Ken Dohmen warns about the dire consequences of a broken real estate bubble followed by an overbuilding of the manufacturing sector.  The decline in manufacturing is illustrated by the decline in electricity consumption and rail freight traffic.

The Rocky Road to Globaization

Mexico may soon enter an elite club composed of Holland, Portugal, Uruguay and Colorado, Oregon and Washington state: It’s on the verge of excluding marijuana from the destructive war on drugs. But will the United States stand in its way?

On Nov. 4, Mexico’s Supreme Court voted by a wide margin to declare unconstitutional the country’s ban on the production, possession and recreational consumption of marijuana. A group of citizens had banded together in a so-called cannabis club (named SMART, for the initials in Spanish of its full title) and requested permission to grow and exchange marijuana among themselves; the government’s health agency (the equivalent of the U.S. Food and Drug Administration) denied them permission; the group sought a writ of habeas corpus, and went all the way to the Supreme Court, which granted them the writ and ordered the agency to legalize the club and allow it to function.

This decision does not entail an across-the-board decriminalization of recreational marijuana. For the moment, it applies only to the group that sought permission. But the court’s ruling may eventually extend to everyone seeking to grow or consume the drug.

Absent injury to third parties, the court resolved that, under the constitution, every individual has the right to enjoy life as he or she sees fit, and that secondary legislation — like prohibiting marijuana — cannot curtail that right.  Legalizaing Marijuana in Mexico

China Tries to Co-op Taiwan with economic incentives.

Austin Ramzy writes:  For the past eight years, the Chinese government has showered its former enemies in Taiwan with economic gifts: direct flights, commercial deals, even an undersea water pipeline. Trade is up more than 50 percent, and mainland tourists, once barred from traveling to the island, now arrive in droves, nearly four million last year alone.

In Taiwan last year, large protests broke out against an agreement to expand trade with the mainland, and the governing Kuomintang, or Nationalist Party, which favors closer ties with China, has plummeted in popularity and is widely expected to lose the presidency and possibly the legislature in January elections.

Now, the Chinese president, Xi Jinping, has agreed to meet the president of Taiwan, Ma Ying-jeou — the first meeting between the leader of the Republic of China, the government that fled to Taiwan after losing a civil war in 1949, and the leader of the People’s Republic of China, established on the mainland by Mao’s victorious Communists.

The encounter, scheduled to take place on neutral ground in Singapore on Saturday, will be trumpeted by both sides as a milestone in cross-strait relations. But it also seems to be an implicit acknowledgment by Mr. Xi that the Chinese effort to woo Taiwan with economic benefits alone has been unsuccessful — and that Beijing’s dream of unification with the island is as distant as ever, despite a long courtship.

“Xi Jinping is at a loss,” said Parris Chang, president of the Taiwan Institute for Political, Economic and Strategic Studies, a think tank in Taipei. “He doesn’t know what to do.”

Jonathan Sullivan, an associate professor at the School of Contemporary Chinese Studies at the University of Nottingham, described the decision to meet Mr. Ma as “a Hail Mary pass with time expiring.”

“Beijing has finally realized that the partner it has been working with on Taiwan, the K.M.T., is heading for disaster,” Professor Sullivan said, referring to the Kuomintang by its initials.

Mr. Xi is breaking with long-established policy by agreeing to meet Mr. Ma. But it is unclear how much further the Communist leadership is able or willing to go to win over the 23 million people of Taiwan, who polls show are uninterested in unification and increasingly anxious about the self-governing island’s dependence on the much larger Chinese economy.

Tsai Ing-wen, the leader of the pro-independence Democratic Progressive Party, is widely favored to become Taiwan’s new president. So far, she has not been subjected to the sort of vitriol that the Communist Party has heaped on some of the D.P.P.’s past candidates, an indication that Beijing may be receptive to working with her.  Can China Buy a Relationship with Taiwan

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Bitcoin not destined for a big future, but the blockchain technology probably is.

Leading figures from the financial industry have expressed their views on the future of digital currency. Jamie Dimon, CEO at JP Morgan, and the head of the International Monetary Fund (IMF), Christine Lagarde, both claimed the cryptocurrency is unlikely to be widely used in the future.

“There will be no real-time, non-controlled currency in the world. There is no government that is going to put up with it for long,” Dimon said while speaking at the Fortune Global Forum 2015 in San Francisco.

He also noted the bitcoin market will not reach global expansion, as it will be stopped by the government. “It’s kind of cute now, a lot of senators and congressmen will say, ‘I support Silicon Valley innovation’, but there will be no currency that gets around government controls,“ Dimon said.

“It’s just not going to happen. You are wasting your time. When the Department of Justice calls and says, ‘it’s an illegal currency and it’s against the laws of the land, and if you do it again, we will put you in jail’, it’s over,” he added.

Still, Dimon noted that JP Morgan believes in the potential of the blockchain, a technology underlying bitcoin. The bank is now investigating the blockchain and its applications. “Blockchain is like any other technology. If it is cheaper, effective, works, and secure, then we are going to use it.

According to Dimon, bitcoin will not be able to compete with the US dollar. “The technology will be used, and it could be used to transport currency, but it will be dollars, not bitcoins.” he said.

One of the areas which, according to Dimon, could be enhanced with the use of the blockchain is the loan market, as it involves a lot of paperwork that could be avoided. Meanwhile, the technology is unlikely to bring significant improvements to such areas as stock market, he said.

Christine Lagarde doesn’t think bitcoin can pose any threat to traditional currencies as well, The Telegraph reported. Moreover, she says that the cryptocurrency could not be trusted. “Many of you in the [financial] industry are actually worried that those technologies are going to massively disrupt the current industry,” she said at a conference in New York.

“Pause for a second. As long as those new technologies are going to abuse and take advantage of the yield for anonymity, I think the banking industry has quite a few good days ahead of it; as long as it takes ownership of those issues of capital and culture in order to restore trust, without which no trade, no transaction, no business can take place,” she stated.

However, the adoption of bitcoin is steadily growing. Although there are fears that bitcoin is utilized for criminal purposes due to its anonymity, its price escalated to almost $500 on Wednesday, showing more than 100% increase over the past month.

The New York Fed reports:  By now it is common knowledge that over the past two years the primary source of stock buying have been corporations themselves (recall Goldman’s admission that “buybacks have been the largest source of overall US equity demand in recent years”) with two consecutive years of near record stock repurchases. However, now that a December rate hike appears practically certain following the “pristine” October jobs report, suddenly the question is whether the recent strong flows into bond funds will continue, and generously fund ongoing repurchase activity.

The latest fund flow report from BofA puts this into perspective:  The increase in interest rates is starting to impact US mutual fund and ETF flows.

More concerning for corporations than even fund flows, which will surely see even bigger outflows now that both yields are spreads are set to blow out making debt issuance far less attractive to corporations whose cash flows continue to deteriorate, is what the NY Fed reported as activity by Primary Dealer, i.e., the most connected, “smartest people in the room” who indirectly execute the Fed’s actions in the public markets, in the most recent week.

As the charts below show, the Primary Dealers aren’t waiting for the December announcement to express how they feel about their holdings of both Investment Grade and Junk Bond (mostly in the longer, 5-10Y, 10Y+ maturity buckets where duration risk is highest).

Indeed, as of the week ended October 28, Primary Dealer corporate holdings tumbled across both IG and HY, plunging to the lowest level in years in what can only be called a rapid liquidation of all duration risk.

Investment Grade Bonds:

And Junk Bonds:

Why would dealers be liquidating their corporate bond portfolios at such a fast pace?

For junk, the obvious answer is that with ongoing concerns around rising leverage, not to mention yields being dragged higher by the ongoing pain in the energy sector, this may be merely a proactive move ahead of even more selling.

But for IG the answer is less clear, and the selling likely suggests fears that any December rate hike will see spreads blow out even further, and as a result dealers are cutting their exposure ahead of December.

Could a gold-based currency make the US Fed more responsible?

Sean Fieler writes:  History suggests that the only way to rein in the sprawling Federal Reserve is to end its money monopoly and restore the American people’s ability to use gold as a competing currency.

The legislative compromise that created the Fed in 1913 recognized that the power to print money, left unchecked, could corrupt both the government and the economy. Accordingly, the Federal Reserve Act created the Federal Reserve System without a centralized balance sheet, a central monetary-policy committee or even a central office.

The Fed’s regional banks were prohibited from buying government debt and required to maintain a 40% gold reserve against dollars in circulation. Moreover, each of the reserve banks was obligated to redeem dollars for gold at a fixed price in unlimited amounts.

Over the past century, every one of these constraints has been removed. Today the Fed has a centrally managed balance sheet of $4 trillion, and is the largest participant in the market for U.S. government bonds. The dollar is no longer fixed to gold, and the IRS assesses a 28% marginal tax on realized gains when gold is used as currency.

The largest increases in the Fed’s power have occurred at moments of financial stress. Federal Reserve banks first financed the purchase of government bonds during World War I. The gold-reserve requirement was dramatically reduced and a central monetary policy-committee was created during the Great Depression. President Richard Nixon broke the last link to gold to stave off a run on the dollar in 1971.

This same combination of crisis and expediency played out in 2008 as the Fed bailed out a series of nonbank financial institutions and initiated a massive balance-sheet expansion labeled “quantitative easing.” To end this cycle, Americans need an alternative to the Fed’s money monopoly.

A competing currency would not only offer people a monetary choice in a crisis. More important, it would give the Fed a clear incentive to anticipate and avoid such crises. In a competitive system, before it embraced another bout of monetary adventurism, the Fed would have to contemplate a decline in market share. For if the Fed were even perceived to be debasing the dollar, many would seek out a sounder alternative.

The continuing revolution in payment technology makes the introduction of competition not only possible, but practical. Bitgold, a Canadian company, is already offering gold-denominated transaction accounts with a debit card. The tag line on the company website reads: “Spend gold with the Bitgold prepaid card. Accepted anywhere globally that accepts credit cards, including ATM machines to withdraw local currency.”

With a gold-based currency up and running north of the border, why not offer Americans a monetary choice as well? The proposition is simple. Americans who prefer the incumbent monopoly provider of money are free to keep their accounts as is. Those who prefer gold are free to switch. And the Fed is free to defend its market share with sound monetary policy.