Juggling Dynamite

Massive credit-bubble fueled, multi-year booms in capacity, production and inventory don’t clear in a few months, especially when suppliers continue to increase output as demand falls. This chart of iron ore gives its April rebound some context.

See, Iron Ore heads towards its next cliff. Oil bulls should take note:

“One of the crueler aspects of a hangover is how you can occasionally fool yourself into thinking you have recovered even though many hours of crushing misery remain. The 2.1 billion-metric-tons-a-year iron-ore market is actually dealing with two related hangovers.

First is the slowdown in China, the economy that consumes about 60% of iron ore and is coming off a stimulus-fueled construction boom. Second is the massive expansion in supply predicated on China’s fascination with building never abating.

From the start of 2011 to the beginning of this month, benchmark iron-ore prices fell from almost $200 a metric ton to less than $50. Yet for much of April, iron ore staged a rally. By the time Cliffs Natural Resources beat expectations with quarterly results late Tuesday, prices had jumped 27% from their low point.

This relief is ephemeral, as Wednesday’s 4.6% drop in iron-ore prices emphasizes. Optimism had sprung, in part, from a 5% jump in Chinese crude steel production in the first 10 days of April. That, coming alongside signs of monetary easing by Beijing, stoked hopes of better demand growth. But structural headwinds in the form of China’s desire to pivot away from fixed-asset investment and need to deal with bad debt remain.”

Even producers who have managed to engineer earnings in recent quarters have talked about the need for production cuts across the supply chain. But no one is wanting to actually implement cuts when most are desperate for cash flow. And so the global glut mounts: “The only thing worse than a hangover is relying on a fellow sufferer to help fix it.”

The rise of extreme income disparity over the past 20 years may be misunderstood without historical context. In 2016, the combined wealth of the richest 1% of the world’s population is on track to overtake that of the other 99%.  That’s one point of reference.

The gap between the rich and everyone else is widening. Here’s a look at why. Here is a direct video link.

More to the point however, is the remarkable top line on the following chart: the relative income gains of the top .01% of the population versus everyone else.
In many ways, the surreal gains of the .01% are inversely related to the financial deficits currently plaguing the rest of the world. Multinational conglomerates have benefited most from the bailouts, corporate welfare, tax loopholes, debt financing and incessant asset propping underwritten by governments and central banks the past 20 years.  As shown clearly above, the windfalls of the top .01% have been highly correlated with the global credit bubble that has siphoned financial strength from the many for the grotesque enrichment of a few.

A further related and disturbing trend, is the fact that the top .o1% (25,000 in America) now donate more than 40% of the country’s political contributions.  As a comparison, in 1980, .01% of the American population contributed 16% of all campaign contributions, Here is a recent chart from CROWDPAC showing the rise since 1980.  See: How much do the 1% of the 1% control politics?

Actionable steps are needed to get corporations off the public purse and back into smaller, separate entities held at arm’s length with greater restrictions on lobby access, political contributions and revolving door employment between the two.  In particular, key areas for immediate focus are these:

1. Break up too big to regulate corporations back into smaller, accountable entities.
2. Legislate much lower limitations on the political contributions of any one individual, company or sector. (Yes, Citizens United was a ridiculous decision.)
3. Move liability and insolvency risks back on to the executives, partners, and directors and away from the public purse.  No more government bail outs of the private sector.
4. Put Glass-Steagall divisions back between banks and security/debt broker/risk sellers.
5. Prevent product sellers from styling and marketing themselves as ‘advisers’.
6. Prevent corporations from negotiating fines unless their directing officers admit and accept punishments personally for their illegal actions and failures of duty.
7. Require executive bonuses be paid in corporate debt not mostly equity.
8. Legislate a mandated time break of several years before representatives are permitted to come out regulatory/government agencies and into jobs in the corporate sector.  (Ben Bernanke’s lucrative consulting gigs for HFT and others is just one shameless example in a long list the past few years.)

Senator Elizabeth Warren referenced a few of these themes on April 15, 2015, at the Minsky Conference in her speech: “The Unfinished Business of Financial Reform.”  You can find the audio link to the recorded speech here.   This quote is a taste:

“This is an economic fight, but this is also a political fight. The biggest financial institutions aren’t just big – they wield enormous political power. Last December, Citibank lobbyists wrote an amendment to Dodd-Frank and persuaded their friends in Washington to attach it to a bill that had to pass or the government would have been shut down. And when there was pushback over the amendment, the CEO of JPMorgan, Jamie Dimon, personally got on the phone with Members of Congress to secure their votes. How many individuals who are looking for a mortgage or a credit card could make that call? How many small banks could have their lobbyists write an amendment and threaten to shut down the US government if they didn’t get it? None. Keep in mind that the big banks aren’t trying to make the market more competitive; they just want rules that create more advantages for themselves. The system is rigged and those who rigged it want to keep it that way.”

Let us be clear.  The complaint about inequality is not that some people have much more money than most.  The complaint is that self-interested groups of some of the wealthiest people and corporations are having undemocratic influence and control over the political process, banking system and policy decisions.

Just as unfair and damaging as any dictatorship, the influence and advantage that a select group of people are buying themselves is undermining the health, stability and progress of a free and democratic society.  None of us can afford to let it continue.

In the meantime, we should expect more civil unrest and rioting as increasingly disenfranchised masses have less and less to lose and every reason to buck the status quo.

Today the US dollar and Treasuries continue to sell off as if the Fed is going to announce some grand new ‘stimulus’ plan. In response commodities and the loonie have been attracting inflows once more. There are reasons to suspect however that this may be nothing more than a short-lived counter-trend rally. For one, the Fed has recently said they want to tighten soon, and flipping to some new theoretical loosening efforts, would scream panic just as central banks are trying to keep financial markets buying their narrative of monetary command and control.

Secondly, the world remains awash in oil and most other commodities and the many debt-strapped producers, are continuing to pump out product at any price just to grab cash flow and keep their story going long enough to float some more bonds…must keep the ‘ponzi’ dream alive for a while longer. With inventories at record highs, the more they pump the more they flood supply.

Before deciding prices will race back to $100, here are five charts worth keeping in mind. Here is a direct video link.

Thirdly, world growth and demand are continuing to weaken. This puts further pressure on foreign borrowers to pay back the 9 trillion in US denominated loans they have taken out over the past few years . They need to buy dollars to pay back those debts.

All these dynamics are critical to understanding and anticipating global capital flows today.