial variation in the minimum wage in Canada. Canadian minimum wages are set at the provincial level and in our time period (1979 through 2008), there are over 140 nominal minimum-wage changes. 
• Second, the Canadian Labour Force Survey contains a consistent question on job tenure asked of all workers in every month in our sample period. Job tenure turns out to play an important role in our results. 
• Third, the survey contains information on education, which the US data used by Dube et al. (2012) does not, and that allows us to define the relevant labour market as individuals with a high school or less education rather than just focusing on teenagers.
Using a difference-in-difference type specification that takes advantage of the time x province variation in minimum-wage changes (and making appropriate adjustments to standard errors), we find that the impact of minimum-wage increases on turnover depends strongly on job tenure.
• For those with over a year of job tenure, minimum-wage changes have little impact on the probability a job ends.
• However, turnover rates at the start of a job (in the first year) are substantial. A 10% increase in the minimum wage implies a 5% decrease in the probability a job terminates during the first year.
Interestingly, the size of the effect is very similar for workers in all age categories. But this is not the case for hiring rate effects.
• For workers over the age of 20, the reduced separation rate is matched almost exactly by a corresponding decline in the probability an unemployed worker finds a new job. For teenagers, the latter probability declines more.
Thus, for older workers, the two effects offset one another, and there is little impact on their long-term employment rate. For teenagers, the extra reduction in hiring implies that their employment rates decline. The results are very similar for males and females.

One other surprising result is that most of the impact of minimum-wage increases in reducing job separations (approximately 2/3 of the effect) is due to a reduction in layoffs rather than quits. This is interesting new information on the way the labour market works, and could reflect firms screening applicants more carefully before hiring if they are going to be forced to pay a higher minimum wage, or it could reflect firms being less willing to lay off workers because the cost of training and retaining their replacements has increased.
• The key result from a policy perspective, though, is that raising minimum wages affects newly hired, high school educated workers of all ages.
The fact that the overall employment rate for older workers changes little when the minimum wage changes has led many observers to conclude that minimum wages are simply irrelevant for these workers. Instead, we find that when the minimum wage is higher, all low educated workers face jobs that are more stable (in the sense that they are less likely to end in a lay-off) but harder to get. This shifts the debate over the usefulness of minimum wages to the question of whether workers are better off with improved job stability or improved chances of finding a job when unemployed. It also means that minimum wages affect a much larger part of the labour market than is usually recognised and potentially raises the stakes in the policy debates.

Concluding Remarks

Taken together, the results for less educated workers imply that an increase in the minimum wage results in more stable jobs, but fewer of them. Thus, the policy debate should not just be about the employment rate effects of minimum wage increases but about the trade-off between good jobs with higher wages and more job stability versus easier access to jobs. And the debate is relevant for all of the low educated labour market, not just teenagers. 


January 21, 2014

The $23 Trillion Credit Bubble In China Is Starting To Collapse – Global Financial Crisis Next?

Did you know that financial institutions all over the world are warning that we could see a "mega default" on a very prominent high-yield investment product in China on January 31st?  We are being told that this could lead to a cascading collapse of the shadow banking system in China which could potentially result in "sky-high interest rates" and "a precipitous plunge in credit".  In other words, it could be a "Lehman Brothers moment" for Asia.  And since the global financial system is more interconnected today than ever before, that would be very bad news for the United States as well.  Since Lehman Brothers collapsed in 2008, the level of private domestic credit in China has risen from $9 trillion to an astounding $23 trillion.  That is an increase of $14 trillion in just a little bit more than 5 years.  Much of that "hot money" has flowed into stocks, bonds and real estate in the United States.  So what do you think is going to happen when that bubble collapses?

The bubble of private debt that we have seen inflate in China since the Lehman crisis is unlike anything that the world has ever seen.  Never before has so much private debt been accumulated in such a short period of time.  All of this debt has helped fuel tremendous economic growth in China, but now a whole bunch of Chinese companies are realizing that they have gotten in way, way over their heads.  In fact, it is being projected that Chinese companies will pay out the equivalent of approximately a trillion dollars in interest payments this year alone.  That is more than twice the amount that the U.S. government will pay in interest in 2014.

Over the past several years, the U.S. Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England have all been criticized for creating too much money.  But the truth is that what has been happening in China surpasses all of their efforts combined.  You can see an incredible chart which graphically illustrates this point right here.  As the Telegraph pointed out a while back, the Chinese have essentially "replicated the entire U.S. commercial banking system" in just five years...
Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis. "They have replicated the entire U.S. commercial banking system in five years," she said. 
The ratio of credit to GDP has jumped by 75 percentage points to 200pc of GDP, compared to roughly 40 points in the US over five years leading up to the subprime bubble, or in Japan before the Nikkei bubble burst in 1990. "This is beyond anything we have ever seen before in a large economy. We don't know how this will play out. The next six months will be crucial," she said.
As with all other things in the financial world, what goes up must eventually come down.

And right now January 31st is shaping up to be a particularly important day for the Chinese financial system.  The following is from a Reuters article...
The trust firm responsible for a troubled high-yield investment product sold through China's largest banks has warned investors they may not be repaid when the 3 billion-yuan ($496 million)product matures on Jan. 31, state media reported on Friday. 
Investors are closely watching the case to see if it will shatter assumptions that the government and state-owned banks will always protect investors from losses on risky off-balance-sheet investment products sold through a murky shadow banking system.
If there is a major default on January 31st, the effects could ripple throughout the entire Chinese financial system very rapidly.  A recent Forbes article explained why this is the case...
A WMP default, whether relating to Liansheng or Zhenfu, could devastate the Chinese banking system and the larger economy as well.  In short, China’s growth since the end of 2008 has been dependent on ultra-loose credit first channeled through state banks, like ICBC and Construction Bank, and then through the WMPs, which permitted the state banks to avoid credit risk.  Any disruption in the flow of cash from investors to dodgy borrowers through WMPs would rock China with sky-high interest rates or a precipitous plunge in credit, probably both.  The result?  The best outcome would be decades of misery, what we saw in Japan after its bubble burst in the early 1990s.
The big underlying problem is the fact that private debt and the money supply have both been growing far too rapidly in China.  According to Forbes, M2 in China increased by 13.6 percent last year...
And at the same time China’s money supply and credit are still expanding.  Last year, the closely watched M2 increased by only 13.6%, down from 2012’s 13.8% growth.  Optimists say China is getting its credit addiction under control, but that’s not correct.  In fact, credit expanded by at least 20% last year as money poured into new channels not measured by traditional statistics.
Overall, M2 in China is up by about 1000 percent since 1999.  That is absolutely insane.

And of course China is not the only place in the world where financial trouble signs are erupting.  Things in Europe just keep getting worse, and we have just learned that the largest bank in Germany just suffered " a surprise fourth-quarter loss"...
Deutsche Bank shares tumbled on Monday following a surprise fourth-quarter loss due to a steep drop in debt trading revenues and heavy litigation and restructuring costs that prompted the bank to warn of a challenging 2014. 
Germany's biggest bank said revenue at its important debt-trading division, fell 31 percent in the quarter, a much bigger drop than at U.S. rivals, which have also suffered from sluggish fixed-income trading.
If current trends continue, many other big banks will soon be experiencing a "bond headache" as well.  At this point, Treasury Bond sentiment is about the lowest that it has been in about 20 years.  Investors overwhelmingly believe that yields are heading higher.

If that does indeed turn out to be the case, interest rates throughout our economy are going to be rising, economic activity will start slowing down significantly and it could set up the "nightmare scenario" that I keep talking about.

But I am not the only one talking about it.

In fact, the World Economic Forum is warning about the exact same thing...
Fiscal crises triggered by ballooning debt levels in advanced economies pose the biggest threat to the global economy in 2014, a report by the World Economic Forum has warned. 
Ahead of next week's WEF annual meeting in Davos, Switzerland, the forum's annual assessment of global dangers said high levels of debt in advanced economies, including Japan and America, could lead to an investor backlash. 
This would create a "vicious cycle" of ballooning interest payments, rising debt piles and investor doubt that would force interest rates up further.
So will a default event in China on January 31st be the next "Lehman Brothers moment" or will it be something else?

In the end, it doesn't really matter.  The truth is that what has been going on in the global financial system is completely and totally unsustainable, and it is inevitable that it is all going to come horribly crashing down at some point during the next few years.

It is just a matter of time.