Transcript of a Press Briefing on the World Economic Outlook (WEO)

Washington, D.C.

Tuesday, April 14, 2015


Olivier Blanchard
IMF Economic Counsellor and Director of Research Department

 Oya Celasu

Research Department, IMF

 Thomas Helbling

 Research Department, IMF

 Gian Maria Milesi-Ferretti

 Research Department, IMF

 Ismaila Dieng

 Communications Department, IMF

MR. DIENG: Good morning, everyone ... Welcome to the launch of the 2015 World Economic Outlook. I’m Ismaila Dieng form the Communications Department here at the Fund. Good morning, everyone. Welcome to the launch of the April 2015 World Economic Outlook. I am Ismaila DIENG from the Communications Department here at the IMF.

Joining us today:

Olivier Blanchard, Economic Counselor and Director of the Research Department,

Thomas Helbling Head of the World Economic Studies División

Gian Maria Milesi-Ferretti, Deputy Director of the Research Department.

Oya Celasun, Deputy Division Chief in the Research Department

As usual, Mr. Blanchard will make some opening remarks and then we will open the floor for questions.

MR. BLANCHARD - Let me start with the number you typically focus on: We forecast global growth to be roughly the same this year as last year, 3.5% versus 3.4%. This global number reflects an increase in growth in advanced economies, 2.4% versus 1.8%, offset by a decrease in growth in emerging market and developing economies, 4.3% versus 4.6% last year. In short, to repeat the words used by the Managing Director last week, we see growth as “moderate and uneven”.

Behind these numbers lies an unusually complex set of forces shaping the world economy. Some, such as the decline in the price of oil and the evolution of exchange rates, are highly visible. Some, from crisis legacies to lower potential growth, play more of a role behind the scene but are important nevertheless. Let me briefly review them.

So, let me take the first, legacies. Legacies from both the financial crisis, which affected directly most advanced economies, and the euro crisis, which affected Europe, are still highly visible to different degrees in different countries, weak banks and high debt, and by high debt it can be high debt of households, it can be high debt of corporations, it can be public debt obviously, still slow down spending and growth. So, they slowed down spending and growth, but at the same time low growth is making deleveraging, the decrease in debt of these various actors slower, more difficult.

So, I think what we have learned is that these legacies go away very slowly. Deleveraging is a very slow process and, while it lasts, it really slows down growth. That is the first force at work. Again, it works differently in different countries, but it is clearly there in most.

The second is potential growth. Here we are building on one of the analytical chapters of the WEO but it is directly relevant to our way, our view of what is going on. Potential growth, just to define it, is the way at which the economy can grow if the factors of production are fully employed, so it basically tries to attract away from cyclical movements.

What we have seen and established in that chapter is that potential growth in advanced economies has been declining. The interesting fact is that it was already declining before the crisis, probably from the early 2000s it was declining. What was behind it, aging surely, which decreases the growth of the labor force, and a slowdown in total factor productivity were both at work. Then the crisis made it worse because of decrease in output, the decrease in investment, capital growth, growth in the capital stock itself slowed down, adding to lower potential growth.

When we look forward, we think capital growth, maybe investment will recover, but the other factors will still be there, so that in the end we still have, looking forward, in advanced economies, potential growth at about 0.5 percent less than in the early 2000s, and that is a factor which is important.

If you turn to emerging markets, the decrease in potential growth is even more visible and it comes from, again, aging in a number of countries, in many countries, and a decrease in total factor productivity. What we do not see is the decrease pre-crisis, but since the crisis, and probably coincidentally, rather than due to the crisis, we see a decrease in potential growth. It is very visible in countries such as China, but it is much more general and applies to emerging markets.

I wish I could say more about what happens in low-income countries. Unfortunately, data issues are more [?]; it is more difficult to be sure. If I had to guess based on what we know, they would also show lower potential growth than they did 10 years ago.

Now, why does it matter? It matters clearly because this is where we are going if we are able to eliminate the output gaps, the cyclical fluctuations, but we think in a number of countries it has an effect outstanding today, which is that if you expect growth to be lower in the future, your sales growth to be less, you are going to invest as if you think your income is going to grow less, you consume less. So, it has an effect, we think, on activity today and, therefore, growth today.

So, these are the two deep forces that are at work. Let me now turn to the two visible ones and the ones which make the news. The first is the oil price. The decline in the price of oil has led to a large reallocation of real income from oil exporters to oil importers. Although it is a bit early to say, the evidence we have suggests that this increase in real income is leading to an increase in spending. If you look at the big oil importers, the U.S., the Eurozone, China, India, consumption spending is fairly strong and it is very plausible that that comes partly from the increase in real income coming from the decrease in the price that people have to pay for oil.

Now, this is clearly good news for the oil importers, which are most major countries. For the oil exporters, it is clearly not very good news. They are suffering from the other side, the decrease in real income coming from the decrease in the price of oil. Many of them have financial resources that they have accumulated when the price was relatively high and so can accommodate and decrease spending only marginally. Some of them, as you know, are in more serious trouble. But overall, looking again at the effect on the world economy, I think there is no question that the decline in the price of oil is a very good thing for the world economy.

Let me turn to the last one, which is exchange rate movements. They have been, as you know, unusually large, not exceptionally large, this happens once in a while, but fairly large. Among the major currencies, the dollar has appreciated. The yen and the euro have seen fairly large depreciations.

Now, where do they come from? We think that it comes fairly straightforwardly from the difference in monetary policies, the fact that in the U.S. we are not very far from the exit from the zero lower bound, maybe an increase in interest rates where in the Eurozone and in Japan were clearly very far away from it. Indeed, the ECB has started on a fairly large scale quantitative easing.

So, we think this divergence in monetary policies explains most of the movement in exchange rates, and we think that these monetary policies are appropriate given the state of the U.S., on the one hand, and the Eurozone and Japan, on the other.

Now, is it good news? Yes, I think it is good news. Clearly, for the Eurozone and Japan, it is going to help being more competitive, will eventually increase exports. What we have learned is that the process is a fairly slow one, but it typically happens. We are starting to see it in Japan.

Now, is it bad news for the U.S.? Well, there is the usual effect that it basically leads to an appreciation of the dollar which might have an effect on U.S. exports, but we think here that the U.S. has more margin of adjustment in terms of policies and, therefore, can offset most of the effects of an appreciation. So, again, on net, we think that this adjustment of exchange rates is justified and will help the world economy.

So, let me now put all these forces together, and that is a very different puzzle. You have some countries which suffer from adverse legacies and you have some countries which basically do not. You have some countries which suffer from clear declines in potential growth and you have countries where the effect is very small. You have countries which benefit from the decrease in the price of oil and you have countries which suffer from the decrease in the price of oil. You have countries which move with the dollar mostly and, therefore, is seeing an appreciation, and then there are countries which move more with the euro or the yen which are seeing a depreciation.

So, you have all these effects. You have to add to this a number of country-specific developments. I will cite two: Russia, which clearly there is serious economic trouble, and Brazil, where there is, again, a serious slowdown. So, the picture is a very complex one.

On net, as I have said, basically in our baseline forecast we have an increase in growth in advanced economies and a decrease in growth in emerging markets and low-income countries, but as I have made clear, these aggregate numbers do not give you a good sense of the granularity, of the specificity of what happens in each country.

Let me turn to risks. As always, there are risks to the forecasts. I think the good news is that the macroeconomic risks have, in our opinion, decreased. The main one last year when we met in October was the risk of a recession in the euro area and possibly in Japan. I think based on the numbers that we now have, the probability of a recession has not gone to zero but it has decreased substantially. So, what we saw as the major world macroeconomic risk from a systemic point of view probably is less likely to happen than it was, and it is good news.

At the same time, other risks have increased. Financial risks, geopolitical risks have increased.

Much of the presentation of the GFSR tomorrow will be on the financial risks, but let me just mention a few, which is that whenever you have large movements in relative prices, and it can be the price of oil, it can be the exchange rate, you are going to have winners and losers. It may well be that the losers find themselves in very difficult positions. They may go bankrupt if they are companies. They may have serious problems if they are countries.

So, we are seeing some of this around the world. I mean, the world in which you have large movements in exchange rates or in relative prices is a more risky world from a financial point of view and, therefore, there is some risk there.

There are other risks. Let me just mention the political and geopolitical side and the obvious one is the risk of an intensified Greek crisis, which could well unsettle financial markets; that is fairly obvious. Then you have turmoil which continues in Ukraine, in parts of the Middle East.

So far, this is very sad. It is not systemic, but this is something which could, again, get worse.

Let me turn finally to policy recommendations. Given the diversity of situations, it is obvious that one line does not fit all, that you have to have granular policy advice. But it is still the case that there are some general principles which applies, so I am just going to summarize those.

There is still the demand deficit and, as I have said, there is the worry that growth in the future is not going to be as strong as it was in the past. So, you need measures to sustain growth both in the short run mostly for demand policies and in the longer run through supply policies, and both continue to be needed.

On the demand policy side, with the introduction of the very successful program of quantitative easing in the euro area, we think that monetary policy now has in major countries done more or less everything it can. On the fiscal side, the decrease in the price of oil gives some room for some countries to adjust. In particular, there is a set of measures which may not have an effect on the deficit itself but on the composition of spending. The decrease in the price of oil is a golden opportunity to decrease energy subsidies in countries which have large ones and maybe to increase energy taxes in countries in which these taxes are too low. They are extremely good arguments for moving energy subsidies, replacing them by better targeted programs toward the poor, and for increasing energy taxes around the world.

The case we made for infrastructure investment, which I pushed rather strongly at the October meeting, remains. We think that in many countries, public investment, public capital is too low, that there is room for more public investment. Given the current very low rates at which many governments can borrow, we think that it makes sense to have high infrastructure investment. So, that advice very much remains.

Last, but not least, structural reforms. I think one has to be very clear that structural reforms are not a miracle cure. They are hard to get through; the effects are very often uncertain. But given the future that I have described, it is very important to try. Some structural reforms can clearly make a difference, maybe not to the growth rate permanently but at least to the level of output, which means that for some time there will be higher growth. I think given the short-term political costs associated with structural reforms, which is the main reason why you do not see them happening very quickly, I think the challenge is to choose them very carefully rather than have a long list and deliver on none of them.

So, let me stop here. We will take questions. Thank you very much.

QUESTIONNER: On page 9 you have an analysis of the global implications of exchange rate movements in which I guess you see a peak of the strengthening of the dollar and the yuan against the euro and the yen. You say that ultimately it will have a positive impact on global growth, as it boosts exports in Japan and Europe.

But in here you also say that the real GDP impact on China and the U.S. will be negative over 2-3 years—those are the two world’s largest economies—and exchange rate movements perhaps have not finished their trend. Given the risks that those exchange rate movements can have on the global economy, the dollar debt denomination and asset bubbles, is it not a pretty big gamble to be making?

MR. BLANCHARD: First, we are not making gambles. Markets determine exchange rates. We just observe and interpret. But let me take your various points.

So, the first one is, you know, a depreciation of a country is an appreciation of another one, so it is clear that indeed the Eurozone and Japan benefit from the exchange rate depreciation, which they need, given the situation in which they are. It is clear also that the U.S. is adversely affected; again, we do not know by how much. To the extent that China decides to move with the dollar, which is a decision that they can take or not, it will also be adversely affected.

Why do we think that, on net, this is a good thing? Because we think that both the U.S. and China are in a much stronger cyclical position and they have the tools, and if it turned out that the effect on exports was fairly large, to offset that effect through monetary policy, fiscal policy, or other measures. So, on net, we think it is a good thing because of the asymmetry in the position of these countries.

On the risks, you are absolutely right, and that is the point I just made, which is that movements in the exchange rate mean that if you borrowed in the currency which is appreciating, you are going to be worse off. A number of countries and a number of firms have done so, and this is something that has to be taken into account. We have taken it into account.

Again, Jose Viñals tomorrow will give you a more detailed assessment of this, but we have concluded that it is not going to be a major issue, that basically the world is in a better situation from the point of view of foreign exchange exposure than it was in the past. So, this is clearly the side effects, but, again, on net, the main thing is I think a positive development.

QUESTIONNER: You spoke extensively in this report about the effect of the U.S. dollar on the global economy and the way in which it is redistributing growth. Given that, I am wondering if you can speak to what your base case is for the Federal Reserve in terms of raising rates, both the timing and the pace of that path.

MR. BLANCHARD: So, here we think that the Fed has been very explicit in the way it thinks about when to exit. It has made clear that it is data-contingent. We think that this is the right approach to it. This means that there is complete clarity as to the role that the Fed or principles that the Fed will follow when it takes a decision, but there is uncertainty about the timing because, by definition, we do not know exactly what the data will bear, whether the U.S. expansion will strengthen or weaken. We think the approach they take is the right one. We agree with the general consensus that it will probably happen this year. Whether it happens in June or September will depend on the data that come between now and then, but we think that they are doing exactly the right thing.

QUESTIONNER: My question is on Russia and Ukraine. Basically, the biggest mistake in the forecasts that were made by the IMF was after the 1998 crisis, when you did not expect a rapid resumption of growth in Russia. So, the question is, are you maybe selling Russia short a little bit in your new forecast, and alternatively, how confident are you that growth will resume in Ukraine in 2016?

MR. BLANCHARD: So, your point is exactly right, the IMF and others actually got it wrong in 1998, and the Russian economy did much better than had been forecast. The question is, why? I think retrospectively what happened is that the effect of the depreciation of the ruble had much more of an effect on exports than had been anticipated, and that helped. The question is will this happen again, given that there has been a large depreciation of the ruble? We are very skeptical and that shows in our forecast because we think that the Russian economy is subject to many other problems than just that. We think that the business climate is not good. We think that the price of oil has major adverse effects. So, this is why we are forecasting a recession.

QUESTIONNER: ... inaudible)

MR. BLANCHARD: - ... levels are very high and it would be desirable to decrease them. I think the speed at which this should be done depends on the strength of private demand and has to be done case by case. I think the general direction is clear. We have to try to decrease the ratios of debt-to-GDP and we should do it at a prudent pace. In general, we think that the current pace is about right.

QUESTIONNER: I have a question regarding China. You mentioned that your growth projection on China this year is 6.8 and next year is 6.3 and it is after the China government lowered its growth target 7 percent. I wonder if you can elaborate more on your projection on China. Also, are you confident that they can carry on with structural reform and stabilize growth at the same time?

MR. MILESI-FERRETTI: As you have noted, our forecast is quite close to the authorities’ target. We think it is a good slowdown for China. It is associated with a more balanced pattern of growth and with a reduction in vulnerabilities. Our basic assumption is that policies will do less to push growth at all costs, and this is going to have some short-run negative effect on the level of growth but positive medium-run effects because you have slower growth of credit, slower buildup in imbalances, and ultimately you are heading toward a place where you have a more balanced structure of the macro economy.

We think it is extremely important to carry out financial sector reforms, social security reforms, reforms of monetary policy that will ensure that the set of tools that the authorities have is fully modernized and appropriate to ensure a stable and solid growth rate for China in the future.

QUESTIONNER: [THROUGH INTERPRETER] - Good morning to everyone. I would like to know if you have any anticipation of the 3.8 level for this year and 5 percent for next year. So, in your report you say that the different concerted policies and the appearance of new mining operations will consolidate that growth. The Ministry of Economy has said that it should be 4.2 for this year and 5 for next year. What we would like to know is if you could explain to us a bit what these concerted policies are meant to be, what is the line that is meant to be taken. Do you expect that there will be a consolidation of that 3.8 and that we will reach that level this year or do you consider that there is a downward trend to be expected?

Ms. CELASU - My channel still gave me the question in Spanish but I will answer your question if I understood it. Peru’s growth rate decelerated sharply last year from close to 6 percent in 2013 to around between 2 1/2 and 3 percent last year. Much of that was related to the slowdown in metal prices but there were some domestic factors as well. Those domestic factors—supply side constraints, lower production in some mines temporarily, some issues and slowdown in investment and sub-nationals—are going to go away next year. The government has introduced a stimulus program in view of the slowdown in growth, around 2 percentage points of GDP, and there has been monetary easing as well. So, these are the factors why we expect growth to be closer to 4 percent in the next year.

The authorities have slightly higher estimates. What is important is that both us and them see this as a temporary setback and growth picking up in the years ahead, maybe not to the height of the last decade but closer to 4 1/2 percent.

QUESTIONNER: My question will be about North Africa, because I think that you do not mention anything about North Africa, about the situation there, especially about Tunisia, because Tunisia is still waiting for the third part IMF credit and I do not know why the IMF does not let Tunisia accept the last part. Can we have anything about the situation in Tunisia?

MR. HELBLING: The situation in North Africa reflects generally the difficult situation in the Middle East more generally. I think it has been a difficult few years with the transition and new political regimes, and the European economy overall that was decelerating, the main trading partner, which has not helped. So, countries like Tunisia have made important progress in terms of economic reforms, established governments under the IMF program. Looking forward, the fact that Europe is recovering should help. Program negotiations are ongoing and we expect the review to be completed sometime this year.

QUESTIONNER: I wonder if you could compare how Italy and the other three major Eurozone countries will take advantage of factors like the oil price decrease and quantitative easing, and in a comparative fashion, please.

Mr. HELBLING: I think we already see the benefits of lower oil prices in Europe. This is one reason why we have generally upgraded the forecast, the real income effect from lower oil prices. Similarly, as Mr. Blanchard mentioned, QE has been very successful. The asset price transmission has worked out. Borrowing costs have decreased. We now expect the transmission to the real economy.

One factor that distinguishes in this cross-section of the European countries which will lead probably to some distinction is the transmission to the real sector through the banking system. As our colleagues from the Global Financial Stability Report will elaborate upon tomorrow, there is the point that nonperforming assets, weak banking sectors are handicapped in the transmission of the impulse from QE in general, but overall I think one general theme as far as Europe, the euro area is concerned is growth and the recovery are strengthening and it is due, in particular, also to a change in policy to boost oil and we hope, going forward, also from continued further reform implementation.

MR. BLANCHARD: Let me just add, given that you asked for a comparative assessment, that clearly one of the problems of Italy is still its banking system, the ability of banks to actually supply credit, which is probably worse than in the other countries you mentioned.

QUESTIONNER: Brazil had almost no growth in 2014. You forecast a contraction of 1 percent this year and a very modest recovery in 2016. What explains such a weak performance in a three-year period?

MS. CELASU: You are right, the Brazilian economy stalled in 2014. Our forecast for next year is a contraction of 1 percent before there is a modest recovery in 2016 of 1 percent. What explains this deceleration this year, we have observed data coming in quite weak at the end of 2014 and early 2015, weaker than expected, and that slow momentum coming into the year is going to weigh on this year’s growth. Our forecast also incorporates a policy adjustment, as announced by the authorities, quite some correction in the primary surplus this year. That is going to have a negative effect on growth early in the year, but we believe that it will actually boost credibility and confidence later in the year and set the stage for a return to positive growth next year.

MR. BLANCHARD: Let me add here that there is a silver lining, I think, to the Brazilian story.

Clearly the problem of the past few years is the problem of business confidence primarily leading to very low investment. It is still there, but the government clearly is taking measures to re-establish full credibility of fiscal policy. Monetary policy is responsible. But we are in a situation in which confidence has not come back yet while at the same time there is a fairly strong fiscal consolidation. So, the two effects are working in the same direction for the moment of making things worse, but if confidence comes back because of the measures which have been taken, things will turn around and one can be more optimistic about the future.

QUESTIONNER: A number of low-income countries, especially in Africa, are caught between a strong U.S. with currency issues and a weaker Europe. What would you recommend will be the way forward, because these two forces are affecting growth going forward?

Mr. Milesi-Ferretti - I can see two sets of effects. A lot depends on whether the exchange rate in these countries is floating or is tied, more tied to the dollar or more tied to the euro. Clearly, currencies that have depreciated, say, together with the euro will imply some boost to competitiveness for the countries. On the other hand, if a currency depreciates and the country has access to international financial markets, maybe for the first time borrowing in dollars, this, of course, raises the cost of external finance.

I think that, more generally, it is important to monitor foreign exchange exposures, particularly in the financial system, given these rapid currency movements. Overall, I would say that the growth outlook in a number of these economies remains quite favorable. Particularly low-income countries in Africa are seeing their growth forecasts for this year above 6 percent. They are actually doing much better than the middle-income ones and better than the oil exporters that are being affected by the decrease in the oil price.

Mr. BLANCHARD: Your point raises a more general issue which echoes what I have said earlier, which is that the divergence of monetary policies and, therefore, the divergence of exchange rates complicates the life of countries which have both trade and financial relations both with the dollar zone and the Eurozone. So, if you take, for example, the example of Turkey, on the one hand, clearly U.S. rates are going to be more attractive to go from Turkey to the U.S., but the very low euro rates are going to make it more attractive to go from the euro to Turkey. So, what happens to Turkey depends on what determines the capital flows to Turkey, whether they are more sensitive to the euro or more sensitive to the dollar. That is just one example. It is much more general than that. That clearly leads to an environment which is harder to manage than one in which all monetary policies are going in the same direction, but that is the world in which we are.

QUESTIONNER: If the measures taken in Brazil to increase confidence are not enough, what other sets of economic tools are available for the government of Brazil to be taken to increase and to reach growth again next year?

MS. CELASU: Olivier highlighted the importance of weak confidence in what is happening there right now. So, I think it is really of the essence that they press ahead with these measures in normalizing fiscal policy. Monetary policy has to also be calibrated well to the circumstances.

We have seen inflation pressures. Regulated prices have caught up with more normal levels. So, in terms of building confidence again, some normalization of these policy frameworks and settings will be the most helpful.

MR. BLANCHARD: Let me just add, we think that on the macro front, the measures which had been taken are the right ones, but clearly Brazil has problems beyond just macro. It has a problem of corruption, which we know, which hopefully will be solved. There are all kinds of structural reforms which are needed as well. So, we focused on the macro, but there is clearly more than just that.

MR. DIENG This will bring an end to our press conference today. We will see you tomorrow for the launch of the GFSR.

QUESTIONNER (Microphone not on)... is there a reason why you are ending early ...

MR. BLANCHARD : We will take one more question. Please, one more question.

QUESTIONNER? You mentioned Greece and the risk that is still going on in Greece. Unlike foreign exchange markets, you are a player in Greece. Is it not time to restructure Greece’s debt?

MR. BLANCHARD: Look, you understand why we try to finish before the—

MR. BLANCHARD - We are clearly in the middle of negotiations with the Greeks. We very much want to come to an agreement and we hope we will. Now, what happens if no agreement were reached? I think that a number of things are fairly clear. The first one is that, say, an exit from the euro would be extremely costly for Greece. It would be extremely painful.

The second point is that, looking at the rest of the Eurozone, the rest of the Eurozone is in a better position to deal with the Greek exit. Some of the firewalls which were not there earlier are there. Still, it will not be smooth sailing, but it could probably be done. The third is that if that were to happen, I think the way to reassure markets and make progress is actually go further, use the opportunity to make progress in terms of the fiscal union and the political union. This would be clearly the right moment to do it.

Mr. DIENG - Now this will bring end to our press conference. We will see you tomorrow for the GFSR.


Ghosts In The Machine

By: Richard Mills

Friday, April 10, 2015

As a general rule, the most successful man in life is the man who has the best information

In 1798 32 year-old British economist Malthus anonymously published "An Essay on the Principle of Population" and in it he argued that human population's increase geometrically (1, 2, 4, 16 etc.) while their food supply can only increase arithmetically (1, 2, 3, 4 etc.). Since food is obviously necessary for us to survive, unchecked population growth in any one area or involving the whole planet would lead to individual pockets of humanity starving or even mass worldwide starvation.

"The power of population is indefinitely greater than the power in the earth to produce subsistence for man." Thomas Robert Malthus
Facts - Our topsoil is turning to dust and disappearing while at the same time we're draining our fresh water aquifers faster than they can be recharged. Our atmosphere, the very air we breathe and earth's armor against cosmic radiation is being poisoned and destroyed.

 Viva the revolution
The second half of the 20th century saw the biggest increase in the world's population in human history. Our population surged because of:
  • Medical advances lessened the mortality rate in many countries

  • Massive increases in agricultural productivity caused by the "Green Revolution"

The global death rate has dropped almost continuously since the start of the industrial revolution - personal hygiene, improved methods of sanitation and the development of antibiotics have all played a major role.

The term Green Revolution refers to a series of research, development, and technology transfers that happened between the 1940s and the late 1970s. The initiatives involved:
  • Development of high yielding varieties of cereal grains

  • Expansion of irrigation infrastructure

  • Modernization of management techniques

  • Mechanization

  • Distribution of hybridized seeds, synthetic fertilizers, and pesticides to farmers

Tractors with gasoline powered internal combustion engines (versus steam) became the norm in the 1920s after Henry Ford developed his Fordson in 1917 - the first mass produced tractor.

This new technology was available only to relatively affluent farmers and it was not until the 1940s tractor use became widespread.

Electric motors and irrigation pumps made farming and ranching more efficient. Major innovations in animal husbandry - modern milking parlors, grain elevators, and confined animal feeding operations - were all made possible by electricity.

Advances in fertilizers, herbicides, insecticides, fungicides and antibiotics all led to better weed, insect and disease control.

There were major advances in plant and animal breeding - crop hybridization, artificial insemination of livestock, growth hormones and genetically modified organisms (GMOs).

Further down the food chain came innovations in food processing and distribution.

All these new technologies increased global agriculture production with the full effects starting to be felt in the 1960s.

Cereal production more than doubled in developing nations - yields of rice, maize, and wheat increased steadily. Between 1950 and 1984 world grain production increased by over 250% - and the world added a couple billion people more to the dinner table.

The modernization and industrialization of our global agricultural industry led to the single greatest explosion in food production in history. The agricultural reforms and resulting production increases fostered by the Green Revolution are responsible for avoiding widespread famine in developing countries and for feeding billions more people since. The Green Revolution also helped kick start the greatest explosion in human population in our history - it took only 40 years (starting in 1950) for the population to double from 2.5 billion to five billion people.

We goosed agra machine's growth and at the same time, through better sanitation and the use of antibiotics, we saved a billion people who birthed a billion and more.

The Revolution is dead

Unfortunately the effects of the Green revolution are fast wearing off and the true cost to our environment is only now becoming apparent.

The production advances of the Green Revolution were real. But by any yardstick the Green Revolution, while a true, almost global agricultural revolution, was not as green as many think - there was heavy collateral damage:
  • Agricultural output did increase as a result of the Green Revolution, but the energy input to produce a crop increased faster - the ratio of crops produced to energy input has decreased. This is because High Yielding Varieties (HYVs) of seeds only outperform traditional varieties when adequate irrigation, pesticides and fertilizers are used

  • Green Revolution agriculture produces monocultures of cereal grains. This type of agriculture relies on the extensive use of pesticides because monoculture systems - with their lack of genetic variation - are particularly sensitive to bug infestations

  • The transition from traditional agriculture to GR agricultural meant farmers became dependent on industrial inputs - not made on the farm inputs. Farmers faced severely increased costs because they now had to purchase such items as farming machinery, fertilizer, pesticides, irrigation equipment and sedes

  • The increased level of mechanization on larger farms removed a large source of employment from the rural economy. New machinery - mass produced gas tractors, large self propelled combines and mechanical cotton pickers - all combined to sharply reduce labor requirements

  • Less people were affected by hunger and died from starvation - but many more are affected by malnutrition such as iron or Vitamin A deficiencies. Green Revolution grains do not have the same nutritional values as traditional varieties. The switch from heavily rotated multiple crops to mono cropping or dual cropping reduces total soil fertility and the nutritional value of our food

  • The Green Revolution reduced agricultural biodiversity by relying on just a few varieties of each crop. The food supply could be susceptible to pathogens that cannot be controlled by agrochemicals

  • Many valuable genetic traits, bred into traditional varieties over thousands of years, are now lost

  • Wild plant and animal biodiversity was hurt because the Green Revolution expanded

  • agricultural development into new areas where it was once unprofitable or too arid to farm

  • The 20/80 phenomenon - the rapid increase in farm size and the concentration of production among large producers means 20% of producers generate 80% of the agricultural output

  • As a result of modern irrigation practices, aquifers in places like India and the US mid west have become depleted. There are two types of aquifers: replenish able, most of the aquifers in India and the shallow aquifer under the North China Plain are replenish able - depletion means the maximum rate of pumping is automatically reduced to the rate of recharge. For fossil, or non-replenish able aquifers - like the U.S. Ogallala aquifer, the deep aquifer under the North China Plain, or the Saudi aquifer - depletion brings pumping to an end. In the more arid regions like the southwestern United States or the Middle East the loss of irrigation water could mean the end of agriculture in these áreas

  • Green Revolution techniques rely heavily on chemical fertilizers, pesticides and herbicides, some of these are developed from fossil fuels which makes today's agriculture regime much more reliant on petroleum products

  • Farming methods that depend heavily on chemical fertilizers do not maintain the soil's natural fertility and because pesticides generate resistant pests, farmers need ever more fertilizers and pesticides just to achieve the same results

  • The increased amount of food production led to overpopulation worldwide

By 2050, the world's population is expected to reach 9.6 billion people. Norman Borlaug, the Father of the Green Revolution, is on record stating he believed that 100% adoption of Green Revolution practices (and adaptation of well advanced research in the pipeline), could feed 10 billion people on a sustainable basis.
"Future food-production increases will have to come from higher yields. And though I have no doubt yields will keep going up, whether they can go up enough to feed the population monster is another matter. Unless progress with agricultural yields remains very strong, the next century will experience sheer human misery that, on a numerical scale, will exceed the worst of everything that has come before". Norman Borlaug
Unfortunately the high yield growth is tapering off and in some cases declining. This is in large part because of an increase in the price of fertilizers, other chemicals and fossil fuels, but also because the overuse of chemicals has exhausted the soil and irrigation has depleted water aquifers.

Dr. M.S. Swaminathan, to rice what Borlaug was to wheat, said: "Stagnation in productivity is due to depleting natural resources base such as a steep fall in ground water table, impaired water quality, increasing input cost - particularly diesel, deficiency of micro-nutrients in the soil, deteriorating soil health, and high indebtedness of farmers."

Consider also...

Narrowly focusing on increasing production as the Green Revolution did cannot alleviate hunger because it failed to alter three simple facts - an increase in food production does not necessarily result in less hunger - if the poor don't have the money to buy food increased production is not going to help them.

Secondly, a narrow focus on production ultimately defeats itself as it destroys the base on which agriculture depends - topsoil and water.

And thirdly to end hunger once and for all, we must make food production sustainable and develop secure distribution networks of needed foodstuffs.

Price spike in the cost of survival

There are currently 7.3 billion of us sharing the planet. Here's today's conditions for the world's poorest...

Because our agriculture system is concentrated on producing a very few staple crops there is a very serious lack of crop and production location diversity. Corn, wheat, rice and soy are the main staples and production is oftentimes half a world away from where the majority of the crop would be consumed. The world's extreme poor exist almost exclusively on what is a 'buy today, eat today' plant based diet - wheat, corn, soy or rice provide the bulk of their calories.

Almost half of the planets population lives on less than $2.50 a day - roughly 1.4 billion people live on less than $1.25 per day. On average developing countries citizens spend a much larger percentage of their wages on food than do their counterparts in developed nations. Some published estimates are as high as 50 to 60 percent of income going towards food.

When food prices soar these people lack the money to feed themselves and their children - when your living on a couple of dollars a day, or less, and most of your income already goes to feed your family there's no money to cover a price spike in the cost of survival.

Almost 1 billion people already go to bed hungry each night and somewhere in the world someone starves to death every 4 seconds - most on this tragic roll call are children under the age of five.

Malthusian pessimism

Malthusian pessimism has long been criticized by doubters believing technological advancements in:
  • Agriculture
  • Energy
  • Water use
  • Manufacturing
  • Disease control
  • Fertilizers
  • Information management
  • Transportation
would keep crop production ahead of the population growth curve. The way we treat our most precious natural resources, the earth's topsoil, water and air has convinced me to give that conclusion a huge doubt.

Humans are currently withdrawing more natural resources then our Earth bank is able to provide on a sustainable basis. How much more? At today's rate of withdrawal we need another half earth.

The headline projection of the latest UN study says the world's population is likely to grow by another 2.3 billion, to 9.6 billion people in 2050 - that's 68.5 million people expected to be born every year between 2015 and 2050.

By 2030, food demand is predicted to increase by 50% and 70% by 2050.

  • Global abnormal weather. Record setting droughts, flooding, hailstorms, cold snaps all exacerbated by climate change

  • Aquifers are being depleted faster than natural refreshment rates


In his Nobel lecture of 1970, Borlaug stated: "Most people still fail to comprehend the magnitude and menace of the population monster. The rhythm of increase will accelerate...unless Man becomes more realistic and preoccupied about his impending doom."

The ghosts of Thomas Robert Malthus and Norman Borlaug haunt our broken agra machine and an almost indecipherable whisper can be heard...we warned them.

Food, water and air. Since they are kinda important to our well being shouldn't all three be on our radar screens? It's obvious they are on mine, are they on yours?

If not, maybe they should be.

Markets Insight

April 13, 2015 5:42 am

How to invest for renewed dollar strength

Mohamed El-Erian

Benign influence on global rebalancing or financial nuisance?

Just as many more people were starting to talk about the impact of the US dollar’s sharp appreciation, the currency reversed course and weakened by almost 5 per cent. While it has been relatively rangebound since then, the prospect of renewed dollar strength now confronts investors with a basic question: should they bet on its beneficial influence on global rebalancing or guard against financial breakage?

Two factors drove the dollar’s earlier surge: superior US economic performance, in absolute terms and relative to many other countries; and the prospects of tighter monetary policy.
Buying dollars became not just the consensus trade in financial markets but also a particularly crowded one that inevitably became vulnerable to a sharp technical pull back. The catalyst came in the form of a bout of weaker US data that culminated in a disappointing March jobs report, along with a more dovish-sounding Federal Reserve.
Having gone through a period of technical consolidation, the dollar now seems set for a new phase of strengthening. As noted last week by New York Fed President Bill Dudley, the patch of weaker data is likely to be a transient one. While it might have pushed back the first interest rate rise, it has not materially changed policy prospects. It is likely the Fed will move in September and embark on what Mr Dudley describes as a relatively shallow path of rate rises over time.

Advocates of global rebalancing would view dollar appreciation as helping European and Japanese economies struggling with sluggish economies and the threat of price deflation. It would also benefit emerging countries that have stumbled in re-orienting their growth engines away from dependence on external markets.

Yet this path to a better global economy is far from assured. US companies’ revenues would be undermined by lower dollar proceeds and more intense foreign competition. Meanwhile, having fallen short of “lift off”, the US economy remains too delicate to tolerate a much larger transfer of growth impetus to foreigners. Then there are the historical precedents of a strong dollar breaking things elsewhere.
In the past, the major systemic risks emanated from overexposed sovereigns with excessive dollar-denominated debt, large currency mismatches, and/or fixed exchange rate regimes. While these issues are not totally absent today — and Switzerland’s dramatic exit in January from its partial euro peg is a reminder — it is the corporate sector that poses the biggest risk.

Renewed dollar strengthening would damp US corporate profits, undermining equity markets that are over-reliant on central bank support and the redeployment of idle cash into share buybacks, dividends and mergers and acquisitions. Vulnerability would also come from companies in emerging countries that have gone on a borrowing binge that has left them exposed to currency and debt maturity mismatches.

Fortunately, in many of these cases, the first line of defence would come from the sovereign balance sheets. As such, big global contagion risks would be limited to just a few particularly vulnerable spots in the emerging world.

The implications of all this for investors are clear. In positioning for renewed dollar strength, it may be best to resist the temptation of big trades. A superior approach would be to maintain larger cash balances while also exploiting relative price movements and highly differentiated positioning within asset classes.

That means combining exposures that favour the dollar versus other major currencies (particularly the euro) with hedged European versus US equities positioning and, on the government bond side, US bonds versus German Bunds.

The emerging market segment of portfolios would be repositioned in favour of countries with high international reserves and limited dollar-denominated debt. This would all come with selective private market investments.
For those retail investors unable to pursue such positioning, their focus would be on accumulating larger cash cushions, providing them with the ability to exploit the high likelihood of market-wide overshoots. After all, we should never forget the growing phenomenon of limited liquidity provision during periods of greater market volatility. And volatility is what awaits markets.

Mohamed El-Erian is chief economic adviser to Allianz and chair of President Obama’s Global Development Council

Money for Nothing

Daniel Gros

APR 10, 2015
Good debt scrabble economy

BRUSSELS – The developed world seems to be moving toward a long-term zero-interest-rate environment. Though the United States, the United Kingdom, Japan, and the eurozone have kept central-bank policy rates at zero for several years already, the perception that this was a temporary aberration meant that medium- to long-term rates remained substantial. But this may be changing, especially in the eurozone.
Strictly speaking, zero rates are observed only for nominal, medium-term debt that is perceived to be riskless. But, throughout the eurozone, rates are close to zero – and negative for a substantial share of government debt – and are expected to remain low for quite some time.
In Germany, for example, interest rates on public debt up to five years will be negative, and only slightly positive beyond that, producing a weighted average of zero. Clearly, Japan’s near-zero interest-rate environment is no longer unique.
To be sure, the European Central Bank’s large-scale bond-buying program could be suppressing interest rates temporarily, and, once the purchases are halted next year, they will rise again. But investors do not seem to think so. Indeed, Germany’s 30-year bund yield is less than 0.7%, indicating that they expect ultra-low rates for a very long time. And many issuers are extending the maturity structure of their obligations to lock in current rates, which cannot go much lower (but could potentially increase a lot).
In any case, the eurozone seems stuck with near-zero rates at increasingly long maturities. What does this actually mean for its investors and debtors?
Here, one must consider not only the nominal interest rate, but also the real (inflation-adjusted) interest rate. A very low – or even negative – nominal interest rate could produce a positive real return for a saver, if prices fall sufficiently. In fact, Japanese savers have been benefiting from this phenomenon for more than a decade, reaping higher real returns than their counterparts in the US, even though Japan’s near-zero nominal interest rates are much lower than America’s.
Nonetheless, nominal rates do matter. When they are negligible, they flatter profit statements, while balance-sheet problems slowly accumulate.
Given that balance-sheet accounting is conducted according to a curious mix of nominal and market values, it can be opaque and easy to manipulate. If prices – and thus average debt-service capacity – fall, the real burden of the debt increases. But this becomes apparent only when the debt has to be refinanced or interest rates increase.
In an environment of zero or near-zero interest rates, creditors have an incentive to “extend and pretend” – that is, roll over their maturing debt, so that they can keep their problems hidden for longer. Because the debt can be refinanced at such low rates, rollover risk is very low, allowing debtors who would be considered insolvent under normal circumstances to carry on much longer than they otherwise could. After all, if debt can be rolled over forever at zero rates, it does not really matter – and nobody can be considered insolvent. The debt becomes de facto perpetual.
Japan’s experience illustrates this phenomenon perfectly. At more than 200% of GDP, the government’s mountain of debt seems unconquerable. But that debt costs only 1-2% of GDP to service, allowing Japan to remain solvent. Likewise, Greece can now manage its public-debt burden, which stands at about 175% of GDP, thanks to the ultra-low interest rates and long maturities (longer than those on Japan’s debt) granted by its European partners.
In short, with low enough interest rates, any debt-to-GDP ratio is manageable. That is why, in the current interest-rate environment, the Maastricht Treaty’s requirement limiting public debt to 60% of GDP is meaningless – and why the so-called “fiscal compact” requiring countries to make continued progress toward that level should be reconsidered.
In fact, near-zero interest rates undermine the very notion of a “debt overhang” in countries like Greece, Ireland, Portugal, and Spain. While these countries did accumulate a huge volume of debt during the credit boom that went bust in 2008, the cost of debt service is now too low to have the impact – reducing incomes, preventing a return to growth, and generating uncertainty among investors – that one would normally expect. Today, these countries can simply refinance their obligations at longer maturities.
Countries’ debts undoubtedly play a vital role in the global financial system. But, in a zero interest-rate environment, that role must be reevaluated.

Heard on the Street

European Bond Markets Go Down the Rabbit Hole

Bond market is increasingly challenging fundamental tenets of investing

By Richard Barley

Updated April 13, 2015 6:43 a.m. ET

A one Swiss franc coin and a one euro coin are seen in front of a Swiss flag. Switzerland has become the first country to issue 10-year debt with a negative yield. Photo: Reuters

Europe is no stranger to the avant-garde, the experimental and the absurd. But until now, they have largely been the preserve of the arts. Now the financial world—and in particular the bond market—is increasingly challenging fundamental tenets of investing.

Take last week as an example.
Switzerland became the first sovereign to issue a 10-year bond carrying a negative yield, raising 232.5 million Swiss francs ($237.2 million) with investors paying for the privilege of lending. Mexico followed with a 100-year €1.5 billion bond that was swiftly snapped up. By Friday the price of the bond had risen five points, and it was yielding less than 4%. In the eurozone, French five-year yields turned negative. And German yields continued to grind deeper into negative territory: yields on eight-year bonds briefly dipped below zero, while the two-year yield stands at minus 0.277%.

Any of these events would be noteworthy in and of themselves; that they all occurred within a week speaks to the highly unusual situation bond investors find themselves in. Increasingly, the time value of money, a core concept, seems to count for little. That leaves the market faced with questions that, not so long ago, would have seemed ridiculous.

Any of these events would be noteworthy in and of themselves; that they all occurred within a week speaks to the highly unusual situation bond investors find themselves in. Increasingly, the time value of money, a core concept, seems to count for little. That leaves the market faced with questions that, not so long ago, would have seemed ridiculous.

For instance: can German 10-year yields turn negative? There seems no reason to believe they can’t: the zero bound has ceased to exist. Previous targets for low yields that were dismissed as unrealistic have come and gone, and German securities have continued to rally. A year ago, 10-year yields stood at 1.53%; they are now around one-tenth of that level, at 0.16%. The European Central Bank’s quantitative easing program, coming at a time when the German budget is balanced, is creating a scarcity of paper. The rise in government-bond yields expected by some—a feature of quantitative-easing programs in the U.S. and U.K.--has failed to materialize.

This week the ECB is likely to face more questions about its purchase program, under which it aims to buy €60 billion of bonds a month. The debate here has swung quickly from wondering whether ECB QE would be good enough to whether it is too effective. It has certainly made a splash: The average 10-year yield for Germany, France, Italy and Spain, weighted by the size of their economies, has fallen to just 0.61%, from around 1% at the start of the year. Meanwhile, eurozone economic data have put in a surprisingly strong showing, led by an apparent consumer revival—although inflation is still far off the ECB’s target of “below, but close to” 2%.

But given that the ECB has only just started on a program that is intended to run until September 2016, it seems likely that President Mario Draghi will bat away any questions about changing tack.

For European bond investors, that means more bond-market curiosities probably lie ahead.
The absurd is becoming an everyday occurrence. All the more reason for investors to keep one foot anchored in the real financial world.

The American Consumer Will Never Be Back

by: Ilargi

That title may be a bit much, granted, because never is a very long time. I might instead have said "The American Consumer Won't Be Back For A Very Long Time". Still, I simply don't see any time in the future that would see Americans start spending again at a rate anywhere near what would be required for an economic recovery. Looks pretty infinity and beyond to me.

However, that is by no means a generally accepted point of view in the financial press. There's reality, and then there's whatever it is they're smoking, and never the twain shall meet.

Admittedly, my title may be a bit provocative, but in my view not nearly as provocative, if not offensive, as Peter Coy's at Bloomberg, who named his latest effort, "US Consumers Will Open Their Wallets Soon Enough".

I know, sometimes they make it just too easy to whackamole 'em down and into the ground. But even then, these issues must be addressed time and again until people begin to understand, and quit making the wrong decisions for the wrong reasons. People have a right to know what's truly happening to their lives, and their societies. And they're not nearly getting enough of it through the 'official' press.

So here goes nothing:

US Consumers Will Open Their Wallets Soon Enough
People are constantly exhorted to save, but as soon as they do, economists pop up to complain they aren't spending enough to keep the economy growing. A new blogger named Ben Bernanke wrote on April 1 that there's still a "global savings glut." Two days later the Bureau of Labor Statistics announced the weakest job growth since 2013, which economists quickly attributed to soft consumer spending.
The first problem with Coy's thesis is that even if people open their wallets, far too many of them will find there's nothing there. And Bernanke simply doesn't understand what savings are. His ideas through the past decade+ about a Chinese savings glut were always way off the mark, and his global - or American - savings glut theory is, if possible, even more wrong. In the minds of the world's Bernankes, there's no such thing as people opening their wallets to find them empty. If they don't spend, they must be saving. That there's a third option, that of not having any dollars to spend, is for all intents and purposes ignored.
The U.S. personal savings rate - 5.8% in February - is the highest since 2012. "After years of spending as if there were no tomorrow, consumers are now saving like there is a tomorrow," Richard Moody, chief economist at Regions Financial, wrote to clients in March. Saving too much really can be a problem when spending is weak.
The little man inside, when I read things like that, tells me this is nonsense. So I decided to look up how the US personal savings rate is calculated. Turns out, it's another one of those whacky goal-seeked government numbers. At least, that's what I make of it. Mainly, though not even exclusively, because of things like this, from a site called Take A Smart Step:
[The personal savings rate in] November 2012 was 3.6%, this is not even close to where we need to be for financial health. This savings rate barely gives us enough to handle emergencies, and makes us as a nation weaker. The government calculates the personal savings rate as the difference between the after tax income and consumption of Americans. So they include not only retirement savings, but debt repayments, college savings, emergency fund savings, anything that was not spent.
Making paying off your debt (i.e. money you've already spent) count towards your savings is a practice fraught with questionable consequences. But useful for economists, and accountants alike, no doubt. The problem with it is that it hides reality behind a veil. Because debt repayments are not really savings at all; people are not free to spend what they put into paying off debt on something else, like iPads, cars or trinkets. Not even on hookers or crack cocaine, for that matter.

For the vast majority of what is paid off in debt, there's no such thing as free choices. People pay off debt because they must. Or, to look at it from another, wide lens, angle, Americans would have to stop servicing their debt payments if they want to 'start spending' again.

Going through the numbers from various sources, I can see that the US personal savings rate is presently some 5.8% of pre-tax income, and debt repayment is close to 10% of disposable - after tax - income. I'm still trying to make those stats rhyme. But no matter how you read and interpret them, it should be clear that debt repayments are a large part of 'official' savings. Even if they really shouldn't be counted as such.

Of what remains in real savings, retirement/pension savings must necessarily be a substantial percentage, and it would be weird to call those things 'saving like there is a tomorrow', if only because they are about, well, tomorrow. But that seems to be the new normal: creating the impression that saving any money at all is somehow detrimental to the economy. A truly crazy notion, if you ask me. Let's get back to Bloomberg's Coy:
There are only two things you can do with a dollar, after all: spend it or save it. If you spend it, great - that's money in someone else's pocket.
In someone else's pocket, but no longer in yours. Why would that be so great? It's only great if that someone has added value to something by doing productive work, not if you simply swap paper assets.
If you save it, the financial system is supposed to recycle your dollar into productive investment with loans for new houses, factories, software, and research and development.
That notion of 'the financial system is supposed to' refers to theories such as those that Bernanke and his ilk 'believe' in. Theories that have no practical value. What is normal for many everyday Americans is crippling debt levels, and no such thing is recognized in these theories. After all, according to them, whatever amount of dollars you get in, you either spend or save them. And if you use them to pay off previously incurred debt, you're supposedly actually saving, even though you no longer have possession of the money in any way, shape or sense, nor a choice of what to spend it on.
But if no one's in the mood to invest more and interest rates are already as low as they can go (as they are in much of the world), the compulsion to save can sap demand and throw people out of work. For the U.S. economy, the good news is that the jump in the personal savings rate is probably no more than a blip. Three economists from Deutsche Bank Securities in New York explained why in a March 25 report called 'U.S. Consumers: Still Shopping, Not Dropping'. While noting a "deceleration" in consumer spending, they wrote, "we think that concerns about the outlook for the consumer are overstated." Their model of the U.S. economy predicts the savings rate will fall to 3% to 3.5% by 2017.
Oh sweet lord. Now a falling savings rate has become a beneficial thing, even when and where savings are very low. Not saving will allegedly save the economy. How did that happen? If we may presume that debt repayments will continue virtually unabated, and there seems to be little reason to think otherwise, this means that by 2017 there will be just about nothing saved at all anymore in America. Which means there'd be very little left of the 'If you save it, the financial system is supposed to recycle your dollar into productive investment'.

The only 'growth' perspective America has left is to grow its debt levels continually, continuously and arguably exponentially.
Other economists have also concluded that the spending dropoff is temporary, which is why the slowdown in job growth, to just 126,000 in March, didn't set off many alarm bells. "Consumer spending is starting to look more and more like a coiled spring," says Guy Berger, U.S. economist at RBS Securities. One sign that consumers aren't retrenching: On April 7, the Federal Reserve reported that consumer credit rose $15.5 billion in February, in line with the recent past.
They got deeper into debt, and this is a sign they're not 'retrenching'? A coiled spring? Really?
According to Deutsche Bank Securities, the first reason to think consumers will resume spending is that their incomes are rising. Annual growth in average hourly earnings has averaged about 2% since 2010, which isn't great but does exceed inflation. With more people working as well, aggregate payroll outlays are up 4.9% from the past year, according to Bureau of Labor Statistics data. 
The rises in stock and home prices should make consumers more willing to live a little, say the Deutsche Bank authors. They calculate that households' net worth is almost 6.5 times consumers' disposable personal income. That's the highest ratio since before the housing crash.
But that last bit is arguably all due to QE induced asset bubbles. Not an argument the author would make, I know, but nevertheless. Coincidentally, another Bloomberg article published the same day as the one we're delving in here is called: Why Your Wages Could Be Depressed for a Lot Longer Than You Think. Perhaps the respective authors should have a sit down.
No question, the high savings rate depresses spending in the short run. Purchases of durable goods, from cars to couches, remain well below their 60-year average share of GDP. But all that saving helps consumers get their finances in order, which will allow them to satisfy pent-up demand for that sweet new Ford F-150.
No, no, no: they just paid off part of their debts. How can that possibly mean they'll go out and get a new F-150? In real life, they spent their money instead of saving it. Either way, they don't have it any longer to spend on a F-150. It would mean they need to get into new debt. On top of what they still have left over even AFTER paying down part of it.
Fed data show that financial obligations, including debt service, rent, and auto leases are about their lowest in comparison to disposable income since 1981.
Hmm. According to Wikipedia, "Household debt as a % of disposable income rose from 68% in 1980 to a peak of 128% in 2007, prior to dropping to 112% by 2011." It's about 105% today.

So that's just a very weird statement. Someone's wrong, very wrong, and I think I know who that would be. Maybe Peter Coy conveniently ignores mortgage payments when he talks about "financial obligations including debt service, rent, and auto leases"?!
When consumers are ready to borrow more, it won't hurt that, according to the Fed's survey of banks' senior loan officers, banks are easing lending standards.
See? That's what I said: they can only spend if they acquire new debt. They're just getting rid of the last batch, and it's going mighty slowly at that. Lest we forget, when debt as a percentage of income falls, that is due to quite an extent to people failing to make any debt payments at all, and losing their homes and cars. This is a dead economic model. This model is pining for the fjords.
These factors add up to an optimistic consumer.
Oh, c'mon. What is that statement based on? That 'sky high' savings rate that is really just poor slobs paying off what they can in debt repayments so they won't get hit with even more fees and fines?

What I think these factors add up to is a delusional reporter. There is no excess saving. It's ludicrous.

As far as people have any money at all, they're using it to pay down their previously incurred debts.

And that gets tallied into their savings rate by the government's creative accounting methods. That's all there is to the whole story. But it will, regardless, induce a few more poor souls to sign up for more mortgages and car loans and feel like happy American consumers on their way down into the maelstrom.

It's sad, it really is. Maybe we should first of all stop referring to the American people as 'consumers'. That might help.

miércoles, abril 15, 2015



It's Time To Buy Gold

By: Ben Lockhart

  • Despite a rally this week, the broad market remains on edge and any downside in equity markets is likely to spur safe haven demand for gold.
  • Treasury bond performance has mirrored that of gold recently, showing that after a period in the wilderness gold is once again used as a hedge against equity market volatility.
  • The gold chart pattern is set up very bullishly, and should the pattern play out we will likely see a $50 move to the upside in the near term.
In last week's article I noted that if we were to move higher than $1217 early in the week we would then have a bullish 5 wave move up from the lows, and as long as we did not exceed $1193 on the subsequent retrace, the chances were that a rally would ensue.

Bulls should be happy this week as that pattern played out rather well. We gapped up on Sunday night and completed the initial move higher at just under $1225, fell back to $1193 by Thursday, and then began what may turn out to be the start of our next leg higher on Friday.

Moving forward to this week a breakout above $1225 would signify that the rally is in effect, but more than the chart pattern itself there are some fundamental reasons why I believe this rally will play out.

Are equity markets weak or strong?

I have said it often enough in the past, but when equity markets are weak investors often turn to safe haven type securities like treasuries (NYSEARCA:TLT), the volatility index (NYSEARCA:VIXY), and gold (NYSEARCA:GLD).

I wrote an article a few weeks back stating that although we may head a touch higher I thought the markets (NYSEARCA:SPY) would turn lower short term, and investors should be wary of a correction that may unfold. Well we declined over 4% from the date that was written, but given we have now rallied back up to test the highs again, a fair question would be to ask whether my outlook has changed.

My answer to that question is no -- we have so far not made any new highs since that forecast was made, and my expectation has not changed. I still perceive the greater risk to be to the downside in broad equity markets, and regardless of whether or not we do head slightly higher, I believe we are on the cusp of a decline and I'll be writing in more detail on broad equities in a separate article this weekend.

Despite weaker economic reports many Fed board members have stated that they still see a rate increase as likely this year, something the broad market is definitely sensitive to. Although the market seems to be pricing in a delay to that action, the next major report that shows improvement is likely to result in volatility. Couple that with company earnings that are expected to be relatively poor, and we have the recipe for a correction on the horizon.

More often than not, when the US market moves lower US Treasuries are bought as protection. This can be seen quite clearly in their respective charts, which show Treasuries peaking at the same time a low is formed in the S&P500 index.

Gold on the other hand has not received the same amount of "safe haven love" as Treasuries in the last few years, but are these relationships changing? Over the last 6 months gold has been purchased at roughly the same rate and time as TLT, something that is clearly evident when we compare their price patterns. Here we can see that their respective ups and downs are mirrored to more or less the same extent:

(click to enlarge)

Should we see some equity market weakness over the next couple of months, we are likely to see investors turn to treasuries and gold in equal measure. A lot depends on economic numbers and investor reaction to company earnings, and given the way both gold and TLT are currently set up, we can see that this is perhaps already being anticipated by the street. Both charts are in bullish posture, and both are good candidates for gains over the next month or two.

The important thing to note is that while treasuries were the safe haven asset of choice for investors seeking shelter from equity market weakness, the tide seems to be shifting in favor of precious metals and placing them on equal footing for the time being. This is an aspect of investor behavior we want to see continue, as for a sustained rally in gold prices to occur it needs to have the kind of investor appeal the bond market has commanded in recent years.

While the market may be pricing in a delay to a rate increase, it would appear investors remain cautious on equities and are anticipating weakness ahead. As it is, the S&P500 is up just 2.7% on the year to date and investor confidence is perhaps not as high as the sentiment indices reflect, given the poor relative performance in what is traditionally a strong part of the year.

Hedge Funds Are Heavily Short Gold

Have a look at the chart below taken from the Bloomberg terminal, which shows that hedge funds are currently as short as they have ever been in the last 6 years:

(click to enlarge)

You may want to note the dates of the last time their short positions were at this kind of extreme level and the result -- these were all dates where lows formed in the gold price and rallies ensued:

Date% Hedge Fund ShortResult
June/July 201380%21% rally
December 201380%18% rally
June 201470%9% rally
November 201480%15% rally
April 201584%????

We can see then that the hedge funds are not always rewarded when they all run to the front of the bus to steer it; in fact, more often than not, the bus tips over and stops moving in their requested direction.

If you are currently short gold, a natural place to set your stop would be just above the last high, i.e., $1225, and should the price rise above that level we are more than likely going to see a fast spike higher as shorts rush to cover their positions.

Data Points


As usual, let's start with the commitment of traders report -- the latest figures are below:


At first glance you may be a little disappointed with the figures, as it shows that the commercial category have added to their short positions and reduced the number of their long contracts.

This is a little misleading, however, as it is the ratio of long to short positions that we are interested in.

Sometimes it is easier to see a visual representation, so I have included a chart of the commercial positioning overlaid with the gold price to show what happens when the ratio hits certain levels (chart courtesy of TDF Ameritrade & iSPYETF):

(click to enlarge)

Reviewing the figures, the actual numbers of contracts owned by the commercials is eerily similar to those held when I wrote my first article in mid-December 2014, just before gold rallied from $1180 to $1308 by late January.

If we do indeed see a rally in the short term you can expect to see the commercials add to their short positions, while the large and small speculator categories chase price by adding to their long positions the higher we go.


As of last week backwardation remained in place, although at relatively slight levels and perhaps not at levels that result in a consistent bid underneath gold prices. This does not necessarily concern me as I believe there to be a weight of evidence in place to support a rally, and I expect backwardation to subside over the coming month.

US Dollar

Although the dollar (NYSEARCA:UUP) rallied hard towards the end of last week, I am not so certain that the correction is over and we will make new highs from here. I would expect further consolidation into the summer before the next leg higher, but you should note that it is perfectly possible to test the highs before we test the lows.

Regardless, you should note gold rallied with the dollar on Friday and this can certainly be added to the growing number of factors that support an impending rally. Resistance for the DXY Dollar Index chart remains at 100 and 103, with support standing at 94 & 92.


The miners performed well last week and it was noticeable that they failed to decline to any real extreme even when gold fell from $1225 to $1193. The charts I provided in last week's article still apply with the same support and resistance levels in place for the Majors (NYSEARCA:GDX) and the Juniors (NYSEARCA:GDXJ).


The gold chart pattern is currently about as short-term bullish as it gets. Of course, patterns don't always play out as expected, but the set-up is there all the same. The latest chart is below:

(click to enlarge)

In the most bullish count we should now not break the $1193 low on any retrace, and the short-term target for the next move higher is $1275. This would be the strongest and quickest part of the rally should this pattern play out.

The overall target is between $1330 and $1380 for completion of our wave C. Once wave C completes, I expect a decline to new lows in gold.

If we do decline through $1193 in the short term (not my primary expectation), we have support just below at $1172 and $1163, and we could still maintain bullish posture and rally from those levels.

Declining through $1163 would be bearish overall and the count would need to be revised.