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Friday, May 24, 2013

Mercury in Chinese medicine stirred up debate in China after Hong Kong's Health Department forced Beijing Tong Ren Tang Group Co., one of the largest producers and retailers of Chinese medicine, to recall a batch of its stuff due to excess levels of mercury. Now people are debating the general safety of Chinese medicine as herbs might contain heavy metals, pesticides, and other goodies found in Chinese soil, water, and air. They worry that governments with their outdated equipment cannot monitor the medicines. And there are structural problems: “because these companies are either state-owned enterprises or large taxpayers, local governments protect them," said Zeng Danhua, a senior analyst at the China Capital Investment Group, and the fines for companies using contaminated herbs were too low to be a deterrent.

Inflation to hit Japanese consumers: largest bread maker in the country, Yamazaki Baking, announced that it would raise prices by 3% to 6% for bread and by 2% to 6% for pastries. Culprit? Not rising demand or optimism or rising wages, but the devalued yen that pushed up the cost of imported flower. The costs of other ingredients have also risen recently. How increasing the cost of food will crank up the economy remains one of the mysteries of Abenomics.

Stability in the Japanese government bond market is "extremely desirable," said Bank of Japan Gov. Haruhiko Kuroda after the turmoil and craziness that his policies have unleashed upon it. “We are going to conduct our market operations in a flexible manner to head off, as much as possible, volatility in long-term interest rates,” he explained. I thought the BOJ could control the JGB market with an iron fist because of the omnipotence of the printing press and the support of state-owned or controlled institutions that hold a big chunk of the JGBs. But on April 5, I started having doubts. That was the day when 10-year yields dropped to 0.315%, only to more than triple over a period of six weeks to 1.0% yesterday. The BOJ was able to force them down by throwing a truckload of money at the market yesterday. And today again it mopped up ¥900 billion ($8.9 billion) in bonds. Efforts that were aided by the crashing stock market. The jump in yields is the opposite of what the BOJ wants to achieve as institutions and individuals are bailing out. If the BOJ is losing control of the JGB market, if in the end, it's the only one buying these despicable JGBs while everyone else is dumping them.... But Kuroda refused to comment on the “daily movements” of the markets.

Worry in the eyes of Prime Minister Shinzo Abe: “Sharp increases in long-term interest rates could have a grave impact on the economy and the government’s fiscal conditions,” he told parliament. “We expect the BOJ to respond appropriately to any developments in the market.” Because the BOJ might be the only one buying. And he also talked dreamily of creating “a fiscal structure that will be sustainable in the long term.” At the rate and direction they’re going: snowball’s chance in hell.

Insanity in Japanese stock market continues: the Nikkei, which had jumped over 500 points to 15,008 in the early moments of trading in a bout of post-crash buy-buy-buy, maybe by the BOJ, went on to crash over 1,000 points to 13,982, about 500 points below yesterday's close of 14,484, before the BOJ's buying boosted it 600 points to 14,612, ending up 128 points, or 0.88%, for the day. What rollercoaster craziness.

Thursday, May 23, 2013

Eurozone manufacturing and services mired in contraction, sez the Purchasing Managers Index, at 47.7 (below 50 = contraction). Germany, miracle economy that can do no wrong, shrank again, though upticks are visible. France continues to slide downhill rapidly. "The Eurozone's second recession in five years looks set to drag on into a seventh successive quarter," the report said. Accelerating decline of new orders in the service sector; job shedding picking up, companies trying to cut capacity, order backlogs shrinking further, now for almost two years.... Very ugly.

Hitting the China jobs wall: a record 7 million students will graduate from university this year, 190,000 more than last year, according to the Ministry of Education. Yet job openings are down 15%, based on a February survey of 500 companies. It's going to be tough for these educated young people finding an appropriate slot.

Japanese government bonds go crazy again, lose their footing, with yields on the 10-year JGB spiking, briefly kissing 1.0% Thursday morning, the highest in a year, over triple the 0.315% on April 5. The goal of Abenomics and the Bank of Japan's money-printing and bond-buying frenzy is to push down yields, while creating a wave of inflation, thus devaluing the debt, and causing losses for everyone who owns it. In response, investors have been dumping JGBs. The BOJ tried to put a stop to the rout by handing out ¥2 trillion ($19 billion) in the morning. Thankfully, for the BOJ, the Nikkei began to crash, and suddenly these despicable JGBs seemed like a pretty good deal; demand picked up, yields dropped to 0.84%. The BOJ has bought equities before to prop up the Nikkei, but Thursday it was busy propping up JGBs and had to let the Nikkei go. When push comes to shove, it will always support bonds, its number one priority, and let stocks swoon.

China manufacturing contracts in May, after months of fitful near-stagnation, sez the HSBC Purchasing Managers' Index which dropped to 49.6 from 50.4 in April (under 50 = contraction), a seven-month low. A harbinger: New Orders in April had dropped to a five-month low. Ominously, in May, New Orders as well as New Export Orders fell again, as did Employment, Backlog of Work, Quantity of Purchases, among others. “The cooling manufacturing activities in May reflected slower domestic demand and ongoing external headwinds,” said Hongbin Qu, Chief Economist of Asian Economic Research at HSBC. “A sequential slowdown is likely in the middle of 2Q, casting downside risk to China’s fragile growth recovery.” Not very pretty. Though we’ve seen the manufacturing slowdown coming, the reaction on the Asian stock markets is brutal....

Nikkei crashed over 1,460 points, a 9.2% dive peak-to-bottom from its morning high of 15,943, after having been up 300 points early on, to 14,484. For the day, it’s down 1,143 points, or 7.3%. That’s what happens when the air hisses out of a central-bank money-printing induced bubble. The hot money wants to get out.

Wednesday, May 22, 2013

H-P revenues plunged 10.1%, worse than expected, with PC revenues down 20%. Only uptick: lowly printing supplies, such as cartridges, paper, ink, up a measly 2%. Earning didn't "completely crater" like Dell's earnings, CEO Meg Whitman consoled her investors. But H-P had a huge write-off not long ago, and who knows what they plowed into it to make subsequent quarters look better. They always do that. Write-off accounting puts some lipstick on expenses, though it can’t do much about revenues. Props up operating income. “You can feel the turnaround taking hold at H-P,” Whitman said. Indeed, feel. Because there's no visible turnaround in the numbers. Nevertheless, stock jumped 13% after hours.

Justice Department admits: drones killed 4 Americans, in a letter sent to Congressional leaders. One of them was Anwar al-Awlaki, in September 2011 in Yemen. While widely reported, the government had never fessed up to it. The other three were Samir Khan (in the same strike); Awlaki’s son Abdulrahman al-Awlaki, also in Yemen; and Jude Mohammed, in Pakistan. Last year, Attorney General Eric Holder had outlined the government’s legal rationalizations behind knocking off Americans overseas – for example when they pose an “imminent threat of violent attack” and when capturing them is inconvenient. While the whole concept is iffy, the rubbery term "imminent" came under particular fire. But certainly, it won’t be abused; after all, there’s a Nobel Peace Prize winner in the White House.

Delta Air Lines rebels against taxpayer subsidies for Boeing because they benefit state-owned foreign airlines that compete with Delta. The US Export-Import bank is helping Boeing sell wide-body jets by helping foreign airlines buy them. CEO Richard Anderson said Delta would be “perfectly willing” to accept a “total moratorium” on financing of jets, which it also benefits from. "We are trying to do whatever we can to get a level playing field in a world where my government decides that they would rather have my competitors in the marketplace than Delta," he said. In April, Delta sued the Ex-Im Bank to put a stop to these shenanigans. It noted that 46% of the $106.6 billion in the Ex-Im Bank's activities are for aircraft loans or loan guarantees. Emirates and Korean Air were among the biggest beneficiaries, and as Anderson told Reuters, they could get funding without "the balance sheet of the US government." Ah the complex web of government handouts.

BOJ Governor Haruhiko Kuroda accepts jumpy yields on Japanese Government Bonds that nearly tripled from the April 5 low of 0.315% to today’s 0.90%, exact opposite of what money-printing and bond-buying is supposed to accomplish. Japanese investors have been fleeing JGBs; inflation, if it rises to 2% or more as per plan, will eat them up without compensation from yield. Add yen devaluation to make a nasty investment. He lost a bit of his brashness: "I am not expecting long-term interest rates to increase sharply considering the strong downward pressure being exerted on them by our quantitative and qualitative easing," he said at the press conference after the BOJ’s two-day huddle that left monetary policy unchanged, with the spigot wide open, committed to buying ¥50 trillion in JGBs a year, or 70% of all new bonds the government is issuing. "I believe it is quite possible to prevent any spikes in long-term interest rates," he said with even less certainty, then submitted to fate and accepted rising yields: "If expectations for economic recovery and inflation strengthen sharply, that could outweigh the risk-premium reducing effect and result in increases in interest rates," he said.

Japan trade deficit soars 69.7% in April to ¥879.9 billion, from April a year ago, the tenth months in a row of trade deficits, the worst series since 1980, and the worst April ever. For each of the last three Aprils, the deficit was worse than in the prior one; same for March, February, and January. The trend is relentlessly awful. Abenomics is deepening the hole, but it’s digging at a faster rate. The weaker yen nudged up exports 3.8%, but imports jumped 9.4%. Don’t blame oil: imported crude oil volume dropped 2.2%. Exports to China stagnated, but imports jumped 13.3%; the deficit skyrocketed 60.2%. However, exports to the US rose 14.8% while imports stagnated; the trade surplus leaped 32.5%. Japan exports twice as much to the US as it imports. Perhaps someone in the White House will someday get Japan to open up its auto market. The trade balance with Western Europe flipped from a surplus a year ago to a deficit; exports fell 3.5% and imports rose 11.4%. Abenomics and the money-printing binge have heated up consumption of imported luxury goods and other items that can’t be produced in Japan. For the rest, Abenomics appears to be a giant miscalculation. The graph for the years 2011, 2012, and 2013 shows the worsening trend:

Despite the awful trade data that was much worse than economists had hoped for, the Nikkei jumped 246 points or 1.6%, to 15,627 – oblivious to reality for months now, drunken with money the Bank of Japan is printing.

Tuesday, May 21, 2013

“Apple does not use tax gimmicks,” Apple wrote without twitching an eyebrow apparently, in response to a Senate investigation that showed that it sheltered at least $74 billion in profits from US taxes between 2009 and 2012 by using a "complex web" of offshore mailbox companies. One such Irish subsidiary with no employees and no physical existence made $30 billion in profits and didn't pay a dime to a single government anywhere, not even Ireland. Legal, and proof that the US corporate tax dodge code is a scam that bestows a tax-free environment and other welfare handouts to certain companies, while raking less fortunate and often smaller companies over the coals.

Impact of cheap natural gas in the US: the construction of 97 chemical and plastics plants that use natural gas as feedstock has been announced, with investments over $71 billion, sez the American Chemistry Council (ACC). Among them, in Texas alone: Dow Chemical’s plan to plow $4 billion into ethylene crackers and Exxon Mobil’s plan for an ethylene cracker and two polyethylene plants. Others lining up: Chevron Phillips Chemical, LyondellBasell, and Mitsui & Co. Via OilPrice.com. These companies vigorously oppose the export of liquefied natural gas (LNG) as they fear it would raise prices in the US to the levels natural gas trades for on the world markets. Their pleas fell on deaf ears, a dilemma and opportunity I wrote about.... The Quiet Triumph Of Oil And Gas In Obama’s Policies

Japanese Government Bonds: "Absolutely no guarantee" that Japanese investors will continue to buy them, warned an advisory panel to Finance Minister Taro Aso. Investors who lose confidence in the JGB can easily invest their funds overseas, the report nervously pointed out. Some have already made that shift. Hence the recent spike in yields, despite the Bank of Japan, which is mopping up around 70% of the flood of new bonds that the deficit spending of Abenomics generates. Investors only have to pick up the remaining 30%, but they appear to be reluctant to do so. Why is anyone outside of a government controlled institution still buying this crap?

Finding excuses: Japan supermarket sales dropped 1.9% in April, on a comparable-store basis, from April 2012, with food sales down 0.4% and clothing down 8.8%. Blamed was the "unseasonably cold weather." When sales edged up in February and March, the credit went to Abenomics, not the weather or some other silly thing. A broader media trend: when economic data points are positive, Abenomics gets the credit; when they’re negative, the weather and other reasons are dragged into the scenery, sometimes by their hair.

Mystery pollution in China: unknown foul-smelling goo emerges from cracks in the street, becomes huge, finally gets cleaned up ... and remains unknown.

Monday, May 20, 2013

“Every 10 years or so, banks make some horrible mistake and it usually starts with easy money,” said Mike Pinto, vice-chairman of M&T Bank, a regional US bank. “We are worried about the competitive atmosphere. It creates the temptation to do silly things.” He was talking about the credit bubble. US banks made $1.55 trillion in business loans through April, up 10% from last year; banks are falling all over each other trying to goose their profits by making risky loans. US corporations have also sold a record amount of bonds at record low yields and with historically low protections for investors. So now banks are loading up their balance sheets with business loans that will come to haunt them. But no problem. It will just be part of the next financial crisis that will give the eager Fed another opportunity to hand trillions to TBTF bankers to bail them out.

UK wages propaganda war against Scotland, which will hold an inconvenient independence referendum in September 2014. A new report by the UK Treasury, the third in the series, claims that the Scottish banking sector – composed of two large banks, Bank of Scotland and Royal Bank of Scotland, plus smaller ones – would put an independent Scotland at risk. Its assets would be 1250% of Scottish GDP, while the Cypriot banking sector, which brought down Cyprus, was 700% of GDP, the report said ominously. For the UK overall, banking assets are 492% of GDP, also very high. But the UK has “credibility” in the markets to manage that risk, something Scotland would lack. A "feeble attempt to undermine confidence in Scotland's ability to be a successful independent country," retorted Scotland's Finance Secretary John Swinney. "The Treasury, true to form, will outline what is in its own best interests, not what is in the best economic interests of the people of Scotland." He called these assertions misleading; "In terms of share of GDP, in fact, financial services are actually smaller for Scotland at 8.3% than the UK at 9.6%. So if the argument is about risk, then the risk is with the UK," he said.

Now Germany has a real reason to exit the euro: Goldman Sachs CEO Lloyd Blankfein wants it to stay! A bad sign. In an interview with the Welt, he said Germany had profited from the euro the most – from his point of view, “Germany” is “Germany Inc.” But real wages for working Germans have declined since the introduction of the euro, and workers have had a hard time, while wages in Greece, Spain, and other countries have shot up. Though German workers now have jobs, unlike people in Spain and Greece, they earn less than they used to in real terms. For that privilege, German taxpayers (not Germany Inc.) must pay a price, he said, namely bailing out banks and speculators who hold the crappy debt of periphery countries. He predicted utter economic mayhem for Germany if it left the euro. No, German taxpayers will have to bail out weaker countries, he said. And he raved about the "political project" behind the euro, the ultimately total integration of Europe (and of course, he defended TBTF banks, which were more secure, he said, than smaller ones). My question: is Goldman now seriously long the euro?

Weekend, May 18 - 19, 2013

Sales skid at S&P 500 companies: 458 companies of the 500 in the index have reported their Q1 results so far: earnings were up a measly 3.4% year-over-year, but sales fell 0.2%. Not exactly the foundation for the gigantic undying stock market rally that has plowed through whatever economic and corporate bad news with nary a twitch. When will this separation of reality from stock prices end? Someday, one way or the other! He who can pinpoint that day will make a lot of money.

Central bank success story: The global market for luxury goods grew 38.6% in three years. From $200 billion in 2009, luxury goods sales jumped 13% in 2010, 11% in 2011, and 10% in 2012, to end up at $275 billion. Despite the Eurozone debt crisis and austerity, despite the earthquake and tsunami in Japan in 2011... no matter what happened in those three years, luxury goods boomed, sez the the just released "Worldwide Luxury Markets Monitor," by Bain & Company for Fondazione Altagamma (PDF). “Absolute luxury items (high-end products with no logo, highest quality materials, and exquisite craftsmanship) lead the way,” the report reassured us, but there were some losers, including “watch consumption” which crashed in China. The report confirmed what we’ve seen everywhere: when central banks hand out trillions to their cronies, it doesn’t do much for the real economy as a whole, nor for employment, but it does one heck of a job at the very top of the pyramid.

"Threat of Default": US hits debt limit on Saturday, but by using a slew of shuffle maneuvers, shell games, tricks, and devices, the US won't actually run out of money until "after Labor Day," Treasury Secretary Jacob Lew told Congress in a letter. In his previous statement, the US would be "okay until Labor Day." Today, he was more frantic. He begged Congress to get its act together and do something "sooner rather than later" to “remove the threat of default.” In its infinite wisdom, Congress had suspended the debt limit till May 18, rather than dealing with it. The debt, though still over the limit, declined in April and early May; tax extractions were fattened by asset bubbles. But since May 10, the debt has once again been rising.

Friday, May 17, 2013

US Consumers haven’t felt this good since July 2007, just before all heck broke loose. An "encouraging sign," Reuters sez. For short sellers? The preliminary results of the Thomson Reuters/University of Michigan's consumer sentiment index jumped to 83.7 in May from 76.4 in April. Big part of the reason: households in the upper third of the income bracket felt flush from the ballooning stock market – the wealth effect. The Fed giveth.... They were able to brush off the payroll tax increase, which Wal-Mart shoppers, as we’ve seen, had a harder time brushing off. The Consumer Expectations index rose to 74.8 from 67.8. And the Current Economic Conditions index leaped to 97.5 from 89.9, the highest since October 2007, a month before the stock markets began to swoon. Impeccable timing, the hallmark of consumers.

Car sales in the EU crept up 1.7% in April, from a horrible April last year. The fact that the parade of ever worsening numbers has finally stopped, at least for a moment, was greeted with a huge sigh of relief. The details of the report aren’t that rosy: sales in the UK, now the second largest market after Germany, jumped 14.8%. Without the UK, sales for the rest of the EU actually dropped 0.46%. It wasn't exactly a smooth trend across the member states: Greece finally seems to have hit bottom, and sales increased 20.9%; in Denmark, they jumped 30.7% and in Finland 142.6%; but they crashed 26% in the Netherlands and 51.9% in Cyprus; they rose 3.8% in Germany but dropped 5.3% in France.

Deafening US media hype: Japan Core Machinery Orders jumped 14.2% in March, seasonally adjusted, from February. The eternal money-printing and fiscal-stimulus apologists dragged it out as proof that Abenomics is working massively. Alas, these are highly volatile big-ticket items, though “core” orders exclude container ships, nuclear reactors, etc., which are even more volatile. To iron out the volatility, the Cabinet Office also offers quarterly numbers. Soooo, core orders in the first quarter of 2013 were actually 4.8% lower than in the first quarter of 2012, when Noda was prime minister. Kampai!

The Japanese take care of their college grads: 93.9% of all those who graduated on March 31, the end of the academic year, had jobs by April 1, the beginning of the business year. This was the second year in a row that the percentage increased, so it’s NOT related to Abenomics, please! College recruitment, like so many things in Japan, is a highly structured process with the idea to get pretty much everyone squared away before the end of the academic year. But those who miss this entry into Japan Inc. have the greatest difficulty getting through the door later. The system is unforgiving punitive to those who don’t toe the line.

About that secret inflation in Argentina: famously, no one is allowed to accurately track or discuss inflation, but all the whisper numbers floating around peg it at over 20% annually. Now confirmation has come from official sources: wage negotiations between unions and the government of President Cristina Fernández Kirchner. Unions are her base. In fact, she personally met with the leaders of six unions that represent about 2 million workers, or 40% of all workers covered by wage negotiations, and made a deal, similar to the deals she’d made with Railway and Bus Drivers’ unions. The agreed-upon wage increases this year to keep the purchasing power of her voters intact? The closest estimate to official CPI that Argentina has? 24%!

Thursday, May 16, 2013

Last time French-made cars were sold is the US? 1980? Long time ago. But... French-made models of the Toyota Yaris are coming to the US, Canada, and Mexico, apparently to keep the plant in Onnaing, near Valenciennes, busy. Car sales in Europe have been catastrophic, and plant shutdowns and layoffs are hard to do, especially in France where even thinking about it causes a huge political ruckus. In 2012, 182,841 Yaris were sold in Europe, accounting for 22% of Toyota's total European sales - a highly successful model at the low end of the lineup. North America will get US versions, not EU versions. So no diesels.

Plunging price of gasoline shaves 0.4% from Consumer Price Index in April. Total energy prices dropped 4.3%, with gasoline down 8.1%. We’ll remember those days fondly because that cheap gasoline is now history; prices have been climbing in May! Food prices rose 0.2%. Core CPI, which excludes food and energy, rose 0.1%. For the 12-month period, CPI is up 1.1% and core CPI 1.7%. The Fed might complain that this is below target; but it’s still inflation, and it still whittles down the value of your and my dollars, and everything denominated in them, and it’s still higher than the interest that banks pay on most deposits and CDs, though it’s better than 4.3%, as we had some months in 2011.

Another blow to US manufacturing: Philadelphia Fed's Business Outlook Survey – for manufacturing in eastern Pennsylvania, southern New Jersey, and Delaware – dropped into the negative, to -5.2 in May, from 1.3 in April (below zero = decline). The New York Fed's Empire State Manufacturing survey, reported yesterday (below), had also pointed at a contraction. Ominous: new orders dropped to -7.9, the worst since June last year, from -1 in April; the Workweek Index dropped to -12.4, and the Employment Index dropped to -8.7. Manufacturing is only a small part of the US economy, and this region is a small part of the US, so we’re not going to panic just yet...

US Housing Bubble confirmed: Heard an ad on the radio on how to get rich quick by flipping houses – and we’ll show you how. It conveniently offered an 800-number. Something or other was free.... but keep your credit card handy. These kinds of things usually appear late in a bubble.

Death penalty for financial fraud in China. A court in Wenzhou slapped a local, 39-year-old gal, former general manager of Wenzhou Xinfu Investment Consulting Co., with the maximum penalty available, death, for having illegally raised funds for investments starting in 2007. Everything worked fine until October 2011, when her scheme collapsed and she ended up defaulting on a 428 million yuan loan ($69.6 million). Leaves open the question if they’d slap the same penalty on TBTF bank CEOs every time their banks need a bailout. A bit draconian maybe, but something the US might want to consider as well, after not having prosecuted anyone responsible for the financial crisis and for the Fed’s bailouts that followed, though they did hound, as in China, small-scale crooks like Bernie Madoff.

Bad loans at Chinese commercial banks swelled by 6.8% in the first quarter, to 526.5 billion yuan ($85.6 billion), the sixth consecutive quarter of increases, raising the non-performing loan ratio to 0.96%. And NPLs are expected to rise further. One of the many elements in a boundless debt-fueled scheme that will eventually, like the micro-case above, unravel.

The Japanese Diet rubber-stamped the ¥92.6 trillion ($926 billion) budget for fiscal 2013, which started April 1. A breath-taking ¥43 trillion ($425 billion) will have to be borrowed to make ends meet - that's 46.4% of the total outlays! But no problem. Abenomics will get Japan out of its fiscal quagmire, one way or the other, by printing money. Government spending on public works – welfare spending for Japan Inc. – will rise to ¥5.3 trillion. In a show of rare fiscal discipline, welfare spending for the poor will be cut by ¥67 billion. Priorities of Abenomics are becoming clear.

Japanese GDP growth less than a year ago! The economy grew 0.9% in the first quarter 2013 from Q4 last year, or a 3.5% annual rate. Private demand was up some, with investment in housing being fairly strong, but corporate investment lackluster. Public demand – government spending and investment, including boondoggles – jumped, as promised by Abenomics. Exports rose, and so did imports, but not as much. All seasonally adjusted. Great? Give credit to Abenomics for that 0.9% growth in GDP? Because it was the fastest growth since... oops, well, since the first quarter of 2012, when the economy grew 1.3%. Abenomics can't even keep up with Noda's maligned era.

Wednesday, May 15, 2013

Megabanks "are NOT too big to jail," claimed Attorney General Eric Holder today in a heroic about-face at a House Judiciary hearing, after he'd explained to the Senate Judiciary Committee in early March why exactly they were indeed too big to jail. The Justice Department has not prosecuted any megabanks despite their shenanigans leading up to the Financial Crisis and continuing to this day. A debacle I wrote about.... 'Regulatory Capture' Emasculated The Regulators Of Megabanks.

French purchasing power plunges 1.5% per capita, and 0.9% for all households together in 2012 (difference due to population growth), the worst performance since 1984. Combination of: disposable income creeping up only 0.9%, and prices rising 1.9%. Ah yes, the many benefits of "moderate" or even "below-target" inflation.

Tough day for US manufacturing: industrial production dropped 0.5% in April, after increasing in February and March; year-over-year, it's up only 1.9%. Within it, manufacturing fell 0.4%; fingers point at motor vehicles and parts, down 1.3%. Capacity utilization fell 0.5% to 77.8%, and is 2.4 percentage points below long-term average. Add to that: the New York Fed's Empire State Manufacturing Survey for May dipped into the red (-1.43, from 3.05 in April). Employment sub-indices were mixed, with number of employees up slightly, but hours worked down sharply. Darkest cloud: new orders were negative. Executive optimism for the next six months declined, second month in a row. Not an exemplary picture of a growing economy.

"My question is, who is going to jail?" wondered House Speaker John Boehner about the IRS scandal. So why didn't he and other Republicans ask that question after the financial crisis, the largest scandal in the US ever?

Swooning energy prices, particularly gasoline, pushed down wholesale prices by 0.7% in April, seasonally adjusted. Food prices also dropped, a godsend for those of us who like to eat, with veggies and meat down the most. Without food and energy, which are highly volatile, the core Producer Price Index rose 0.1%. For the 12-month period, the unadjusted PPI is up a scant 0.6%. If they could just keep it that way!

Warning shot: Russian car sales plunged 8% in April. For the year, they are now 2% below the same period last year, a record year during which sales had jumped 11% from 2011. The good times appear to be over. Is the EU malaise heading east?

Europe stuck in recession: the Eurozone economy shrank 0.2% in the first quarter, from Q4, the sixth quarter of recession in a row, another glorious record. The 27-nation EU contracted 0.1%. Year over year, they’re down 1.0% and 0.7% respectively. Germany's economy inched up 0.1% in Q1, after having plunged 0.7% in Q4, thus barely avoiding the red stamp of recession. Both quarters combined, Germany is in the hole. The lousy performance in both quarters surprisingly surprised pundits. France is formally in a recession; its economy contracted 0.2% in Q1, third contraction in four quarters. Italy and Spain both shriveled 0.5%. Unperturbed, German stocks, while down a smidgen for the day so far, are still above their prior all-time intra-day high of July 2007. This will be seen as the greatest accomplishment of the central bank money-printing binge: separating (at least temporarily) stock markets from reality and allowing them to float in a dream world.

China's pile of foreign exchange grew by 294 billion yuan to 27.363 trillion yuan ($4.41 trillion) in April, according to the People's Bank of China, the fifth month in a row of increases. For the first four months of 2013, the monthly influx averaged 400 billion yuan, nine times the average in 2012. Earlier this month, the State Administration of Foreign Exchange, the top forex regulator, had threatened to crack down on foreign money flooding the country. China is where the hot money goes – on the bet that the yuan will continue to rise against the dollar which, through the arduous and heroic efforts of the Fed, will continue to lose value.

Nikkei jumps 2.29%, to 15,096, highest since December 28, 2007. If it keeps going like this, it will be above 40,000 soon. This thing has become a joke – even more so than the US stock markets. Japanese government bonds continue their descent, pushing yields up, with the 10-year JGB hitting 0.90% but then settled down at 0.85%. The yen skidded.

Tuesday, May 14, 2013

Ex-leaders of consumer electronics: Sharp's huge loss is a sign of how Japanese powerhouses have lost the edge to Korean, US, and Chinese rivals. A doozy: ¥545 billion ($5.3 billion) in red ink, a record in its storied century-long history. A top exec reshuffle has been announced, but it won't fix the real issue that is bedeviling Sharp and other Japanese consumer electronics companies, once world leaders, now not even also-rans. Abenomics won't be able to cure that either. This isn't an issue of costs and exchange rates, but of innovation, products, and now increasingly brand (they squandered it).

China's white paper on human rights, helpfully issued in English so that foreigners like me can get their brains washed, starts out promisingly: "Since the arrival of the 21st century, the Chinese people have been making constant efforts in advancing human rights protection along the path of building socialism with Chinese characteristics under the leadership of the Communist Party of China (CPC) and the Chinese government." Further into it, the paper clarifies priorities: "China has a population of over 1.3 billion. For such a populous country, it would be impossible to protect the people's rights and interests without first developing the economy to feed and clothe the people." Money before rights. But it also points out how the government has become much more transparent in many ways, which few people will dispute (text in full).

Inflation hits Japan: wholesale prices rose for 5th month in a row in April, by 0.3% from March, with the index at 101.4 (2010 prices = 100). Electricity, gas, water, lumber, and wood products jumped over 3%. Some of it was due to the weakening yen that made imported fuels and raw materials more expensive. How exactly higher prices would cure Japan’s economic ills remains a mystery, though it will give a stylish haircut to all those owning Japanese Government Bonds....

Japanese Government Bonds skid once again: yields rose, for the 10-year JGB to 0.85%, from 0.79% yesterday, from 0.69% on Friday, and from 0.315% on April 5, the day they went bonkers. While yields are still ultra-low, the rise has been relentless, not at all what the BOJ wants – and now there's also volatility, rare sight in the JGB market. Japanese institutions and individuals are buying foreign bonds with higher yields to diversify out of the yen that has been doomed by Abenomics to decline. If this turns into a massive dumping of yen, if the BOJ cannot keep it under control, the selloff might turn into a rout, and the BOJ and government-controlled institutions will be the only ones left buying. In sympathy, mortgage rates are creeping up, as are bank loans. The opposite of what Abenomics wants to accomplish. Free money is suddenly becoming more expensive.

Click for Older Rumblings....

VIDEOS

Wolf Richter on Max Keiser's "On The Edge"
"The Pauperization of America"

Wolf Richter on the Keiser Report
"Where the Money Goes to Die"

Clarke and Dawe: European Debt Crisis
Two favorite Australian Comedians

Clarke and Dawe: Quantitative Easing
Big industrial-strength printers, all facing the window

The Fastest Drive Ever Through San Francisco
Don't try to do this yourself

humanERROR - by "Frying Dutchman"
Powerful, lyrical appeal to the Japanese. Slams nuke industry, MSM, bureaucrats, and politicians.

Sunday

Nov182012

Is There Wisdom in the Crowd?

Sunday, November 18, 2012 at 5:04PM

Contributed by Doug Hornig, Casey Research.

Back in the 1960s, a clever but financially disadvantaged fellow placed a small ad in a national magazine that read something like: Money needed. Please send $1 to the address below. Do it today! No specific need was given, and nothing was promised in return, so that fraud could not later be charged. Yet within a few months, thousands of dollars arrived in his mailbox, a considerable sum in those days. Or so the urban legend goes.

P2P Money

A half-century later, many things have changed, but one thing remains unchanged: People still need money, and they have not ceased to innovate ways in which to get it.

We have written extensively in this space about many of the P2P Internet connections that are transforming the planet... in commerce, in education, in the job market, and with business and social networking. The list of possibilities is truly endless. For yet another example, the world of money has been given a Red-Bull jolt by a fast-growing phenomenon known as "crowdfunding."

Previously, if you had a grand scheme for a new product or service and you needed seed money to get your project off the ground, you had to save it yourself, borrow from friends and relatives, or go with begging bowl to your local bank, which was unlikely to see you as the next Steve Jobs. If it was a big enough idea, you might even attract the attention of a venture capital (VC) company, but there you had to be prepared to offer many pounds of flesh in return. And still, those ideas that didn't meet with bank criteria (there's no collateral for a software startup) yet weren't large enough for the VC crowd often fell into a no man's land, scraping out some funding from unorganized, so-called "angel" investors, or never getting funded at all.

More recently, we've seen the rise of for-profit Internet alternatives to traditional lending, such as Prosper, Zopa, and the market leader, LendingClub. These P2P companies specialize in small loans – LendingClub's limit is $35,000. They don't originate loans – they facilitate them, cutting out the banks and creating a situation that allows individuals with spare cash directly to invest in other people's dreams, while the dreamers can borrow based on the public responses to their particular (hopefully compelling) stories. For each loan, there is a multitude of lenders, not just one.

It's a win-win proposition. Borrowers receive below-market rates with less hassle than is usually encountered at a traditional financial institution. Investors get an excellent rate of return, and can attenuate risk by building a portfolio spread across multiple loans. And LendingClub prospers by taking a cut. The site claims a very low default rate of less than 3% since its inception in 2007, and it has been a monster success. To date, LendingClub has negotiated nearly a billion dollars in loans, a meteoric ascent from about $175 million just two years ago.

Other, more philanthropically oriented organizations either are or function a little more like nonprofits. They solicit donations in order to make very small micro-loans to budding entrepreneurs, primarily in the developing world. Donors either simply get their money back, or the principal plus a small amount of interest. Those that work this way include Kiva, Zidisha, Fundable, PayPal's MicroPlace, GlobalGiving, FirstGiving, CreateaFund, Calvert Foundation's Community Impact Investing, and the Grameen Foundation, which received tremendous worldwide publicity when its partner organization Grameen Bank shared the Nobel Peace Prize with Muhammad Yunus in 2006.

At the other extreme – if you're an upscale investor looking outside of the traditional markets for greater risk/reward potential – there are alternatives for you as well, in the form of secondary markets. Sites such as SharesPost and SecondMarket provide access to participation in private placements and the purchase of already existing, pre-IPO shares in privately held companies. These opportunities are generally only open to accredited investors, i.e., those who can verify that they are high-net-worth individuals and attest that they're comfortable with assuming a high degree of risk.

No quite so well-heeled? You can still play the game. MicroVentures was the first Internet broker/dealer to help startups in the US raise capital in exchange for equity. Companies can apply for up to $500,000, and individuals can buy in with an investment as low as $1,000. There's also MediaShares, which offers companies the opportunity to crowdfund IPOs, and investors the chance to buy as little as a single share of stock. The stock can be sold online, with or without an underwriter. A new US law (H.R.1070) has been passed by Congress that will allow for advertising the sale of stock to the general public and selling to non-accredited investors; this is expected to greatly expand these types of online offerings. Crowdcube, Grow VC, and Symbid also finance business startups. SeedUps specializes in tech.

Clearly there are a lot of new and imaginative ways of moving money around that vie for our attention. Many of them would be considered crowdfunding (derived from the general term "crowdsourcing," which has traditionally referred to works like Wikipedia driven by large numbers of amateur contributors), since the definition of this term still tends to be on the loose side. It can be applied very widely, as Wikipedia does, calling it any "collective effort of individuals who network and pool their resources, usually via the Internet, to support efforts initiated by other people or organizations."

Crowdfunding, if thought of merely as the pooling of resources for a common cause, is as old as human groupings. Neighbors pitching in to help someone who's had a house fire, supporting the local rescue squad, sending truckloads of canned goods to disaster areas – all of these cooperative efforts represent crowdfunding of a sort.

But that isn't the way it's thought of nowadays. In fact, the very term "crowdfunding" is just six years old, with Word Spy attributing its first official appearance in print to blogger Michael Sullivan on his fundavlog of August 12, 2006. And the first book on the subject – Kevin Lawton and Dan Marom's The Crowdfunding Revolution – wasn't published until October, 2010.

In contemporary usage, "crowdfunding" is generally defined as an ongoing money-raising effort organized through the Internet. As such, it is intimately related to and initiated by online communities and social networks. However, while a given crowd might pre-exist as a community, it can also arise completely spontaneously, from disparate groups around the world which happen to share an interest in funding a person, project, or whatever. And it can be brought together by a website whose purpose is just that. These are the characteristics that distinguish crowdfunding from traditional co-ops.

Funding the Arts

Early crowdfunding efforts often involved musical groups that needed cash to advance their careers. A British rock group, Marillion, wanted to tour the US in 1997, but the band lamented on a newsgroup that they couldn't hack it financially themselves, and their record company wasn't prepared to pony up the support money.

Marillion's fans then took it upon themselves to raise the necessary bucks. Word went out via the Net, and the money poured in. With just a live CD promised in return, the band raised $60,000 from all over the world. Later, Marillion went on to tap its Internet fan base to fund the production and distribution of subsequent albums, cutting out the record company entirely.

ArtistShare, founded in 2000, formalized the concept, becoming the first fully crowdfunded website for music. In 2005, American composer Maria Schneider's Concert in the Garden became the first album in history to win a Grammy Award without being available in retail stores. The album, funded through ArtistShare, received four nominations that year and copped the Grammy for "best large jazz ensemble album." Since then, ArtistShare projects have received several other nominations and taken home four additional Grammies.

Other music-centric crowdfunding sites followed ArtistShare's lead, including SellaBand (2006) and PledgeMusic (2009).

Music and the arts have always been logical targets for crowdfunding and, with barriers to entry in the movie business historically so high, film was a natural. Movie crowdfunding was initiated by French entrepreneurs and producers Benjamin Pommeraud and Guillaume Colboc in August 2004, when they launched a public Internet donation campaign to fund their film, Demain la Veille (Waiting for Yesterday). Within three weeks, they managed to raise $50,000, allowing them to make the picture.

Spanner Films has been a centrally organized pioneer in this area, and has even published a guide titled How to Crowdfund Your Film, just in case you have any great cinematic ideas. Spanner crowdfunded a film called The Age of Stupid, set in 2055 and starring Oscar nominee Pete Postlethwaite. Further taking advantage of the Internet, the company in September 2009 pulled off a gala global premiere, satellite-linking to more than 700 cinemas and other venues in 63 countries, with a total audience of more than a million people.

Many, many other sites – including RocketHub, Sponsume, My Show Must Go On, AKA Starter, inkubato, and A Swarm of Angels – have set up shop to service the creative arts.

One of them, Indiegogo, originally focused on fundraising for independent film, and was launched at Sundance in 2008. But the site soon branched out into all sorts of creative projects, whose breadth is confirmed by a quick look at the projects currently listed: game development; a graphic novel; a documentary film; a gender-transition calendar; a Canadian comic-book anthology; an asthma education app; traveling dramatic performances; and some kind of knitting endeavor (which you can back if you read German), among others.

As an example of how these things work, here's Indiegogo's model: Entrepreneurs create a page for their funding campaign, set up an account with PayPal, make a list of "perks" for different levels of donation, set a fundraising goal in dollars (or euros, pounds, etc.), then create a social-media-based publicity effort. They publicize the projects themselves, through Facebook, Twitter, and the like. Postings are free, and users have 100% ownership of their campaigns.

In the end, Indiegogo collects 4% if you reach your goal, but allows you to keep money raised even if you don't, minus 9% (to encourage people to set "reasonable" goals). If you fail to reach your goal, you may also elect to return all money to contributors, and you will owe nothing.

Kick It into Gear

Then there is the current king of the hill, Kickstarter. Launched in April of 2009, the site has been a massive success. At the moment, Kickstarter says that over $350 million has been pledged by more than 2.5 million people, successfully funding more than 31,000 creative projects "in the worlds of Art, Comics, Dance, Design, Fashion, Film, Food, Games, Music, Photography, Publishing, Technology, and Theater."

The bulk of Kickstarter-funded projects – 68% – were in the $1,000-10,000 range. But 300 raised between $100,000 and $1 million, and 13 raised in excess of $1 million. Of those that are posted, about 45% fully meet their goals, and about 12% end without having received any pledges. 82% of those that reach 20% of their goal go on to attain full funding.

Kickstarter is an "all or nothing" proposition. Project creators make their pitch, set a funding goal, and a deadline by which the full amount must be raised. If they succeed, donors' credit cards are charged at that time; if they don't make it, no one is charged anything. Kickstarter takes a 5% cut of successful fundraisers, and payment processing fees can claim another 3-5%. Outside of that, creators keep 100% of the money and retain all rights to their projects.

Backers receive no equity or financial payback, but are promised "rewards," depending on one's pledge level. Mostly, people participate in good faith, contributing to something they believe in. Kickstarter's "Terms of Use require creators to fulfill all rewards of their project or refund any backer whose reward they do not or cannot fulfill." But there are no legal guarantees.

If a Kickstarter project really tickles people's fancies, the results can be stunning. For instance, a modest project currently listed on its start page began with a goal of $5,000 and, with the deadline still two weeks away, has pulled in almost $110,000.

Where To from Here?

So, is crowdfunding the future capital source for every new venture under the sun? Well, probably not... although we can't say for sure, because it does sometimes seem that way. In no particular order, some current and projected applications include:

Journalism – With Spot.us and Global for me, the public provides suggestions and tips for stories. When a journalist accepts a suggestion, he creates a pitch, which is then funded by those who are interested. Whether this will gain any traction with readers accustomed to free Internet news content remains to be seen.
Politics – Democratic candidates can benefit from ActBlue, a crowdsourced fundraising site that allows anyone to be part of a PAC. Since 2004, ActBlue has raised over $300 million. Across the aisle, Ron Paul ran his campaign for the presidential nomination largely through crowdfunding.
Public projects – Want those bike lanes but your town is out of money? You can turn to CivicSponsor.
Fashion – Milk and Honey Shoes allows customers to design their own shoes. Several other sites that will let consumers participate in designing new fashions are currently under development.
Personal wants and needs – GoFundMe specializes in fundraising for individuals, for everything from weddings to funerals, and medical expenses to high-school trips. Greedy or Needy aims to fund make-a-wishes without the necessity of going through a big foundation. Kapipal teams up with PayPal to finance just about anything.
Science – Still in its infancy, science crowdfunding has many researchers excited about the possibilities. RocketHub's #SciFund Challenge was the first crowdfunding initiative to support science projects, while Petridish invites donors to "fund science & explore the world with renowned researchers."
Biotech – On October 1, biopharmaceutical antibacterial drug-discovery company Antabio, and WiSEED, the French crowdfunding platform dedicated to technologic startups, announce the successful completion of their seed round of financing. Initially funded by more than 200 small investors, Antabio was able to finance a key step in the validation of its drug-candidate molecules, bringing it to the attention of some major players in the drug-discovery arena.
Cars – According to Gizmag, Local Motors "is a small Phoenix, Arizona-based automotive firm that uses crowd sourcing for brainstorming, designing, refining and developing vehicle ideas. They work with an Internet community of more than 20,000 designers, engineers, auto enthusiasts and other passionate minds toward developing unique, customer-centric offerings." They're currently working with BMW to crowdsource the Beamers of the future.
DIY – Launcht claims it "empowers universities, nonprofits, startup crowdfunding portals and others" to design and implement "their own custom white label crowdfunding & voting platforms."
Brewskies – BeerBankroll is your destination if you want to help fund a small brewery.

And so on.

It's difficult to overstate how fast and furious crowdfunding has grown (but it pales in comparison to the growth potential of a new technology in replication). So red-hot is the sector that a whole secondary support network has popped up out of nowhere, largely as a result of the 2012 passage of the Jumpstart Our Business Startups (JOBS) Act, which effectively lifted a previous ban against public solicitation for private companies raising funds. Among the nascent bureaucracies there is now a National Crowdfunding Association (NLCFA), National Crowdfunding Association of Canada, World Crowdfund Federation, Crowdfund Intermediary Regulatory Advocates, and Crowdfunding Professional Association (CfPA), all of which sprang into existence subsequent to the passage of JOBS. The CfPA offers a course in Crowdfunding 101 and sponsors a Crowdfunding Bootcamp to teach entrepreneurs how to master the process.

While crowdfunding does not yet have the Web presence of some other services, it's headed up with a bullet. Alexa, a leading Web information company, ranks some 30 million websites worldwide, according to the amount of traffic users of its toolbar generate. Its statistics are considered one of the most accurate yardsticks by which site popularity can be measured.

As of August 2012, crowdfunders were nowhere near challenging the top 10 megasites like Google, Facebook, YouTube, Wikipedia, Twitter, and Amazon. But Kickstarter was in 748^th place, followed by Indiegogo (#1,798). Rounding out the ten most-visited crowdfunders were GoFundMe (10,892), ChipIn (28,394), RocketHub (47,424), GiveForward (52,383), Fundable (60,149), Crowdtilt (133,246), crowdfunder (105,447), and appbackr (125,977).

Pros and Cons… and Cons

The pros of crowdfunding – the Internet's P2P ability to unite worthy projects with seed capital, in the absence of conventional funding sources, and bring dreams to life – are obvious. But what of the cons?

Well, there's fraud, for one. Though crowdfunding sites claim to do detailed background checking before clearing a project to be posted, in reality this is fertile new ground for scam artists. In fact, in August the Massachusetts Securities Division charged a Lowell man in a crowdfunding scam, alleging that he had bilked 20 investors – who thought they were putting money into a gaming site – out of more than $150,000.

Regulation of securities issuance is another sticky topic. Questions about crowdfunding campaigns involving unaccredited investors and private companies are being closely examined in Washington. Complicating the matter is that due diligence can be very hard if not impossible for a prospective investor to do prior to offering startup money for a new company, and that the stock those companies are offering is often not intended to be traded on any recognized exchange. Private offerings for oil and gas drilling, which are not SEC-registered, are another area of concern.

Though the SEC has yet to set any hard-and-fast rules in place regarding equities, it is widely expected to stick some fingers into this rapidly baking pie as soon as the next few months.

Further, the North American Securities Administrators Association (NASAA) publishes an annual list of emerging threats to investors. This year, NASAA included crowdfunding on its list of worries, warning that fraudsters could use it in new scams involving such unexplored territory as precious metals, real estate, and promissory notes.

Although not overtly fraudulent, there are also going to be ideas (including possibly some great ones) for which the funding goal is unrealistic. A September Reuters article discussed a Kickstarter project called Lifx, which intends to develop a dimmable, WiFi-enabled, multicolor, energy efficient, 25-year LED light bulb that you control with your iPhone or Android... and to start shipping finished product by next March. Talk about ambitious. So far, the bulb is a monster Kickstarter hit, and the project is oversubscribed. Backers have thought so highly of it that they've ponied up more than $1.3 million, in return for which they'll get… well, some bulbs. Once they're in production.

Unfortunately, as the Reuters piece pointed out, "Coming up with a truly worthy LED bulb is enormously complex, requiring expertise in physics, chemistry, optics, design, and manufacturing." One of the early entrants into the space, the Switch bulb, has received an eight-figure investment from one VC company alone; it was promised in October of 2011 and still hasn't arrived. Phillips, which won a $10-million government prize by marketing the first LED bulb, spent much more than that in development. So maybe Lifx can deliver the goods for $1.3M, and good for them if they can. But investors should probably be at least a little skeptical that they'll ever be dimming the room lighting with their phones.

If, instead of bulbs or other manufactured goods that may not show up, you're looking for a return on capital – i.e., investing in a startup that's offering stock – you are also likely to be disappointed, since more than half of all new small businesses fail within five years. Should you wish to make such an investment, it would seem sensible to find one in your immediate area, so you can check it out with your own boots on the ground.

Then there is intellectual-property theft. Most basement innovators probably haven't patented their ideas before presenting them to the waiting world, which means there's nothing to prevent someone with deeper pockets from stealing the idea, producing the product, and getting it to market first.

The reverse is also possible. Someone may, knowingly or unknowingly, post a project that infringes on someone else's patent or intellectual-property rights. According to a recent story in Wired, this has happened on Kickstarter at least five times since April.

On balance, though, we're optimistic. All of these potential drawbacks will eventually work themselves out in the marketplace, we're sure, provided that forthcoming government regulations don't make it too difficult for these sites to thrive.

Investment Implications

Crowdfunders may facilitate transfers of newly minted stock to investors, but they don't sell stock in themselves, so there are no opportunities here, at least for the time being.

However, there are some income-producing sites, like Lending Club, that have been very successful at returning a decent yield. Some Casey Research employees are invested in them, and they may interest readers who are willing to do their homework. By all means, check them out for purposes of portfolio diversification if you'd like to – or crowdfund your own pet project.

As promising as crowdfunding is for investors, its profit potential pales in comparison to a new technology that could change everything from people's shopping habits to the way diseases are treated. When you hear about it, it may well seem like science fiction, but it's already working on a number of fronts. You can learn more about it here.

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