Category Archives: Economic interventionism

Economic interventionism is an action taken by a government in a market economy or market-oriented mixed economy, beyond the basic regulation of fraud and enforcement of contracts, in an effort to affect its own economy. Economic intervention can be aimed at a variety of political or economic objectives, such as promoting economic growth, increasing employment, raising wages, raising or reducing prices, promoting equality, managing the money supply and interest rates, increasing profits, or addressing market failures. The term economic intervention assumes the state and economy are inherently separate from each other, and therefore applies to capitalist market or mixed economies where government action would make an “intervention” (although this does not apply to state-owned enterprises that operate in the market).

Sense Of Unease Growing Around The World As U.S. Government Looks Befuddled

10/05/13
By STEVEN R. HURST

– An unmistakable sense of unease has been growing in capitals around the world as the U.S. government from afar looks increasingly befuddled — shirking from a military confrontation in Syria, stymied at home by a gridlocked Congress and in danger of defaulting on sovereign debt, which could plunge the world’s financial system into chaos.

While each of the factors may be unrelated to the direct exercise of U.S. foreign policy, taken together they give some allies the sense that Washington is not as firm as it used to be in its resolve and its financial capacity, providing an opening for China or Russia to fill the void, an Asian foreign minister told a group of journalists in New York this week.

Concerns will only deepen now that President Barack Obama canceled travel this weekend to the Asia Pacific Economic Cooperation Forum in Bali and the East Asia Summit in Brunei. He pulled out of the gatherings to stay home to deal with the government shutdown and looming fears that Congress will block an increase in U.S. borrowing power, a move that could lead to a U.S. default.

The U.S. is still a pillar of defense for places in Asia like Taiwan and South Korea, providing a vital security umbrella against China. It also still has strong allies in the Middle East, including Israel and the Gulf Arab states arrayed against al-Qaida and Iran.

But in interviews with academics, government leaders and diplomats, faith that the U.S. will always be there is fraying more than a little.

“The paralysis of the American government, where a rump in Congress is holding the whole place to ransom, doesn’t really jibe with the notion of the United States as a global leader,” said Michael McKinley, an expert on global relations at the Australian National University.

The political turbulence in Washington and potential economic bombshells still to come over the U.S. government shutdown and a possible debt default this month have sent shivers through Europe. The head of the European Central Bank, Mario Draghi, worried about the continent’s rebound from the 2008 economic downturn.

“We view this recovery as weak, as fragile, as uneven,” Draghi said at a news conference.

Germany’s influential newspaper Sueddeutsche Zeitung bemoaned the U.S. political chaos.

“At the moment, Washington is fighting over the budget and nobody knows if the country will still be solvent in three weeks. What is clear, though, is that America is already politically bankrupt,” it said.

Obama finds himself at the nexus of a government in chaos at home and a wave of foreign policy challenges.

He has been battered by the upheaval in the Middle East from the Arab Spring revolts after managing to extricate the U.S. from its long, brutal and largely failed attempt to establish democracy in Iraq. He is also drawing down U.S. forces from a more than decade-long war in Afghanistan with no real victory in sight. He leads a country whose people have no interest in taking any more military action abroad.

As Europe worries about economics, Asian allies watch in some confusion about what the U.S. is up to with its promise to rebalance military forces and diplomacy in the face of an increasingly robust China.

Global concerns about U.S. policy came to a head with Obama’s handling of the civil war in Syria and the alleged use of chemical weapons by the regime of President Bashar Assad. But, in fact, the worries go far deeper.

“I think there are a lot of broader concerns about the United States. They aren’t triggered simply by Syria. The reaction the United States had from the start to events in Egypt created a great deal of concern among the Gulf and the Arab states,” said Anthony Cordesman, a military affairs specialist at the Center for International Studies.

Kings and princes throughout the Persian Gulf were deeply unsettled when Washington turned its back on Egypt’s long-time dictator and U.S. ally Hosni Mubarak during the 2011 uprising in the largest Arab country.

Now, Arab allies in the Gulf voice dismay over the rapid policy redirection from Obama over Syria, where rebel factions have critical money and weapons channels from Saudi Arabia, Qatar and other Gulf states. It has stirred a rare public dispute with Washington, whose differences with Gulf allies are often worked out behind closed doors. Last month, Saudi Foreign Minister Saud al-Faisal warned that the renewed emphasis on diplomacy with Assad would allow the Syrian president to “impose more killing.”

After saying Assad must be removed from power and then threatening military strikes over the regime’s alleged chemical weapons attack, the U.S. is now working with Russia and the U.N. to collect and destroy Damascus’ chemical weapons stockpile. That assures Assad will remain in power for now and perhaps the long term.

Danny Yatom, a former director of Israel’s Mossad intelligence service, said the U.S. handling of the Syrian crisis and its decision not to attack after declaring red lines on chemical weapons has hurt Washington’s credibility.

“I think in the eyes of the Syrians and the Iranians, and the rivals of the United States, it was a signal of weakness, and credibility was deteriorated,” he said.

The Syrian rebels, who were promised U.S. arms, say they feel deserted by the Americans, adding that they have lost faith and respect for Obama.

The White House contends that its threat of a military strike against Assad was what caused the regime to change course and agree to plan reached by Moscow and Washington to hand its chemical weapons over to international inspectors for destruction. That’s a far better outcome than resorting to military action, Obama administration officials insist.

Gulf rulers also have grown suddenly uneasy over the U.S. outreach to their regional rival Iran.

Bahrain Foreign Minister Sheik Khalid bin Ahmed Al Khalifa said Gulf states “must be in the picture” on any attempts by the U.S. and Iran to open sustained dialogue or reach settlement over Tehran’s nuclear program. He was quoted Tuesday by the London-based Al Hayat newspaper as saying Secretary of State John Kerry has promised to consult with his Gulf “friends” on any significant policy shifts over Iran — a message that suggested Gulf states are worried about being left on the sidelines in potentially history-shaping developments in their region.

In response to the new U.S. opening to Iran to deal with its suspected nuclear weapons program, Israeli Prime Minister Benjamin Netanyahu told the U.N. General Assembly that his country remained ready to act alone to prevent Tehran from building a bomb. He indicated a willingness to allow some time for further diplomacy but not much. And he excoriated new Iranian President Hassan Rouhani as a “wolf in sheep’s clothing.”

Kerry defended the engagement effort, saying the U.S. would not be played for “suckers” by Iran. Tehran insists its nuclear program is for peaceful energy production, while the U.S. and other countries suspect it is aimed at achieving atomic weapons capability.

McKinley, the Australian expert, said Syria and the U.S. budget crisis have shaken Australians’ faith in their alliance with Washington.

“It means that those who rely on the alliance as the cornerstone of all Australian foreign policy and particularly security policy are less certain — it’s created an element of uncertainty in their calculations,” he said.

Running against the tide of concern, leaders in the Philippines are banking on its most important ally to protect it from China’s assertive claims in the South China Sea. Defense Secretary Voltaire Gazmin said Manila still views the U.S. as a dependable ally despite the many challenges it is facing.

“We should understand that all nations face some kind of problems, but in terms of our relationship with the United States, she continues to be there when we need her,” Gazmin said.

“There’s no change in our feelings,” he said. “Our strategic relationship with the U.S. continues to be healthy. They remain a reliable ally.”

But as Cordesman said, “The rhetoric of diplomacy is just wonderful but it almost never describes the reality.”

That reality worldwide, he said, “is a real concern about where is the U.S. going. There is a question of trust. And I think there is an increasing feeling that the United States is pulling back, and its internal politics are more isolationist so that they can’t necessarily trust what U.S. officials say, even if the officials mean it.”

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EDITOR’S NOTE — Steven R. Hurst, The Associated Press’ international political writer in Washington, has covered foreign affairs for 35 years, including extended assignments in Russia and the Middle East.

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AP writers Brian Murphy in Dubai, United Arab Emirates, Robert H. Reid in Berlin, Hrvoje Hranjski in Manila, Gregory Katz in London, Josef Federman in Jerusalem, Rod McGuirk in Canberra, Australia, and Sarah DiLorenzo and David McHugh in Paris contributed to this report.

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Cartoon of the Day: “Well, here we go again!”

A Small President on the World Stage

At the U.N., leaders hope for a return of American greatness.

The world misses the old America, the one before the crash—the crashes—of the past dozen years.

By PEGGY NOONAN

That is the takeaway from conversations the past week in New York, where world leaders gathered for the annual U.N. General Assembly session. Our friends, and we have many, speak almost poignantly of the dynamism, excellence, exuberance and leadership of the nation they had, for so many years, judged themselves against, been inspired by, attempted to emulate, resented.

As for those who are not America’s friends, some seem still confused, even concussed, by the new power shift. What is their exact place in it? Will it last? Will America come roaring back? Can she? Does she have the political will, the human capital, the old capability?

It is a world in a new kind of flux, one that doesn’t know what to make of America anymore. In part because of our president.

“We want American leadership,” said a member of a diplomatic delegation of a major U.S. ally. He said it softly, as if confiding he missed an old friend.

“In the past we have seen some America overreach,” said the prime minister of a Western democracy, in a conversation. “Now I think we are seeing America underreach.” He was referring not only to foreign policy but to economic policies, to the limits America has imposed on itself. He missed its old economic dynamism, its crazy, pioneering spirit toward wealth creation—the old belief that every American could invent something, get it to market, make a bundle, rise.

The prime minister spoke of a great anxiety and his particular hope. The anxiety: “The biggest risk is not political but social. Wealthy societies with people who think wealth is a given, a birthright—they do not understand that we are in the fight of our lives with countries and nations set on displacing us. Wealth is earned. It is far from being a given. It cannot be taken for granted. The recession reminded us how quickly circumstances can change.” His hope? That the things that made America a giant—”so much entrepreneurialism and vision”—will, in time, fully re-emerge and jolt the country from the doldrums.

The second takeaway of the week has to do with a continued decline in admiration for the American president. Barack Obama‘s reputation among his fellow international players has deflated, his stature almost collapsed. In diplomatic circles, attitudes toward his leadership have been declining for some time, but this week you could hear the disappointment, and something more dangerous: the sense that he is no longer, perhaps, all that relevant. Part of this is due, obviously, to his handling of the Syria crisis. If you draw a line and it is crossed and then you dodge, deflect, disappear and call it diplomacy, the world will notice, and not think better of you. Some of it is connected to the historical moment America is in.

But some of it, surely, is just five years of Mr. Obama. World leaders do not understand what his higher strategic aims are, have doubts about his seriousness and judgment, and read him as unsure and covering up his unsureness with ringing words.

A scorching assessment of the president as foreign-policy actor came from a former senior U.S. diplomat, a low-key and sophisticated man who spent the week at many U.N.-related functions. “World leaders are very negative about Obama,” he said. They are “disappointed, feeling he’s not really in charge. . . . The Western Europeans don’t pay that much attention to him anymore.”

The diplomat was one of more than a dozen U.S. foreign-policy hands who met this week with the new president of Iran, Hasan Rouhani. What did he think of the American president? “He didn’t mention Obama, not once,” said the former envoy, who added: “We have to accept the fact that the president is rather insignificant at the moment, and rely on our diplomats.” John Kerry, he said, is doing a good job.

Had he ever seen an American president treated as if he were so insignificant? “I really never have. It’s unusual.” What does he make of the president’s strategy: “He doesn’t know what to do so he stays out of it [and] hopes for the best.” The diplomat added: “Slim hope.”

This reminded me of a talk a few weeks ago, with another veteran diplomat who often confers with leaders with whom Mr. Obama meets. I had asked: When Obama enters a room with other leaders, is there a sense that America has entered the room? I mentioned de Gaulle—when he was there, France was there. When Reagan came into a room, people stood: America just walked in. Does Mr. Obama bring that kind of mystique?

“No,” he said. “It’s not like that.”

When the president spoke to the General Assembly, his speech was dignified and had, at certain points, a certain sternness of tone. But after a while, as he spoke, it took on the flavor of re-enactment. He had impressed these men and women once. In the cutaways on C-Span, some delegates in attendance seemed distracted, not alert, not sitting as if they were witnessing something important. One delegate seemed to be scrolling down on a BlackBerry, one rifled through notes. Two officials seated behind the president as he spoke seemed engaged in humorous banter. At the end, the applause was polite, appropriate and brief.

The president spoke of Iran and nuclear weapons—”we should be able to achieve a resolution” of the question. “We are encouraged” by signs of a more moderate course. “I am directing John Kerry to pursue this effort.”

But his spokesmen had suggested the possibility of a brief meeting or handshake between Messrs. Obama and Rouhani. When that didn’t happen there was a sense the American president had been snubbed. For all the world to see.

Which, if you are an American, is embarrassing.

While Mr. Rouhani could not meet with the American president, he did make time for journalists, diplomats and businessmen brought together by the Asia Society and the Council on Foreign Relations. Early Thursday evening in a hotel ballroom, Mr. Rouhani spoke about U.S.-Iranian relations.

He appears to be intelligent, smooth, and he said all the right things—”moderation and wisdom” will guide his government, “global challenges require collective responses.” He will likely prove a tough negotiator, perhaps a particularly wily one. He is eloquent when speaking of the “haunted” nature of some of his countrymen’s memories when they consider the past 60 years of U.S.-Iranian relations.

Well, we have that in common.

He seemed to use his eloquence to bring a certain freshness, and therefore force, to perceived grievances. That’s one negotiating tactic. He added that we must “rise above petty politics,” and focus on our nations’ common interests and concerns. He called it “counterproductive” to view Iran as a threat; this charge is whipped up by “alarmists.” He vowed again that Iran will not develop a nuclear bomb, saying this would be “contrary to Islamic norms.”

I wondered, as he spoke, how he sized up our president. In roughly 90 minutes of a speech followed by questions, he didn’t say, and nobody thought to ask him.

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Special report: We all thought Libya had moved on – it has, but into lawlessness and ruin

Libya has plunged unnoticed into its worst political and economic crisis since the defeat of Gaddafi

 
Tuesday 03 September 2013
by Patrick Cockburn

A little under two years ago, Philip Hammond, the Defence Secretary, urged British businessmen to begin “packing their suitcases” and to fly to Libya to share in the reconstruction of the country and exploit an anticipated boom in natural resources.

Yet now Libya has almost entirely stopped producing oil as the government loses control of much of the country to militia fighters.

Mutinying security men have taken over oil ports on the Mediterranean and are seeking to sell crude oil on the black market. Ali Zeidan, Libya’s Prime Minister, has threatened to “bomb from the air and the sea” any oil tanker trying to pick up the illicit oil from the oil terminal guards, who are mostly former rebels who overthrew Muammar Gaddafi and have been on strike over low pay and alleged government corruption since July.

As world attention focused on the coup in Egypt and the poison gas attack in Syria over the past two months, Libya has plunged unnoticed into its worst political and economic crisis since the defeat of Gaddafi two years ago. Government authority is disintegrating in all parts of the country putting in doubt claims by American, British and French politicians that Nato’s military action in Libya in 2011 was an outstanding example of a successful foreign military intervention which should be repeated in Syria.

In an escalating crisis little regarded hitherto outside the oil markets, output of Libya’s prized high-quality crude oil has plunged from 1.4 million barrels a day earlier this year to just 160,000 barrels a day now. Despite threats to use military force to retake the oil ports, the government in Tripoli has been unable to move effectively against striking guards and mutinous military units that are linked to secessionist forces in the east of the country.

Libyans are increasingly at the mercy of militias which act outside the law. Popular protests against militiamen have been met with gunfire; 31 demonstrators were shot dead and many others wounded as they protested outside the barracks of “the Libyan Shield Brigade” in the eastern capital Benghazi in June.

Though the Nato intervention against Gaddafi was justified as a humanitarian response to the threat that Gaddafi’s tanks would slaughter dissidents in Benghazi, the international community has ignored the escalating violence. The foreign media, which once filled the hotels of Benghazi and Tripoli, have likewise paid little attention to the near collapse of the central government.

The strikers in the eastern region Cyrenaica, which contains most of Libya’s oil, are part of a broader movement seeking more autonomy and blaming the government for spending oil revenues in the west of the country. Foreigners have mostly fled Benghazi since the American ambassador, Chris Stevens, was murdered in the US consulate by jihadi militiamen last September. Violence has worsened since then with Libya’s military prosecutor Colonel Yussef Ali al-Asseifar, in charge of investigating assassinations of politicians, soldiers and journalists, himself assassinated by a bomb in his car on 29 August.

Rule by local militias is also spreading anarchy around the capital. Ethnic Berbers, whose militia led the assault on Tripoli in 2011, temporarily took over the parliament building in Tripoli. The New York-based Human Rights Watch has called for an independent investigation into the violent crushing of a prison mutiny in Tripoli on 26 August in which 500 prisoners had been on hunger strike. The hunger strikers were demanding that they be taken before a prosecutor or formally charged since many had been held without charge for two years.

The government called on the Supreme Security Committee, made up of former anti-Gaddafi militiamen nominally under the control of the interior ministry, to restore order. At least 19 prisoners received gunshot shrapnel wounds, with one inmate saying “they were shooting directly at us through the metal bars”. There have been several mass prison escapes this year in Libya including 1,200 escaping from a prison after a riot in Benghazi in July.

The Interior Minister, Mohammed al-Sheikh, resigned last month in frustration at being unable to do his job, saying in a memo sent to Mr Zeidan that he blamed him for failing to build up the army and the police. He accused the government, which is largely dominated by the Muslim Brotherhood, of being weak and dependent on tribal support. Other critics point out that a war between two Libyan tribes, the Zawiya and the Wirrshifana, is going on just 15 miles from the Prime Minister’s office.

Diplomats have come under attack in Tripoli with the EU ambassador’s convoy ambushed outside the Corinthia hotel on the waterfront. A bomb also wrecked the French embassy.

One of the many failings of the post-Gaddafi government is its inability to revive the moribund economy. Libya is wholly dependent on its oil and gas revenues and without these may not be able to pay its civil servants. Sliman Qajam, a member of the parliamentary energy committee, told Bloomberg that “the government is running on its reserves. If the situation doesn’t improve, it won’t be able to pay salaries by the end of the year”.

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A spectacle to behold: Markets usurp central banks

Thu, Jun 13 2013, 09:04 GMT
by Peter Baxter Jr. | Kondratieffwinter.com

K Winter Endgame now playing out in Japan

Mark May 23rd of 2013 as a potential key date in the unfolding of this fourth Kondratieff Winter of the modern era. In the afternoon session of trading in Tokyo that night, at approximately 7:30 PM EST, everything suddenly changed. The juggernaut that had propelled the Nikkei average up almost 90% since early November took a bit of a breather by plunging almost 10% from its peak hours earlier, settling down over 1140 points from the previous close. As of yesterday it had declined 2343 points (15%) in just one week. With one more day like Thursday the Nikkei would have achieved the impossible- a 90% gain in six months that turned into a bear market (20% down) in just one week. Ho, hum, just another day in the life of a world distorted with tens of trillions of central bank intervention.

I suspect this will become the new normal going forward in the next few years that will mark the twilight of the winter cycle phase of this present Kondratieff cycle that began in 1949. Our theory holds that paper assets have never been more overpriced because there’s too much unpayable global debt that will default. Is there a day in our future when our Dow will also plunge over 1000 points in a grand mal seizure from too much debt?

What was so transformative that occurred in that Thursday session in Japan, one that was preceded hours earlier by a sudden whipsaw in US markets? Simple- too much volatility. This grand experiment by central banks is much like a ponzi scheme because it has absolutely no room for error that could undermine confidence. Yet that is what is occurring right before us. Could this be the beginning of the endgame scenario I have promised here for over two years- a dreaded deflationary bust caused not by an economic slowdown but instead by rising yields?

It’s very possible this may be the case given the scale and speed of the move higher in yields all across the globe. Don’t forget here that the entire premise of these massive QE programs by all the global central banks is to keep rates DOWN, not up. They are failing miserably in their primary objective and I implore our readers and all investors to sit up and take notice. It seems the bond vigilantes have now finally emerged from many years of hibernation.

Remember the Apple bonds floated a few weeks ago in the biggest corporate offering in world history? It was way oversubscribed as everyone wanted them so badly. They are now down over 4% in a matter of days losing investors around $700 million in no time on this “safe” investment. Given that global bond markets are 4-5 times larger than stocks the potential for even a small rise in rates would be very devastating. Few may appreciate that nothing could cause more wealth destruction than a large and sustained rise in interest rates.

It seems that peak euphoria was being tested in the US last Wednesday as unfettered exuberance mid-morning gave way in the afternoon to discontent and outright scorn over Fed policy by the end of the session, one that saw the indexes plunge more than 2% on a single day after making an intra-day all-time high that same day. That has only happened twice before and both times (2000 and 2007) marked major cycle peaks in the markets. Could this be true again?

Cycle theory and common sense both say yes in prohibitive terms. Why can we advance this notion? Because if one were to peel back the layers of what has been unfolding recently in many other financial markets you could only come to one conclusion: global central banks have lost control of their mandates. The end must be near when the confusion over the meaning of one or two words from Chief Bernanke could cause such an uproar in the financial markets. Has it really come to this? Valuations are determined through hyper-parsing of nuanced words that are so carefully prescribed as to not achieve that effect?

The unintended consequences caused by policy decisions that could be called quite extraordinary has caused many individual asset classes to have a mid life crisis recently. They have seen explosive moves in all directions in degrees several standard deviations removed from their historic benchmarks. In other words, all hell is breaking loose just about everywhere. Everywhere except in the US, of course, where investors from Japan to Timbuktu have blindly reallocated so much capital since last November.

The action resulting from these audacious central bank moves has been dramatic across the board. The third largest stock market in the world (Nikkei in Japan) has rallied almost 90% in just over six months while their currency has declined against the USD by over 25% in the same period. Both of these moves are so enormous they can hardly be explained in a cogent manner without an overload of superlatives that would understate their true meaning. In the month of May we saw many strange events- gold plunging over $200 in a matter of hours, no fewer than 17 mini flash crashes in five NYSE stocks and silver halted four times in one session due to a lack of bids in a disorderly marketplace to say the least. And as of Thursday the Nikkei had plunged over 15% in just one week. Just another day in the parallel universe created by the global central banks.

These moves are alarming at best and who knows at worst. They are the best evidence yet of true parabolic moves one could expect to see at the end of grand super-cycles of credit such as the tail end of a Kondratieff Winter. And much like the geometric explosion of global debt, they are just not sustainable. My gut tells me two things- 1) markets are out of control,; and 2) very few investors agree these markets are out of control. This can be seen by tame levels of the VIX index and the release this week showing that margin debt had reached an all-time high. It all sounds a bit frothy to me and could signal the end of an era.

But the ludicrous nature of the these awesome moves in certain paper assets just keeps coming. Greek bonds sure to default have tripled in the past year. The Dow Industrials as of the end of May 2013 will not have seen a three day decline for the longest period since 1900 and that defies all sensibilities. It seems to many that there is some force or entity out there (the Fed ?) that’s not willing to allow such an event to occur, perhaps to create a myth that the markets will nudge ever higher. Incredibly, many now think that is the case as they believe the Federal Reserve and other central banks are in complete control. Or so it seems.

Our theme here today is that there is abundant exculpatory evidence hiding in plain sight that indicates the opposite- that central banks are losing control of the markets. In last month’s comments I noted the disturbing explosion of yields in the JGB’s (long term Japan bonds) that sent their prices crashing overnight, beginning a period extreme apprehension over a more serious bond crash could be looming. That worry has only worsened since then as the yield on 10 year JGB is now a whisker away from the 1 % level that is seen as crucial to hold to maintain the appearance that the world’s second largest bond market is not spinning out of control.

One thing that bulls and bears and nearly everyone can agree on this this- bad consequences will occur if global bond yields rise fast and far worse will happen if they rise too fast. The reason for this is that when volatility spikes and endures, leverage is taken off the table and that means lots of securities will be sold. So what are the chances yields could spike higher (making bonds plunge) given this universal belief of the consequences of such an outcome?

I believe the chances of such an outcome are quite underappreciated by investors today all along the the spectrum. This would include brokers, money managers, hedge fund managers, CFO’s managing billions of corporate cash coffers, pension fund managers, individual retail investors, sovereign wealth fund managers, and so many more. Their worldview could be soon shattered if global bond markets usurp the collective actions of global central banks. It would only take one of these markets to crash to induce a large global sell-off. Such an event would finally showcase the folly that rampant global central bank printing is beneficial to modern industrial economies. The central theme of Kondratieff Wave theory holds that the long term credit cycle cannot continue unabated and the excesses of this cycle must be removed. Clearly this is not the case.

Most investors and investment pros are still beholden to a worldview that puts no premium on long wave credit cycles. They insist on owning paper assets such as stock, bonds, and derivatives,etc. These instruments have on balance have been performing well since 1982 but not so well for the past 13 years. They subscribe to the same worldview that emphasizes yesterday’s metrics- PE multiples, PE expansion, cash on the sidelines, nowhere else to put your money other than stocks, and this chase for yield has pushed them into more risk and leverage than they otherwise would have deployed. Such an approach did not work too well in 2000 or 2007 when yields were still historically very low, so this mindset makes even less sense today now given the tens of trillions in global debt that has been added in the past few years.

But a closer look at the performance of money managers over that period since 1982 clearly shows a persistent underperformance by them over time even in bull markets? How can this be? Even in 2013 it is all too clear that hedge funds and professional money managers on balance are prohibitively underperforming the S&P index. Such statistics are meaningful in gleaning what could be missing from their equations. I advance that a coherent appreciation of the existence and the significance of long wave super-cycles would be a good place to start.

If they had an appreciation of the higher truths offered by the K-Wave theory perhaps they would be more likely to realize compounded gains over time from their acumen in the day to day, month to month decisions on asset allocation they are well suited to execute. Typically their lack of performance over the years can be attributed to poor decisions made during those critical inflection points in the the markets that seem to always occur when there is universal agreement upon the near term direction of the market (up in 2000, down in 2002, up in 2007, down in 2009 as recent examples). If they could only avoid the pitfalls at these junctures then I suspect most fund managers would instead outperform the broad market averages. Bubbles are not black swans, they hide in plain sight and lend themselves to distinct patterns that can be useful in making decisions.

Many are bewildered that the market has surged so much higher despite any meaningful help from retail investors. It is worth noting that a key element in the overperformance of the US market in recent years has been the collective impact of corporate stock buybacks by the healthiest US corporations. These buybacks have served to satisfy shareholders over employees or their local or national communities. The end result has been a historic drop-off in cap-ex and R&D and a dramatic increase in layoffs for even the best companies. The mandate of the modern corporation has never been more evident- making profits at any cost. Yet empirical evidence suggest these buybacks occur when stocks are relatively expensive. You wanna bet that some of them may regret this down the road? But why have they been so prevalent lately despite price levels that are so rich?

Large corporations have been for many years enduring the pitfalls of this deflationary Kondratieff winter that assures very low or negative growth rates globally that make it very difficult to grow the top line. So what to do if you are a CFO? Just resort to financial gimmicks such as stock buybacks so that your reduced operating profits during this winter period can be better cloaked with higher EPS through reduced shares outstanding. This behavior, much like the hoarding of cash by commercial banks unwilling to lend but dying to speculate in paper assets tells me the recent new highs in the S&P do not reflect a new bull market, only desperation to please investors at any price. They are creating less and less and investing less and less. Several studies have concluded that perhaps as high as 40% of the rally in recent years can be attributed to these buybacks. At any rate these buybacks I believe have cloaked more serious problems in the financial performance of corporations and their stocks. Global aggregate demand is slowing despite central banks accommodation and exponential increases in the population base. You just can’t hide from deflation.

The gains in stocks have diverged from the macroeconomic landscape for many years now and that trend has really accelerated this year. And we all know why- controversial central bank policies that range from keeping rates too low for too long during the mid- 2000’s to outright destructive ones such as printing several trillions to create a wealth effect whose benefits do not trickle down to the middle class and serves in effect to cushion political leaders from making unpopular structural reforms that are sorely needed. Today developed countries in the western world are staring down the barrel of a gun of their own making that can still be dismantled.

But sadly we have not taken the necessary steps to deconstruct our debt warheads to prevent the collateral damage they could cause. I suspect soon we will reach the brink, stare into the abyss, and determine once and for all if we can thrive in a world dominated by debt. I hope that our financial. corporate, and political leaders can find the will to reign in the central bankers before it’s too late. They may have good intentions but their approach has proven to be a failure and they should be called out on this at once. But time is running out, and several key market metrics described above are now flashing red lights. And remember the long wave chart of the US market still sports and ending diagonal bearish wedge that implies a severe plunge once key support is broken.

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