An Empire Strikes Back: Germany and the Greek Crisis

By George Friedman

July 14, 2015 | 08:00 GMT 

A desperate battle was fought last week. It pitted Germany and Greece against each other.

Each country had everything at stake. Based on the deal that was agreed to, Germany forced a Greek capitulation. But it is far from clear that Greece can allow the agreement reached to be implemented, or that it has the national political will to do so. It is also not clear what its options are, especially given that the Greek people had backed Germany into a corner, where its only choice was to risk everything. It was not a good place for Greece to put the Germans.

They struck back with vengeance.

The key event was the Greek referendum on the European Union's demand for further austerity in exchange for infusions of cash to save the Greek banking system. The Syriza party had called the vote to strengthen its hand in dealing with the European demands. The Greek government's view was that the European terms would save Greece from immediate disaster but at the cost of impoverishing the country in the long term. The austerity measures demanded would, in their view, make any sort of recovery impossible. Facing a choice between a short-term catastrophe in the banking system and long-term misery, the Greeks saw themselves in an impossible position.

In chess, when your position is hopeless, one solution is to knock over the chessboard. That is what the Greeks tried to do with the referendum. If the vote was lost, then the government could capitulate to German demands and claim it was the will of the people. But if the vote went the way it did, the Greek leaders could go to the European Union and argue that broad relaxation of austerity was not merely the position of the government, but also the sovereign will of the Greek people.

The European Union is founded on the dual principles of an irrevocable community of nations that have joined together but have retained their national sovereignty. The Greeks were demonstrating the national will, which the government thought would create a new chess game.

Instead, the Germans chose to directly demand a cession of a significant portion of Greece's sovereignty by creating a cadre of European bureaucrats who would oversee the implementation of the agreement and take control of Greek national assets for sale to raise money. The specifics are less important than the fact that Greece invoked its sovereign right, and Germany responded by enforcing an agreement that compelled the Greeks to cede those rights.

Germany's Motivations

I've discussed the German fear extensively. Germany is a massive exporting power that depends on the European free trade zone to purchase a substantial part of its output. The Germans had a record positive balance of trade last month, of which its trade both in the eurozone as well as in the rest of the European Union was an indispensible part. For Germany, the unraveling of the European Union would directly threaten its national interest. The Greek position — particularly in the face of the Greek vote — could, in the not too distant future, result in that unraveling.

There were two sides of the Greek position that frightened the Germans. The first was that Athens was trying to use its national sovereignty to compel the European Union to allow Greece to avoid the pain of austerity. This would, in effect, shift the burden of the Greek debt from the Greeks to the European Union, which meant Germany. For the Germans, the bloc was an instrument of economic growth. If Germany accepted the principle that it had to assume responsibility for national financial problems, the European Union — which has more than a few countries with national financial problems — could drain German resources and undermine a core reason for the bloc, at least from the German point of view. If Greece demonstrated it could compel Germany to assume responsibility for the debt in the long term, it is not clear where it would have ended — and that is precisely what the Greek vote intended.

On the other hand, if the Greeks left the European Union, it would have created a precedent that would in the end shatter the bloc. If the European Union was an elective affinity, in Goethe's words, something you could enter and then leave, then the long-term viability of the bloc was in serious doubt. And there was no reason those doubts couldn't be extended to the free trade zone. If nations could withdraw from the European Union and create trade barriers, then Germany would be living in a world of tariffs, European and other. And that was the nightmare scenario for Germany.

The vote backed the Germans into a corner, as I said last week. Germany could not accept the Greek demand. It could not risk a Greek exit from the European Union. It could not appear to be frightened by an exit, and it could not be flexible. During the week, the Germans floated the idea of a temporary Greek exit from the euro. Greece owes a huge debt and needs to build its economy. What all this has to do with being in the euro or using the drachma is not clear. It is certainly not clear how it would have helped Europe or solved the immediate banking problem.

The Greeks are broke, and don't have the euros to pay back loans or liquefy the banking system. The same would have been true if they left the European Union. Suggesting a temporary Grexit was a fairly meaningless act — a bravura performance by the Germans.

When you desperately fear something in a negotiation, there is no better strategy than to demand that it happen.

The Resurrection of German Primacy

I have deliberately used Germany rather than the European Union as the negotiating partner with the Greeks. The Germans have long been visible as the controlling entity of the European Union. This time, they made no bones about it. Nor did they make any bones about their ferocity. In effect they raised the banner of German primacy, German national interest, and German willingness to crush the opposition. The French and the Italians, among others, questioned the German position publicly. In the end, it didn't matter. The Germans consulted with these other governments, but Berlin decided the negotiating position, because in the end it was Germany that would be most exposed by French or Italian moderation. This negotiation was in the context of the European Union, but it was a German negotiation.

And with this, the Germans did something they never wanted to do: resurrect fairly unambiguously the idea that Germany is the sovereign and dominant nation-state in Europe, and that it has the power and the will to unilaterally impose its will on another nation.

Certainly the niceties of votes by finance ministers and prime ministers were adhered to, but it was the Germans who conducted the real negotiations and who imposed their will on Greece.

Germany's historical position was that it was one nation among many in the European Union.

One of the prime purposes of European integration was to embed Germany in a multinational European entity so that it could develop economically but not play the role in Europe that it did between 1871 and 1945. The key to this was making certain that Germany and France were completely aligned. The fear was that German economic growth would create a unilateral German political power, and the assumption was that a multilateral organization in which France and Germany were intimately bound together would enable German growth without risking German unilateral power.

No one wanted this solution to work more than the Germans, and many of Germany's maneuvers were to save the multilateral entity. But in making these moves, Germany crossed two lines. The lesser line was that France and Germany were not linked on dealing with Greece, though they were not so far apart as to be even close to a breach. The second, and more serious, line was that the final negotiation was an exercise of unilateral German power. Several nations supported the German position from the beginning — particularly the Eastern European nations that, in addition to opposing Greece soaking up European money, do not trust Greece's relationship with Russia. Germany had allies. But it also had major powers as opponents, and these were brushed aside. 

These powerful opponents were brushed aside particularly on two issues. One was any temporary infusion of cash into Greek banks. The other was the German demand, in a more extreme way than ever before, that the Greeks cede fundamental sovereignty over their national economy and, in effect, over Greece itself. Germany demanded that Greece place itself under the supervision of a foreign EU monitoring force that, as Germany demonstrated in these negotiations, ultimately would be under German control.

The Germans did not want to do this, but what a nation wants to do and what it will do are two different things. What Germany wanted was Greek submission to greater austerity in return for support for its banking system. It was not the government's position that troubled Germany the most, but the Greek referendum. If Germany forced the Greek government to capitulate, it was a conventional international negotiation.  If it forced the government to capitulate in the face of the electoral mandate of the Greek public, it was in many ways an attack on national sovereignty, forcing a settlement not in opposition to the government but a direct confrontation with the electorate. The Germans could not accommodate the vote. They had to respond by demanding concessions on Greek sovereignty.

This is not over, of course. It is now up to the Greek government to implement its agreements, and it does so in the face of the Greek referendum. The situation in Greece is desperate because of the condition of the banking system. It was the pressure point that the Germans used to force Greek capitulation. But Greece is now facing not only austerity, but also foreign governance.

The Germans' position is they do not trust the Greeks. They do not mean the government now, but the Greek electorate. Therefore, they want monitoring and controls. This is reasonable from the German point of view, but it will be explosive to the Greeks.

The Potential for Continental Unease

In World War II, the Germans occupied Greece. As in much of the rest of Europe, the memory of that occupation is now in the country's DNA. This will be seen as the return of German occupation, and opponents of the deal will certainly use that argument. The manner in which the deal was made and extended by the Germans to provide outside control will resurrect historical memories of German occupation. It has already started. The aggressive inflexibility of the Germans can be understood as an attitude motivated by German fears, but then Germany has always been a frightened country responding with bravado and self-confidence.

The point of the matter is not going away, and not only because the Greek response is unpredictable; poverty versus sovereignty is a heady issue, especially when the Greeks will both remain poor and lose some sovereignty. The Germans made an example of Cyprus and now Greece. The leading power of Europe will not underwrite defaulting debtors. It will demand political submission for what help is given. This is not a message that will be lost in Europe, whatever the anti-Greek feeling is now.

This is as far from what Germany wanted as can be imagined. But Greece could not live with German demands, and Germany could not live with Greek demands. In the end, the banking crisis gave Germany an irresistible tool. Now the circumstances demand that the Greeks accept austerity and transfer key elements of sovereignty to institutions under the control or heavy influence of the Germans.

What else could Germany do? What else could Greece do? The tragedy of geopolitical reality is that what will happen has little to do with what statesmen wanted when they started out.

The Myth of the China Crash

A plummet in Beijing’s economic fortunes likely wouldn’t have the global effects many say it could.

By John Lee

July 14, 2015 12:02 p.m. ET

The consequences of a prolonged slowdown in China’s $10 trillion economy will overshadow all else, including an unstable Greece. Or at least that’s a view often expressed in the last few weeks as the Shanghai and Shenzhen stock exchanges melted down.

Yet fears of a contagion effect from China’s slowdown are overblown. For they assume that the country’s enormous economy plays a proportionate role in driving global growth. In reality, the impact of a dramatic and sustained downturn would likely be more psychological than material.

On a superficial level, the belief that a slump in China will affect the rest of the world is understandable. In addition to its economic size and importance as a trading partner to every major economy, China is also the leading manufacturing country by volume. It is hard to believe that an economy that constitutes just less than half of all global growth can sink without creating tsunami-like impacts in every corner of the globe.

But such statistics can be misleading. The Chinese economy is not nearly so important as a driver of global growth.

Take fixed investment, which drives around half of all Chinese economic expansion. Of the up to $4.5 trillion worth of new fixed investment in 2014, less than 3% originated from outside China.

In addition to a still heavily regulated and largely closed capital account, almost every significant sector of the Chinese economy, with the exception of export manufacturing, is designed to privilege state-owned enterprises at the expense of foreign and private-domestic firms. Just as SOEs have been the primary beneficiaries of Beijing’s political economy, they will also be far more exposed to any great slowdown than will multinational firms.

One illustration of this on-the-ground reality: The U.S. firm General Electric, GE 0.42 % which has targeted Chinese sectors including health care, finance, aviation and energy, recently revealed that it still derives more revenue from a midsize market like Australia than it does from China, despite employing approximately 20,000 people in the latter country.

Then consider China’s often misunderstood role as a trading powerhouse. Export manufacturing is dominated by foreign-owned and foreign-invested firms, which makes China the world’s preferred subcontractor. Any slowdown, or even liquidity crisis, in the Chinese economy is unlikely to significantly effect export-manufacturing operations since the majority of these are financed by foreign capital and is where more than 80% of all foreign direct investment into China ends up.

Even China’s status as a great trading nation is often overplayed. More than two-thirds of China’s trade is in processing trade, with advanced-economy consumption markets in North America, the European Union and even Japan more important as sources of final net demand.

In addition to the restricted access to the Chinese consumer offered to outsiders, some estimate that around 75% of China’s domestic market is made up of nontradable goods. In other words, the net demand China offers the world is significantly less important than the raw size of its economy might suggest. Yet it is increases in final demand that ultimately drive trade, global manufacturing and global growth.

In the 10 years before the global financial crisis, trade between China and the Association of Southeast Asian Nations countries grew at high double-digit rates per year. But when the crisis hit, that trade immediately contracted 7.8%, while GDP growth rates throughout East Asia plummeted.

This occurred despite China’s economy, the largest in Asia, growing at almost 9% during that period.

The story is the same when it comes to the excess savings needed by businesses to invest in regional opportunities. It’s true that China consumes too little and saves too much. But most of the country’s savings cannot exit the country. Consequently, Chinese FDI is still dwarfed by U.S., European, Japanese and even South Korean FDI in the region. Neither is China a major source of technology transfers into developing economies around the world. Instead, it absorbs far more foreign technology than it provides to the world.

Or might we be underplaying the possible problem at hand? If the damage from falling stock prices in Chinese exchanges is confined to the tens of millions of speculative investors having to respond to margin calls, then events of the previous week will be remembered merely as a dramatic footnote.

But if the share-market panic becomes a contagion that leads to steep falls in the valuation of other assets, such as real estate, Chinese banks and other lending institutions will likely face some trouble, having issued credit using overpriced assets as collateral.

Nonetheless, there is relatively little outside investment in, or in integration with, Chinese banks. This means that aside from those economies reliant on exporting commodities to China, the Chinese people rather than outsiders will bear most of the pain—even if the financial system grinds the economy to a halt. The major external impact is that such developments will finally end the unrealistic expectations the world placed on China to drive global growth

Even if there is no financial or banking-system bust-up, this may be the year China hits the malaise known as the middle-income trap as a result of stalled reforms. This could prove a dangerous period politically for the Communist Party. But judging from the reaction of global markets, the rest of the world has less economic skin in the game than many think.

Mr. Lee is a senior fellow at the Hudson Institute and an adjunct associate professor at the Australian National University.

Wall Street's Best Minds

The Right Way to Handle a Market Storm

Events in Greece and China have some U.S. investors on edge. Here’s a good response.

By Zachary Karabell

July 10, 2015

If it seems as though we have focused on crises in Europe for years, that’s because we have. The seemingly endless impasses of Greece and its possible spillover effects on the rest of Europe and then, by extension, on the global financial system, have beset markets and investors for nearly six years.
The past month was yet another convoluted chapter, culminating in a referendum by Greek citizens who, by a margin of more than 60%, rejected their European creditors’ demands for further austerity. That vote was a significant development, but for Greece especially, and the financial markets in general, it will not be the last word.          
In fact, in the last 24 hours, Greece’s leaders have been working on a compromise plan designed to avoid an exit from the eurozone. This development may be contributing to a U.S. stock-market rally on Friday.
The shaky markets in recent days provide an opportunity to evaluate investments in the face of geopolitical instability. Greece is but one example of what happens continually in human affairs: change, both expected and unexpected, and crises small and large, which shift the narrative (or at least perspective) of what the present holds and the future portends. The world is always messier and less predictable than spreadsheets suggest, with their expected returns predicated on assumptions of bond yields and equity returns over the next five or ten years.
What to do with a crisis?

In every crisis, investors must answer one question first: Is this the Big One? Followed by: Is this the moment of the great unraveling? And further: Will this event trigger not only volatility but also a sharp deterioration, upending markets and prices so dramatically that no amount of prepositioning can inoculate against losses too severe to recoup in any reasonable amount of time?

If the answer to that first question is yes, then radical action is in order. In 2008–2009, we learned that there are few (if any) safe havens in a major crisis. And, that anything that can be bought and sold will be, at a steep discount. Even that dramatic financial selloff, however, saw sharp reversals in the months after March 2009, and had you sold at the end of 2008 or during the first weeks of 2009, you would have suffered large losses and enjoyed none of the rebound.
If you believe that a crisis of even greater order is on the horizon, however, then being invested in any financial instrument carries significant risks and heavy losses.

Voices in the financial world are always warning of the Big One. But the Big One rarely happens, and most of the time, it is a big mistake to heed those warnings. Opportunities are lost, and “inoculation” investments—i.e. gold bars—often turn out poorly, at best.

Of course, the Big One could be just around the corner. We only will know in retrospect. The next question to ask is whether it makes sense to prepare for it considering A) it may never come and B) the investment choices you make to protect yourself perform badly unless it does.
How you answer these questions depends on your personal ability to manage the uncertainty and potential stress that come with a dislocating event. Remember, investment decisions born of the desire to protect against worst case scenarios will almost always do quite badly unless the events occur.

If the Big One isn’t on the immediate horizon, then the next series of questions has to do with the actual implications of the crisis du jour. Today it is Greece; a few months ago it was Ukraine. Prior to that, it was tension in the Middle East, from Iraq to Iran to ISIS, which may soon resurface. And before that it was the U.S. debt crisis of 2011. Unfortunately, each year there is always something, and there always will be.

Each of these junctures presented investors with a series of choices. The two most important are: Do you sell or trim exposure to financial markets and stay with “safe” investments such as U.S. Treasuries? Or do you increase exposure to investments that have been sold off in the stampede, since many of them are unlikely to be affected fundamentally?

To repeat, investments made at the heart of a crisis and designed to protect against further downside rarely perform well. Gold, bear-market funds, derivatives (the simple act of buying puts): none of these tend to outperform once the crisis passes. Most of the time, fear- and insurance-based investments need to be in place before the crisis hits to generate meaningful upside.

On the flip side, however, crises almost always cause a broad financial sell-off with implications for assets that have little fundamental exposure to the crisis. Many equities that experience volatility during a regional crisis become oversold either because of greater contagion concern or short-term traders and algorithms triggering selling pressure. Therein lies a genuine, albeit clichéd, buying opportunity.

The aftermaths of March 2009 and November 2011 (which was the last major global spasm triggered by the Greek crisis) demonstrate just how potent those buying opportunities are, and how significant the bounce-back can be for assets that sold off even though they had little direct connection. Today, countless American companies as well as global bond yields have experienced volatility despite no direct effect from Greece per se. Major American retailers, for instance, won’t see earnings affected by a Greek default, yet many saw price volatility. Investors who bought gold as insurance during the crises noted above, however, had considerable losses.
Never let a crisis go to waste
We all know the investing homilies: buy when others are selling; markets climb a wall of worry.

But truth lies in such homespun wisdom. The caveat is that any one of these crises could trigger the Big One. And the further caveat is that Big Ones almost never happen, and when they do, most efforts to protect will fail.

But, market movements can be clumsy during moments of crisis and concern. The past weeks have seen not just Greece floundering, but also China’s rapid reversal of its equity markets, both of which have spooked investors worldwide. China is an admittedly larger issue and economy than Greece, but its equity markets are almost purely retail and do not involve foreign money. So even though tens of millions of Chinese investors are panicking, the implications for global markets should be minimal. Should be. But, indeed, many will take their cue from a purely local, retail, domestic Chinese event and apply it to a selloff in equity and bond markets whose implications suggest little correlation.

Instead, there may be opportunities to build positions in areas that have been unduly hit. Or it may simply be a wave that passes, with one’s basic allocations remaining largely intact, and even adding new cash to them (unless those allocations were heavily focused on, say, Greece).

This basic wisdom has been repeated over and over: no crisis looks precisely like another, and we are all primed and alert about the ever-present potential for bad situations to spin out of control. Given the cost of attempting to prepare for the worst, however, and the opportunity cost of not calmly standing in the eye of the storm, that basic wisdom is unlikely to become common sense anytime soon, and bears repeating for some time to come.

Karabell is head of global strategy at Envestnet, a leading provider of wealth management technology and services to investment advisors.

Two Horsemen of The Apocalypse

By: Alasdair Macleod

Mon, Jul 13, 2015

Gold and Silver 2015 Chart

If we can reassign meanings given to the biblical Four Horsemen of the Apocalypse from the original, we can then say financial markets saw two of them this week. The first brought us the Greek Crisis which went from very bad to impossible to resolve, and the second was a collapsing stock market in China. Between them these two events triggered another flight into the US dollar, which would have been far worse without central bank intervention. With the dollar rising against the euro, commodity prices, particularly energy and oil, have fallen sharply, with US Crude down over 15% in the last month.

Against falls of that magnitude the falls in gold of 3% and silver at 7% over the same period could have been worse. Very few market participants in Western capital markets use gold as a safe-haven in troubled financial times thinking of them primarily as commodities, seeing the dollar and US Treasuries as risk-free; so it's no surprise that the dollar rose and Treasury yields fell.

China's stock market may or may not be guided out of its slump by government intervention.

The Greek crisis appears to be the greater currency danger, with Greece being only part of the problem.

As principal creditor to Italy, Spain and Portugal, the real problem is with Germany, which cannot afford economically and politically to write off these debts, and the ECB which is in negative equity on Greece alone. And if this becomes increasingly obvious in the coming weeks, confidence in the Eurozone and the euro itself can be expected to erode.

A third Horseman may soon hove into sight. A credit implosion in China plus a slump in Eurozone confidence and economic activity would be powerful negatives for the US economy, possibly bringing yet more extraordinary measures from the Federal Reserve. The Fed is unlikely to stand by idly and watch from afar the collapse of the Eurozone's $11 trillion economy, nor can it stand by while stock prices in the US slide if Chinese negativity spreads to other markets. It is at that point that owners of physical bullion should sleep better at night than those that have none.


The market set-up is now extreme, with falling prices in futures markets generating physical buying of precious metals, a dichotomy that should lead to a more general scramble for physical metal eventually. This is already evident in silver, with the US Mint cleaned out of silver eagles and unable to supply any more until August at the earliest.

Silver is a good example of how extreme market positions have become. The chart below is of Managed Money short contracts on Comex.

MM Silver Shorts

This category of speculative shorts is the highest on record, and represents 273 million ounces, or over 30% of global mine production. These shorts are in an illiquid market, and have allowed professional dealers to square their books. This is reflected in record longs for swap dealers.

Swap long contracts

Admittedly, this is a one-sided view that excludes the managed money long positions and the swap shorts; but the objective is to show just how unbalanced the futures market for silver has become.

viernes, julio 17, 2015



Buy Gold When The Fed Raises Rates

by: Prudent Finances            


  • Odds are good that the Fed will start raising rates in December.
  • The anticipation of higher rates is hurting gold.
  • Historically, buying gold at the beginning of a Fed rate raising cycle has been profitable.
By Ivan Y.

The conventional wisdom is that gold (NYSEARCA:GLD) falls when interest rates are high. This is based on the idea that because gold doesn't pay any interest or dividends, investors will not want to buy it because they can park their money in bonds and receive high interest rates instead. However, gold has performed rather well during the last two periods of Fed rate hikes.

The last period in which the Fed raised rates was from June 2004 to June 2006. During that time, gold rose from under $400 to over $700. The first rate hike occurred on June 30, 2004. In the six months prior to the first rate hike, gold fell from roughly $430 to $375. You can see this in the chart below.

(click to enlarge)
Prior to 2004-2006, the next most recent period of rate hikes was from June 1999 to May 2000.

You can see in the chart that gold spiked up twice during that period. Gold ended up with only a modest gain during that 11-month rate raising period, but prior to the first rate hike in June, gold was in a 3-year bear market. From January 1996 to June 1999, gold fell from over $400 to roughly $260.

(click to enlarge)

These two historical examples show that a good time to buy gold is right after the first rate hike. In the first example, it was actually better to buy it before the first rate hike, but that would've required accurately guessing at which meeting the Fed would've raise rates for the first time, so buying it after eliminates that risk.

After a disastrous 2013 and a slightly down 2014, gold is once again having another slightly down year this year. I believe this is in part due to the anticipation of the Fed raising rates this year. At the beginning of the year, the consensus was that the Fed would hike rates in June.

Then it got pushed back to the September meeting. Now the consensus view is that December will be the first rate hike.

According to Reuters, traders see a 66% chance that the Fed will raise rates in December. I think the anticipation of the rate hike and the fact that it keeps getting pushed back is one of the major factors that is hurting gold this year. It would be better for gold if the Fed just raised rates right now and got it over with. The lyrics from a 1971 song by Carly Simon called Anticipation sums up my feelings on gold.

Anticipation, Anticipation
Is making me late
Is keeping me waiting

If the Fed does indeed meet expectations and raises rates by a quarter point in December, I believe there is a decent possibility that could mark the end of gold's four year bear market.

Gold peaked in August 2011 at almost exactly $1900. In the mean-time the anticipation of the first hike will likely keep the price down. Some pundits and analysts have made predictions of gold reaching lower lows this year.
  • Morgan Stanley - $1138
  • Commerzbank - $1100 (a possibility)
  • Goldman Sachs - $1050 (end of 2015)
  • Peter Brandt - $1050
  • Avi Gilburt - GLD $98 (equivalent to ~$1022 gold)
  • Louise Yamada - $1000
  • ABN Amro - $1000 (end of 2015)
  • Harry Dent - $700
I think all of these targets, except for Harry Dent's, are a reasonable possibility between now and the first rate hike in December or early 2016. Dent's price is actually lower than the 2008 capitulation low when the financial world looked like it was about to collapse. As a final thought, I will give you a couple of other bottom targets. The first one is $1007 (~$96.6 GLD).

That price would match the 47% decline during gold's bear market from 1974 to 1976. By the way, gold went on from that point to rise 8x from roughly $105 to nearly $860 in less than four years. The second one is $1077 (~$103 GLD).

That would be a 50% retrace of gold's entire bull market from July 1999 to August 2011. Both targets look reasonable considering what others have predicted.

Sinking Ships, Train Wrecks, and Empty Trucks: My Case Against Transportation Stocks

Tony Sagami

July 14, 2015

You can gnash your teeth over the Greek debt crisis or the Chinese stock meltdown, but one economic sure-thing you should be watching is the collapsing fundamentals of the transportation industry.

Check out this headline:

More problematic for the stock market is that the profit outlook for transportation stocks, particularly ocean shipping companies, is horrible.

The story was about container ships facing the business-killing environment of expenses exceeding revenues. According to the Wall Street Journal, the container-freight rates on the Asia-to-Europe route have sunk like rocks and are now below the cost of fuel. And that doesn’t even include all the other fixed and variable costs.

The Shanghai Containerized Freight Index—the cost of shipping a container from Shanghai to Rotterdam—fell to $243 per TEU (twenty foot equivalent unit), a new all-time low and below the cost of fuel, estimated to be $300 per TEU.

That’s right: For every container an Asia-to-Europe ship transports, it will lose $57. Ouch!

There are a lot more costs to operating a ship than just fuel, which is estimated to account for 40% of operating costs. Drewry Maritime Research estimates that the break-even rate for most container ships is $800 per TEU on that route.

Global demand is weak, but the real culprit is a massive increase in the number of container ships that have come online, mostly ULCSs (Ultra Large Container Ships).

Braemar ACM Shipbroking reported that the industry has added enough capacity to carry 500,000 containers in just the first quarter of 2015. To put that number in perspective, a total of one million containers were shipped in all of 2014!

That’s a 50% increase in capacity.

That supply is going to get even larger. There are backorders for 55 more container ships, 30 of them with a capacity of 18,000 TEU, 12 in the 10,000-11,000 TEU range, and 13 in the 1,400-4,000 TEU range.

Maersk Lines, the largest container shipping company in the world, ordered 11 ULCSs capable of carrying 19,600 TEU, with options for six more from South Korea’s Daewoo Shipbuilding & Marine Engineering.

“Unless by a miracle demand grows, we are up for heavy losses in the next quarter and maybe the rest of 2015,” moaned one industry executive.

Hey, this is exactly the type of misallocation of capital you see when the cost of money is taken down to zero.

This oversupply isn’t going to get worked off for years, and while the transportation industry is in trouble, the sickest part of the transportation food chain are the ocean-going shippers.
The Land-Based Transporters Aren’t Doing So Hot Either

Truck and rail are the dominant forms for moving freight in the United States and are crucial parts of the US economy. Billions of dollars of freight is transported across our nation’s highways and railroads every day. In fact, roughly 90% of the value of all goods moved in the US is transported by trucks and trains.

Especially by trucks. In 2014, trucks hauled just under 10 billion tons of freight and collected $700.4 billion, or 80% of total revenue earned by all transport modes.

That’s why I pay close attention to what the American Trucking Associations (ATA) has to say about the state of its industry, and according to the ATA, business isn’t very good.

The association reported that its For-Hire Truck Tonnage Index, which represents the actual tonnage hauled by trucks, fell 3% in April (most recent reporting period) and is definitely trending down.

“Like most economic indicators, truck tonnage was soft in April,” said ATA Chief Economist Bob Costello. Yes, the April numbers were down, but the above chart clearly shows that truck shipments have been down all of 2015.

There is no doubt in my mind that transportation stocks of all kinds are headed lower. As always, timing is everything—so don’t rush out and short a bunch of transportation stocks tomorrow morning.

Being bearish can pay big, though. To see how I’m playing the downtrends, check out my Rational Bear newsletter risk-free for 3 months.

It’s a good time to get started. I have several airlines, railroads, and trucking companies in my sight and expect to place bets against them—using puts or inverse ETFs—in the very near future.

Artificial intelligence

Cheer up, the post-human era is dawning

Artificial minds will not be confined to the planet on which we have evolved, writes Martin Rees

by: Martin Rees .

Planet Earth seen from outer space

So vast are the expanses of space and time that fall within an astronomer’s gaze that people in my profession are mindful not only of our moment in history, but also of our place in the wider cosmos. We wonder whether there is intelligent life elsewhere; some of us even search for it.

People will not be the culmination of evolution. We are near the dawn of a post-human future that could be just as prolonged as the billions of years of Darwinian selection that preceded humanity’s emergence.

The far future will bear traces of humanity, just as our own age retains influences of ancient civilisations. Humans and all they have thought might be a transient precursor to the deeper cogitations of another culture — one dominated by machines, extending deep into the future and spreading far beyond earth.

Not everyone considers this an uplifting scenario. There are those who fear that artificial intelligence will supplant us, taking our jobs and living beyond the writ of human laws. Others regard such scenarios as too futuristic to be worth fretting over. But the disagreements are about the rate of travel, not the direction. Few doubt that machines will one day surpass more of our distinctively human capabilities. It may take centuries but, compared to the aeons of evolution that led to humanity’s emergence, even that is a mere bat of the eye. This is not a fatalistic projection. It is cause for optimism. The civilisation that supplants us could accomplish unimaginable advances — feats, perhaps, that we cannot even understand.

Human brains, which have changed little since our ancestors roamed the African savannah, have allowed us to penetrate the secrets of the quantum and the cosmos. But there is no reason to think that our comprehension is matched to an understanding of all the important features of reality. Some day we may hit the buffers. There are chemical and metabolic limits to the size and power of “wet” organic brains.

Today’s computers do not learn like we do. Their internal network is far simpler than a human brain, but they partly make up for this disadvantage because their “nerves” transmit messages at the speed of light, millions of times faster than the chemical transmission in human brains.

They can learn to identify dogs, cats and human faces by crunching through millions of images.

They learn to translate from foreign languages by reading multilingual versions of millions of pages of EU rules, among other documents (and, crucially, they never get bored).

These are primitive steps, and there is disagreement about the route towards machines of human-level intelligence. Some think we should emulate nature, and reverse-engineer the human brain. Others say that is as misguided as designing flying machine by copying how birds flap their wings. Philosophers debate whether “consciousness” is special to the wet, organic brains of humans, apes and dogs, so that robots, even if their intellects seem superhuman, will still lack self-awareness or inner life. But of the kind of “thinking” that has enabled humans to understand and then harness the forces of nature, far more will be done by silicon computers (or quantum ones) than has ever been managed by people.

Artificial minds will not be confined to the 14 mile layer of water, air and rock in which organic life has evolved at the earth’s surface. Indeed this biosphere may be far from an optimal habitat for post-human “life”. Interplanetary and interstellar space will be the preferred arena for the grand constructions of robotic fabricators, including the non-biological brains that might one day develop insights as far beyond our imaginings as string theory is for a monkey.

The collective activities of human brains have underpinned the emergence of all our culture and science. They may not have been the first intelligences in the cosmos, however, and they are most unlikely to be the last. Searches for extraterrestrial intelligence are attracting growing support.

Astronomers have learnt in the past decade that there are likely to be billions of earthlike planets, orbiting stars in our galaxy. Searches will focus on the nearest of these. But we do not know how likely it is that chemistry generates life (replicating, metabolising, entities), nor what chance primitive organisms have of evolving to earth-like biospheres. If our searches fail, there will be a compensation: if advanced life is exceedingly rare, we need be less cosmically modest.

Our earth, though a tiny speck in the cosmos, could be the unique “seed” from which intelligence spreads through the Galaxy.

Our era of organic intelligence is a triumph of complexity over entropy, but a transient one, which will be followed by a vastly longer period of inorganic intelligences less constrained by their environment. If life is widespread, worlds orbiting stars older than the sun could have had a head-start. If so, aliens are likely long ago to have transitioned beyond the organic stage.

We have no crystal ball. But it is a fair bet that machines, not organic brains, will most fully understand the cosmos. They may be our own remote descendants. Or they may be out there already, orbiting distant stars. Either way, it will be the actions of autonomous machines that will most drastically change the world, and perhaps what lies beyond.

The writer is the Astronomer Royal

Janet Yellen’s Fed Flounders in Political Arena

Congressional leaders from both sides of aisle fault central bank’s transparency and responsiveness

By Kate Davidson and Victoria McGrane

July 13, 2015 12:51 p.m. ET

Lawmakers in Congress say the Fed has been poor at communicating and responding to inquiries. Here, central bank chief Janet Yellen testifies before a Senate panel in February.Lawmakers in Congress say the Fed has been poor at communicating and responding to inquiries. Here, central bank chief Janet Yellen testifies before a Senate panel in February. Photo: Alex Wong/Getty Images

In his final days as Federal Reserve chairman, Ben Bernanke offered his successor parting advice for dealing with lawmakers: “The first thing to agree to is that Congress is our boss.”
Almost 18 months after taking the helm, Fed Chairwoman Janet Yellen is struggling to manage an increasingly strained relationship with the boss.

The Fed was structured by Congress as an independent agency and its monetary-policy decisions were specifically exempted from congressional audits. But the Fed must still answer to Congress—and lately it has become embroiled in a dispute with House Republicans over the possible leak of confidential information from its September 2012 policy meeting. Republicans, miffed by what they see as a lack of responsiveness from Fed officials on this and other matters, are pushing the central bank to turn over documents related to its internal leak probe.

Some lawmakers also are pressing Ms. Yellen to appear before Congress more frequently on regulatory issues. Meanwhile, some in Congress have found bipartisan accord to revamp aspects of the Fed’s structure and operations.

A central bank spokesman said “the Federal Reserve Board values transparency and accountability and aims to respond in a timely and complete manner to all congressional inquiries.”

At best, the confrontations pose a distraction for the Fed as it prepares to raise interest rates for the first time in nearly a decade. At worst, they could damage the central bank’s reputation in a way that hinders its effectiveness, potentially through legislative changes to how it conducts monetary policy.

The leak probe, and other points of tension, will be on full display Wednesday when Ms. Yellen delivers her semiannual monetary-policy testimony before the House panel hitting hardest against the central bank.

House Financial Services Committee Chairman Jeb Hensarling (R., Texas) said the Fed is violating the law by refusing to fully comply with a committee subpoena on the leak probe.

Asked if the committee may move to hold the Fed chairwoman in contempt—the next step in the process—Mr. Hensarling declined to say.

“We want the chair to tell the truth,” he said. “We want the Federal Reserve to produce the documents they are legally obligated to produce.”

Current and former staffers on both sides of the aisle, and former Fed officials, say the relationship didn’t have to get this bad. They argue the Fed has done poorly in some basic tasks required to keep the boss happy—like responding swiftly to requests for information—and it is catching up.

“The fact that we have to reiterate and re-ask the same questions hearing after hearing…should indicate there is a problem of lack of transparency despite all their so-called efforts to ameliorate it,” said Rep. Scott Garrett (R., N.J.), who helped craft pending legislation to change Fed operations on both the monetary policy and regulatory sides.

Some critics will never be satisfied, said Donald Kohn, a former Fed vice chairman who has worked with Ms. Yellen and Mr. Bernanke. But he acknowledged the central bank has a problem “at least of perception.”

“The Fed needs to be very careful that it is acting in a way that the middle two-thirds of the Congress will see as reasonable, and responding to the Congress promptly and reasonably,” he said. “That perception isn’t there.”

The tensions can be traced to the economic and political upheaval of the past seven years. The Fed earlier had gained an aura of technocratic competence thanks to steady economic growth, low inflation and financial stability. The 2008 financial crisis and its aftermath sullied that aura.

At the same time, Congress became more polarized. Conservative Republicans think the radical steps the Fed took to resuscitate the economy represent an irresponsible exercise of centralized government power. Populist Democrats and others think the Fed is too cozy with bankers who instigated the crisis.

The Fed has been hamstrung by a culture that prizes staying above ordinary politics and considers its independence central to its ability to do its job. The result is a Congress that sees the central bank as unresponsive, aloof, politically tone-deaf and unaccountable, and a central bank that wonders whether it could do anything, short of submitting every decision to congressional vote, to satisfy its critics.

“What they mean is, ‘They’re not giving us what we want. … They’re not supporting our theories.

They’re not agreeing with our policy objectives,’ ” said a former Obama administration official who worked on Fed matters, referring to Congress’s view of the central bank. “Those are battles that cannot be won no matter how hard you try.”

As Ms. Yellen put it when asked recently about legislation to revamp the Fed’s structure, “I’m not certain what the problem is that needs to be addressed.”

Many of the strongest complaints come from Republicans. But some Democrats have expressed dissatisfaction, publicly and privately, with the conduct and attitude of the Fed.


Six Democrats, including Sens. Elizabeth Warren of Massachusetts and Sherrod Brown of Ohio, joined Republicans last year in complaining the Fed hadn’t complied with congressional intent in a requirement to restrict its emergency lending authority. Lawmakers from both parties are now pushing legislation to put more detailed constraints on those powers since the Fed failed to address their concerns.

Reps. Darrell Issa (R., Calif.) and Elijah Cummings (D., Md.), the leaders of the House Oversight Committee, sent a rare bipartisan request to the Fed last year seeking more details about how the Fed handled a foreclosure settlement, which some lawmakers said may have gone too easy on big banks.

The Office of the Comptroller of the Currency, which was also involved in the settlement and received the same request, turned over the information within a few weeks. The Fed waited more than two months until the night before Ms. Yellen was set to appear before the Joint Economic Committee, on which Mr. Cummings also serves, to produce the documents—a point Mr. Cummings complained about at the time.

J.W. Verret, until recently the House Financial Services Committee’s chief economist, recalled reaching out to a Fed governor to discuss Republican legislation requiring the central bank to follow a formula when setting interest rates—a measure Ms. Yellen and other Fed officials oppose.

The governor, whom Mr. Verret declined to name, agreed. But soon after, Fed congressional-affairs staff canceled the meeting and offered a sit-down with Fed staff instead.

Mr. Verret, now an assistant professor at George Mason University School of Law, said he got a better reception from several regional Fed banks including Dallas and St. Louis, which operate independently of the Fed board of governors in Washington. He found the presidents themselves—not just staff—willing to discuss provisions of the bill.

“Sometimes they agreed with me, sometimes they didn’t, but it felt like a real discussion,” he said. “I never had a discussion with any staffers from the Fed board…that didn’t feel scripted and like political talking points.”

One Democratic aide, whose boss is generally supportive of the central bank, said the Fed is responsive on some issues but not others, and tends to wait until the last minute to start engaging with members of Congress on important issues, such a measure requiring monetary-policy audits by an arm of Congress. The rest of the time, the person said, they seem disinterested in dealing with the Hill.

“The more criticism the Fed gets, it makes it harder on someone like Janet Yellen to maintain the Fed’s reputation as a nonpartisan expert institution that is doing the right thing,” said Sarah Binder, a senior fellow at the Brookings Institution who has studied the Fed’s relationship with Congress.

Fed leaders have long sparred with ardent critics on the Hill such as former Reps. Henry Gonzalez (D., Texas) and Ron Paul (R., Texas) and former Sen. Jim Bunning (R., Ky.). But frustration with the Fed has grown more mainstream since the 2008 crisis, a trend that can be measured in part by the proliferation and popularity of legislation aimed at the central bank.

One illustration: Mr. Paul’s anti-Fed bills attracted few, if any, co-sponsors in the years before the crisis. The “Audit the Fed” bill he introduced in 2009 went on to collect 320 co-sponsors in the House.

Some Fed officials, for their part, have defended the central bank’s independence from political interference as crucial for its mission on monetary policy and the economy.

Bills like Audit the Fed would politicize monetary policy and subject the Fed to short-term political pressure that could threaten its independence, Ms. Yellen said in February at her semiannual testimony before the Senate Banking Committee. “Academic studies establish beyond a shadow of a doubt that independent central banks perform better,” Ms. Yellen said.

There is evidence Ms. Yellen is trying to do some damage control, especially after House Republicans railed against her at the February hearing for failing to meet more regularly with the GOP.

She met with or spoke to lawmakers 11 times in May, compared with an average 2.4 lawmaker meetings a month before that. Nine of those conversations were with Republicans, including multiple calls with the leaders of the House Financial Services and Senate Banking committees.

Some Capitol Hill offices from both parties say they find the Fed accessible and willing to engage in deep discussion on any topic. Sen. Mark Warner (D., Va.) said Fed leadership and staff has been “incredibly responsive to my questions, even if sometimes their answers aren’t always the ones I’d prefer to hear.”

One Democratic aide said he has weekly—if not daily—interactions with the Fed, and recalled recently spending an hour on the phone with Governor Jerome Powell talking about derivatives risk.

Fed supporters also note Mr. Powell met with high-level GOP Senate staff in January. A Fed spokesman said Fed staff generally provide multiple briefings each week to congressional staff. The Fed also hosts an annual briefing at the central bank for congressional staff.

How Quickly Are You Growing Old?

Measuring the pace of biological aging in young people could someday help prevent age-related diseases

By Sumathi Reddy

July 13, 2015 1:22 p.m. ET

Feel like you’re 40 years old going on 60? Or maybe, 40 going on 21?

Age may be just a number, but medical experts increasingly are saying it might not always be the right number to gauge your health.

Everybody grows older at a different pace, according to a recent study that found the processes of aging can begin fairly early in life. The study calculated the aging rate of 954 men and women—taking various measurements of their bodies’ health—when they were each 26, 32 and 38 in chronological years. By analyzing how these measures changed over time, the researchers were able to see who aged faster and who slower than normal.

The aim of the research is to be able eventually to identify signs of premature aging before it becomes evident years or decades later in chronic diseases such as cardiovascular disease, diabetes or kidney and lung impairment. “Intervention to reverse or delay the march toward age-related diseases must be scheduled while people are still young,” according to the study, published online last week in the Proceedings of the National Academy of Sciences.

Also, being able to measure aging in young people could allow scientists to test the effectiveness of antiaging therapies, such as calorie-restrictive diets, the study said.

To measure the pace of biological aging, which the study defined as the declining integrity of multiple organ systems, the researchers relied on 18 separate biomarkers. These ranged from common measures such as HDL-cholesterol levels and mean arterial blood pressure to more obscure ones like the length of telomeres—the protective caps on the ends of chromosomes that shorten with age.

Most of the study participants aged one biological year for each chronological year. Some, however, put on as much as three biological years for every one year, while others didn’t increase in biological age at all during the 12-year span the study surveyed. Using a subset of the biomarkers, the researchers calculated that at 38 years old, the participants’ biological ages ranged from 28 to 61.

Dr. Daniel Belsky, an assistant professor of medicine at Duke University School of Medicine, was first author on a new study that measured the pace of biological aging in young people. Photo: Laura Louison        

Studies looking at biological age have been done before, but mainly in older people who already had age-related diseases. Earlier studies also generally took just a single reading that compared chronological with biological age and didn’t examine the pace of aging over time.
“This makes detecting the mechanism of aging difficult because it can be hard to separate aging from a disease-specific mechanism,” said Daniel Belsky, first author of the new study and an assistant professor of medicine at Duke University School of Medicine. “It also may be the case that it’s too late to intervene effectively with some of these individuals” after the age of 40 or 50, he said.

The study by Dr. Belsky and colleagues made use of an unusual cohort: a group of young people, all born in 1972 or 1973, and each of whose biomarkers had been recorded over an extended period. The researchers found data on such a group in a study being conducted in Dunedin, New Zealand, in which an international team of scientists is tracking a range of health measures and behaviors from birth to death.

 Icons by Mike Sudal/The Wall Street Journal        

The research team needed to come up with a set of biomarkers they felt would accurately reflect the aging process. Popular biological-age calculators have proliferated, and websites allow people to enter a few numbers and get a reading. But aging experts say there isn’t as yet a standardized clinical measure of biological age.

The set of 18 biomarkers the team settled on tracked the function of organs such as the liver and kidneys, the immune and metabolism systems and dental health, among other measures.

The results were checked against other tests typically given to elderly people to gauge aging,
including functions such as balance, coordination, grip strength and cognitive abilities.

Participants who showed accelerated aging in the biomarker tests also performed worse on the other tests.

Dr. Belsky hopes the biomarker formulas the team used will ultimately be useful in a clinical setting in a few years. But the measures will need to be refined in future studies looking at different populations, he said. Biomarkers may be dropped or added and given different weights or importance.

“Now there’s work to do to make these measurements better, faster and leaner,” Dr. Belsky said, noting that many of these measures are already taken during regular doctors’ visits.

Nir Barzilai, director of the Institute for Aging Research at Albert Einstein College of Medicine in New York City, said coming up with the right combination of biomarkers to evaluate aging is very important as experts push to develop interventions and therapeutics to target aging and the onset of chronic diseases.

Such tests could result in big medical savings, too, said Dr. Barzilai, who wasn’t involved in the study. “If you’re 60 and you do a test that determines you’re biologically 50, maybe you don’t need a colonoscopy or mammogram every year,” he said.

Dr. Barzilai heads a group of the country’s leading aging experts who are launching a clinical trial to test the diabetes drug metformin to see if it can delay or prevent other chronic diseases often associated with aging. The group hopes to persuade the Food and Drug Administration to consider aging an indication, or preventable condition. Such a move could spur drug manufacturers to target factors that contribute to aging.

Dr. Belsky said the research team also hopes to investigate differences in how fast people age by looking at genetics, lifelong environmental factors and lifestyle behaviors. Previous research on twins has suggested that about 20% of aging can be attributed to genes, so there are many other factors that can be modified to affect the aging process, he said.

Measuring the pace of aging in young people could prove useful to study lifestyle interventions, such as diet and exercise, but are less likely to prompt drug interventions, said James Kirkland, director of the Robert and Arlene Kogod Center on Aging at Mayo Clinic, in Rochester, Minn.

“If you wanted to give a drug to a 38-year-old in an effort to slow or delay or prevent subsequent development of age-related chronic diseases 20 or 30 years later, you would have to have a drug with zero side effects over that amount of time and you would have to prove that,” Dr. Kirkland said.

Stephen Kritchevsky studies functional assessments in older people such as grip and gait, both of which are measures used to determine how well people are aging. Dr. Kritchevsky, who is a professor and director of the Sticht Center on Aging at Wake Forest Baptist Medical Center in Winston-Salem, N.C., said strength typically peaks around age 35 to 40 after which people start losing 1% of their strength per year. That rate accelerates in the 70s and 80s.

How fast older people walk is considered one of the most useful markers for determining future health, Dr. Kritchevsky said. Exercise can help people walk faster, and strength can be improved through resistance training. Balance-training regimens are readily available, including on the National Institute on Aging website. Yoga and tai chi are also believed to help improve balance, he said.

“The primary message is that what happens to us at the end of life has its roots early in life,” said Dr. Kritchevsky of the new study in the Proceedings of the National Academy of Sciences. “Investments in your health in middle age will have payoffs in old age.”