More Wackoism

Doug Noland

October 24, 2014

Central banks win the day and week.

October 21 – Reuters (Andreas Framke, Eva Taylor and Paul Carrel): “The European Central Bank is considering buying corporate bonds on the secondary market and may decide on the matter as soon as December with a view to begin buying early next year, several sources familiar with the situation told Reuters. The ECB has already carried out work on such purchases, which would widen out the private-sector asset-buying program it began on Monday - stimulus it is deploying to try to foster lending to businesses and thereby support the euro zone economy. ‘The pressure in this direction is high,’ said one person familiar with the work inside the ECB, speaking on condition of anonymity.”

Early Tuesday morning trading provided another dicey juncture, with a semblance of global market stability at risk of unravelling. European stocks were under heavy selling pressure, with Germany’s DAX index trading to the lowest level since September 2013. Italian, Portuguese and Spanish bonds were getting hit hard. Italian Credit default swaps (CDS) were trading at 146 bps, up 26 bps from Friday’s close to the highest level since March. Portugal CDS traded as high as 217 (last Friday’s close 185), and Spain rose to as much as 110 (last Friday’s close 97). Popular European corporate and financial CDS were spiking to one-year highs. Safe haven bunds and Treasuries were being bought, while commodities and EM were being sold. S&P500 futures were trading down 20 points. “Risk off” was gathering momentum.

The timely Reuters’ article - with unnamed sources claiming the ECB was readying corporate debt purchases - worked wonders for struggling global markets. After trading as low as 8,645, the DAX ended Tuesday’s session at 8,887 - and then traded as high as 9,068 on Thursday. Italian stocks enjoyed a 6.1% rally off of trading lows and Spanish stocks bounced 5.75%. After trading to 392, a popular European high-yield corporate CDS contract sank back to 350 bps. A European subordinate financial debt CDX dropped from 186 to end the week at 155.

After trading as low at 1,886 in the pre-market, S&P500 futures rallied 2.8% to end Tuesday’s session at 1,938. By the end of the week the S&P500 had surged 4.1%, as U.S. equities enjoyed "the best week since 2013.” The corporate debt market came back to life. And it’s easy to miss the significance the Reuters article had for global markets. Importantly, talk of ECB buying in the huge corporate bond market helps ameliorate the markets' waning confidence in the potential scope of Draghi's QE.  I believe European markets are now a key weak link in the global securities Bubble.

Especially with a now vulnerable global speculator community, an unwind of leveraged positions in European high-yield and periphery sovereign debt would have major “risk off” ramifications.It’s worth noting that the yen weakened soon after European market rallied. A strengthening yen would also be problematic for the leveraged crowd (yen “carry trade”). Anyways, “Do Whatever it Takes” central banking won the day and week.

October 24 – Reuters (Noah Barkin, Eva Taylor and Paul Taylor): “In early October, European Central Bank board member Benoit Coeure paid a discreet visit to the Chancellery in Berlin to express concerns about rising criticism of the bank from German politicians. The Frenchman… hoped for reassurances that the bank bashing, led by Finance minister Wolfgang Schaeuble, would stop. But the message from Chancellor Angela Merkel's advisers was not entirely comforting…

Merkel would continue to refrain from questioning the ECB's policies in public. But the broader backlash would be difficult to contain, especially if Draghi pressed ahead with unconventional measures… ‘Then you would see a real debate,’ a top German official told Reuters… ‘Public criticism in Germany would take off.’ Back in 2012, Draghi appeared to save the euro zone from breaking up with his promise to do ‘whatever it takes’ to defend the single currency, a stance that won swift backing from Merkel… But two years on, the Italian's relationship with his most important stakeholder - the Germans - is fraying, with worrying implications for Europe and its faltering economy. This tension is most obvious in the relationship between Draghi and Bundesbank President Jens Weidmann, which… has almost broken down… According to German officials, Merkel felt betrayed by Draghi's speech at a central banking conference in Jackson Hole… in which he pressed Berlin for looser fiscal policy to stimulate the economy. Her entourage is also deeply skeptical about Draghi's plan to buy up asset-backed securities (ABS) and covered bond…”

Markets have grown completely dependent on “Do Whatever it Takes” central control. And six years into a historic global experiment in central bank monetary stimulus, the maladjusted global economy has become dependent upon inflated (and dangerously speculative) securities markets. Meanwhile, the consequences of reckless “money” printing spur deepening social and political tensions. As more begin to question contemporary central bank doctrine, the issue of economic inequality is finally becoming an issue. “Hats off” this week to Yves Mersch, Luxembourg central banker and member of the ECB’s Executive Board, for his presentation “Monetary Policy and Economic Equality.”

"...I would like to discuss an unusual topic for central bankers – namely the interactions between monetary policy and inequality. All economic policy-makers have some distributional impact as a result of the measures they introduce – yet until relatively recently, such consequences have been largely ignored in the theory and practice of monetary policy. Of course, central banks are not charged with the task of addressing inequalities in the distribution of wealth, income or consumption – nor are they dealing with the broader challenge of promoting economic justice for society as a whole… But particularly at a time of exceptionally low interest rates and non-standard monetary policy measures, it is essential for us to be aware of all collateral effects – including the distributional ones, i.e. the potential economic damage to some parts of society; and the potential benefits for others. So I would like to take this opportunity to explore some of the emerging evidence on the distributional effects of monetary policy. I will begin with a brief discussion of the rising prominence of inequality as an issue of global public concern."

Let me begin with inequality, which has recently re-emerged as a topic of wide public debate. From a central banker’s perspective, the most relevant aspects of recent works concern the assessment that monetary policy can have sizeable distributional effects. Indeed, inequality has been largely ignored in discussions of monetary policy. But this might be changing. In part, this is because of the potentially negative impact of rising inequality on financial stability. For example, some – not least the current governor of the Reserve Bank of India – have argued that US policies to circumvent the consequences of inequality fuelled financial instability ahead of the crisis. More generally, inequality is of interest to central banking discussions because monetary policy itself has distributional consequences which in turn influence the monetary transmission mechanism. For example, the impact of changes in interest rates on the consumer spending of an individual household depend crucially on that household’s overall financial position – whether it is a net debtor or a net creditor; and whether the interest rates on its assets and liabilities are fixed or variable.”

There are so many signs pointing to the present as an extraordinary juncture in history. For one, the misconceptions, flaws and unfolding failure of contemporary central banking are coming into clearer view. Yet fragilities associated with a flagging global Bubble ensure only more radical monetary measures. In the name of fighting “deflation” risk, everything has become fair game. God only knows how much “money” they might end up printing.

It seems an opportune time to revisit Fed governor Bernanke’s speech from almost 12 years ago, “Deflation: Making Sure ‘It’ Doesn't Happen Here.” Since Bernanke’s 2002 “U.S. government has a technology, called a printing press” dissertation, the Fed’s balance sheet has inflated from $800 billion to $4.5 TN. Treasury debt has inflated from about $4.5 TN to $12.6 TN. Total system marketable debt has jumped from about $30 TN to almost $60 TN. On the rate side, despite booming mortgage Credit growth, the Fed waited until June 2004 to nudge rates up 25 bps (to 1.25%). Rates didn’t make it to 4% until late 2005, just as mortgage Credit was wrapping up its fourth consecutive year of double-digit expansion.

Bernanke: “But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation. Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior).

Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys… Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.

It’s been painful to watch. Federal Reserve Credit has inflated 460% in twelve years (most of it in the past six). Federal debt has about tripled (excluding wildly inflating contingent liabilities). Rates have been held at near zero for almost six years. Savers have been punished as financial operators have made billions. Two years of previously unimaginable “money” printing have coincided with a collapse in global commodities prices and general downward pressures on consumer price inflation.

Arguably, financial, economic and geopolitical stability have all suffered at the hands of two years of rampant QE. Inarguably, there are serious flaws in central bank doctrine that need to be resolved. For me, so much goes back to Dr. Bernanke and his defective theories.

Bernanke: “Deflation is defined as a general decline in prices, with emphasis on the word ‘general.’ At any given time, especially in a low-inflation economy like that of our recent experience, prices of some goods and services will be falling. Price declines in a specific sector may occur because productivity is rising and costs are falling more quickly in that sector than elsewhere or because the demand for the output of that sector is weak relative to the demand for other goods and services.

Sector-specific price declines, uncomfortable as they may be for producers in that sector, are generally not a problem for the economy as a whole and do not constitute deflation. Deflation per se occurs only when price declines are so widespread that broad-based indexes of prices… register ongoing declines. The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand--a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers.

There’s always been an arrogance surrounding Bernanke’s view of deflation and the power and omnipotence of contemporary central bankers. He blames inept central banking and associated insufficient Fed money printing for the Great Depression. He places blame for the 1929 crash on the “Bubble poppers” and excessively tight monetary policy. He apparently has little issue with the 1920s Bubble. In general, Bernanke is dismissive of risks associated with Bubbles, convinced that aggressive “mopping up” policies can simply inflate away problematic debt loads and shortfalls in aggregate demand. It’s been an incredibly dangerous six-year experiment: “Sufficient injections of money will ultimately always reverse a deflation.” Well, we do have evidence that injections inflate securities market Bubbles.

I have for years argued that Bubbles – rather than deflation - were the prevailing risk to global financial and economic stability. Deflation and faltering demand are certainly risks that I associate with protracted Credit and speculative Bubbles. Dr. Bernanke has referred to understanding the forces behind the Great Depression as the “Holy Grail of economics.” I am instead convinced that understanding this protracted Bubble period is the real “Holy Grail.” And once we come to a more coherent understanding of this period we can attempt to go back and correct the historical revisionism that made such a phenomenal mess out of 1920s and 1930s analysis.

There are key analytical parallels between this prolonged Bubble period and the Bubble that commenced with the First World War and ended with the 1929 stock market crash. The “Roaring Twenties” Bubble period saw incredible technological innovation and stunning productivity gains.

Importantly, the fledgling Federal Reserve took an increasingly activist role in managing the economy and markets (fledgling Greenspan Fed “activism” took hold in the early-nineties). The Fed succeeded in prolonging the boom, but at the high cost of deepening maladjustment in the real economy and distortions in increasingly speculative financial and asset markets. When the Bubble finally burst, all the structural deficiencies – including gross wealth disparities – came home to roost. Fed money printing would have had minimal impact in the face of a devastating collapse in confidence and Credit.

I am convinced that protracted booms bolstered by aggressive policymaking are the root cause of so-called “deflation risks”. Prolonged booms become more global in nature, with major ramifications for financial and economic stability. The benefits of “Globalization” spur trade, investment and outsized financial flows. Later, growing imbalances, speculative excess and runaway booms become prominent. To sustain increasingly unwieldy booms and to ward off fragility require that policies become more “activist”/inflationist. The combination of aggressive monetary inflation and unstable booms over time leads to gross imbalances and increasingly conspicuous wealth redistributions and inequality. Various price levels in real economies and assets markets go haywire, feeding wild wealth disparities and animosities.

I was always uncomfortable with Bernanke’s prescription of aggressive “mopping up” monetary inflation with basically no consideration whatsoever for the associated costs/risks. It was always presented that the scourge of deflation was so utterly horrendous that nothing else really mattered.

Yet what we’re seeing in the world today can be explained as the foreseeable consequences of inflationism – financial fragility, economic imbalances and maladjustment, and social and geopolitical tensions reflective of increasingly conspicuous wealth redistribution and inequality. And I feel quite comfortable stating that more QE – from the ECB, Fed, BOJ, Bank of China and others – will in no way stabilize the situation.

Air needs to come out of dangerously inflated global securities markets. Right now, however, the bull has taken a sword and he’s turned crazy violent – just wants to hurt people. After the 1929 crash there was a big crackdown on large financial institutions. My own theory is that in the late phase of protracted Bubble periods the markets turn dangerously speculative and the marketplace becomes increasingly dictated by dominant market operators. A general perception takes hold in the marketplace that these big players and reliable policy interventions ensure that the game keeps rolling on. This helps explain why speculative markets for a while continue to inflate in the face of deteriorating fundamentals. Moreover, I believe prolonged booms underpinned by policy measures tend to nurture myriad financial schemes and shenanigans, again disregarding fundamental factors. It regresses to the point of being little more than one big precarious game.

I appreciate that comparing today’s backdrop to the late-twenties is considered Wackoism. And I don’t make these comparisons as some prediction of an imminent crash. Markets will do what the markets will do. I just believe strongly that the Credit Bubble Analytical Framework has become invaluable for better understanding the extraordinarily complex and precarious global backdrop. When Bernanke back in 2002 was outlining his policy course to fight deflation, he would not have contemplated today’s social and geopolitical tension. He would not have seen how his “mopping up” could lead to so much instability and angst around the world. He surely would have scoffed at the notion of a new cold war.

“Vladimir Putin took part in the final plenary meeting of the Valdai International Discussion Club’s XI session. The meeting’s theme is The World Order: New Rules or a Game without Rules. This year, 108 experts, historians and political analysts from 25 countries, including 62 foreign participants, took part in the club’s work. The plenary meeting summed up the club’s work over the previous three days, which concentrated on analysing the factors eroding the current system of institutions and norms of international law.”

Putin’s Friday speech did nothing to temper my apprehension that an unstable world is turning more confrontational. Rather than excerpt, a bunch of Bloomberg headlines pretty well captured the gist of his message:

“Putin says world order changing… World growing less secure, predictable; No guarantee of global security; Global security system is weak, deformed; Cold war ended without peace being achieved; Cold war ‘victors’ dismantling international laws, relations; U.S. has worsened disbalance in international relations; U.S. acting like nouveau riche as global leader; World leaders being blackmailed by ‘Big Brother’; U.S. leadership brings no good for others; Sees global media under control, undermining truth; Unipolar world like dictatorship over other countries; Russia sees attempt to carve up world, create image of enemy; Business under unprecedented pressure of western governments; …Many countries disenchanted with globalization; U.S. risks losing trust as globalization leader; Russia won’t beg for anything; U.S. can’t humiliate its partners forever; Pressure from sanctions won’t sway Russia; Ukraine conflict isn’t last to affect world balance; Ukraine crisis itself caused by unbalanced international ties; Putin says current conflicts may lead world order to collapse.”

The euro crisis

Back to reality

The debt of some euro-zone economies looks unsustainable

Oct 25th 2014

EARLIER this year it all looked so rosy. In April, just two years after Greece imposed the biggest sovereign-debt restructuring in history on its private creditors, it raised €3 billion ($4.2 billion at the time) in five-year bonds at a yield of less than 5%. In July its ten-year bonds were yielding less than 6% and their Spanish and Italian equivalents less than 3%, not far off Germany’s. The troubled economies of Europe’s “periphery” were beginning to turn around, it seemed, and the European Central Bank (ECB) would do whatever it took to keep the euro zone together.

That all went out the window in the global market sell-off of October 15th-16th. Yields on Greek government debt briefly exceeded 9%; the spread between yields on German government bonds and those of debt-addled euro-zone countries widened and lower-rated corporate-bond yields rose sharply too. Part of the rise might have been due to bond markets’ declining liquidity. At any rate, some ground has since been regained, with corporate bonds especially buoyed by the rumour (later denied) that the ECB was about to buy corporate debt as part of an asset-purchase scheme.

But worries that slow growth in the euro zone will be a serious drag on the world economy are increasing. Deflation, which makes debts harder to bear, has taken hold in the periphery, and threatens to afflict the euro zone as a whole. Faith that the ECB will be able to do much about either problem is declining. Against that background some euro-zone debt—both public and private—looks unsustainable.

Between 2007 and 2013 the ratio of government debt to GDP in the euro area rose from 66% to 93%. The spike was more dramatic in the periphery (see chart): in Greece the ratio increased to 175% and in Portugal it virtually doubled to 129%. High government debt itself does not necessarily crimp economic growth. But as bond yields rise, servicing that debt becomes difficult. Italy—with the third-largest stock of government debt in the world, much of it refinanced each year—is a particular concern. According to estimates from Moody’s, a rating agency, it will have to find around €470 billion of funding next year, worth nearly one-third of its GDP. The financing needs of other peripheral governments are not as drastic, but they are still high.

The overhang of private-sector debt is also cause for concern. Overindebted firms struggle to grow and invest, while tying up scarce bank capital, which impedes lending to worthier borrowers. The picture is not uniformly grim. Despite Italy’s staggering government debt, its households owe less than Germany’s and its non-financial companies not much more. Spain’s private sector has deleveraged substantially over the past few years, as big recapitalisations have left its banks better able to withstand write-downs of bad loans.

But peripheral countries typically have a long tail of heavily indebted firms. In Portugal around a quarter of listed firms have debts of more than five times their earnings before interest, tax, amortisation and depreciation—the worst ratio in the periphery, points out Alberto Gallo of RBS, a bank. And the proportion of loans in default is still rising in Portugal, Italy and Greece, he says.

On October 26th the results of the ECB’s review of the books of big euro-zone banks will be released. They are expected to show few serious problems. Banks have been raising capital to be sure not to be found wanting. After it they may write down more bad loans rather than rolling them over. Another change is to corporate insolvency regimes, which typically make it harder to call in debts or seize collateral in the euro area than in America. All the peripheral countries have either reformed their laws or promised to do so, and the European Commission is pushing a common European standard.

Government debt looks more intractable, especially in light of the lacklustre growth and slide towards deflation that now seem entrenched. A recent analysis by Fitch, a rating agency, suggests that it will be very hard for any highly indebted euro-zone government to reduce its debt-to-GDP ratio by 20 percentage points over the next eight years, still less return it to its pre-crisis level.

Governments need to run primary (ie, before interest payments) surpluses in order to pay off existing debt. The IMF reckons that Italy will reach and maintain a primary surplus of nearly 5% of GDP by 2018, but is less sanguine about other euro-zone debtors. Tax rises and spending cuts are hard to implement. A study of 54 emerging and advanced economies, by Ugo Panizza of the Graduate Institute, Geneva and Barry Eichengreen of the University of California, Berkeley shows that large and sustained primary surpluses are extremely rare. People in the southern periphery are especially fed up with austerity, which has had a massive cost in terms of unemployment and living standards. More bad news, and the situation could look critical once again.

The crucial questions financial journalism won't ask and central banks won't answer


Remarks by Chris Powell, Secretary/Treasurer

Gold Anti-Trust Action Committee Inc.
New Orleans Investment Conference
Hilton New Orleans Riverside Hotel
New Orleans, Louisiana
Thursday, October 23, 2014

For many years this conference has bravely invited GATA Chairman Bill Murphy and me to speak here about the evidence of manipulation of the gold market, particularly manipulation undertaken directly or indirectly by central banks, and every year there has been new documentation to report. This documentation has been compiled at GATA's Internet site,, whose home page you can see here --

-- with the "Documentation" section noted at the top left, along with a section called "The Basics," which summarizes the documentation as well as the purposes and history of central bank policy of suppressing the price of gold, gold being a currency that competes with government currencies.

The last two months have brought confirmation that, as we long have suspected, GATA has outlined only a small part of the surreptitious market manipulation being undertaken by central banks -- that this manipulation is actually comprehensive, that it covers nearly every major market in the world.

This confirmation is largely the work of Eric Scott Hunsader, founder of the market data and research company Nanex in Winnetka, Illinois, who publicized, through the Zero Hedge Internet site, documents recently filed with the U.S. government, two of them with the Commodity Futures Trading Commission and one with the Securities and Exchange Commission.

The first document is a letter to the CFTC, dated January 29 this year, from CME Group, the operator of the major futures exchanges in the United States, and signed by CME Group's managing director and chief regulatory counsel, Christopher Bowen:

The letter notifies the CFTC of changes to CME Group's discount trading program for central banks. That is, the letter reveals that central banks are getting discounts for trading all futures on CME Group's exchanges, including the New York Commodity Exchange, the major mechanism for "price discovery" in the monetary metals.

The CME Group letter argues that letting central banks trade in futures is beneficial because it adds "liquidity" to the markets. But of course "liquidity" here might as well mean the ocean.

Anyone trading against the ocean will drown.

The second document is another letter from CME Group's Bowen to the CFTC, dated August 28 this year, disclosing that CME Group is enacting rules against certain trading practices that are considered abusive and unfair, specifically "spoofing" and "quote stuffing," the abrupt placing and withdrawal of huge volumes of phony orders to mislead traders about prices:

The letter's implication is that such manipulative trading practices have been common on CME Group exchanges.

The third document is the CME Group's annual report to the Securities and Exchange Commission, its 10-k report:

CME Group's 10-k report reveals on Page 9: "Our customer base includes professional traders, financial institutions, institutional and individual investors, major corporations, manufacturers, producers, governments, and central banks."

That central banks and governments are trading both surreptitiously and comprehensively in U.S. futures markets is a transformative development. Since central banks can create and deploy infinite money, this trading means that there are probably no markets anymore in anything, mainly just government interventions. It means that democratic capitalism has been quietly overthrown by a totalitarian coup and that the world has lost the great engine of its economic and democratic progress, free markets -- without even being aware of the loss.

And yet what has been disclosed by these documents filed by the CME Group is only what was asserted 14 years ago in an essay written by the British economist Peter Warburton, an essay he titled "The Debasement of World Currency: It Is Inflation But Not As We Know It":

* * *

"What we see at present," Warburton wrote, "is a battle between the central banks and the collapse of the financial system fought on two fronts.

"On one front, the central banks preside over the creation of additional liquidity for the financial system in order to hold back the tide of debt defaults that would otherwise occur.

"On the other, they incite investment banks and other willing parties to bet against a rise in the prices of gold, oil, base metals, soft commodities, or anything else that might be deemed an indicator of inherent value. Their objective is to deprive the independent observer of any reliable benchmark against which to measure the eroding value not only of the U.S. dollar but of all fiat currencies.

"Equally, they seek to deny the investor the opportunity to hedge against the fragility of the financial system by switching into a freely traded market for non-financial assets.

"The central banks have found the battle on the second front much easier to fight than the first. Last November [November 2000] I estimated the size of the gross stock of global debt instruments at $90 trillion as of mid-2000. How much capital would it take to control the combined gold, oil, and commodity markets? Probably no more than $200 billion, using derivatives.

"Moreover, it is not necessary for the central banks to fight the battle themselves, although central bank gold sales and gold leasing have certainly contributed to the cause. Most of the world's large investment banks have overtraded their capital so flagrantly that if the central banks were to lose the fight on the first front, the stock of the investment banks would be worthless.

"Because their fate is intertwined with that of the central banks, investment banks are willing participants in the battle against rising gold, oil, and commodity prices."

* * *

That is, as the saying goes, the futures markets are not manipulated; the futures markets are the manipulation.

As Warburton noted, if a commodity has a futures market, the price of that commodity likely is being manipulated, and probably suppressed, by surreptitious trading by central banks and their agents. As a result most market prices now are probably mere illusions, holograms created in large part in the trading rooms of central banks, like the trading room at the Federal Reserve Bank of New York.

But overwhelming as the power to create and deploy infinite money surreptitiously through central banks is, it is not the decisive power of governments. No, the decisive power of governments is the power to stifle or intimidate news organizations. For if people are ever informed that a market is rigged, they won't participate in it and the rigging will lose its usefulness.

For 15 years GATA has done a fair job documenting the manipulation of markets by central banks and their agents. But publicizing that manipulation has been part of GATA's work as well, and in that respect we have not succeeded much. We can get on television in Asia and Russia but we strain for the occasional citation by Western news organizations.

We have sent the recent CME Group documents to most major financial news organizations and to many financial letter writers, and as far as we can determine, not one has posed any question about them to the authorities or written or broadcast anything about them.
As with GATA's other documentation, no one disputes these documents either. They simply cannot be acknowledged. They give the game away.

Maybe that will change on Saturday, when this conference will have the remarkable opportunity of questioning Alan Greenspan, who was chairman of the Federal Reserve for more than 17 years, from August 1987 to January 2006. If Greenspan is in a mood to be candid, we may learn a lot without having to interrogate him as a prosecutor would. If Greenspan is not in a mood to be candid, extracting anything useful from him will be tedious, requiring his interrogators to be very specific and to brandish documentation.

Of course I suspect that Greenspan may not care to be candid. So let me suggest a few very specific and detailed questions for him.

Question 1: Mr. Greenspan, in your testimony to Congress in July 1998, in which you urged Congress not to legislate regulation of derivatives --

-- you said: "Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise."

Did you mean that gold lending by central banks was intended to suppress or control gold's price -- that Congress didn't have to worry about someone cornering the gold market because central banks already had it cornered? With their many years of selling, lending, and swapping of gold, have central banks been underwriting the bullion banking business because it is a mechanism by which governments control the gold Price?

Question 2: Mr. Greenspan, in recent years right down to the present, have central banks or governments been trading in the gold market and related markets? Are they trading in the gold and related markets now? If so, what has been and is the objective of that trading? Is it to make money, to obtain more gold, or to control gold's price?

Question 3: Mr. Greenspan, did central banks and governments trade in the gold market and related markets when you were chairman of the Federal Reserve? How about any agency of the U.S. government -- not just the Fed but the Treasury Department or any other agency? If there was such trading, what was its objective? Was it to control the gold price because gold is a currency competing or potentially competing with government currencies?

Question 4: Mr. Greenspan, when you were chairman of the Fed you were also, by virtue of that office, a member of the Board of Directors of the Bank for International Settlements. The annual report of the BIS --

-- says the BIS "transacts foreign exchange and gold on behalf of its customers, thereby providing access to a large liquidity base in the context of, for example, regular rebalancing of reserve portfolios or major changes in reserve currency allocations. The foreign exchange services of the bank encompass spot transactions in major currencies and Special Drawing Rights as well as swaps, outright forwards, options, and dual currency deposits. In addition, the bank provides gold services such as buying and selling, sight accounts, fixed-term deposits, earmarked accounts, upgrading and refining, and location exchanges."

Additionally, in a presentation to potential central bank members at BIS headquarters in Basel, Switzerland, in June 2008, the BIS advertised, as being among its services to its members, secret interventions in the gold and currency markets:

Further, in a speech to a BIS conference in Basel in June 2005, the head of the bank's monetary and economic department, William R. White, said that a primary purpose of international central bank cooperation is "the provision of international credits and joint efforts to influence asset prices --
especially gold and foreign exchange -- in circumstances where this might be thought useful":

So: While you were chairman of the Federal Reserve and a member of the BIS board, did the BIS operate in the gold market on behalf of any of its members to influence the gold price, and, if so, exactly how and for what purposes? Were such operations in the gold market public and announced or were they kept secret? If they were kept secret, why?

Question 5: Mr. Greenspan, by virtue of your chairmanship of the Fed, you were also a member of the Board of Governors of the International Monetary Fund. In March 1999, while you were a member of the IMF board, the IMF staff presented the IMF board with a secret report that has been posted on the Internet site of the Gold Anti-Trust Action Committee:

The secret IMF staff report said central banks objected to the staff's proposal to require them to make a forthright public accounting of their gold swaps and lending. Such a public accounting would have required central banks to distinguish gold in central bank vaults from gold that had been swapped or loaned by central banks. The secret IMF staff report said central banks objected to such a forthright accounting of their gold reserves out of "a desire to preserve the confidentiality of foreign exchange market intervention for a period, in order to enhance its effectiveness."

While you were Fed chairman and a member of the IMF board, did the IMF intervene secretly in the gold and foreign exchange markets, and, if so, on whose behalf and for what purposes? Did the Fed, U.S. Treasury Department, U.S. State Department, or any other U.S. government agency advocate or concur with any such intervention? Why was such intervention kept secret?

Question 6: Mr. Greenspan, in a letter to the Gold Anti-Trust Action Committee in September 2009 --

-- Fed Governor Kevin M. Warsh wrote that the Fed has secret gold swap arrangements with foreign banks. Did the Fed have such arrangements during your chairmanship? If so, with whom were these arrangements undertaken and what were their purposes? And why must these arrangements be kept secret?

Question 7: Mr. Greenspan, during your tenure as Fed chairman, how many markets were the Fed and other U.S. government agencies trading in, directly or through intermediaries? Was such trading by U.S. government agencies for their own accounts or for the accounts of other governments and central banks, or both? And which markets were involved and what was the objective of such trading?

Question 8: Mr. Greenspan, do the Fed or other U.S. government agencies have any connection to the huge interest rate derivative positions that, according to the U.S. comptroller of the currency, are held by JPMorganChase, a primary dealer in U.S. government securities? Are these positions really U.S. government positions or the positions of other governments or central banks, undertaken to defeat market forces on interest rates?

* * *

Of course these questions might be useful for interviewing not just Alan Greenspan but any current or former central banker -- if the world ever gets any financial news organizations willing to put critical questions to central banks.

Instead, of course, while surreptitious central bank intervention in the markets is setting the value of all capital, labor, goods, and services in the world, the first rule of financial journalism is that central banks are never to be questioned about anything important.

In any case GATA aims to continue its work on behalf of free and transparent markets and limited and accountable government. We're a nonprofit educational and civil rights organization recognized as federally tax-exempt by the U.S. Internal Revenue Service, so financial contributions to GATA are federally tax-deductible. We're also close to broke, so we would be especially grateful for any support from you now. Donations can be made through our Internet site,

Thanks for your kind attention.

Op-Ed Columnist

The American Dream Is Leaving America

OCT. 25, 2014

Nicholas Kristof

THE best escalator to opportunity in America is education. But a new study underscores that the escalator is broken.
We expect each generation to do better, but, currently, more young American men have less education (29 percent) than their parents than have more education (20 percent).
Among young Americans whose parents didn’t graduate from high school, only 5 percent make it through college themselves. In other rich countries, the figure is 23 percent.
The United States is devoting billions of dollars to compete with Russia militarily, but maybe we should try to compete educationally. Russia now has the largest percentage of adults with a university education of any industrialized country — a position once held by the United States, although we’re plunging in that roster.
These figures come from the annual survey of education from the Organization for Economic Cooperation and Development, or O.E.C.D., and it should be a shock to Americans.

A basic element of the American dream is equal access to education as the lubricant of social and economic mobility. But the American dream seems to have emigrated because many countries do better than the United States in educational mobility, according to the O.E.C.D. study.
As recently as 2000, the United States still ranked second in the share of the population with a college degree. Now we have dropped to fifth. Among 25-to-34-year-olds — a glimpse of how we will rank in the future — we rank 12th, while once-impoverished South Korea tops the list.
A new Pew survey finds that Americans consider the greatest threat to our country to be the growing gap between the rich and poor. Yet we have constructed an education system, dependent on local property taxes, that provides great schools for the rich kids in the suburbs who need the least help, and broken, dangerous schools for inner-city children who desperately need a helping hand. Too often, America’s education system amplifies not opportunity but inequality.
My dad was a World War II refugee who fled Ukraine and Romania and eventually made his way to France. He spoke perfect French, and Paris would have been a natural place to settle. But he felt that France was stratified and would offer little opportunity to a penniless Eastern European refugee, or even to his children a generation later, so he set out for the United States. He didn’t speak English, but, on arrival in 1951, he bought a copy of the Sunday edition of The New York Times and began to teach himself — and then he worked his way through Reed College and the University of Chicago, earning a Ph.D. and becoming a university professor.
He rode the American dream to success; so did his only child. But while he was right in 1951 to bet on opportunity in America rather than Europe, these days he would perhaps be wrong. Researchers find economic and educational mobility are now greater in Europe than in America.

That’s particularly sad because, as my Times colleague Eduardo Porter noted last month, egalitarian education used to be America’s strong suit. European countries excelled at first-rate education for the elites, but the United States led the way in mass education.
By the mid-1800s, most American states provided a free elementary education to the great majority of white children. In contrast, as late as 1870, only 2 percent of British 14-year-olds were in school.
Then the United States was the first major country, in the 1930s, in which a majority of children attended high school. By contrast, as late as 1957, only 9 percent of 17-year-olds in Britain were in school.
Until the 1970s, we were pre-eminent in mass education, and Claudia Goldin and Lawrence Katz of Harvard University argue powerfully that this was the secret to America’s economic rise. Then we blew it, and the latest O.E.C.D. report underscores how the rest of the world is eclipsing us.
In effect, the United States has become 19th-century Britain: We provide superb education for elites, but we falter at mass education.
In particular, we fail at early education. Across the O.E.C.D., an average of 70 percent of 3-year-olds are enrolled in education programs. In the United States, it’s 38 percent.

In some quarters, there’s a perception that American teachers are lazy. But the O.E.C.D. report indicates that American teachers work far longer hours than their counterparts abroad. Yet American teachers earn 68 percent as much as the average American college-educated worker, while the O.E.C.D. average is 88 percent.
Fixing the education system is the civil rights challenge of our era. A starting point is to embrace an ethos that was born in America but is now an expatriate: that we owe all children a fair start in life in the form of access to an education escalator.
Let’s fix the escalator.

AEP: Spain's export-led recovery comes at a price

Booming car factories behind the country's expert-led revival leave question marks over the true health of Spanish economy, reports Ambrose Evans-Pritchard

By Ambrose Evans-Pritchard, in Valladolid

1:25PM BST 25 Oct 2014

The Spanish national flag is seen flying near the Plaza Colon in Madrid, Spain, on Tuesday, Feb. 14, 2012
Spain’s car industry has come back from the dead, saved by drastic wage cuts that transform the social character of Europe.
The French group Renault has restarted night shifts at its plant in Valladolid this month for the first time in a decade as demand surges for its snazzy bi-tonal Captur, much of it from South Korea of all places.
It is a moment that traumatised workers here in the heartland of old Castile never expected to see again after Spain’s economy crashed into depression six years ago, and then crashed yet deeper before hitting rock bottom in 2012. “We all thought this factory was going to be closed. It was a terrible time,” said Luis Estevez, a manager of the assembly plant.
Other countries may be mothballing lines or cutting shifts as Europe flirts with a triple-dip recession, but Spain’s 17 car factories are firing on all cylinders. Output has risen 20pc over the last two years, on track to reach 2.4m this year and 3m by 2017, leaving Britain, Italy, Russia and, above all, France ever further behind.
Nissan began night shifts last week at its Pulsar factory in Barcelona. Ford is shutting its Belgian plant at Genk, and switching output of the Mondeo and Galaxy to Valencia. The long-running saga of General Motors’ operations in Zaragoza has ended happily after all. The factory will survive, and thrive. Output will jump 15pc this year, and jump again in 2015 as 80,000 Opel Mokkas come on stream.

The car industry is the spearhead of Spain’s great plan for export-led recovery. Some 85pc of all vehicles built in the country last month were shipped abroad, chiefly to France, Germany and Britain.

The pro-business government of Mariano Rajoy and its allies point to this remarkable surge as a vindication of their policies, proof that it is possible to claw back competitiveness within the eurozone by means of an “internal devaluation”, a euphemism for deflationary wage cuts.

“Spain shows what reforms can do. We have become the export champions of Europe,” said Ana Botín, the chairman of Santander.

Keynesian economists counter with equal vehemence that this is a beggar-thy-neighbour strategy, a race to the bottom that shifts the pain within the eurozone to other states that try to defend their social models – chiefly France and Italy at this point – and ultimately sucks the whole currency union into a self-feeding deflationary vortex along the lines of the 1930s.
Renault’s plants in Valladolid, the old capital of the Spanish empire, are so highly mechanised that at first glance they seem post-human. Self-guided carts move around the factory floors on magnetic strips.
The Captur dashboards are lifted and punched into place by Swiss and German robots. Another set of robots lifts the under-carriages from below, snapping them in with a single action, one car every minute. Quality control for the motors is carried out by an array of computerised cameras, programmed to pick up defects down to 40 parts per million.
All the fiddly bits that the workers need to finish off arrive already placed inside the chassis as it moves along the line. It is a method pioneered in Japan, designed so that nobody wastes valuable seconds turning round to fetch things. The speed and repetition is dizzying to watch.

“We want the fewest possible number of people, working as fast as possible,” said the line manager. Output has jumped 150pc in two years to 210,000 vehicles.

Spain’s trade unions have had to accept once unthinkable terms to save their car factories, caught between mass unemployment (27pc at the peak) and new labour laws that make it much easier for employers to demand flexible hours. The term “Spanish practices” has lost its meaning.
A deal reached with Renault after much soul-searching in 2012 cuts entry pay for new workers by 27.5pc, to roughly €17,000 a year (£13,400). Older workers keep their jobs at frozen pay, but with fewer holidays and tougher conditions. Joaquin Arias from the trade union federation CCOO said the terms amounted to blackmail. “The alternative was slow death. We would never have accepted such a plan if the crisis hadn’t been so bad.”
Wage costs are now 40pc below levels in comparable French plants in France, the chief reason why Renault and Peugeot have cut their output of vehicles in their home country by half over the last decade. French unions may rage against “social dumping”, but they now face the asphyxiation of their industry unless they too knuckle under.

“The French factories are going through exactly what we faced five years ago. It is very hard for everybody, but they too are having to follow the Spanish model,” said Mr Estevez.
The Renault expansion is a shot in the arm for the 300,000-strong city of Valladolid, bolstered by flourishing wine exports from the vineyards of Ribera and Rueda along the Duero River, once the frontier between Christian Spain and the Moors. The company has just taken on 700 new workers to cover the night shifts and is adding a further 800 at a nearby factory in Palencia, including a few from the homeless shelters of the Catholic charity Caritas.
In a remarkable reversal of fortunes, Spain is now the fastest-growing of the eurozone’s Big Four economies. Madrid forecasts growth of 1.3pc this year and 2pc next. The jobless rate has dropped from 25.7pc to 23.7pc, and no longer because of mass emigration. The numbers in work have jumped 530,000 in six months.

What is far from clear is whether Spain’s economy has genuinely turned the corner, or whether the boom in car exports reflects competitiveness in the rest of the economy.
Raoul Ruparel from the independent think-tank Open Europe says most of the rebound in growth this year has come from a local spending spree, an unleashing of pent-up demand as confidence returns after years of self-denial.

Fernando de Acuña, head of Spain’s top property consultancy RR de Acuña, warns that the country is going through an illusionary mini-bubble, with people betting on a fresh cycle in the housing market when the crippling effects of the last boom-bust cycle have yet to be cleared.

“We think prices will fall by another 20pc over the next three years. There is still an overhang of 1.7m unsold homes in an annual market of around 230,000. The developers have 467,000 units on their books, and half of these are indirectly controlled by the banks. It is extend and pretend. There are another 150,000 in foreclosure proceedings that are backed up because the courts are saturated,” he said.

“People don’t want to hear any of this. We were called criminals and terrorists when we warned in 2007 the country was going to Hell, but we were right, because we base our analysis on the facts and not on wishful thinking,” he said.
It has always been debatable whether Spain can hope to pull itself out of a low-growth trap by relying on exports alone, given that it still has a relatively closed economy with a trade gearing of just 34pc of GDP, far lower than Ireland at 108pc.
The current account is already slipping back into deficit in any case as imports surge, suggesting that Spain is still nowhere near a competitive equilibrium within the eurozone. It is already “overheating” – in a sense – even with 5.6m people unemployed. The International Monetary Fund says Spain’s exchange rate is up to 15pc overvalued.
Ominously, the export boom has been fading despite the success of the car industry. Total shipments rose just 1pc in the year to August compared with the same period in 2013, with falls of 11pc to Latin America, and of 13pc to the Middle East. Exports actually contracted by 5pc in August from a year earlier.

Trade experts say the export rebound after the Lehman crisis was the result of a frantic search for overseas markets by firms battling for their lives as internal demand collapsed by 15pc.

This is a one-off effect by its nature. It cannot be sustained without an investment blitz, yet the IMF says bank credit to firms is still contracting at an annual rate of 11pc, with a “steadily-rising share of firms under financial distress”.
The IMF warns that the country is still acutely vulnerable. “Spain is heavily indebted to the rest of the world. The net international investment position (NIIP) deteriorated further in 2013 almost 100pc of GDP,” it said.

The IMF called into question whether Spain really has pushed through deep structural reforms, noting that its “Doing Business” ranking has slipped yet further. Total factor productivity (TFP) is on a “declining trend”, though flattered by the perverse fall of unemployment for now. The labour market remains “segmented between well-protected 'insiders’ on permanent contracts and precarious 'outsiders’, who cycle between temporary jobs and unemployment,” it said

What is clear is that any recovery so far has scarcely reached the victims of the long slump.

“The economy has at least stabilised, but we are still helping 4pc to 5pc of the population,” said Father Jesus Garcia Gallo, head of the Caritas network of shelters, soup-kitchens and charities in the region.

“We are seeing a chronic deterioration that gets worse every day, the longer this goes on. There are a lot of people who have exhausted their unemployment pay and simply can’t survive,” he said. Two million people in Spain live in households where nobody has a job.

Caritas has a warehouse at the episcopal headquarters stacked to the rafters with suitcases, each listed to somebody living out on the streets or camping on the floors of distant family or friends. It is like a locker. They drop by to fetch things. Another room is full of washing machines that they use in turns before disappearing again, maintaining a disguise of normality to the untrained eye.
Yet the acute phase of Spain’s ordeal is over, or at least in remission. “It no longer feels anything like 2012, when we feared that the Spanish state might actually go bankrupt and they would kick us out of the euro. Those were really alarming moments for this country that everybody wants to forget,” he said.


Dollar Bulls Slow the Stampede

Some Investors Pull Back After Worries About Global Growth, Possible Fed Delay in Raising Rates

By James Ramage

Oct. 23, 2014 3:22 p.m. ET   

The prospect that the Federal Reserve may delay raising interest rates next year has removed a key underpinning for the dollar. The prospect that the Federal Reserve may delay raising interest rates next year has removed a key underpinning for the dollar. Bloomberg News        

The crowds of investors piling into the dollar are beginning to thin.

While the dollar has steadied itself after last week suffering its worst selloff this year, some investors said they have become wary of adding to their bullish bets.

For months, an improving U.S. economy and the prospect of higher interest rates sent the dollar soaring against most currencies. Investors placed record bets on a stronger greenback, hoping to get ahead of the torrent of cash expected to flow into U.S. assets once rates begin to rise. Higher rates make a currency more attractive to hold.

But doubts have surfaced this month, which brought a halt to the dollar’s 12-week winning streak, according to the ICE Dollar Index, which measures the dollar against a basket of six currencies. Those doubts intensified last week after worries flared anew about the health of the global economy, sparking a rethink about the strength of the U.S. recovery and raising the prospect that the Federal Reserve would delay any increase in U.S. interest rates. Treasury prices soared, sending yields nose-diving, and stocks plunged.

The prospect of a Fed delay removed, at least temporarily, a key underpinning for the dollar, which lost more than 1% of its value against the euro on Oct. 15. While it has regained some ground, the greenback hasn’t hit its high of just over $1.25 to the euro reached on Oct. 3. It is down 0.1% against the euro and 1.3% against the yen this month.

Late Thursday in New York, the dollar bought ¥108.27, compared with ¥107.15 late Wednesday, and the euro was flat at $1.2647.

Many money managers still see the Fed raising interest rates next year, while other central banks continue to ease monetary policy, and believe the dollar will strengthen in the long run, but are trimming these wagers or buying options as insurance in case the market turns against them.

“Any weakness in the U.S. [economic] data would affect the crowded dollar trade,” particularly against the euro and yen, said James Kwok, head of currencies at Amundi Asset Management, with $1 trillion in assets. “The recent rise of volatility and volume in the [foreign-exchange] market will increase the need for investors to consider hedging their currency risks.”

Amundi is betting the dollar will strengthen against the Canadian dollar and other currencies that would be undermined by falling oil prices. This year, the dollar has gained 5.7% against the Canadian currency.

Bank of America Merrill Lynch on Oct. 17 recommended options that give investors the right to buy Swiss francs, a popular haven, and sell dollars. The bank said the contracts would act as insurance against two risks: that an economic crisis forces the Federal Reserve to abandon plans to raise interest rates or that a widespread Ebola outbreak derails global growth.

Investors and economists overwhelmingly believe the Fed will raise rates sometime next year. That will benefit the dollar by narrowing the differences in yield between dollar-denominated assets and those of higher-yielding currencies, making the greenback more attractive.

At the same time, the European Central Bank and Bank of Japan are attempting to boost inflation and growth by further easing monetary policy, which would weigh on the euro and yen.

“In our view, this is just the beginning; the strong U.S. dollar is here to stay,” wrote Michael Novogratz and Jeff Feig, co-CIO’s of Fortress Macro Fund Ltd., in a letter to investors dated Oct. 15.

But investors aren’t as confident as they once were that central banks will stick to their plans, particularly if slowing economies in Europe or China send global growth into a tailspin.

Predicting the precise moment when the Fed will raise rates is tricky. Weak U.S. data and concerns about low inflation could postpone the Fed’s timeline for raising interest rates. Expectations for a rate increase at the Fed’s July 2015 meeting stood at 27% on Thursday, from 66% in April, according to CME Group Inc.
Because so much money is riding on a stronger dollar, even a small shift in expectations for a rate increase could cause the currency to sell off, some investors said.

“Market positioning worries me, since it could lead to a short-term correction,” said Paresh Upadhyaya, portfolio manager and director of currency strategy at Pioneer Investments, which manages $251.7 billion. “Right now, the conditions may be ripe for this with the fall in U.S. Treasury yields and questions over the start to the tightening cycle.”

Mr. Upadhyaya has positions that will profit if the dollar rises against the euro, pound and Swiss franc.

The fixed-income group at Schroders Investment Management Ltd., which manages $104 billion of the firm’s $464 billion, reduced its bet last week that the euro would fall against the dollar. Bob Jolly, portfolio manager of the Schroder Global Strategic Bond Fund, said investors were becoming too confident that the ECB’s determination to lift inflation would lead to policies that weakened the euro.
“We felt the short-euro position was getting too crowded and some of the world was getting a bit too overexcited for the potential for [euro] devaluation,” Mr. Jolly said.

Additionally, the dollar’s surge is itself becoming a source of worry. A stronger currency gives consumers more spending power by reducing the cost of imported goods, holding down inflation. But it also makes U.S. exports less competitive, threatening a consistent bright spot for the economy. Low inflation is stoking concerns about the sluggish recovery and could give the Fed an excuse to postpone raising interest rates.

Still, dollar bulls said the contrast between the Fed’s plans and moves by the ECB and Bank of Japan to keep borrowing costs low is too great to ignore. And though a winning streak like the dollar saw this summer is rare, the size of the gains is small compared with past rallies. The ICE Dollar Index is up 7% this year, compared with double-digit-percentage gains for four years in a row in the early 1980s or a three-year stretch starting in 1999 that saw the index rise 24%.

Money managers’ net bullish bet on the dollar was running just below an all-time high in the futures market on Oct. 14, according to the most recent data from the Commodity Futures Trading Commission.

“There might be pauses, but no pullbacks,” said Jennifer Vail, who heads fixed-income research at U.S. Bank Wealth Management, which oversees $124 billion. “As we move toward one side easing and another side tightening, that will only amplify the dollar’s strength.” In September, Ms. Vail’s firm bought emerging-market debt denominated in dollars and sold stocks and bonds valued in other currencies.

—Rob Copeland and Chiara Albanese contributed to this article.

Barron's Take

Oil’s Slump Won’t Last; Which Stocks to Buy Now

Crude oil – and some oil stocks – are now in a bear market. Why this bad patch is a buying opportunity.

By Thomas Streater           

Updated Oct. 21, 2014 6:29 p.m. ET.

Don’t look now, but oil has hit a very bad patch.
Crude oil prices have skidded for four straight weeks, and closed lower over eight of the past 10 weeks, taking many oil and energy stocks down with it. In fact, last week’s 4.9% drubbing in Brent crude oil prices was the worst week in more than 18 months, and Brent crude oil is down more than 22% so far this year, a very definition of a bear market.
The capitulation, however, is not a reflection of fundamentals. In fact, this recent sharp sell-off provides a buying opportunity for certain Asian oil stocks. Already, that flight from risk - including oil – in the global markets was reduced late last week when the Federal Reserve Bank of St Louis president James Bullard hinted at the possibility that the Fed might again come to the markets’ rescue.
Indeed, one of the factors causing oil prices to slump over the last several months from $115 a barrel in June to about $85 a barrel recently has been the strengthening US dollar, which has been lifted by expectations of a tighter US monetary policy. Next, the IMF downgraded 2014 global growth projections to 3.3% from 3.7%, and lowered its projection for 2015 growth to 3.8% from 4%. On top of that, the International Energy Agency last week also reduced its own expectations for oil demand growth in 2014 and 2015.
But the fact is that the oil supply-and-demand balance does not shift so quickly as to justify a fall of 13% in one month, and especially not - as at one point last week - a three day drop of more than $6/bbl in the global benchmark Brent. While a credible argument can be made for oil to remain weak longer term, a rebound from oversold levels looks increasingly likely. As Goldman Sachs, bearish on oil over the longer term, pointed out late last week, this final crash in Brent was likely caused by technical reasons driven by dealer hedging of option positions. Goldman also reminded investors that unlike financial assets, commodities are spot assets clearing today’s supply and demand and that “the supply glut is not yet here today, it exists in expectations”. This means that any pessimism about future market supply should not be reflected by such a low spot price today.
Sandford C. Bernstein takes a much more bullish view over the longer term, noting that oil price should trade around the marginal cost of production, which they estimate to be around $100 a barrel. On the supply front, they note that U.S. oil supply growth is gradually slowing and Russian production is declining.
Despite suggestions leading members of Organization of Petroleum Exporting Countries will not cut output, Bernstein says it is likely they will reduce production to support prices.
China’s slowing growth has hurt demand for oil products like diesel, which is heavily used in industry. While investors have focused on the short term drop in total demand, oil prices will be supported in the long term by increased consumption of transportation fuels, like petrol, as car ownership rises in China. Vehicle ownership in China is just one eighth of that in developed countries according to Bernstein. Additionally, China’s Strategic Petroleum Reserve may view the weakness in oil prices as a buying opportunity.
So where to invest to take advantage of a possible rebound in crude oil prices? Bernstein’s list of Asian companies that are most exposed to the ups and downs of the oil price include Hilong Holdingand Anton Oilfield Services, both China-based oil service and equipment providers. Japan’s INPEX Corp and China’s CNOOC ( 883.HK ) are the two largest exploration and production stocks included on the list.
Anton Oilfield Services was a market darling in 2012 but has been hammered since May. The 60% drubbing has come amid lower oil prices and fears big clients PetroChina and Sinopec will spend less with external service companies. The stock has found little love with sell-side analysts, with more than half rating it a sell.
Given the weight of opinion against it, coupled with a rise in the oil price, Anton may make an interesting contrarian bet for more adventurous investors.
Investors looking for U.S.-listed energy companies, meanwhile, can click to my colleague Ben Levisohn’s post on four oil stocks poised to rally.

October 24, 2014, 11:32 AM ET

Sales of New Homes Worse Than Most Years in 1980s, 1990s

By Nick Timiraos

Home sales rose to their highest annual pace in September in six years, but the new-home market is still depressed by historical standards.

To get a sense of just how painful the housing downturn has been, consider this: excluding the post-2008 depression, sales this year are running at their slowest pace since 1982.

Back then, interest rates were above 15% as the Federal Reserve fought off inflation and unemployment rose above 10%.

Of course, the recessions of the early 1980s were followed by big snapbacks in construction of the kind that haven’t been seen following the 2007-09 recession.

Through the first nine months of this year, builders have signed contracts to sell some 337,000 homes. That’s up just 1.7% from 331,000 through the same period last year, and up from the low of 233,000 in 2011.

Still, this year’s level is below every other year from 1983 to 2009. In 1982, builders had sold 226,000 homes in the first nine months of the year. Sales doubled to 478,000 in 1983.

Friday’s figures suggest that 2014 will be a giant letdown for the new-home sales market.

One sort-of bright spot: For the third quarter of 2014, new home sales were still up 17% from the year-earlier period. Why “sort of” bright? Summer 2013 saw a big drop in sales following a rise in mortgage rates from around 3.5% to 4.5%.

Still, improvement is improvement. Sales in the second quarter stood 5% below the year-earlier level, and the first quarter was down 2%.

Op-Ed Columnist

Plutocrats Against Democracy

OCT. 23, 2014

Paul Krugman

It’s always good when leaders tell the truth, especially if that wasn’t their intention. So we should be grateful to Leung Chun-ying, the Beijing-backed leader of Hong Kong, for blurting out the real reason pro-democracy demonstrators can’t get what they want: With open voting, “You would be talking to half of the people in Hong Kong who earn less than $1,800 a month. Then you would end up with that kind of politics and policies” — policies, presumably, that would make the rich less rich and provide more aid to those with lower incomes.

So Mr. Leung is worried about the 50 percent of Hong Kong’s population that, he believes, would vote for bad policies because they don’t make enough money. This may sound like the 47 percent of Americans who Mitt Romney said would vote against him because they don’t pay income taxes and, therefore, don’t take responsibility for themselves, or the 60 percent that Representative Paul Ryan argued pose a danger because they are “takers,” getting more from the government than they pay in. Indeed, these are all basically the same thing.
For the political right has always been uncomfortable with democracy. No matter how well conservatives do in elections, no matter how thoroughly free-market ideology dominates discourse, there is always an undercurrent of fear that the great unwashed will vote in left-wingers who will tax the rich, hand out largess to the poor, and destroy the economy.
In fact, the very success of the conservative agenda only intensifies this fear. Many on the right — and I’m not just talking about people listening to Rush Limbaugh; I’m talking about members of the political elite — live, at least part of the time, in an alternative universe in which America has spent the past few decades marching rapidly down the road to serfdom. Never mind the new Gilded Age that tax cuts and financial deregulation have created; they’re reading books with titles like “A Nation of Takers: America’s Entitlement Epidemic,” asserting that the big problem we have is runaway redistribution.
This is a fantasy. Still, is there anything to fears that economic populism will lead to economic disaster? Not really. Lower-income voters are much more supportive than the wealthy toward policies that benefit people like them, and they generally support higher taxes at the top. But if you worry that low-income voters will run wild, that they’ll greedily grab everything and tax job creators into oblivion, history says that you’re wrong. All advanced nations have had substantial welfare states since the 1940s — welfare states that, inevitably, have stronger support among their poorer citizens. But you don’t, in fact, see countries descending into tax-and-spend death spirals — and no, that’s not what ails Europe.

Still, while the “kind of politics and policies” that responds to the bottom half of the income distribution won’t destroy the economy, it does tend to crimp the incomes and wealth of the 1 percent, at least a bit; the top 0.1 percent is paying quite a lot more in taxes right now than it would have if Mr. Romney had won. So what’s a plutocrat to do?
One answer is propaganda: tell voters, often and loudly, that taxing the rich and helping the poor will cause economic disaster, while cutting taxes on “job creators” will create prosperity for all. There’s a reason conservative faith in the magic of tax cuts persists no matter how many times such prophecies fail (as is happening right now in Kansas): There’s a lavishly funded industry of think tanks and media organizations dedicated to promoting and preserving that faith.
Another answer, with a long tradition in the United States, is to make the most of racial and ethnic divisions — government aid just goes to Those People, don’t you know. And besides, liberals are snooty elitists who hate America.

A third answer is to make sure government programs fail, or never come into existence, so that voters never learn that things could be different.

But these strategies for protecting plutocrats from the mob are indirect and imperfect. The obvious answer is Mr. Leung’s: Don’t let the bottom half, or maybe even the bottom 90 percent, vote.
And now you understand why there’s so much furor on the right over the alleged but actually almost nonexistent problem of voter fraud, and so much support for voter ID laws that make it hard for the poor and even the working class to cast ballots. American politicians don’t dare say outright that only the wealthy should have political rights — at least not yet. But if you follow the currents of thought now prevalent on the political right to their logical conclusion, that’s where you end up.
The truth is that a lot of what’s going on in American politics is, at root, a fight between democracy and plutocracy. And it’s by no means clear which side will win.