geopolitics Archives - The Automatic Earth

Plunging Commodities Interfere With The New World Order

Dec 082015

December 8, 2015 Posted by Raúl Ilargi Meijer at 7:17 pm Finance Tagged with: Anglo, CIA, commodities, Congo, copper, geopolitics, iron ore, MI5, miners 8 Responses »

Poached baby gorilla, Virunga Park

Anglo American, a British company, and one of the world’s biggest miners, and a ‘producer’ (actually just a miner, how did those two terms ever get mixed up?!) of platinum (world no. 1), diamonds, copper, nickel, iron ore and coal, said today it would scrap dividends AND fire 85,000 of it 135,000 global workforce (that’s 63%!).

Anglo is just the first in a long litany line we’ll see going forward. Commodities ‘producers’ are being completely wiped out, hammered, killed, murdered. They’ve been able to hedge their downside risks so far, but now find they can’t even afford the price of the hedges (insurance) anymore. And then there’s all the banks and funds that financed them.

And they’ve all been gearing up for production increases too, with grandiose plans and -leveraged- investments aiming for infinity and beyond. You know, it’s the business model. 2016 will be a year for the record books.

Just check this Bloomberg graph for copper supply and demand as an example. How ugly would you like it today?

And what’s true for copper goes for the whole range of raw materials. Because China went from double-digit growth to shrinking imports and exports in pretty much no time flat. And China was all they had left.

Iron ore is dropping below $40, and that’s about the break-even point. Of course, oil has done that quite a while ago already. It’s just that we like to think oil’s some kind of stand-alone freak incident. It is not. With oil today plunging below $37 (down some 15% since the OPEC meeting last week), it doesn’t matter anymore how much more efficient shale companies can get.

They’re toast. They’re done. And with them are their lenders. Who have hedged their bets too, obviously, but hedging has a price. Or else you could throw money at any losing enterprise.

But there’s another side to this, one that not a soul talks about, and it has Washington, London and Brussels very worried. Here goes:

These large mining -including oil- corporations most often operate in regions in the world that are remote and located in countries with at best questionable governments (the corporations like it like that, it’s how they know who to bribe to be able to rape and pillage).

The corporations de facto form a large part of the US/UK/EU political/military control system of these areas. They work in tandem with the CIA, MI5, the US and UK military, to keep the areas ‘friendly’ to western industries and regime.

This has caused unimaginable misery across the globe, in for instance (a good example) the Congo, one of the world’s richest regions when it comes to minerals ‘we’ want, but one of the poorest areas on the planet. No coincidence there.

Untold millions have died as a result. ‘We’ have done a lot more damage there than we are presently doing in Syria, if you can imagine. And many more millions are forced to live out their lives in miserable circumstances on top of the world’s richest riches. But that will now change.

Thing is, with the major miners going belly up, ‘our’ control of these places will also fade. Because it’s all been about money all along, and the US won’t be able to afford the -political and military- control of these places if there are no profits to be made.

They’ll be sinkholes for military budgets, and those will be stretched already ‘protecting’ other places. The demise of commodities is a harbinger of a dramatically changing US position in the world. Washington will be forced to focus on protecting it own soil, and move away from expansionist policies.

Because it can’t afford those without the grotesque profits its corporations have squeezed out of the populations in these ‘forgotten’ lands. That’s going to change global politics a lot.

And it’s not as if China will step in. They can’t afford to take over a losing proposition; the Chinese economy is not only growing at a slower pace, it may well be actually shrinking. Beijing’s new reality is that imports and exports both are falling quite considerably (no matter the ‘official’ numbers), and the cost of a huge expansion into global mining territory makes little sense right now.

With the yuan now part of the IMF ‘basket‘m Beijing can no longer print at will. China must focus on what happens at home. So must the US. They have no choice. Other than going to war.

And, granted, given that choice, they all probably will. But the mining companies will still be mere shells of their former selves by then. There’s no profit left to be made.

This is not going to end well. Not for anybody. Other than the arms lobby. What it will do is change geopolitics forever, and a lot.

Recovery, Geopolitics and Detergents

Mar 302015

March 30, 2015 Posted by Raúl Ilargi Meijer at 1:38 am Finance Tagged with: detergents, geopolitics, Greece, living standards, power, propaganda, QE, recovery, Ukraine 8 Responses »

Gottscho-Schleisner Fulton Market pier, view to Manhattan over East River, NY 1934

Increasingly over the past year or so, when people ask me what I do, and that happens a lot on a trip like the one I’m currently on in the world of down under, I find myself not just stating the usual ‘I write about finance and energy’, but adding: ‘it seems to become more and more about geopolitics too’. And it’s by no means just me: a large part of the ‘alternative finance blogosphere’, or whatever you wish to call it, is shifting towards that same orientation.

Not that no-one ever wrote about geopolitics before, but it used to be far less prevalent. Much of that, I think, has to do with a growing feeling of discontent with the manner in which a number of topics are handled by the major media and the political world. Moreover, as would seem obvious, certain topics lay bare in very transparent ways how finance and geopolitics are intertwined.

In the past year, we’ve seen the crash of the oil price, which will have – financial and political – effects in the future that dwarf what we’ve seen thus far. We’ve seen Europe and its banks stepping up their efforts to wrestle Greece into – financial and political – submission. And then there’s the nigh unparalleled propaganda machine that envelops the Ukraine-Crimea-Russia issue, which has bankrupted the economy of the first and imposed heavy economic sanctions on the latter, for political reasons.

And while there are plenty people out there all across the west who may feel convinced that Greece had it coming, that waging wars in far away lands is the only way to keep the west safe, and that Putin is the biggest and meanest bogeyman this side of Stalin, if not worse, many also have come to question the official version(s) of events. Something that, if you ask me, is always good, even if it doesn’t mean the conclusions arrived at are always top notch.

For that matter, even Société Générale does geopolitical commentary, as evidenced in a note published by Tyler Durden:

Western sanctions have exerted a broad-based negative impact on Russian businesses. The cost of borrowing has climbed considerably not just for sanctioned institutions, but also for other Russian entities. Risk management departments across global enterprises are likely to continue erring on the side of caution, continually assessing the risk of sanctions materializing for counterparties in Russia. Normalization of business practices may only reemerge long after the removal of sanctions. Although this does not mean completely avoiding interactions with Russian entities, businesses and investors are increasingly cautious and selective in their participation…

Western sanctions against Russia may persist indefinitely. Some locals believe in the likelihood of de-escalation later this year, pointing to the lack of political cohesion and unanimity among Europe’s political leaders, and increasing calls for easing of sanctions. Russian businesses believe that escalation of sanctions may be hard to implement, given that they will also hurt European counterparties.

Some local asset managers are optimistic on the performance of Russian assets later this year, based on a perceived high likelihood of improvement in geopolitics. Although locals differ in their assessment of the timeline when sanctions may be lifted, they appear united in their support and admiration of President Putin. Few care to speculate on President Putin’s ultimate game plan, or whether one exists, citing the opacity of the situation. With that said, locals broadly concur that Russia would never (again) relinquish Crimea. In this light, Western sanctions against Russia based on its annexation of Crimea may persist indefinitely…

While in my opinion the conclusions in the note leave to be desired, which may be an indication that the boys are somewhat new to the topic, the very fact that SocGen issues notes about geopolitics, and uses the term itself, is interesting and – to an extent – solidifies the link about finance and geopolitics I noted before.

Still, I’, inclined to think that when it comes to Greece, the bank’s analysts are capable of leaving their narrow finance perch behind for a broader vista that allows for a view that makes Greece a political instead of a financial issue. Because that’s what is has become, whether the parties involved wish to acknowledge it or not.

Greece, like Ukraine, is about power politics, executed at about the same level of intelligence and sophistication that you and I had when we are still playing in a sandbox. And finance, economics, is one of the very favorite weapons to try and get the side perceived as weaker to say Uncle.

And that in and of itself is still far from the worst thing. The worst is that what reaches the general public about these power games – which are far from innocent, they kill, maim, hurt real people – is a distorted and simplified precooked storyline, so hardly anyone can make up their own mind about what happens. That is why the ‘alternative finance blogosphere’ feels increasingly compelled to cover that part of the story as well.

This is also a major problem in the more domestic issue of economic recovery. Unless we would agree, which we really shouldn’t, that making a small group of the population richer while the much larger rest is made poorer, is how we define ‘recovery’, we have no recovery. But it is still accepted and proclaimed like a gospel: our economies are in recovery.

If you take a step back and watch things from a distance, it’s truly too silly to be true, but endless repetition of the same lines, be they true or not, has them accepted as being cast in stone. It’s like selling detergent. It’s exactly like that: say something often enough and people start to believe it, connect to it. Of course it doesn’t hurt that people very much want to believe a recovery is here. Just as they want to believe product X will turn them into shiny happy people dressed in ultra white shirts.

And of the best pieces I’ve seen in a while on the illusionary recovery topic comes from Scott Minerd at Guggenheim Partners, writing in the FT:

QE Will Lower Living Standards Long Term

New monetary orthodoxy is likely to permanently impair living standards for generations to come, while creating a false perception of reviving prosperity. As economic growth returns again to Europe and Japan, the prospect of a synchronous global expansion is taking hold. Or, then again, maybe not. In a recent research piece published by Bank of America Merrill Lynch, global economic growth, as measured in nominal US dollars, is projected to decline in 2015 for the first time since 2009, the height of the financial crisis.

In fact, the prospect of improvement in economic growth is largely a monetary illusion. No one needs to explain how policy makers have made painfully little progress on the structural reforms necessary to increase global productive capacity and stimulate employment and demand. Lacking the political will necessary to address the issues, central bankers have been left to paper over the global malaise with reams of fiat currency. [..]

What I decidedly do not like about Minerd’s piece is the suggestion that if only policy makers had made more progress on ‘structural reforms necessary to increase global productive capacity’, things would have been fine, or better at least. Like if someone came up with a better way towards growth, that would solve our problems.

In my view, this is not about failing to find the right way towards more growth, it’s that more growth itself is not the right way to solve the issues. When he says policy makers and central bankers are ‘lacking the political will necessary to address the issues’, I can only hope he means the will needed to restructure the entire financial system, force bankrupt banks into bankruptcy and break up what’s left into pieces too small to ever again threaten an economy, let alone the entire financial system. But I don’t see him say it, so I’m left doubting that’s what he means.

Essentially, monetary authorities around the globe are levying a tax on investors and providing a subsidy to borrowers. Taxation and subsidies, as well as other wealth transfer payment schemes, have historically fallen within the realm of fiscal policy under the control of the electorate. Under the new monetary orthodoxy, the responsibility for critical aspects of fiscal policy has been surrendered into the hands of appointed officials who have been left to salvage their economies, often under the guise of pursuing monetary order.

The consequences of the new monetary orthodoxy are yet to be fully understood. For the time being, the latest rounds of QE should support continued U.S. dollar strength and limit increases in interest rates. Additionally, risk assets such as high-yield debt and global equities should continue to perform strongly.

Despite ultra-loose monetary policies over the past several years, incomes adjusted for inflation have fallen for the median U.S. family. With the benefits of monetary expansion going to a small share of the population and wage growth stagnating, incomes have been essentially flat over the past 20 years.

That last bit is the same as saying there is no recovery. Which is a tad curious, because Minerd started out saying, in his first paragraph: ‘As economic growth returns again to Europe and Japan’. Pick one, I’d say.

In the long run, however, classical economics would tell us that the pricing distortions created by the current global regimes of QE will lead to a suboptimal allocation of capital and investment, which will result in lower output and lower standards of living over time.

In fact, although U.S. equity prices are setting record highs, real median household incomes are 9% lower than 1999 highs. The report from BoA Merrill Lynch plainly supports the conclusion that QE and the associated currency depreciation is not leading to higher global output. The cost of QE is greater than the income lost to savers and investors. The long-term consequence of the new monetary orthodoxy is likely to permanently impair living standards for generations to come while creating a false illusion of reviving prosperity.

It’s by no means the first time I bring this up, but I’ll do it again until there’s no more need. The stories we are bombarded with 24/7 under the quite hilarious misnomer ‘News’ have been prepared, pre-cooked and pre-chewed for our smooth and painless digestion, and as such they contain only tiny little flakes of reality. They are designed to make us feel good, not understand the world around us.

It’s up to sites like the Automatic Earth – and there’s quite a few others – to expose these storylines and narratives for what they really are: tools to sell detergents. Their purpose is not to inform people, but to manipulate them into forming opinions about their world that serve the intentions of one or more groups of people hungry enough for power to occupy themselves with this sort of scheming.

Somewhere on the not so sharp edge between money and power, there are lots of people who devote their entire lives towards devising ways to make up your mind for you. And if you’re like most people, you like that, because it absolves you from having to think for yourself. But the price to pay doesn’t come with the commercials: if you let others think for you, you or your children may be called into war at any time of somebody else’s choosing.

And, as Scott Minerd says, the economic future for your entire families will look utterly bleak. Because that recovery they talk about? It’s not for you.

Debt Rattle Aug 17 2014: America Can See Its Future In The Mirror

Aug 172014

August 17, 2014 Posted by Raúl Ilargi Meijer at 3:37 pm Finance Tagged with: bonds, Ferguson, geopolitics, pension fund, stocks 18 Responses »

Leslie Jones The Hindenburg over Boston Common 1936

If Americans were less prone to self-deceit, they would have long since realized that the American Dream is over, for good, and that continuing to chase it is the worst of the few remaining options they get to choose between.

They could then look at themselves in the mirror and see their future.

As things are, however, the future is creeping up on them in small, slow and silent steps, until one day it will simply be there, no longer deniable or avoidable, and it will find them woefully unprepared.

This is not true only for Americans, the entire formerly rich world will undergo the same transformation. But it will be very pronounced stateside.

It’s impossible to follow events in Ferguson, Missouri and not recognize that there are thousands of – potential – Fergusons in-waiting spread across the USA. You don’t have to be particularly clever to recognize the patterns.

Segregation by race – a.k.a. racism – has never left the country, even though the courage of true American heroes like Martin Luther King and Muhammad Ali changed many things for the better.

Segregation by race has always remained inevitably linked to segregation by wealth and income. As a hugely disproportionate number of black kids continue to be incarcerated under a prison system that locks away more citizens than in any other country.

You could be forgiven for thinking that America went looking for trouble. And is now finding it. Like so many things, that trouble doesn’t stand out or float to the top in times of plenty. But when those times are over, trouble is the only thing remaining.

As long as the illusion of the American Dream, and the illusion of economic growth, can be kept alive, people will be inclined to take a lot of things for granted. When their eyes open and these illusions are shattered, matters can turn on a dime.

Bloomberg provides some of the background to Ferguson and all those other American communities. What’s happening in Ferguson shouldn’t come as a surprise, what’s surprising is that it’s not much more widespread yet.

Ferguson Unrest Shows Poverty Grows Fastest in Suburbs

• “We’ve passed this tipping point and there are now more poor people in the suburbs than the cities,” said Elizabeth Kneebone, author of [a July 31 Brookings Institution report]. “In those communities, we see things like poorer health outcomes, failing schools and higher crime rates.”

• [..] the city – which has lost more than 40% of its white population since 2000 – [has] a mostly white city council and police force. [..] The St. Louis metropolitan area ranks as one of the most segregated in the U.S. Ferguson, once a majority white community that’s now about two-thirds black, highlights that dynamic.

• Coinciding with the decline in white population is a rapid rise in poverty since 2000 [..]

• “Looking at the neighborhood poverty rates, it’s striking how much has changed over a decade,” Kneebone said. “In Ferguson in 2000, none of the neighborhoods had hit that 20% poverty rate. By the end of the 2000s, almost every census tract met or exceeded that poverty rate.

• The poverty rate in Ferguson was 22% in 2012, the most recent available, up from 10.2% in 2000. Suburban locales from the outskirts of Atlanta to Colorado Springs have seen similar trends. The number of poor people living in impoverished U.S. suburbs has more than doubled since 2000, comparing to a 50% rise in cities. More than half of the 46 million Americans in poverty now live in suburbs ..

• “The median income is so low in Ferguson that people are really struggling, living from check to check, and they’re even behind checks,” state Senator Maria Chappelle-Nadal said.

• “For much of the latter half of the 20th century, it was a pattern of segregation by race, and that’s been displaced somewhat by a segregation by income, which is growing starker and starker in cities like St. Louis.”

While Americans have been – and still are – waiting for the recovery to come that the government and the media promise, their world is not standing still; it’s deteriorating at a fast pace. It just takes them a long time to notice, focused as they are on the illusions.

That is a dangerous dynamic in a country so loaded to the hilt with firearms. Something that the government, at all levels, has been acutely aware of for many years. The calls, in the wake of Ferguson, to de-militarize police forces, look somewhat less than timely or honest or genuine in that light.

The militarization of American police forces has been a very conscious choice by those who long since sensed a threat to their positions, their way of life, and their powers. Not everyone feels they can afford to stare blindly into illusions.

Another aspect of the demise of America as we once knew it, and one very much connected to Ferguson, because it’s economics that drives the whole machinery, is pensions. An amazing graph posted by Tyler Durden, along with some apt comments, explain.

Why The Fed Can’t, And Won’t, Let The Stock Market Crash

… it is not the 1% that would suffer the most should the S&P have a post-Lehman like 50%+ wipe out, which also means that the Federal Reserve’s only mandate of pushing asset prices to ever higher levels while pretending it does so to boost employment and keep inflation at 2% is no longer for the benefit of the uber-wealthy.

So why can’t, or rather won’t, the Fed let the bubble market collapse once again? Simple – as the following chart shows, the illusion of wealth is now most critical when preserving the myth of the welfare state: some 50% of all US pension fund assets are invested in stocks and only 20% in Treasurys.

This compares to less than 10% for Japan which also explains why for Abe, the only lifeline left is pushing pension funds out of their existing asset allocation sweet spot and forcing them to buy stocks.

What is known is that in a country like Germany between 2005 and 2012 the Pension funds asset rotation out of stocks and into bonds has been truly unprecedented, with stocks plummeting from 30%+ of total exposure to less than 5%! It also explains why Germany was, is and always will be leery of allowing the ECB to pursue asset bubble-inflating policies which would barely benefit pension funds on the equity side …

But back to the US: while the 1%’s paper fungible, market-driven wealth has been long converted into other hard asset formats, it is the paper gains for the future retirees that are on the chopping block should the S&P 500 “get it.”

As such, it is the fate of future retirement funds, and in fact, the very core of the US welfare state that is at stake should there be a massive market crash. In which case what happened in Ferguson will be a polite stroll in the park compared to the chaos that would ensue should another generation of Americans wake up with half or more of their paper wealth wiped out overnight.

… will the Fed be able to avoid a market crash? The answer of course is no. But we will give the podium to Fred Hickey, aka the High-Tech Strategist, who gives a very poetic summary of what the Fed’s endgame will look like:

The Fed hasn’t made the world a better place with its interventions. It has created moral hazard, encouraged the formation of asset bubbles that eventually pop (leaving economic messes), widened the wealth inequality gap to record levels, discouraged savings and investment, severely penalized retirees on fixed incomes, encouraged spending, funded massive government deficit spending by monetizing the debts, lengthened the recession and likely reduced the number of jobs that would have been created if the economy had been allowed to take its normal course.

What Durden forgets to mention is that, given the incredibly outsized exposure US pensions funds have built up to stocks, it’s no wonder the S&P 500 has been setting records.

Another issue he omits is while one may claim the Fed can’t let the stock market crash, it has no such control, if only since because of that same outsized exposure pension funds have to the S&P, they are set and certain to cause their own demise by moving out of stocks and back into bonds.

Recent developments in geopolitics are not a one-off incident. They are merely a first step in the real battle for oil and gas, equals energy, equals power. It’s not going to stop if Ukraine and Russia sign some deal, or if Shi’ites beat Sunnis or the other way around. Every party that sees an opening to increase their share of oil and gas will do so, and increasingly with blunt force. That’s the geopolitics which will be a part of the global – and financial – landscape for the rest of our lives.

That necessarily means that the Fed controlled quiet boom in stocks is over. Volatility is back to stay. And volatility doesn’t rhyme with pension funds. Risk and potential losses are too great to even consider. So the funds will have to move back into Treasurys. A move that will hurt both stocks AND bonds. And cause more volatility. Rinse and repeat.

It would be suicide for pension funds to stay where they are. It will also be suicidal to move. They’re hugely overexposed to a market that’s only seemingly under control. They purchased themselves into a bind.

Just like America developed itself into a bind. By building an infrastructure around its city cores that is increasingly, and rapidly, becoming an expansive layer of cemeteries for the hopes and dreams of large numbers of its citizens, where millions of poorly constructed and insulated overpaid homes play the part of so many underwater mausoleums.

There is still time to take another look in the mirror. To see what is actually there in your reflection, not what you would like there to be. And make your decisions based on what you see when you do. But that time is not measured in decades, perhaps not even years.

• Why The Fed Can’t, And Won’t, Let The Stock Market Crash (Zero Hedge)

When it comes to the stock market, while the biggest, and according to many only, beneficiary of the Fed’s ZIRP/QE policies of the past 6 years has been the wealthiest 1%, the reality is that said top crust of US society no longer needs the S&P to continue its relentless, manipulated and centrally-planned levitation. Between a third Hamptons residence, a 5th Ferrari, and a 7th French villa, not to mention a few tons of gold, the super wealthy have long since booked their paper profits, and transferred their “wealth” out of the intangible and into actual, physical assets. Therefore it is not the 1% that would suffer the most should the S&P have a post-Lehman like 50%+ wipe out, which also means that the Federal Reserve’s only mandate of pushing asset prices to ever higher levels while pretending it does so to boost employment and keep inflation at 2% is no longer for the benefit of the uber-wealthy.

So why can’t, or rather won’t, the Fed let the bubble market collapse once again? Simple – as the following chart shows, the illusion of wealth is now most critical when preserving the myth of the welfare state: some 50% of all US pension fund assets are invested in stocks and only 20% in Treasurys. This compares to less than 10% for Japan which also explains why for Abe, the only lifeline left is pushing pension funds out of their existing asset allocation sweet spot and forcing them to buy stocks. Whether this gambit will work is unknown.

What, however, is known is that in a country like Germany between 2005 and 2012 the Pension funds asset rotation out of stocks and into bonds has been truly unprecedented, with stocks plummeting from 30%+ of total exposure to less than 5%! It also explains why Germany was, is and always will be leery of allowing the ECB to pursue asset bubble-inflating policies which would barely benefit pension funds on the equity side, while any rising inflation would crush the mark-to-market value of bond holdings. But back to the US: while the 1%’s paper fungible, market-driven wealth has been long converted into other hard asset formats, it is the paper gains for the future retirees that are on the chopping block should the S&P 500 “get it.” As such, it is the fate of future retirement funds, and in fact, the very core of the US welfare state that is at stake should there be a massive market crash.