06 January 2016

2016 - The Year the Frogs Boil?

"The premise is that if a frog is placed in boiling water, it will jump out, but if it is placed in cold water that is slowly heated, it will not perceive the danger and will be cooked to death. The story is often used as a metaphor for the inability or unwillingness of people to react to or be aware of threats that occur gradually." From the Wikipedia article "Boiling frog".

Looking back over 2015 I see that I stopped writing mid-year. What I didn't stop doing was starting new articles, only to close them unfinished, or deleted them when they were done. There were so many topics, but self-censorship got the better of me - imagine that. There were just too many stories in the news, and too many desired knee-jerk reactions. The topics have ranged from terrorism and Islam, to economics and Greece.

In summary, 2015 feels in retrospect, as the year the frogs began to feel the heat. Some are getting even more lethargic, others are getting worried. I'm in the worried camp. While I'm not making any predictions about 2016, it certainly felt like 2015 was the year the heat was turned up on the Frogs (that would be all of us, not just the French). 

That, or the frog in a blender.  (Go on, you know you want to...

2015 certainly was a full year, so let's begin.

The Police State

2015 may be seen as the year in which the "modern" world died. In the United States it has become clear that the system is broken, that guns and Trump are viewed as acceptable, possibly even desirable antidotes to an imagined breakdown of central government. Police killed over 1000 people in the United States in 2015, compared with 3 (yes, 3) in the UK in 2015. In a land where 30,000 or more people are killed by guns each year, if you want to see how many people were killed near you, there is now a handy tool to help.


In addition, Asset Seizure in the US (the "legal" seizure of a persons money or other assets by police because the police think the assets might be used for or gained from criminal activity) for 2014 exceeded the total estimated value of burglaries in the US. Apparently police seized $4.5 billion from citizens, while burglars stole only $3.9 billion.

So the United States has become a corrupt police kleptocracy, in which the very act of living can result in you being killed by the police, or having your assets seized simply because they need your money to boost their budgets, becoming "self funding gangs".

The Police State came to Europe in the form of the selective oppression of the peoples of a member state through economic terrorism and abrogation of democracy. Institutional Terror is equally the tool of "liberal" nations. In Greece, the ECB, IMF and the Germans effectively enforced a coup d'état against the Greek government and people. After years of failure of policy, resulting in the enrichment of a few and impoverishment of millions, the Greek people voted over 60% against the austerity programme imposed on them. The ECB (but not the ECB alone, oh no) effectively said "Do what we tell you, not what your people demand, or we will starve you all to death".

This is the New Europe, one in which as un-elected cabal in Brussels, backed by (elected) leaders of (a few) of the major powers of Europe, simply impose their will on all. Democracy is allowed to continue as a joke at the local level, but no longer permissible as a mechanism for the expression of the will of peoples.

Terrorism, ISIS and others

While ISIS enjoys distributing videos of beheadings, apparently our ally Saudi Arabia has beheaded more people (144) in 2015 than ISIS. You can have your head separated from the rest of your body if you are foolish enough to express unauthorised thoughts or actions such as Apostasy (oops, I don't want to be a Muslim any longer), Adultery, Witchcraft and Sorcery.  And Saudi Arabia celebrated the new year with an additional 47 executions.

Turkey, our NATO ally, has been exposed as supporting ISIS, possibly at as high as level as the son of the president, by buying, shipping and refining ISIS oil. Meanwhile, Turkey holds a snap election at the same time as, strangely, terrorist attacks suddenly increase, driving voters back into the arms of the existing government party. Using that 'mandate', the Turkish government begins to pound the crap out of the Kurds, reminding them of their place. Interesting that the Ankara government is apparently supporting ISIS while suppressing their Kurds - "The enemy of my enemy is my friend"?

Then, in what could only be considered a major provocation, Turkey shoots down a Russian aircraft over Syria, claiming that it had violated Turkish airspace. No doubt it did, and the flight paths released showed that it did, for a few kilometers are most. All this in a year in which, by October 2015, Turkey had violated Greek airspace over  1400 times (suddenly stopping on the day that it shoots down a Russian fighter). In 2014, Turkey violated Greek airspace over 2200 times.

NATO clearly is on the verge of falling apart, if one NATO country openly violates the territory of another with impunity, while receiving military aid from the US, and at the same time apparently supporting a common enemy, and shooting down the aircraft of a common partner in the fight against ISIS.

Of course, the year began with the terrible attacks in Paris on Charlie Hebdo (and the Jewish supermarket). If only that were the end of the terror for Paris. Bookmarking the year was the November 13th attacks, killing of 130 people. In both cases, these were acts of terror carried out by Muslims against a liberal and mostly free society, in which secularism is deeply embedded, and religious rule has no place. The people who carried out these attacks were scum that had found "God" in the religion of their elders, and read only the bits of that religion that sanctified them for their barbarity.

What remains equally shocking is the depth of feeling within the UK Muslim community against the values of the liberal Western country that they live in. A February survey by the BBC was supposed to show that the majority of UK Muslims are opposed to the attacks on Charlie Hebdo and others, and reject violence as a mechanism to achieve an Islamic culture / state / law in the UK. Unfortunately the headline should actually read "27% of UK Muslims have some sympathy for the motives behind the Charlie Hebdo attacks in Paris". 27% of UK Muslims. That is sickening. Even as Paris was under attack again, UK Muslim "leaders" called for UK Muslims to struggle for an Islamic State in the UK.

Some of the dead (source unknown)

In April in Kenya a university was attacked, with captives being asked if they were Muslim or Christian - the Christians were then murdered.From the Wikipedia article accessed on 3 January 2015: "On 2 April 2015, gunmen stormed the Garissa University College in Garissa, Kenya, killing 148 people,[1][2] and injuring 79 or more. The militant group and Al-Qaeda offshoot, Al-Shabaab, which the gunmen claimed to be from, took responsibility for the attack. The gunmen took over 700 students hostage, freeing Muslims and killing those who identified as Christians. The siege ended the same day, when all four of the attackers were killed. Five men were later arrested in connection with the attack, and a bounty was placed for the arrest of a suspected organizer."

Economic News

The US economy is in a dubious state as 2016 arrives. After all of that news from 2015, we haven't even come near the economic news, unless you include the continued rape of Greece as economic news. And what a year. Markets ended effectively flat at the end of the year, as printing money slows down in the US, but ramps up in Europe. Yet for all that pumping, the velocity of money continues to fall. The question is what will happen to inflation when velocity increases? And velocity must increase for economies to grow again, and to actually employ people more people.

In the US, Amazon (AMZN) reached a PE Ratio of x900. Compare that to Cisco which, during the Dot-Com bubble went from a PE of x40 to x200 before crashing. How can any company be valued at 900 times earnings? Then look at Netflix (NFLX) at x440, making Google's (GOOG) PE ratio of "only" 36 look downright cheap. While the financial press has all sorts of good reasons why these PE Ratios still represent value, these remain historically scary ratios.

Meanwhile in the US again, the "Middle Income" (Middle class?) has shrunk to 51% (some say less than 50%) of the population. This is not news, nor is it an unexpected or unknown trend. This continues a trend that I was first introduced to in a university level demographics course in 1981.

US Labor Participation Rate

Percentage of workforce employed has dropped to levels not seen since the Jimmy Carter presidency. While President Carter is truly a great man, he is not remembered for managing a great economy, even though labor market participation did grown under his tenure. Month on month the BLS (Bureau of Labor Statistics) has reported gains in employment, yet the rate of employment growth has trailed the number of workers coming into the workforce, resulting in a continuing net reduction in participation rates. Looking at this BLS link, expand the period from default 10 years back to 1975 to see the full growth and fall of the participation rate.
US Inventories to Sales Ratio
Throughout 2015, the inventories-to-sales ratio has been growing, and at 1.38 is the highest that it has been since the middle of the Great Recession. Fundamentally, companies are building inventories faster than sales, a trend whose reversion to mean can come through a recession. Equally, long term trends have allowed for a reduction in the ratio without recession. None the less, it is a worrying indicator.

In December the Fed raise the discount rate by .25%, the first rate risk in nine years, offically because the economy is showing strength. Of course every increase in the Fed rate also increases the cost of borrowing by the Government. Some commentators suggest that the real motive is to protect the reputation of the Fed after too many years of policies not delivering what was promised, and suggest that an additional reason for the rate hike is to provide the Fed with some ability to ease when the next recession arrives. 2016 or 2017?

So, what about the rest of the world?

China is slowing - not stopping, but slowing, and China slows only if the rest of the world slows, and the rest of the world slows as China slows. First it was seen in collapse in commodity prices, followed by a collapse in the "Baltic Dry Index" - the benchmark cost of transporting goods by ship. The Baltic Dry Index has dropped to historic lows in the past months. The last time the Index dropped so low was 2008, as the Global Financial Crisis (GFC) was in full swing. Why does this matter? In growth periods excess new shipping was laid down in shipyards, and that new capacity is now online, and with that excess capacity, prices naturally fall. But this should result in capacity being removed from the stock of global shipping capacity. This is not happening yet.

It will, because the total volume of shipping has also dropped, not just the value of products shipped. This is not a seasonal problem.

As the markets opened for 2016, we saw the Shanghai market drop by 7% before the stops kicked in, ostensibly due to "weaker-than-expected manufacturing data".  We will see how this plays out over the coming weeks and months.

Around the world, easy central bank money has fueled share buybacks that add nothing to the productive capacity of companies, but that serve only as an additional mechanism to the transfer of wealth. Share buybacks simply transfer financial wealth out of the company by increasing company’s debt (at very low interest rates it must be said) to equity, effectively creating a future obligation on the part of the company. So while companies’ future obligations increase with little or no corresponding increase in productive capability, institutional shareholders, which today means funds that hold equities (typically, for relatively short periods of time) take the direct financial benefits of the buyback, and move on to the next company that offered the potential for significant return. No value is added, debt is increase, productive capacity stagnates, and the underlying “real” economy sees no benefit.

It is important to note that share buybacks are a logical response to central bank purchases of bonds and otherwise “printing” money. When almost free money is being pumped into the system, it will find a place to land, but not necessarily achieving the desired results. Unintended consequences abound.

Turning our eyes to Europe and the anti-austerity movements are gaining traction, with no idea that their imposed versions of "austerity’ are a joke compared with what Greece has had to endure. Countries like the UK have made big noise about their austerity budgets, while increasing their total debt loads. In fact total debt (i.e sovereign, corporate and household debt) has increase apace around the world, reaching 289% of global GDP (excluding unfunded commitments and mandates). These debt levels are unsustainable, and are already reducing potential growth.

Austerity has become the euphemism for not having enough national income to meet the basic fantacies of enough of the people to ensure that the ruling party has a chance of staying in power. In France for example, the inability to Chirac, then Sarkozy and followed by Hollande to implement even basic reforms has resulted in a government that continues to drop deeper into debt while at the sime time pretending to be implementing a programme of austerity. Basically, France is a country waiting for its own “Greek” moment.
French banks are poorly capitalized, and the myth of financial system reforms will only exacerbate the coming recession / depression.


  1. A great read Dan. Thanks

  2. I brilliant analysis Dan and I fear sounds like surrender to a sad state of consequences we have created. Any good news?

  3. Very nice. A few notes:

    - Debt per se is not bad if it is invested to generate a return greater than the servicing costs. Of course, there is little evidence that that has happened :(

    - GDP is also growing as the scale and velocity of trade increases and as those incurring the debt tend to spend most locally. Rising GDP means the actual growth in global debt is more alarming

    - GDP growth is primarily driven by Gross National Product which is expenditure within an economy by Government, business, and consumers. That's traditionally useful because GNP reflected the industriousness of society. Sadly, today, GNP is more about the ability of consumers and government to buy trinkets. The flow-on is that rising global GDPs isn't really about a growing world economy but rather, the skill of consumers and governments to buy stuff.

    - Share buy-backs are today mostly used to influence share prices (as you comment) however their historic justification was because a business could not generate a competitive rate of return therefore shareholders were best served by being given capital back to invest elsewhere. To me this just reflects very lazy management.

    There's more comments, but that's probably enough lol.

    My conclusion is that if you're in a consumer/government spend-led economy, move (quickly). Aim for an investment-led economy. There may be bumps in those economies but there are a lot less cliffs...