German Government Sends Panic Signal: Ask Citizens to Stockpile Food, Water and Cash! Why?

A few days back the German government reportedly asked their citizens to stockpile food, water and cash or essentially prepare a survival kit supposedly for ‘civil defense’

From Quartz

In English, stashing away food for times of need is “squirreling.” In German, it’s “hamstern.” Hamster pictures, tweets, and jokes are everywhere in Germany this week, since the Frankfurter Allegemeine Zeitung (link in German) revealed that the government is asking citizens to stockpile food and water in case of a national emergency.

It’s the first major update to the country’s civil defense policy since the Cold War, and a paper about the new “concept” will be presented to parliament by interior minister Thomas de Maiziere today (Aug. 24). While the document says that “an attack on German territory, requiring conventional defense of the nation, is unlikely,” it adds that it can’t rule out a major security threat that would make it so emergency services couldn’t reach people quickly.

The paper calls upon individuals to put aside enough food for 10 days and enough water for five, based on a two-liter allowance per person per day. It also recommends that people keep sufficient cash reserves, medicines, blankets, and energy supplies in their homes.

Many see a clear link between the new guidelines and the series of deadly attacks that have unsettled Germany in recent weeks, but according to interior ministry speaker Johannes Dimroth, the guidelines were last amended in 1995 and were long overdue a comprehensive overhaul. He said that many of the recommendations are nothing new—the Federal Office for Civil Protection and Disaster Assistance has been offering the same tips for a long time.

Politicians from the Green and Left parties slammed the new recommendations as scaremongering, saying that asking people to stockpile emergency supplies will make them feel insecure. “The government could completely worry people and even lead them to panic buy,” Dietmar Bartsch, co-leader of the Left party said.

Read same reports from Reuters and Independent.co.uk

Has terrorism reached a boiling point where it has morphed into a pandemic? Or has the German government been using civil defense as pretext to expand the police state? Or has it been that the German government senses some other risk or potential black swan event which has used instead ‘civil defense’ as a cover?

The irony is that early this year, the German government proposed that cash transaction be banned or limited to just € 5,000 euros. And this has been met with stiff resistance.

Nevertheless, because of the ECB’s “do whatever it takes” policies, finance companies like reinsurer Munich Re and lender Commerzbank have already been stashing up millions of cash in vaults.

So cash hoarding seem to be a snowballing dynamic even before the German government’s announcement. Could this be actually linked to 'civil defense'?

Besides, negative interest rates regime has already prompted a German cooperative savings bank to charge negative rates to retail clients. And this means likely more people flocking into cash.

And another thing, this has not just been limited to the German government, the Czech government have also called for a similar contingency preparation. 

The point here is WHY has the Europe's governments been evincing signs of panic?

The Nationalization of Japan's Stock Market

At my old (now closed to the public) blog, I observed last April 2016 that the Bank of Japan's QE, which included buying stock market ETFs had virtually meant the nationalization of its equity markets:

The BoJ's QE program, which has partly been intended to bolster the stock market, implicitly means the use price controls. Such tacit price controls were originally designed to favor stock market owners through the mechanism of increased demand provided by the BoJ and reduced supply from the public in order to push equity prices higher.

Yet increases in BoJ's share ownership of a corporation means decrease in the public's share ownership.  Remember, the BoJ buys these shares from the public. Hence, intensifying implicit price controls through the deepening of BoJ's asset buying extrapolates to the path of complete nationalization of the Japan's stock market.

Furthermore, as the BoJ increases its ownership in the stock market, liquidity is reduced if the BoJ does not sell. Eventually, the greater the BoJs ownership, the lesser the trading volume/liquidity. In essence, sustained BoJ QE would mean monopolization, and thus, the end of the stock market.

A major mainstream research outfit seem to share my view. From CNBC: (bold mine)

In a report titled, "BOJ nationalizing the stock market," Nicholas Smith, an analyst at CLSA, said that the central bank's exchange-traded fund (ETF) buying program was distorting the market.

At its late July meeting, the BOJ said it would increase its ETF purchases so that their amount outstanding will rise at an annual pace of 6 trillion yen ($56.7 billion), from 3.3 trillion yen previously.

Those purchases were particularly distorting to the market because they focused largely on funds tracking the Nikkei 225 index, Smith said in a note dated Sunday, estimating that more than half of the BOJ's ETF buying was likely in Nikkei-tied funds.

That was particularly distorting because that gauge was "a Flintstones index from an abacus age," due to its arbitrary inclusions.

For example, he noted that Uniqlo owner Fast Retailing had the largest weighting in the index, but that was primarily due to its high share price after avoiding any stock splits since April 2002. He estimated that BOJ buying of Nikkei-tied ETFs worked out to more than 16 percent of the stock's free float each year.

By comparison, Toyota Motor had the biggest market capitalization of any Japan stock, but was only ranked 15th by weight in the Nikkei index, he noted.

"If it seems strange that the BOJ is hamstringing the price discovery mechanism of the Japanese stock market by partially nationalizing it, it is all the stranger that it chooses to do so by substantially skewing its buying towards such a distorting index," he said. "The arbitrary decisions of the Nikkei committee get to choose the destination of trillions of yen of BOJ – and hence government - money."

Smith expected that as long as the BOJ continued to buy ETFs, the Japanese market's performance would become increasingly a function of liquidity in the central bank's buying basket.

Other parts of the stock market were also being distorted, analysts said.

The BOJ's purchases of Japan real-estate investment trusts (J-REITs) had also lost market-based "price discovery," analysts at Deutsche Bank said in a note Friday.

They noted that on August 18, the BOJ purchased around 1.2 billion yen worth of J-REITs for a total of around 61.2 billion yen worth so far this year and 330 billion yen worth since October of 2010. Last week's BOJ action caused the TSE REIT index to drop sharply in the morning session then surge later in the afternoon, the report said.

Because the J-REIT market is so small, the BOJ's purchases have an even stronger tendency to distort the market than the central bank's ETF purchases, Deutsche Bank said.

"While real estate majors are trading at more than 30 percent discounts to net asset value, their price levels are exactly opposite those of J-REITs, which are at premiums of above 30 percent," Deutsche Bank said, noting that both sectors should be tied to Japan's real-estate market.

"The elimination of the price discovery function leads to lost buying opportunities for investors and ultimately weakens the investment appetite," the report said, calling it a "serious error" by the BOJ.

Price "distortions" simply means that prices of such securities have veered from reflecting on the underlying fundamentals. Of course, this means that such misalignments signify as unsustainable conditions which will be subject to eventual (most likely violent) market clearing process.

Wall Street Journal Highlights Developing Extreme Divergences Between Financial Markets and the Real Economy

History is in the making. By history, I mean that the current financial environment has been evolving towards a critical inflection point unparalleled in the annals of finance and economics...courtesy of modern day technology enhanced central bank inflationism.

But since markets represent a process, the ramifications of current developments will be markedly different as time goes by.

And as part of the progressing symptoms, no less than mainstream media have been caught in the maelstrom of the widening abyss between the effects of inflationism in the financial world as against the real economy

An article from the Wall Street Journal as quoted by the Zero Hedge:

What exactly is the market trying to say about the state of the global economy? Do the recent record highs in U.S. stock markets signal growing confidence in the recovery, or do soaring government borrowing prices and flattening yield curves as borrowing costs tumble at even long maturities signal market fears that the global recovery is a distant dream?

How does one reconcile this year’s 30% rise in the price of gold—usually considered a hedge against inflation—with long-term swap rates suggesting inflation will remain low for years? And how does one explain the strength of European markets as many banking shares are trading at more distressed levels than at the height of the global financial crisis?

One answer to these disparities is that the markets have become so distorted by central bank activity that they are no longer transmitting very useful information about the economy at all.

Given that mainstream media has expressed on such patent discomfort. Such should account for manifestations of increased angst or apprehensions by even the elites.

As evidence, for insurance purposes, the wealthy or billionaires have been stashing record cash reserves. From CNBC:

The world's billionaires are holding more than $1.7 trillion in cash — the highest amount since one firm began recording the measure in 2010.

Because of what they perceive to be growing risks in the economy and world, the world's 2,473 billionaires are keeping 22.2 percent of their total net worth in cash, according to the Wealth-X Billionaire Census.

And some billionaires have even bet heavily against the current tide. 

And this only tell us how inflationism has been driving a wedge between policymakers and even the supposed beneficiaries of the "wealth effect". Nevertheless increasing tensions or pressures will eventually find an outlet valve...soon

Infographic: The Largest US Companies by Market Cap Over 15 Years

Change is permanent. Economic conditions ALWAYS change, so does the firms that constitutes them. And such dynamic can be seen or has been manifested by how the public discerns or appraises public listed companies. The infographic below exhibits on the transformation of the public's perception of listed companies--in the order market cap ranking--in particular, the largest 5 listed US companies--in 15 years.

From the Visual Capitalist

By definition, the largest companies by market cap are the most valued by investors in absolute terms.

Of course, these companies change all the time. Secular trends rise and fall, and economic cycles rinse and repeat. New companies are built, while former “blue chips” may struggle. For every Enron that busts, there’s an Amazon shooting up through the ranks.

At the end of the day, however, a snapshot of the largest companies at a given time tells us what the market valued the most. And as this week’s chart shows, this simple data series can also tell us a surprising amount about the macroeconomic story over recent years.

ENERGY DOWNTURN, TECH UPTURN

In 2001, oil was about $30/bbl. Only one oil company (Exxon) cracked the top five list by market cap at the time.

Fast forward a decade, when oil prices soared to the $100/bbl neighborhood. At this point, three of five of the largest companies by market cap were now in the oil business: Exxon, PetroChina, and Royal Dutch Shell.

And today? We are back at $40/bbl and no energy companies crack the top five. Instead, the list has been completely replaced by tech companies, including Apple, Alphabet, Amazon, Facebook, and Microsoft.

SCALE IS IN STYLE

Well, scale has always been in style, but now it is achievable in ways like never before. To reach more people, Walmart had to build more stores, expand complex supply chains, and hire new employees. This takes a lot of capital and manpower, and the stakes are high for each new expansion.

Amazon on the other hand, can bring in more revenues with less of the work or risk involved. Scale allows tech companies to get bigger without getting bogged down by many of the problems that companies with millions of employees can run into.

The world’s best tech companies are also able to gain competitive advantages that are extremely difficult to supplant. While oil companies are fighting over a limited supply and have a commoditized end product, Google and Facebook have key businesses that are truly unique and the best at what they do.

For these reasons, tech is likely to top the leaderboard for the largest companies by market cap for the foreseeable future.

The dominance of tech companies indicates  that either the economic activities has been gravitating towards the industry, or that market has been overrating the industry's contribution--due to central bank policy distortions.

Courtesy of: Visual Capitalist

Chart and Quote of the Day: European Banking System's Doom Loop

CFR's Benn Steil and Emma Smith writes:

Italian banks have taken a pounding of late from the ECB, the markets, and the media. They currently hold a whopping €360 billion in nonperforming loans (18 percent of their portfolio), the most in the European Union and double that of the next worst performer—Spain.

As shown in the graphic above, Italy is also the worst performer among major EU nations along another metric of banking-sector fragility—the dreaded “doom loop” of indebted banks and sovereigns.

A doom loop is set in motion when banks load up on debt issued by their government, and the government in turn guarantees, explicitly or implicitly, the debt of the banks. As banks’ balance sheets weaken with rising bad loans, this impairs the fiscal position of the government backstopping their debt. And as the government’s fiscal position deteriorates the loss exposure of the banks holding its debt rises. Thus do weak banks drag down weak sovereigns, which in turn further weighs on the banks—ad infinitum.

The graphic also shows that Portugal’s doom loop metric has soared over the past two years. Portuguese banks have been gorging on Portuguese sovereign debt, taking it from 7 percent of total assets to 10 percent—the same level as Spain. If they continuing loading up at this pace, they will reach Italian levels by 2018.

This is worrying because Portugal has a government debt-to-GDP ratio of 129 percent (just below Italy’s 136 percent) and is set to fall short of its deficit target for a third year running. Spain, with debt to GDP at 101 percent, will fall short for the 9th straight year. And slowing growth means that current budget projections may prove overoptimistic yet again, leading to ratings downgrades.

What does this mean from a practical perspective? Well, we calculate that a 15 percent fall in the bond prices of their respective sovereigns would erase 35 percent of Italian bank capital, 22 percent of Portuguese bank capital, and 18 percent of Spanish bank capital. This would fuel already heightened tensions with the EU over new bailout restrictions and revive speculation of a Eurozone break-up.

This shows why ECB's negative policy regime emerged. Unsustainable debt has bounded both Europe's governments and their respective national banking system where both have been locked in a deadly embrace.

The aim of negative rates has not only been to redistribute wealth to the beleaguered triumvirate -- the insolvent governments and banking system, as well as to the ECB, but to buy time and keep the unsustainable status quo afloat. 

But as pointed out above, doom loop to ad infinitum or the debt trap translates to an eventual breaking point.

More Central Bank Panic: New Zealand's RBNZ Chops Interest Rate to New Record Low to Sustain Asset Bubbles, Kiwi Soars!

Make this 666++ interest cuts by global central banks since Lehman

From Bloomberg: (bold mine)

New Zealand’s central bank cut interest rates to a fresh record low and flagged more easing to combat low inflation, disappointing some investors who were looking for a more aggressive signal. The local dollar surged.

“Our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range,” Reserve Bank Governor Graeme Wheeler said in a statement Thursday in Wellington, after lowering the official cash rate by a quarter point to 2 percent. The central bank’s forecasts indicated at least one more rate reduction is likely.

While today’s cut was expected by all 16 economists surveyed by Bloomberg, investors had priced a 20 percent chance of a half-point reduction, according to swaps data. Wheeler said that a 50 basis points move wasn’t seriously considered or justified, in a media briefing following today’s decision.

Wheeler has been prodded into further monetary loosening by the strong New Zealand dollar, which is suppressing import prices and keeping inflation below the RBNZ’s 1-3 percent target band. The currency has climbed since Wheeler last cut rates in March as he grew wary of fanning a housing boom with even lower borrowing costs.

The supposed publicized intention of the rate cuts has been due to a stronger NZ dollar (kiwi), but the response of the market, given the lesser than expectation of policy action, has been to strengthen the kiwi.

So even from a short term standpoint the RBNZ's action has only produced market actions opposite to the desired effect   That's the USD-NZD quote as of this writing.

In my view, the RBNZ's interest rate action has hardly been about inflation targeting....

The real issue: Record household debt to income!

Since 2008, as the central bank chopped policy rates to record low, household debt climbed to surpass the 2008 highs.

Yet the bigger the debt, the larger the cost of repayment or debt servicing. Hence, RBNZ's lowering of the debt servicing cost, in the hope that households will act to mend their respective balance sheets. But the RNBZ forgets, ceteris paribus, that when the cost of an activity decreases, people do more of the said activity. So debt continues to ballooned due to the RNBZ's interest rate subsidies. 

The RNBZ has only been kicking the proverbial can down the road.

Naturally, banks bankrolled most of the surge in household debt, as shown by the sustained surge in the banking system's balance sheets.

And where has all these gargantuan growth debt flowed into?

Well the blunt answer: Inflate asset bubbles.

Apparently even the central bank has recognized this. From the same Bloomberg article: (bold added)

Wheeler last month announced new lending restrictions for property investors in an attempt to cool the nation’s rampant housing market and give himself more room to lower rates. From Sept. 1, the Reserve Bank will require investors across New Zealand to have a deposit of at least 40 percent to obtain a mortgage.

Record-low borrowing costs have encouraged the housing boom to spread beyond largest city Auckland, where surging immigration and a supply shortage have seen prices almost double since 2007. In the North Island city of Hamilton, house prices jumped 32 percent in the year through July, while nationwide house-price inflation accelerated to 14 percent.

Stronger Growth

“House price inflation remains excessive and has become more broad-based across the regions, adding to concerns about financial stability,” Wheeler said. The bank was consulting on stronger macro-prudential measures that should help to mitigate financial system risks, he said.

Central bank's macro prudential policies function like band-aid. They treat the symptom rather than the disease.

Nonetheless to showcase more of where skyrocketing debt has gone into...

See? Central banks can make stocks go up FOREVER! (chart from chartrus.com)

Infographics: The Regulatory Burden in the U.S. is a Whopping $4 Trillion

There is no such thing as a free lunch. Government actions comes with costs: either direct or indirect.

Part of the indirect costs constitute time, money and effort exerted to comply with regulations. This is called the compliance costs.

At the Visual Capitalist, Jeff Desjardins explains the onus of compliance on the regulatory-bureaucratic state:

One of the big problem with regulatory policy is that typically new regulations are only added – never subtracted.

A good example of this is the federal tax code, which is now 74,608 pages long.

It’s an astonishing 148x longer than it was under President Franklin Roosevelt’s New Deal:

If all you have is a hammer, everything looks like a nail. Regulators add new regulations to “solve” problems, but there is much less political will to actually go back and sort through any outdated, ineffective, or convoluted regulations of the past.

Over time, this has created a massive regulatory burden that continues to snare the growth potential of many industries. According to one study, the cumulative effect creates a burden with a dollar value greater than the GDP of many of the world’s largest economies.

REGULATORY BURDEN IN THE U.S. IS A WHOPPING $4 TRILLION

The following graphic comes from a recent study by the Mercator Institute and it shows that the U.S. regulatory burden alone is bigger than the economies of Germany, France, Brazil, Russia, or the U.K.

The full study focuses on how regulatory accumulation, or the buildup of regulations over time, changes the approach that businesses have in making decisions and investments that could lead to innovation and technological growth.

These changes affect the economy, and a core finding of the study is that U.S. growth was reduced by an average of 0.8% per year from 1980 to 2012 due to this regulatory accumulation. An exponential effect is created over time as companies are forced to invest fewer dollars into activities like R&D and hiring new staff. Instead, they must divert money and time to areas such as compliance or acquiring licenses.

There are now over one million words denoting “constraints” in the Code of Federal Regulations – and the total size of the code is roughly 180,000 pages according to Mercator’s database.

 

Infographics: Mapping the Greatest Empires of History

Since empires are products of human action, then they are subject to cyclicality too.

An almanac for several major empires have been shown below.

The Visual Capitalist explained:

Just like the stock market, the history of the greatest empires is cyclical in nature. Even the most powerful empires have crashed and burned – and it is this creative destruction that creates the next opportunity for new civilizations and cultures to rise.

At its height, the Roman Empire spanned across 5,000,000 km² with 70 million people within its borders. Yet, despite massive amounts of riches and its fearsome legionaries, Rome slowly but surely self-destructed. While there are many complex factors involved in this including the debasement the empire’s currency, this collapse set the stage for the next cycle.

The Byzantines would take over in the East, and centuries later the Holy Roman Empire eventually would emerge in the West. The nomadic Huns unified a formidable empire under Attila in the grasslands of the Western Steppe. To the south of the Mediterranean, the Umayyad Caliphate became one of the greatest empires ever formed.

MAPPING THE GREATEST EMPIRES OF HISTORY

The following infographic from Just the Flight looks at the greatest empires of history, and their geographical and political footprints.

Courtesy of: Visual Capitalist

What important lessons for business and investing can we take home from the cyclical nature of empires?

For one, even empires that once seemed impenetrable have fallen apart. We must be vigilant to spot cracks in our investments and business ideas at all times, because even the mightiest companies can bite the dust. The music industry was once a machine: there was an oligopoly of major labels that could produce radio singles and market them to rake in money. Many of these companies did not see the writing on the wall as it happened, and now Apple, Spotify, and other companies are eating their lunch.

Lastly, even in the wake of the worst crash, there are opportunities available to build something great. Things were gruesome for many of the empires that imploded, but there were certainly people that were able to prosper even in spite of the tough times. The “heroes” of The Financial Crisis such as Michael Burry and Steve Eisman were able to recognize a disaster, while making smart decisions to help them build their own empires and legacies.

Everything that has a beginning has an end.

US Consumers Under Pressure: Outlet Malls On the Way Out? A Coming Restaurant Recession?

Job growth in the US beat expectations. So reported the US government.  And since jobs have seemingly transformed into some sort of mental conditioning trigger to what has been a deeply entrenched confirmation bias by Wall Street, government report on jobs appears to have inspired manic buying on the stock market for the past 6 months. See chart here. Ironically, such frenzied stock market pumps emerged in whatever direction of jobs growth, or whether such reports posted beats or misses.

The paradox has been that US jobs have been growing so strongly such that consumers appear to be under sustained pressure. Or consumers haven’t been spending enough to the point that they have been affecting the corporate environment (sales and profits). This means that either jobs created have been of low quality material or that consumers have resisted on spending their incomes and instead have chosen to save them. But the personal savings rate  data (as of June) don’t seem to fit this logic.

The other probable explanation could be that these job numbers have not been representative of reality. Election time could mean the padding up of job numbers to enhance the chances of the incumbent's bet.

This post has not been meant to discuss about US job conditions or politics. 

Instead, this post has been intended to exhibit symptoms of increasingly strained US consumers

The Bloomberg reported (August 5) that retail trouble have spread to outlet malls, or malls designed to cater to manufacturers directly selling to consumers

Outlet mall square footage expanded by 33 percent over the past decade, according to Cushman & Wakefield. And a concept that began as a way to offer last year's fashions at cut-rate prices far from mainline stores soon grew beyond those boundaries…

After ramping up growth, outlet mall expansion is starting to slow

Retailers such as Coach and Nordstrom opened more outlet locations than mainline stores. Outlets crept into cities, and in many cases opened just a short drive from a retailer's full-price store. Many of the same deals were available on the Web, saving shoppers the outlet trip. Further blurring the lines between outlets and chains was the growth of off-price retailers such as T.J. Maxx, which also carries discounted brand names.

Now, that retail growth engine is slowing. Retailers have put outlet store opening plans on hold. Real estate developers are wavering: There was 1.8 million square feet of U.S. outlet center space under construction in the second quarter, compared to 4.2 million square feet under construction during the second quarter of 2015, according to Cushman data. 

 

After 15 straight positive quarters, outlet center construction growth turned negative at the end of 2015. In the second quarter, outlet center square footage under construction fell 24 percent from the year before, Cushman's data show.

So more signs of brick and mortar shopping mall woes.

Some corporations have recently reported conditions that has manifested the said symptoms, as enumerated by the Sovereign Investor.com

Reports earlier this week hit the presses, and I immediately noticed a trend: The American consumer is no longer going to be the all-star for the economy. Take for instance:

-Ford, GM and Chrysler — three of the U.S.’ largest auto companies — reported sales for July that missed estimates: down 3%, 1.9% and up 0.3%, respectively.

-Delta Airlines, one of the largest airlines in the world, said revenue fell 7% in July as part of its monthly performance update.

-Macy’s, the biggest department store company, reported a decline in sales for July, leading to more aggressive markdowns and an industry-wide sell-off.

Many analysts are now anticipating a restaurant recession, similar to what led the previous two recessions, as major restaurant chains McDonald’s, Chipotle and Texas Roadhouse are posting weaker earnings and offering up guidance below analyst expectations.

These are all consumer-driven businesses, and they all speak to a weaker consumer.

Retail outfit Office depot which closed 400 hundred stores by the end of the second quarter announced that it will close 300 more in the 3 years. Aside from household, signs of decay in business conditions?

And speaking of the risk of ‘restaurant recession’, another Bloomberg article (August 2) noted that

Restaurants are having a pretty unappetizing earnings season.

Fifteen of the 16 restaurant chains that have reported second-quarter earnings so far said sales were down from a year ago, or that growth had slowed from the previous quarter. For the first time since 2009, average comparable sales for the group turned negative.

The downbeat results prompted Stifel restaurant analyst Paul Westra to deem it the start of a "restaurant recession."

 

Of course, a downturn doesn’t mean that all restaurants will be affected. Some will benefit from the miseries of others. 

For instance, US consumers have reportedly downscaled on outdoor meals in favor of burgers and pizza joints. Such is called the income and substitution effect.

The point is: the weakening US consumer chimes with what has been going on elsewhere around the world.