Follow the Money

Since we covered the drop in crude a month ago, prices have continued to fall. An updated chart is below. A commodity crash looks like any other crash. If you are holding oil stocks or futures, you want to get out today because it may go lower tomorrow.

This is worse, actually, because everybody knows the other guy’s cost of production. Here in America, shale oil is comparatively expensive – and subsidized with cheap (relative to risk) financing. The producers best equipped to endure price pressure are the Saudis, and they know it.


Yesterday, we read that the oil crash is not a problem for Russia because the ruble is also crashing. Jeremiah enjoys the unique insights at Zero Hedge, but this is the dumbest idea ever. They printed a chart showing that the price of oil is stable – in rubles. All this proves is that Russia has two crises, and they’re related. So what if oil consumers in Russia have a stable cost? Their purchasing power is still getting crushed.

This is an example of “reasoning from your conclusions.” The author must have some thesis about the Russian economy, and he’s looking for a way to support it. Maybe he’s long Russian stocks. The key to understanding the world is always to have an unbiased model of reality. As Saint Francis said, “Seek first to understand.” Only then is it safe to make investments – or public policy. Jeremiah is not even interested in the stock market. We only follow it because of Mark Felt’s advice.

Some pundits say the Saudis have spiked the price of oil because America asked them to help crush the Russian economy. That’s a little conspiratorial, but it does explain the (one) cause and effect. Our original post was more market oriented, and held that the target is actually marginal American shale producers. Only the Saudis know what went into their analysis, but we’d like to believe it was based on maximizing their long term revenue.

The catalyst could have been any early warning of lower prices to come. Destroying Russia? How about a slowing global economy? One would certainly want to be proactive about that – or Venezuela. The wheels have been coming off the Bolivarian Revolution since Chavez died. It was only a matter of time before a glut of North and South American supply ran into waning global demand. The present crash was unpredictable only because a key participant chose to force the issue.

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America’s Deep State

us-ciajpg-5d21951bc95bc9da_largeThe intriguing thing about the CIA torture report is not so much the content, but the timing and motivation for making it public. For the record, Jeremiah feels the way most people do. America should not torture people anywhere, on any pretext. It’s against our principles, and it’s ineffective.

Hard cases who don’t mind “waterboarding some Arabs if it saves American lives,” seem to be mostly on the right. We refer them to über Republican John McCain, who has been a vocal critic of torture from the outset.

National security policy is forged and carried out by a managerial class that is effectively removed from electoral and constitutional constraints

If you’re a whistleblower, like Dan Ellsberg or Edward Snowden, you must go to the press because there’s no other authority you can appeal to. Dianne Feinstein, however, chairs the Senate Intelligence Committee. Publishing a report like this declares that she, her committee, and Congress have not been able to control the CIA. It damns not only the spooks, but their elected handlers in Congress and the White House.

The right says Sen. Feinstein has an axe to grind with the CIA, and wants to release the report before losing her chairmanship in the next Congress. Well, yes! The CIA has done everything it could to bury the report, including hacking the Senate’s computers. That’s quite alarming, if you think about it – an intelligence agency attacking the civilian government.

Mr. Obama can and has ordered the assassination by drone of a US citizen without crossing the door of a judge.

Not that the left should gloat, either. President Obama has his own personal drone war, and NSA surveillance has not slowed since the Snowden revelations. The report shows that the same spooks who have been lying to Sen. Feinstein also lied to President Bush – which brings us to the issue of why a high ranking Senator feels the need to take her case public.

Why hasn’t Obama been able to brake the NSA? Why couldn’t Congress check the CIA? We like the FT’s introduction of the term deep state. This would explain the trend we see, in which rotating red and blue figureheads have no impact on our evolving police state. It’s no different from Iran, where you may vote for Rouhani instead of Ahmadinejad – but the Council of Guardians is always in charge.

See also: Extrajudicial Killing

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Highway Robbery

Police-might-shoot-you-during-a-traffic-stopThe last word on civil asset forfeiture is the Post’s four part report, starting here. Be sure to read all four parts. This guy will be getting a Pulitzer. It is six parts, if you count the two follow up stories. If you don’t have time to read it all, a short video is here.

There is not, as you may have heard, an official warning for Canadian tourists, although there was this scathing editorial on CBC news. Since CBC is government funded, you could argue that it’s official. Canadian journos are so erudite. They call the program “Kafkaesque.”

There have been 61,998 cash seizures made on highways and elsewhere since 9/11 without search warrants or indictments … totaling more than $2.5 billion

And indeed it is. If you refuse a friendly request to search your car, then you’re “suspicious.” In any case, your car gets searched. The police then help themselves to your cash and anything else that seems valuable – er, suspicious. You need never be charged with a crime. The cops just take your stuff. Here are highlights from CBC:

  • The businessman from Georgia who was relieved of $75,000 he’d raised from relatives to buy a restaurant in Louisiana.
  • The church leaders who were carrying nearly $30,000 from their Baltimore parishioners to carry out church activities in North Carolina and El Salvador.
  • The young college grad with no criminal record on his way to a job interview out West who was relieved of $2,500 lent to him by his dad for the trip.

As the editorial says, you might expect this from dirty cops in, say, Tijuana – but America? There is, unbelievably, a legal framework for this, plus training programs and online forums. “Equitable sharing” means the seizures are deemed federal – harder to sue than the local sheriff – and they split the money.

It’s easy to see why the DOJ and local police like the program. Budgets are strained to pay salary, benefits, and retirement for public sector employees. See Detroit, Stockton, Rhode Island, and San Bernardino, to name a few. You can expect this budget challenge to gather pace across the country. Some places have cut police services, like responding to 911 calls.

Civil asset forfeiture allows the police to fund themselves, by robbing passing motorists. Some police forces even plan such takings in their annual budget. Instead of facing up to the budget challenges, we simply empower the police to “live off the land,” or as Deputy Ron Hain put it, “turning our police forces into present day Robin Hoods.”

Turning our police forces into present day Robin Hoods

We have been following Barton Hinkle and Radley Balko on police militarization. Hinkle compares the police to a conquering army, and this completes the paradigm. Sun Tzu (and other generals) said that the army should be able to support itself by pillaging the conquered territory.

See also: The Praetorian Guard

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Asian Values

Jeremiah confesses to becoming somewhat of an Asiaphile. Check out this ad from Bank of Singapore. We looked into this “Asian values” thing, and found Kishore Mahbubani.

Like you, we believe success is built on the Asian values of integrity and hard work

In addition to integrity and hard work, Professor Mahbubani has identified seven “pillars of wisdom.”

  1. Free market economics
  2. Science and technology
  3. Meritocracy
  4. Pragmatism
  5. Culture of peace
  6. Rule of law
  7. Thirst for knowledge

Sound familiar? Those sneaky Asians have lifted our values! Jeremiah distinctly remembers free market economics in America, as recently as the 1980s. In fairness, this is a Singaporean list. For China, meritocracy and rule of law may be more aspirational.

[Western intellectuals] had sharp minds, always producing new insights as they spoke. It has come as a huge personal shock for me to see this same group of Western intellectuals now totally blind to emerging new realities.

Mahbubani writes that he is personally surprised to see intellectual leadership – or wisdom, as he calls it – waning in the West. He draws lessons from our policy failures, as in this article, motivated by the minimum wage debate.

If the powerful American Constitution and its system of checks and balances have failed to prevent dysfunctional governance in the US, we in Singapore should take heed

America is not a place, they say, but an idea. If we have forsaken the idea, we should be glad it has found a new home. Good values are good for everyone. We hope to see them discovered – and rediscovered – around the world.

See also: The Road from Serfdom

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Stories to Frighten Children

MedalCommentators like to exclaim about how much “market cap was lost” or “wealth was destroyed” by the latest drop in price. In a market crash, however, the drop does not destroy wealth. It merely reveals the true level of wealth. Destruction happens on the way up, as irrational exuberance leads to poor investments.

Watching the numbers on Wall Street, it’s easy to forget that investments ultimately are made in earning assets like shops, labs, and factories. It’s during the bubble phase that wealth is destroyed, by funding investments that never pay off.

The EU has had to deal with two crises … The first was obviously the global financial crisis, caused by major falls in asset values. – Douglas Flint, remarks to House of Lords October 2014

We were reminded of this popular misconception when we read it recently in Douglas Flint’s testimony before the House of Lords. This statement is an oversimplification, to put it politely. “Major falls in asset classes” did not materialize out of nowhere.   Is there anyone in the House of Lords who accepts this account of the crisis? It seems scripted – for children, perhaps, or the CNBC cheerleaders.

Masaaki Shirakawa comes off as rather better informed, but still surprised (!) to discover asset price bubbles. In fairness, the Japanese bust was the first of its kind among developed economies in the postwar era.

We have to start by recognizing this odd reality of bubbles being accompanied by price stability, yet then followed by instability of the financial system, subsequently bringing about low growth and often inflation that is lower than desired. – Masaaki Shirakawa, remarks at BIS conference March 2014

Yes, this odd illusion of stability – like ice over a flowing river. He goes on to describe a central bank misled by consumer prices into “accommodating” an asset bubble, which in turn destabilizes the financial system. The ensuing low growth, we have to say, is the true trend rate.

Our purpose here is not to single out people, like Mr. Flint, who should know better. We are intrigued, however, by the long list of trained professionals who continue to be surprised by this well understood chain of events. This prescient article, subtitled “central banks should pay more attention to rising share and property prices,” is from 1999.

U.S. house prices have risen by nearly 25 percent over the past two years … but these increases, [Bernanke] said, “largely reflect strong economic fundamentals.”

This studied “surprise” is starting to wear thin. Have America’s central bankers purposely inflated bubbles and then lied about it? That seems a little extreme. Maybe there’s another explanation. Here is an iconoclastic way of looking at our American trendline:


Maybe, without the tech bubble and the housing bubble, the S&P 500 would have run flat around 1,200. Raghuram Rajan has said that Western leaders are using credit to compensate for their citizens’ loss of purchasing power. They have a powerful incentive not to admit their economies are in decline. Boom and bust cycles, six or seven years long, are preferable to obvious stagnation – especially on an elections calendar.

If the Fed were not complicit in this deception, politicians would change the Fed. Consider Sen. Schumer’s famous “get to work, Mr. Chairman,” or this one from Sen. Gramm – mere weeks before the NASDAQ crash:

 “Don’t become so frightened by success that you throw wet blankets on a fire that isn’t burning.”

Central bankers aren’t stupid, and they aren’t independent. They know their political masters enjoy a rising stock market, and can easily escape blame for the inevitable crash – especially if the crash is inexplicable, and entirely unforeseen.

See also: America’s structural trap

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An economy cannot experience both inflation and deflation, and yet that is exactly what seems to be happening. The Fed’s exertions have produced some consumer price inflation – though not enough for diehard Keynesians – and quite a bit of asset price inflation, and yet the economy “feels” deflationary. This would not be the first paradoxical price phenomenon. Inflation had been associated only with rapid growth – until stagflation was discovered in the 1970s.

One possibility is that prices are behaving differently in different segments of the market. Wolf Richter writes here about a bifurcated real estate market, with mortgages off but cash deals booming. We have mentioned Tiffany’s before, and this interview with John Mauldin touches on the market for fine art.

We need to characterize the economy’s condition, but we should not get hung up on price based definitions. For example, David Stockman describes the Great Moderation as an inflationary period, due to loose monetary policy, offset by cheap Asian imports. Frances Coppola says it would have been deflationary – except for the credit bubble. It all depends on your perspective.

Consider what deflation looks like, without reference to prices. Sellers struggle because demand is weak. They cut back on supplies, and they lay off staff. People are out of work. They don’t have much to spend, and debts become unsustainable. Sound familiar? This is the vicious cycle which characterized that earlier depression – and the current one. Wages and prices ratchet downward, but this is only a symptom.

Another way to look at price is not the value of goods, but the relative scarcity of money. The people unable to buy a house, get a mortgage, or put food on the table, are living in a deflationary world – they’re broke. The Fed doesn’t help by driving prices up all around them.

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Chinese Price Hike

Analysts are reading a lot into the PBOC’s recent reduction of its prime lending rate. Gordon Chang, for instance, sees desperation. Chang says lower rates are a reaction to slower growth, and also – in aiding state owned enterprises – a setback for reform.   Jeremiah takes a longer view, looking at growth trends and currency values among China’s trading partners.

Long term, China needs to rebalance its economy more toward domestic consumption. This will stabilize Chinese society by sharing the proceeds of economic success more broadly. It will also give Chinese producers a new market, free of export costs and currency risk.

The obvious way to do this is to allow the Yuan to appreciate, at a measured pace, exactly as China’s trading partners have requested. This will allow America to rebalance more toward production – although we will first have to end our obsession with consumerism. Here is a chart of the Yuan’s ongoing rise versus the dollar.


In the shorter term, however, the Yuan is in the crossfire of a currency war. Try running that chart for the Euro, or the Yen. You may be sure the Yuan will continue to appreciate, but it may be in the relative sense of “less aggressively debauched.”

So, the PBOC cuts rates to keep up (down) with the neighbors. They are also liberalizing rates, allowing them to rise for ordinary savers. This stands in contrast to Europe’s lunatic policy of charging people to keep money in the bank. Lost in the news over China’s lending rate, is this rise in the deposit rate.

As Shaun Rein writes in The End of Cheap China, the impact of China’s rebalancing will be sharply inflationary for America. Not only will we not have cheap goods coming over here, but we will have to bid against a growing Chinese consumer class.

Jeremiah sees a nice symmetry here. In the 1970s, when America was struggling with inflation, we began importing cheap goods from Asia. Now, we will import inflation, which is just what the Keynesian doctors have ordered. Be careful what you wish for.

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