Dec 282018
 
 December 28, 2018  Posted by at 10:33 am Finance Tagged with: , , , , , , , , , , , ,  


Berthe Morisot After luncheon1881

 

Investors Fear Historic Market Rebound Was Just A ‘Wicked Bear Trap’ (MW)
US Stocks Follow Record-Breaking Rise With Day Of Wild Swings (G.)
VIX Is About To Do Something It Hasn’t Done Since 2011 (MW)
Watch Out When Men Of War Come To The Rescue (Fisk)
Giuliani: Mueller Must Be Investigated For Destruction Of FBI Evidence (Hill)
Donald Trump ‘Worst Perpetrator’ Of Fake News: UN Special Rapporteur (Pol.eu)
Macron ‘Lost Authority’ After Caving To Yellow Jackets, Says Oettinger (Pol.eu)
Corbyn Wants May To Recall MPs Early Over Critical Brexit Vote (Ind.)
Brexit’s Aura Of Inevitability Is Vanishing (Kaletsky)
Turning Brexit Into a Celebration of Democracy (Varoufakis)
Crime and Punishment in an Age of the Jungle (Vallianatos)

 

 

Catchy, but A Christmas Carol might be a better example. ‘Investors’ believe the ghosts are real, just like they believe markets are real. Read yesterday’s 2019: Zombie Markets Before The Fall to understand why that is nonsense.

Investors Are Speechless: “It’s Like Watching Pulp Fiction” (ZH)

With market action becoming increasingly surreal and the panicked, vertigo-inducing bear market rallies (spawned by a record $64 billion pension fund reallocation into stocks in a historically illiquid market) reminiscent of the chaos observed at the depths of the financial crisis, it is only appropriate that some of the quotes Bloomberg picked for its daily wrap piece which commemorated the biggest intraday reversal since 2010, be just as surreal. “Investors are becoming desensitized,” Bryce Doty, SVP at Sit Investment Associates, told Bloomberg, then continued the verbal poetry: “It’s like watching ‘Pulp Fiction.’ Halfway through, the violence doesn’t even bother you anymore.”

He’s right, although whereas the market “violence” in past weeks was one directional, this week it has developed a twist to trap both the bulls and bears, and while the latest Dow swing (of nearly 1000 points) was only slightly bigger than the average up-and-down move last week, back then equities were merely tumbling, now it tends to drop early in the day then soar in afternoon trading. So fast forwarding to the post-Christmas chaos – which this website explicitly warned about when last Friday we said to “Brace For Seismic Volatility” – strategists are starting to ask: if days like these are now normal, is there a context in which the whole three-month rout starts to feel routine?

There are the optimists like Jim Kelleher, director of research at Argus Research, who said market turmoil that happens when the economy is holding up reminds him of past stock declines that ended gently. Unless evidence emerges of deep global growth erosion, what’s going on now “will prove to be shorter and more shallow than the declines experienced in ‘classic’ bear markets.” Others are not so sure: “Investors are wondering if this will be a crash,” said Dave Campbell, a principal at San Francisco’s BOS, who nonetheless still managed to put a favorable spin on events.

“The risks are there, but they’re always there. They’re more heightened but it’s not the most likely outcome. The economy continues to grow – maybe a little more slowly – but next year markets will have hit their lows and we’ll be on the rebound.” Then there are those who echo what we asked yesterday, namely if this is only a bear market rally, although granted a very furious one: as Bloomberg writes in its second end of day wrap, “on the surface, the rally is good news for investors searching for a bottom after a three-month sell-off sent the S&P 500 to the brink of a bear market. But days like this are rarely good omens.”

Read more …

What’s happening is much more profound than bear markets.

Investors Fear Historic Market Rebound Was Just A ‘Wicked Bear Trap’ (MW)

It’s been a rough three months, and a particularly difficult December, for stocks, however. The Nasdaq is in a bear market while the Dow and S&P 500 are solidly in correction territory and nursing hefty December losses and year-to-date declines. Some market watchers find big bounces in such an environment less than convincing. Russ Mould, investment director at AJ Bell, offered up the table below in a Thursday note. It takes a look back at the 20 biggest one-day percentage gains for the S&P 500 going back to 1970, a stretch that includes nearly 12,800 trading days.

[..] Bulls can take encouragement from the fact that three of the 17 other days that saw an advance of 5% or more came immediately in the aftermath of the October 1987 crash, “when buying did prove a good plan,” while two more came in March 2009, when the S&P 500 hit bottom and began its current bull run. But here’s the rub: Eight of those gains of 5% or more came during the 2007-09 bear market and three more occurred during the downturn of 2000-03, “to suggest there is still a risk that this year’s Boxing Day bonanza could be no more than a wicked bear trap set to lure investors into more trouble,” Mould wrote ahead of Thursday’s open, saying that traders and investors “will be looking out for a couple of further definitive signals before they decide it really is time to buy on the dips following this year’s Christmas selloff.”

Indeed, market veterans warn that massive, one-day rallies are often more characteristic of downturns, occurring as selloffs lead to significantly oversold technical conditions that leave markets ripe for short covering only to give way to renewed selling once the frenzy of forced buying is exhausted. Investors who short a stock are essentially betting that its price will fall by first borrowing the shares, but those traders can be forced to buy shares back if prices suddenly swing higher, which, in turn, can amplify price swings.

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When is all this cheap money going to bail out?

US Stocks Follow Record-Breaking Rise With Day Of Wild Swings (G.)

US stock markets seesawed again on Thursday as a record-breaking day of gains gave way to selling once again before rising again in late trading. By lunchtime all the major US markets were in the red, with the Dow Jones Industrial Average down 1.4%, the S&P 500 losing 1.5% and the Nasdaq off 1.9%. But most US markets ended the day in the black with the Dow up 1.13%, the S&P adding 0.85% and the Nasdaq 0.38%. After a series of often wild swings the US stock markets are still on course to end the year in bear market territory – triggered when markets fall 20% from their most recent high. A bear market would be the first in close to a decade.

Michael Antonelli, managing director, institutional sales trading at Robert W Baird in Milwaukee, said he expected more dramatic days aheads. “There’s only two more sessions left before the end of the year. I would expect volatility to reign. It’s dug in like a tick,” he said. Stocks had fallen for four consecutive days through Monday. Wednesday’s rally – with the Dow adding close to 5% and a record 1,080 points – could have signaled a turning point. Markets closed up in Japan and Australia but European markets sank again on Thursday, with the FTSE closing down 1.5% in London, sinking to it’s lowest level since July 2016 (a month after the Brexit vote). Germany’s DAX closed down 2.3% and France’s CAC fell 0.6%

Stock markets have become increasingly volatile in recent months and recorded both record losses and record gains this week. The Dow Jones plummeted 653 points on Monday, capping its worst week in a decade and marking its “worst day of Christmas Eve trading ever”.

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The low VIX shows you how out of touch the financial world is. There can be only one reason for it: the Fed.

VIX Is About To Do Something It Hasn’t Done Since 2011 (MW)

It shouldn’t come as a surprise to anyone paying attention that stock-market volatility is on the rise. But here’s a statistic that underlines the phenomenon. The Cboe Volatility Index, commonly known as the VIX and often, if not sometimes derisively, referred to as Wall Street’s fear gauge, was on track Thursday to close above 30 for the fourth day in a row. The index, an options-based measure of expected volatility over the coming 30-day period, traded at 32.92 in recent action, up 2.51 points. According to data compiled by Dow Jones Market Data, that would be the longest streak since a 14-day run that ended in November 2011, surpassing a three-day period seen in August 2015. The index has a long-term average near 20.

It’s certainly been a week of whipsaw trading for investors. The S&P 500, Dow Jones Industrial Average and Nasdaq Composite all falling more than 2% in Monday’s holiday-abbreviated session to post the worst Christmas Eve performance in Wall Street history, only to roar back on Wednesday to more than reverse those declines as the S&P and Dow jumped 5% each and the Nasdaq gained 5.8%. On Thursday, stocks were back under pressure, with the Dow giving up more than half of the previous day’s 1,086-point gain.

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Robert Fisk is done. Comparing Putin to Hitler on the brink of 2019 is all we need to know. BTW, Mattis DID consider running.

Watch Out When Men Of War Come To The Rescue (Fisk)

When a general popularly known as James “Mad Dog” Mattis abandons a really mad American president, you know something has fallen off the edge in Washington. Since the Roman empire, formerly loyal military chiefs have fled crackpot leaders, and Mattis’s retreat from the White House might have the smell of de Gaulle and Petain about it. De Gaulle was confronted by an immensely powerful hero of the people – the Lion of Verdun – who was, in his dotage, about to shrug off the sacred alliance with Britain for Nazi collaboration (for which, I suppose, read Putin’s Russia). The decision was made to have nothing to do with Petain, or what Mattis now refers to as “malign actors”. De Gaulle would lead Free France instead.

Mattis has no such ambitions – not yet, at any rate – although there are plenty of Lavals and Weygands waiting to see if Trump chooses one of them for his next secretary of defence. Besides, history should not grant Trump and Mattis such an epic panorama. After all, no Trump tweet could compare with Petain’s 1916 “We’ll get them!” (“on les aura”) slogan, and the dignified, cold and fastidious de Gaulle would never have lent himself to the rant Mattis embarked upon in San Diego in 2005: “You go into Afghanistan, you got guys who slap women around for five years because they didn’t wear a veil. You know, guys like that ain’t got no manhood left anyway. So it’s a hell of a lot of fun to shoot them. Actually, it’s a lot of fun to fight. You know, it’s a hell of a hoot. It’s fun to shoot some people. I’ll be right upfront with you, I like brawling.”

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If investigations like this are not held, the US risks becoming a very volatile place.

Giuliani: Mueller Must Be Investigated For Destruction Of FBI Evidence (Hill)

Rudy Giuliani has an unmistakable New Year’s message for special counsel Robert Mueller: It is time for the chief investigator in the Russia case to be investigated in 2019. In wide-ranging interviews with Hill.TV’s Buck Sexton and me on Wednesday and Thursday, President Trump’s defense lawyer pointedly accused Mueller’s office of destroying evidence by allowing text messages from now-fired FBI official Peter Strzok and his FBI lover, Lisa Page, to be erased in the Russia probe. “Mueller should be investigated for destruction of evidence for allowing those text messages from Strzok to be erased, messages that would show the state of mind and tactics of his lead anti-Trump FBI agent at the start of his probe,” Giuliani said.

The Justice Department inspector general (IG) reported this month that it found large gaps in the preservation of official government text messages between Strzok and Page, the two top FBI agents who helped to start the Russia probe in 2016, who were having an affair at the time, and who expressed disdain for Trump. The report said a technical glitch was to blame for the FBI’s failure to save those text messages, but the IG was able to recover more than 19,000 from the early part of the Russia probe before Mueller was named special prosecutor. However, the IG said it was unable to recover messages from the time Strzok and Page worked for Mueller’s office in spring and summer 2017 because the memories of both FBI officials’ government phones were wiped clean by technicians.

That erasure occurred after Strzok and Page left Mueller’s team over revelations they exchanged anti-Trump text messages, including one string in which they talked about stopping Trump from becoming president. “That should be investigated, damn it, that should be investigated fully. You want a special counsel, get one for that,” Giuliani said.

Read more …

Really? The UN is going to pick sides? Against Trump and pro Big Tech?

Donald Trump ‘Worst Perpetrator’ Of Fake News: UN Special Rapporteur (Pol.eu)

The President of the United States is the “worst” perpetrator of misinformation on the internet, the U.N. Special Rapporteur on Freedom of Expression and Opinion David Kaye said in an interview published today. “Governments are real offenders when it comes to disinformation,” said Kaye. “In my own country, the United States, the worst perpetrator of false information is the President of the United States.” The problem of fake news emanating from governments should be covered by journalists, the rapporteur said. Platforms such as Google, Facebook or Twitter can help the broader fight against disinformation — bots, foreign interference… — but should not remove content, Kaye said.

“The platforms, I think, can do things that are more technical as long as they are not evaluating content. There are things they can do. They can’t just zap it and say, “This is fake news, it’s off the platform.” According to Kaye, platforms should focus on reducing spam and bot accounts rather than on policing content. And even bots are “tricky, because there are good bots and bad bots.” Google, Facebook and Twitter are under intense pressure from the European Commission to tackle fake news ahead of the European election in May 2019.

Read more …

When did the Yellow Vests become an insect species?

Macron Lost Authority After Caving To Yellow Jackets – EU’s Oettinger (Pol.eu)

The EU will accept a French budget deficit above the EU’s 3 percent ceiling in 2018 “as a one-time exception,” Budget Commissioner Günther Oettinger said in an interview published Thursday. Oettinger told the Funke media group of German newspapers that French President Emmanuel Macron had “lost authority with his budget for 2019” by upping his spending in response to the Yellow Jackets protests, “but he remains a strong supporter of the European Union.” Brussels reviewed the French budget several weeks ago and won’t be revisiting it, Oettinger added. “It crucial now that Macron continues his reform agenda, especially in the labor market, and that France remains on its growth track.”

“Under this condition, we will tolerate a national debt higher than 3 percent as a one-time exception. However, it must not continue beyond 2019.” Oettinger also told the Funke media group that there’s still a chance Britain’s parliament will vote in favor of Prime Minister Theresa May’s Brexit deal in January and that “there is certainly no majority for a disorderly Brexit or for a new referendum.” If the U.K. leaves the bloc without a Brexit deal, it will become “a third country like Morocco or Azerbaijan,” Oettinger said. He added that if Britain withholds its divorce payment in 2019, Germany would be left footing the bill “in the mid-three-digit range” of hundreds of millions of euros.

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The sudden urgency is too late.

Corbyn Wants May To Recall MPs Early Over Critical Brexit Vote (Ind.)

Jeremy Corbyn has challenged Theresa May to cut short the Christmas recess and recall parliament early in the new year in order to bring forward a critical vote on the Brexit deal. In an interview with The Independent, the Labour leader said he believed the prime minister and her allies were engaged in a “cynical manoeuvre” to run down the clock and offer MPs the “choice of the devil or the deep blue sea”. His remarks come as the Commons prepares to vote on the UK-EU deal in the week beginning 14 January – in what is being billed as the most significant moment in parliament for a generation.

With just 91 days remaining until Britain formally leaves the European Union, Mr Corbyn also reiterated it is a matter of “when, not if” Labour attempts to force a general election by tabling a motion of no confidence in the government, which he signalled will come in the aftermath of Ms May’s deal failing to receive MPs’ backing. But he refused to be drawn on whether a Labour government would seek to extend Article 50, given that just weeks would remain for any renegotiation of Britain’s exit from the bloc, and claimed: “Lots of things are possible, the EU has longform on reopening and extending negotiations, but let’s not jump too many hoops when we haven’t arrived at them.”

Speaking in his constituency office in Islington, north London, ahead of Christmas Day, he poured scorn on the prime minister’s decision earlier this month to pull a vote on the deal in the face of near-certain defeat and instead begin a last-ditch attempt to seek assurances from the EU to assuage Brexiteers’ concerns over the contentious issue of the Irish backstop. Pressed on whether he believed Ms May should now recall parliament a week early, on 2 January, the Labour leader replied: “Well it is in her hands to recall parliament. I want us to have a vote as soon as possible, that’s what I’ve been saying for the past two weeks, and if that means recalling parliament to have the vote let’s have it.

“But it looks to me the government has once again reneged on that and tried to put it back another week. We need to have that vote so a decision of parliament can be made. What I suspect is that it’s a completely cynical manoeuvre to run down the clock and offer MPs the choice of the devil or the deep blue sea.”

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For some, perhaps.

Brexit’s Aura Of Inevitability Is Vanishing (Kaletsky)

In times of political turmoil, events can move from impossible to inevitable without even passing through improbable. In early 2016, the idea of Britain leaving the European Union seemed almost as absurd as the next American president being the six-time bankrupt and serial sex pest Donald Trump. A few months later, Brexit and the Trump presidency were universally acknowledged as the inevitable consequence of an anti-elitist, anti-globalization backlash that was predictable decades ago. This sense of inevitability, far more than genuine anti-European conviction, is what has discouraged Britain from changing its mind about a pointless and self-destructive policy that few voters cared about until 2016.

The message from post-Brexit polling and focus groups has been: “We all know that Brexit has to happen, so why don’t the politicians just get on with it?” But with the Brexit process now moving toward its climax, another outcome is moving from impossible to inevitable: Britain could soon change its mind and decide to stay in the EU. This reversal of fortune could begin next month, when Prime Minister Theresa May is expected to lose the decisive parliamentary vote on her Brexit deal. If and when this defeat happens, May will face two unpalatable options. She could preside over a “No Deal” rupture with Europe — tantamount to a declaration of economic war against the EU — and risk a 2008-level economic crisis accompanied by a border upheaval in Ireland that could reignite the “Troubles.”

Or she could break her extravagant promises to honor the “people’s instruction” from the 2016 referendum and allow a new popular vote that might cancel Brexit. To avoid this invidious choice, May could try one last time to push her proposals through Parliament after losing the vote scheduled for the week of January 14. But if this last-ditch effort fails, her choices will be reduced to a No Deal rupture with Europe and a new referendum.

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Varoufakis is basically right, but I can’t see a three-year People’s Debate tackling 6 issues. Brits will think: we can’t even deal with one issue. And an extension of a transition period until 2022 is hard to see, too.

Turning Brexit Into a Celebration of Democracy (Varoufakis)

With weeks left before the UK leaves the EU by default, none of the three main options on offer – a no-deal Brexit, Prime Minister Theresa May’s withdrawal agreement with the EU, and rescinding Article 50 in order to remain in the EU – commands a majority in Parliament or among the population. Each generates maximum discontent: The no-deal scenario strikes most as a dangerous plunge into the unknown. May’s deal appalls Remainers and is seen by most Leavers as the kind of document only a country defeated at war would sign. Lastly, a Brexit reversal would confirm Leavers’ belief that democracy is allowed only when it yields results favored by the London establishment.

The conventional wisdom in Britain is that this impasse is lamentable, and that it proves the failure of British democracy. I disagree on both counts. If any of the three immediately available options were endorsed, say, in a second referendum, discontent would increase and the larger questions plaguing the UK would remain unanswered. Britons’ reluctance to endorse any Brexit option at present is, from this perspective, a sign of collective wisdom and a rare opportunity to come to terms with the country’s great challenges while re-thinking the UK’s relationship with the EU. But to seize it, the UK must invest in a “People’s Debate,” leading, in time, to a “People’s Decision.”

The People’s Debate must address six issues: the British constitution, including the creation of an English parliament or multiple regional English assemblies; the electoral system and the role of referenda; the Irish question, including the possibility of joint UK-Irish sovereignty over Northern Ireland; migration and freedom of movement; Britain’s economic model, particularly the outsize role of finance and the need to boost green investment across the country; and of course the UK-EU relationship.

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Proudly poisoning your food for 100 years.

Crime and Punishment in an Age of the Jungle (Vallianatos)

[..] studies funded by EPA and others have been connecting farmers’ sprays to ecocide, disease and death. I traced the catastrophic decline of honeybees to the neurotoxic pesticides of the farmers. This brought me in touch with a caring beekeeper from Colorado named Tom Theobald. He was telling me his days as a beekeeper were coming to an end. In December 2018, he summarized 44 years of living with honeybees and the poisoners of honeybees. “Almost every problem we face,” he said, “can be traced to a Criminal Corporatism and an out of control Capitalism. If there is a profit to be made, there is little regard paid to the consequences. If challenged, we get denial, diversion, excuses and junk science. It simply doesn’t matter how many people are sickened or die, how many species are pushed to extinction or how seriously the planet is compromised.”

[..] We are fortunate we have a reliable history of that irresponsible age by Deborah Blum, director of the Knight Science Journalism Program at MIT. A prolific and outstanding writer, Blum is telling a story that illuminates both early twentieth century, but, perversely, our own times. Her timely book, The Poison Squad: One Chemist’s Single-Minded Crusade for Food Safety at the Turn of the Twentieth Century (Penguin Press, 2018) paints an unforgettable picture of an American table full of “adulterated” food. Milk and meat were routinely treated with formaldehyde, a carcinogen used for embalming of corpses. Wine drinkers drank a liquid that had nothing to do with grapes. Wine was made from “tannin and coal tar.”

The poisonous copper sulphate dressed canned vegetables. The cleaning chemical borax coated butter. Honey had nothing to do with real honey. It was rather a version of “thickened, colored corn syrup.” Coffee was usually “sawdust, or wheat, beans, peas and dandelion seeds, scorched black and ground to resemble the genuine article.” Bread was baked with alum or chalk, or “sawdust chopped up very fine or gypsum in powder… Terra alba just out of the mine.” There was no law against the poisonous adulteration of food and drink. However, the adulteration of food, Blum says, gave sickness and death, potentially to huge number of Americans. Tainted milk alone killed thousands of children in New York City every year.

Read more …

Dec 272018
 
 December 27, 2018  Posted by at 9:25 pm Primers Tagged with: , , , , , , , , , , ,  


Francis Tattegrain La ramasseuse d’épaves (The Beachcomber) 1880

 

I haven’t really written about finance since April of this year, and given recent fluctuations in what people persist in calling the markets, maybe it’s time. Then again, nothing has changed since that article in April entitled This Is Not A Market. I was right then, and I still am.

[..] markets need price discovery as much as price discovery needs markets. They are two sides of the same coin. Markets are the mechanism that makes price discovery possible, and vice versa. Functioning markets, that is. Given the interdependence between the two, we must conclude that when there is no price discovery, there are no functioning markets. And a market that doesn’t function is not a market at all.

[..] we must wonder why everyone in the financial world, and the media, is still talking about ‘the markets’ (stocks, bonds et al) as if they still existed. Is it because they think there still is price discovery? Or do they think that even without price discovery, you can still have functioning markets? Or is their idea that a market is still a market even if it doesn’t function?

But perhaps that is confusing, and confusion in and of itself doesn’t lead to better understanding. So maybe I should call what there is out there today ‘zombie markets’. It doesn’t really make much difference. What murdered functioning markets is intervention by central banks, in alleged attempts to save those same markets. Cue your favorite horror movie.

Now Jerome Powell and the Fed he inherited are apparently trying to undo the misery Greenspan, Bernanke and Yellen before him wrought upon the economic system, and people, cue Trump, get into fights about that one. All the while still handing the Fed, the ECB, the BoJ, much more power than they should ever have been granted.

And you won’t get actual markets back until that power is wrestled from their cold dead zombie fingers. Even then, the damage will be hard to oversee, and it will take decades. The bankers and investors their free and easy trillions were bestowed upon will be just fine, thank you, but everyone else will definitely not be.

Central banks don’t serve societies, they serve banks. They fool everyone, politicians first of all, into believing that societies automatically do well if only the demands of banks are met first, and as obviously stupid as that sounds, nary a squeak of protest can be heard. Least of all from ‘market participants’ who have done nothing for the better part of this millennium except feast at the teat of main street largesse.

In the past few days we’ve had both -stock- market rallies and plunges of 5% or so, and people have started to realize that is not normal, and it scares them. So you get Tyler posting DataTrek’s Nicolas Colas saying “Healthy” Markets Don’t Rally 1,086 Points On The Dow. Well, he’s kinda right, but there hasn’t been a healthy market in 10+ years, and he’s missed that last bit. Like most people have who work in those so-called ‘markets’.

 

Here’s why Colas is right, but doesn’t understand why. Price discovery is the flipside of the coin that is a functional market, because it allows for people to see why something is valued at the level it is, by a large(r) number of participants. Take that away and it is obvious that violent price swings may start occurring as soon as the comforting money teat stutters, or even just threatens to do so; a rumor is enough.

In physics terms, price discovery, and therefore markets themselves -provided they’re ‘healthy’ and ‘functioning’- delivers negative feedback to the system, i.e. it injects self-correcting measures. Take away price discovery, in other words kill the market, and you get positive feedback, where -simplified- changes tend to lead to ever bigger changes until something breaks.

Also, different markets, like stocks, bonds, housing, will keep a check on each other, so nothing will reach insane valuations. If they tend to, people stop buying and will shift their money somewhere else. But when everything has an insane value, how would people know what’s insane anymore, and where could they shift that is not insane?

It doesn’t matter much for ‘market participants’, or ‘investors’ as they prefer to label themselves, they shift trillions around on a daily basis just to justify their paychecks, but for mom and pop it’s a whole different story. In between the two you have pension funds, whose rapid forced move from AAA assets to risk will strangle mom and pop’s old-age plans no matter what.

 

People inevitably talk about the chances of a recession happening, but maybe they should first ask what exactly a recession, or a bear market, is or means when it occurs in a zombie (or just plain dead) market.

If asset ‘values’ have increased by 50% because central banks and companies themselves have bought stocks, it would seem logical that a 10% drop doesn’t have the same meaning as it would in a marketplace where no such manipulation has taken place. Maybe a 50% drop would make more sense then.

The inevitable future is that people are going to get tired of borrowing as soon as it becomes too expensive, hence unattractive, to do so. Central banks can still do more QE, and keep rates low for longer, but that’s not an infinity and beyond move. It a simple question of the longer it lasts the higher will be the price that has to be paid. One more, one last, simple question: who’s going to pay? We all know, don’t we?

 

That’s where the Fed is now. You can let interest rates rise, as Powell et al are indicating they want to do, but that will cut off debt growth, and since debt is exclusively what keeps the economy going, it will cut into economic growth as well. Or you can keep interest rates low (and lower), but then people have less and less idea of the actual value of assets, which can, and eventually necessarily will, cause people to flee from these assets.

Powell’s rate hikes schedule looks nice from a normalizing point of view, and g-d knows what normal is anymore, but it would massacre the zombie markets the Fed itself created when it decided to kill the actual markets. You can get back to normal, but only if the Fed retreats into the Eccles Building and stays there until 2050 or so (or is abolished).

They won’t, the banks whose interests they protect will soon be in far too dire straits, and bailouts have become much harder to come by since 2008. It’ll be a long time before markets actually function again, and we won’t get there without a world of pain. Which will be felt by those who never participated in the so-called markets to begin with. Beware of yellow vests.

To top off the perversity of zombie markets, one more thing. Zombie markets build overcapacity. One of the best things price discovery brings to an economy is that it lets zombies die, that bankrupt companies and bankrupt ideas go the way of the dodo.

That, again, is negative feedback. Take that away, as low rates and free money do, and you end up with positive feedback, which makes zombies appear alive, and distorts the valuation of everything.

Most of what the ‘popular’ financial press discusses is about stocks, what the Dow and S&P have done for the day. But the bond markets are much bigger. So what are we to think when the two are completely out of sync -and whack-?

 

Oh well, those are just ‘the markets’, and we already know that they are living dead. Where that may be less obvious, if only because nobody wants it to be true, is in housing markets. Which, though this is being kept from you with much effort, are what’s keeping the entire US, and most of Europe’s, economies going. And guess what?

The Fed and Draghi have just about hit the max on home prices (check 2019 for the sequel). Prices have gotten too high, Jay Powell wants higher interest rates, Draghi can’t be left too far behind him because EU money would all flow to the US, and it’s all well on its way to inevitability.

And anyway, the only thing that’s being achieved with ever higher home prices is ever more debt for the people who buy them, and who will all be on the hook if those prices are subject to the negative feedback loops healthy markets must be subject too, or else.

The only parties who have profited from rising home prices are the banks who dole out the mortgages and the zombie economy that relies on them creating the money society runs on that way. We have all come to rely on a bunch of zombies to keep ourselves from debt slavery, and no, zombies are not actually alive. Nor are the financial markets, and the economies, that prop them up.

Among the first things in 2019 you will see enormous amounts of junk rated debt getting rated ever -and faster- lower , and the pace at which ever more debt that is not yet junk, downgraded to(wards) junk, accelerating. It looks like the zombies can never totally take over, but that is little comfort to those neck deep in debt even before we start falling.

And as for the ‘players’, the economic model will allow again for them to shove the losses of their braindead ventures onto the destiny of those with ever lower paying jobs, who if they’re lucky enough to be young enough, start their careers in those jobs with ever higher student debts.

You’d think that at some point they should be happy they were never sufficiently credit-worthy to afford one of the grossly overpriced properties that are swung like so many carrots before their eyes, but that’s not how the system works. The system will always find a way to keep pushing them deeper into the financial swamp somehow.

The last remaining growth industry our societies have left is inequality, and that’s what our central banks and governments are all betting on to keep Jack Sparrow’s Flying Dutchman afloat for a while longer. Where the poor get squeezed more so the 1% or 10% get to look good a little longer.

But in the end it’s all zombies all the way down, like the turtles, and some equivalent of the yellow vests will pop up in unexpected places. My prediction for next year.

It doesn’t look to me that a year from now we’ll see 2019 as a particular peaceful year, not at all like 2018. I called it from Chaos to Mayhem earlier, and I’m sticking with that. We’re done borrowing from the future, it’s getting time to pay back those loans from that future.

And that ain’t going to happen when there are no functioning markets; after all, how does anyone know what to pay back when the only thing they do know is everything is way overvalued? How wrong can I be when I say debts will only be paid back at fair value?

2019, guys, big year.

 

 

Dec 182018
 


Titian The rape of Europe 1560-62

 

It took me a while to decide which word(s) best define the past year and the next one, but I think this is pretty much it. 2018 was chaotic more than anything else, and that chaos will give rise to mayhem in 2019.

What I think is striking is that this is true across the board, in all walks of life so to speak. In finance, in politics, in energy markets, in ecological matters, and perhaps most of all in the ways all these topics are being covered by what once were trusted media.

I’m going to have to come back to all these topics separately, so it’s promising to be a very busy holiday season, but it’s also good to try and put them together in one place, if only to show how interconnected everything is. And how futile it is to look at the economy without seeing its connection to energy flows and ecosystems. And vice versa.

 

In finance and economics, we’ve seen an avalanche of falling numbers recently, in stock prices, bond prices, housing, across the globe, and obviously that evokes a lot of comments in the financial press. But that press, and bankers investors on their own, still talk about markets.

However, as I wrote in April 2018, if there is no price discovery, and there isn’t, there ARE NO markets, and it would be good and beneficial if many more people absorb that simple reality. Many more so-called traders and investors would be a start, but by no means enough. Lots more people who have nothing to do with the ‘markets’ should understand why there is no such thing anymore.

As long as you limit it to stock and bond markets, it may appear fine that people don’t understand. But as soon as you acknowledge there are no housing markets either for the exact same reasons, the story changes considerably. Because then it becomes clear that all -former- markets, bar none, have been eviscerated by central bank policies that sought to prop up banks, often highly successfully so, which they knew could only happen at the expense of communities and societies.

We’ve ended up with scores of mom and pop ‘investors’ who own hugely overpriced stocks and homes, while their pensions funds hold zillions ‘worth’ of bonds and also increasingly stocks. The link between pensions and AAA-rate assets was pulverized in the process. That looks set to continue, and worsen, in 2019. But that may be just the look of things. Because there really are no markets, there is no price discovery.

What is still there is a lot of talk about whether the Fed -and other central banks- will raise rates further or not, or will stop or continue their asset buying schemes. Central banks are the only game in town, there are no markets, nobody knows what anything is really worth because the Fed etc. took the discovery process beyond their reach.

And now all those financial ‘subjects’ are sitting on all this stuff that only appears to have value, and that value hinges exclusively on what Draghi, Kuroda, Yellen and now Jay Powell have decided things are worth. And yes, it does make matters appear okay, but because they can’t do QE forever, all of those values will need to be re-assessed by actual markets once Powell et al. are either thrown out or decide for themselves to leave the arena.

It won’t be pretty, it will be devastating. It’s impossible to say if it will come to a head in 2019, because the Fed can lower rates a bit again after its recent rate hikes and prop up the zombie for longer. Then again Draghi can’t do that anymore since he’s already in negative rate territory, and while the euro could fall to parity with the USD as a consequence, there’s a limit to that too.

Anyway, more on that later.

 

Energy and ecology seem to become more intertwined as we go along, though that may well be a trompe oeil, trick of the eye. Still, if you see and read what people have to say about things like the big COP24 event in Katowice last week, it’s obvious that the 2nd law of Thermodynamics is a hard one to internalize. Because that law seems to say that the use of energy, period, produces waste, while all these mostly well-meaning folk are merely focusing on shifting between energy sources.

There is surprisingly little attention for not using energy in the first place, which the 2nd Law appears to stipulate is the only way to stop the rot. And it’s entirely feasible to build homes that use 70-80% less power to heat and cool, or to design a transport system in a city that saves that much energy.

But the ‘leaders’, politicians and business people, prefer to address solar panels and wind turbines that allow for the amount of energy used to fall only moderately, which when combined with the economic growth that nobody questions, will lead to the use of ever more energy.

And I get that, you need to shrink your present economies, and the models they’re based on, in order to save the planet. I’m not so much talking about climate change, since the earth is a system so complex we should really be very cautious about deriving any conclusions about it from simplified models, but the species extinction reported in 2018 is another, and more immediately convincing, story.

Still, conferences like COP24, or its predecessor COP21 which I wrote about 3 years ago in CON21, are not just entirely useless, they move everything backward that all the worried boys and girls are so worried about.

The movers and shakers of the world all owe their positions to the economies, and therefore the levels of energy use, that the worried people now want to move away from. And then they turn to the same movers and shakers to make that happen. Sorry, no can do. All you’ll get is lip service from people looking for money and power, who are not interested in being proved wrong if they are.

Today’s climate discussion is a road to nowhere where down the line there’ll be nobody left to talk to and no birds singing. You yourself probably won’t be there either. There is not one politician who will volunteer to give up their power if that could save the world their children will have to live in. They’ll come up with a story where their position is save and so is that world, and they’re more than likely to believe it.

 

As for the media, the tale gets darker fast. It didn’t start in 2018, but it did become a lot more outspoken. As I’ve said before, there are three targets for the former trusted sources of impartial news, even as those sources rapidly become more partial as we move forward. And that of course has to do with their new business model I wrote about a lot: writing negative stories about Donald Trump became an obvious source of revenue well before he was president.

Once he was elected, the media doubled down. They wrote against Trump at first thinking he would be beaten in the GOP primaries, then some more when he faced Hillary, then because they didn’t like him in the White House, and finally because he turned out to be the business proposition that quite literally kept them alive. What was it, over 100,000 new subscribers for the NYT a MONTH at a certain point?! Would CNN and Rachel Maddow even exist anymore without the Donald?

But that also means that the MSM cannot report anything positive about the man, with the exception of a bombing campaign in a faraway sandbox, and that is pretty crazy. No matter where you stand politically, not even Trump can do everything wrong, but CNN, MSNBC, WaPo,NYT et al can’t say it out loud, because their new readers and viewers want negative stories.

I’m not at all a Trump fan, I find it insane that America can’t find a single person among its 320 million inhabitants who could better represent it, but I also saw well over two years ago that the reporting on Trump was so biased someone had to restore at least some balance. And if that was to be me, so be it.

It’s like the entire US -and UK- press has become the National Enquirer, where the questions of truth or accuracy have become, and/or always was, a complete afterthought, irrelevant to whatever is actually published. And the readers and viewers caught inside the echo chamber will never know any better than that that is what the world really looks like.

It’s the ‘old’ media’s response to the threat of social media, a fight they cannot possibly win in the end, but not one they will relinquish easily; it will be the end of them. So there’s Trump, and then there’s Russia and Julian Assange. And there’s a live shooting practice going on in which all three are fair game.

According to two reports published just yesterday in the NY Times and the BBC, African Americans and French Yellow Vests were targeted by Russian bots, trolls, give them a name. What these once trusted media no longer understand, or don’t care about, is that they are effectively saying that African Americans and Yellow Vests are all so stupid and so unconvinced and unconvincing in their political convictions that a bunch of poorly defined Russians made them throw their votes away from Hillary Clinton and towards Trump.

Like African Americans have no opinions and therefore in the end no functioning brains. Like their f*king robots, some inferior lifeform. Is there anything you can say that is more racist than that? I come up empty. And I understand Kanye.

And that the ‘Russians’ caused tens of thousands of Frenchmen and -women to put on a yellow vest and protest Macron’s dismantling of -very- long-standing labor rights and taxation ‘reforms’ that benefit the rich French elite. You cannot insult two such vast yet diverse groups of people, who seem to have little if anything in common, African Americans and Yellow Vests, you cannot insult them more or worse than such reports do.

And they simply don’t see it. In their view, and which they -rightly by now- trust their public will eat up like hot cakes, their 24/7 anti-Trump and anti-Russia campaigns have been so convincing that they can basically say anything at all by now. If Trump or the Russians deny, that’s just what they would do if they were guilty. Assange can’t deny anything at all, they’ve totally silenced him. They being the US deep state in liaison with the MSM.

 

That’s how we’re about to enter 2019, how we’re about to move from chaos to mayhem. It is scary not just because of what we see happening today, but even more because we’ve never seen anything remotely like it. Sure, US media, any country’s media, have always supported government strategic lies in times of warfare or other tensions.

But an overall campaign against a sitting president, comprised of dozens of articles a day consisting of mere allegations and rumors, let alone the same against a state nuclear power arguably mightier than the US itself, and a journalist who’s the only one in his profession who’s actually done what journalists should do, not the well-paid follow the party line thing going on at the MSM, all this is unprecedented.

And given what we’ve seen in 2018 in the realm of banned social media accounts, in a wider sense of the word, we can only wonder how much worse the censorship can get in the mayhem year of 2019.

Can the Automatic Earth, and for instance our friends at Zero Hedge, only continue to exist next year if we agree to increasingly become the poodles of the ruling political classes, intelligence services, and their press masters and lackeys?

It’s starting to look that way. So in closing, I want to call on you to support us by donating a Christmas gift, and preferably a recurring one all through the 2019 mayhem year, so we know we can continue to present you with an alternative to the ‘appropriate’ information you’re ‘supposed’ to be receiving.

It’s later than you think.

 

 

Apr 232018
 
 April 23, 2018  Posted by at 12:46 pm Finance Tagged with: , , , , , , , , ,  


René Magritte La trahison des images 1929

 

“[Price discovery] is the process of determining the price of an asset in the marketplace through the interactions of buyers and sellers”, says Wikipedia. Perhaps not a perfect definition, but it’ll do. They add: “The futures and options market serve all important functions of price discovery.”

What follows from this is that markets need price discovery as much as price discovery needs markets. They are two sides of the same coin. Markets are the mechanism that makes price discovery possible, and vice versa. Functioning markets, that is.

Given the interdependence between the two, we must conclude that when there is no price discovery, there are no functioning markets. And a market that doesn’t function is not a market at all. Also, if you don’t have functioning markets, you have no investors. Who’s going to spend money purchasing things they can’t determine the value of? (I know: oh, wait..)

 

Ergo: we must wonder why everyone in the financial world, and the media, is still talking about ‘the markets’ (stocks, bonds et al) as if they still existed. Is it because they think there still is price discovery? Or do they think that even without price discovery, you can still have functioning markets? Or is their idea that a market is still a market even if it doesn’t function?

Or is it because they once started out as ‘investors’ or finance journalists, bankers or politicians, and wouldn’t know what to call themselves now, or simply can’t be bothered to think about such trivial matters?

Doesn’t a little warning voice pop up, somewhere in the back of their minds, in the middle of a sweaty sleepless night, that says perhaps they shouldn’t get this one wrong? Because if you think about, and treat, a ‘thing’, as something that it’s not at all, don’t you run the risk of getting it awfully wrong?

A cow is not a dinner table; but both have four legs. And “Art is Art, isn’t it? Still, on the other hand, water is water. And east is east and west is west and if you take cranberries and stew them like applesauce they taste much more like prunes than rhubarb does. Now you tell me what you know”. And when you base million, billion, trillion dollar decisions, often involving other people’s money, on such misconceptions, don’t you play with fire -or worse?

 

This may seem like pure semantics without much practical value, but I don’t think it is. I think it’s essential. What comes to mind is René Magritte’s painting “La Trahison des Images”, better known as “Ceci n’est pas une pipe”, (The Treachery of Images – this is not a pipe). People now understand -better- what he meant, but they were plenty confused in the late 1920s when he painted it.

An image of a pipe is not a pipe. In Magritte’s words: “The famous pipe! How people reproached me for it! And yet, could you stuff my pipe? No, it’s just a representation, is it not? So if I had written on my picture ‘This is a pipe’, I’d have been lying!”.

But isn’t that what the entire financial community is doing today? Sure, they’re making money right now, but that doesn’t mean there are actual markets. They don’t have to go through “the process of determining the price of an asset in the marketplace..” I.e. they don’t have to check if the pipe is a real pipe, or just a picture of one.

 

 

What killed price discovery, and thereby markets? Central banks did. What they did post-2008 is two-fold: they bought many, many trillions in ‘assets’, mortgage-backed securities, sovereign bonds, corporate bonds, etc., often at elevated prices. It’s hard to gauge how much exactly, but it’s in the $20+ trillion range. Just so all these things wouldn’t be sold at prices markets might value them at after going through that terrible process of ‘price discovery’.

Secondly, of course, central banks yanked down interest rates. Until they arrived at ultra low interest rates (even negative ones), which have led to ultra low yields and the perception of ultra low volatility, ultra low risk, ultra low fear, which in turn contributed to ultra low savings (in which increasing household debt also plays a major role). As a consequence of which we have ultra high prices for stocks, housing, crypto(?), and I’m sure I still forget a number of causes and effects.

People wanting to buy a home are under the impression they can get “more home for their buck” because rates are so low, which in turn drives up home prices, which means the next buyers pay a lot more than they would have otherwise, and get “less home for their buck”. In the same vein, ultra-low rates allow for companies to borrow on the cheap to buy back their own stock, which leads to surging stock prices, which means ‘investors’ pay more per share.

 

Numbers of the S&P 500 and its peers across the world are still being reported, but what do they really represent? Other than what central banks and financial institutions have bought and sold? There’s no way of knowing. If you buy a stock, or a bond, or a home, you no longer have a means of finding out what they are truly worth.

Their value is determined by central banks printing debt out of thin air, not by what it has cost to build a home, or by what a company has added to its value through hard work or investment in labor, knowledge or infrastructure. These things have been rendered meaningless.

Central banks determine what anything is worth. The problem is, that is a trap. And your money risks being stuck in that trap. Because you’re not getting any return on your savings, you want to ‘invest’ in something, anything, that will get you that return. And the only guidance you have left is what central banks purchase. That is a much poorer guidance than an actual market place. The one thing you can be sure of is that you’re paying more for ‘assets’ -probably much more- than you would have had central banks remained on the sidelines.

The Fed may (officially?) have quit purchasing ‘assets’, but the Bank of Japan and ECB took over with a vengeance (oh, to be a fly on the wall at the BIS); in Q1 2017 the latter two bought over $1 trillion in paper. The Bank of Japan has effectively become its nation’s bondmarket. The European Central Bank is not far behind that role in Europe.

And the ‘market’, or rather the 2-dimensional picture of a market, depends only on what they do. The one remaining question then is when will this end? Some say it can go on forever, or, you know, till these policies have restored growth and confidence. But can, will, anyone have confidence in a market that doesn’t function? Martin Armstrong recently addressed the issue:

 

The Central Bank Crisis on the Immediate Horizon

While the majority keep bashing the Federal Reserve, other central banks seem to escape any criticism. The European Central Bank under Mario Draghi has engaged in what history will call the Great Monetary Experiment of the 21st Century – the daring experiment of negative interest rates. A look behind the scenes reveals that this experiment has been not just a failure, it has undermined the entire global economic structure.

We are looking at pension funds being driven into insolvency as the traditional asset allocation model of 60% equity 40% bonds has failed to secure the future with negative interest rates. Then, the ECB has exceeded 40% ownership of Eurozone government debt. The ECB realizes it can not only sell any of its holdings ever again, it cannot even refuse to reinvest what it has already bought when those bonds expire. The Fed has announced it will not reinvest anything.

Draghi is trapped. He cannot stop buying government debt for if he does, interest rates will soar. He cannot escape this crisis and it is not going to end nicely. When this policy collapses, forced by the free markets (no bid), CONFIDENCE will collapse rapidly. Once people no longer believe the central banks can control anything, the end has arrived. We will be looking at the time at the WEC. We will be answering the question – Can a central bank actually fail?

 

So where do you go from here? Everything you -think you- know about markets is potentially useless and doesn’t apply to what you see before you today. There are many voices who talk about similarities and comparisons with what happened to markets for instance in 1987, but what’s the value of that?

Back then, to all intents, constructions, and purposes, markets were functioning. There was price discovery. There were some ‘novel’ instruments, such as portfolio insurance, that you could argue influenced markets, but nothing on the scale or depth of what we see today with high-frequency trading, robots, Kurodas and Draghis.

The temptation is obvious, and large, to compare today’s financial world with that of any point in the past that seems to fit, even if not perfectly. But the lack of price discovery means any such comparisons must of necessity be way off the mark; you cannot stuff that 2-D pipe.

The BIS-designed unity in central bank policies is under threat, as Armstrong indicates. The Fed has moved towards quantitative tightening, not investing or even re-investing, and raising rates, but it doesn’t look like the ECB will be able to follow that change of direction. It can’t stop ‘investing’ because it has become too big a player. The Bank of Japan appears to be in that same bind.

Central bankers jumped into the markets to save them (or so goes the narrative), but they will instead end up killing them. In fact, they killed them the minute they entered the fray. Markets can’t survive without price discovery, and vice versa. The moment it becomes clear that Draghi MUST keep buying sovereign debt from countries with failing economies, the game is up.

 

All those trillions created by central banks, and the even much bigger amounts conjured up by the creation of loans by commercial banks, will have to be eradicated from the system before markets and price discovery can return. And return they will. There are lots of things wrong with our economic and financial machinery, but functioning markets are not wrong.

Things run off the rails when governments and central banks start interfering, not when markets are allowed to function. But it’s long turned into a giant game of whack-a-mole, in which economists and other know-it-betters are forced to plug one hole by digging another, and so forth.

The best we can hope for is some sort of controlled demolition, but the knowledge and intelligence required to make that happen don’t appear to be available. The political climate certainly isn’t either. A politician who campaigns on “let’s take this sucker down slowly” will always lose out to one who claims to know not only how to save it, but to let it bloat even more.

The Draghis of the world will continue to believe they are in control until they are not. At first, some people will start taking out their money while it’s still there, and then after that the rest will trample over each other in a bloody stampede on the way to the exits trying to save what’s left. After the first $100 trillion is gone, we’ll be able to survey the terrain, but by then we won’t, because we’ll be too busy trying to save ourselves.

And I know you’ve heard this before, and I know central banks bought us 10 years of respite. But it was all fake, it was all just a picture of a pipe. They had to pile on insane amounts of debt on your heads, kill off your pension systems and make markets a meaningless term, to achieve that respite.

They had to kill the markets to create the illusion that there still were markets. With the implied promise that they would be able to get out when they had ‘restored growth’.

But you can’t buy growth. And yet that is the only trick they have up their sleeves, and the only thing the emperor is wearing. Next up: a rabbit and a hat. And a pipe. And then the lights go out and someone shouts “FIRE!”.

 

 

 

 

Apr 122018
 
 April 12, 2018  Posted by at 1:09 pm Finance Tagged with: , , , , , , , , , , , , ,  


Pieter Bruegel the Elder The Triumph of Death c1562

 

This is turning into a comedy. A black comedy, for sure, but still. As both the Skripal novichok ‘poisoning’ case in Britain and the ‘chemical attack’ in Douma, Syria fall flat on their faces on a total and absolute lack of evidence, it’s becoming clear that western ‘authorities’ are not at all planning to let go of the privilege that in times gone by allowed them to claim whatever they wanted and demand to be believed.

And despite the insane amounts of spying that underlies their business models and will lead to their demise(s), here is where social media do play a decisive role. See, if you’re an ‘authority’, there’s nothing you would rather do than to close down those social media that let people spread news that contradicts and/or doubts what you just said, and undermines that privilege. But that also would mean you can’t spy on them anymore through social media. A toss-up?!

Whatever the outcome will be, it’s obvious that Donald Trump is having war talks with his military and closest advisers. And they can basically tell him anything, he’s not a military man. Which is fine, Lincoln wasn’t either. But it does mean he’s vulnerable to narratives and briefings that are simply not true. Lincoln went to great lengths to surround himself with people who could trust.

What about Trump? Does he know that, as Paul Craig Roberts said on Twitter yesterday ..

The Russians know that they can, at will within a few minutes, sink the entire US fleet, destroy every US airplane & ship in the ME & within range of the ME, completely destroy all of Israel’s military capability & wipe out the military of the two-bit punk state of Saudi Arabia.

.. or do they keep that from him? Because if he did know, why have this entire circus going on? Why did the King of Twitter yesterday threaten with his new and shiny toys and then today switch to:

Never said when an attack on Syria would take place. Could be very soon or not so soon at all! In any event, the United States, under my Administration, has done a great job of ridding the region of ISIS. Where is our “Thank you America?”

We already knew that US military won’t be ready for another 10 days or so for an attack on Syrian targets. So that makes sense. It takes the surprise factor out of the game, but nobody seems to want to surprise anyone much anyway. Syrian and Russian military are already way out of the way, and left the most decrepit infrastructure behind for the coalition of the willing (no Germany, Canada) to waste their firepower on.

But does Trump really want to start shooting anything? Certainly only if he knows he will win. And that, he doesn’t. And there’s something else. he’s not only talking to his military people, he’s got a financial/economic team as well. What will the financial effects of a military action be? That might give him some pause. And his military guys can’t fill him in on that.

Can Trump risk imploding the ‘markets’? They’re not actually markets anymore, and that makes them much less predictable.

As Bill Holter says talking to Greg Hunter:

 

It’s Pure Math – We’re Headed for a Train Wreck

Holter also points out the explosion of global debt. Holter charges, “It’s now $237 trillion. The amount of debt grew by $21 trillion globally over the last 12 months. That’s roughly 10 %. How much did global GDP grow? 2% or 3%, I mean that is totally unsustainable.” The biggest worry for Holter right now is escalating military action in Syria. Holter warns, “This is so, so dangerous. Obviously, you worry about a hot war because with the weapons you have today, you could have WWIII start in a heartbeat. But look at the market today. It’s up 400 or 500 points. You have talk of trade wars. You have talk of hot wars. It’s amazing the markets can hold together and ignore potential annihilation.”

David Stockman has something very similar:

 

The Deep State Closes In On The Donald, Part 1

Yes, maybe Wall Street has figured out that the Donald is more bluster than bite. Yet when you consider the broader context and what the Russian side is now saying, it is just plain idiotic to own the S&P 500 at 24X. After all, earnings that have been going nowhere for the past three years (earnings per share have inched-up from $106 in September 2014 to $109 in December 2017), and now could be ambushed by a hot war accident in Syria that would rapidly escalate.

Indeed, did the robo-machines and boys and girls down in the casino not ponder the meaning of this message from the Kremlin? It does not leave much to the imagination: #Russian ambassador in Beirut : “If there is a strike by the Americans on #Syria , then… the missiles will be downed and even the sources from which the missiles were fired..”

Trump would be much more likely to fire away if he thought he would win. And even then. Even if he could win, the whole situation is replete with unknown unknowns. If god forbid the thing escalates and the US and Russia end up facing each other, what will China do? Don’t forget that Beijing and the PBOC play an instrumental part in propping up the world economy, and the S&P 500.

It wouldn’t be hard for Xi to pull that carpet out from under Trump’s feet; it would be costly for China too, but if war were the reality, the rules and priorities change. And you can bet Xi and his people have run through the kinds of scenarios many many times. They’re prepared to “withdraw upon themselves”.

As for the US, the ‘markets are holding on to crazy levels so far despite the threat that hangs in the air, but once the first rockets fly, and gold and bitcoin -oil?- are still available, why hold on to stocks?

It’s the insanity of the so-called markets that makes them so vulnerable and unpredictable. And starting a war on very shaky grounds increases that unpredictability by a factor of 10 or so. And the MSM may -well, there’s no doubt- still fill their role as cheerleaders the way they used to, but social media are a different story.

And besides, which investors are going to say, hell, I feel so patriotic, I’m going to hold on to stocks that have been onvervalued for years already, just to support Bolton and McCain and Tony Blair and Boris Johnson’s fantasies? Who would do that who understands that it is at least quite possible that Russia has the better weapons today? Or that perhaps this kind of conflict is simply not winnable anymore?!

I don’t think there’ll be many. Nor do I think Trump wants to be known as the man who collapsed the S&P 500. So, abandoned buildings in the desert it is. And lots of CNN. Anderson Cooper’s your MC.

 

 

Oct 132017
 
 October 13, 2017  Posted by at 7:45 pm Finance Tagged with: , , , , , , , ,  


Rembrandt Old man with a beard 1630

 

“The Cost of Missing the Market Boom is Skyrocketing”, says a Bloomberg headline today. That must be the scariest headline I’ve seen in quite a while. For starters, it’s misleading, because people who ‘missed’ the boom haven’t lost anything other than virtual wealth, which is also the only thing those who haven’t ‘missed’ it, have acquired.

Well, sure, unless they sell their stocks. But a large majority of them won’t, because then they would ‘miss’ out on the market boom… Some aspects of psychology don’t require years of study. Is that what behavioral economics is all about?

And it’s not just the headline, the entire article is scary as all hell. It reads way more like a piece of pure and undiluted stockbroker propaganda that it does resemble actual objective journalism, which Bloomberg would like to tell you it delivers. And it makes its point using some pretty dubious claims to boot:

 

The Cost of Missing the Market Boom Is Skyrocketing

Skepticism in global equity markets is getting expensive. From Japan to Brazil and the U.S. as well as places like Greece and Ukraine, an epic year in equities is defying naysayers and rewarding anyone who staked a claim on corporate ownership. Records are falling, with about a quarter of national equity benchmarks at or within 2% of an all-time high.

If equity markets in places like Greece and Ukraine, ravaged by -in that order- financial and/or actual warfare, are booming, you don’t need to fire too many neurons to understand something’s amiss. Some of their companies may be doing okay, but not their entire economies. Their boom must be a warning sign, not some bullish signal. That makes no sense. Stocks in Aleppo may be thriving too, but…

“You’ve heard people being bearish for eight years. They were wrong,” said Jeffrey Saut, chief investment strategist at St. Petersburg, Florida-based Raymond James, which oversees $500 billion. “The proof is in the returns.” To put this year’s gains in perspective, the value of global equities is now 3 1/2 times that at the financial crisis bottom in March 2009.

If markets crash by, pick a number, 20-30-50% next week, will Mr. Saut still claim “The proof is in the returns”? I doubt it. Though this time he might be right. As for the ‘value’ of global equities being 250% (give or take) higher than in March 2009, does that mean those who were -or still are- bearish were wrong? Or is there some remote chance that the equities are part of a giant planetwide bubble?

Aided by an 8% drop in the U.S. currency, the dollar-denominated capitalization of worldwide shares appreciated in 2017 by an amount – $20 trillion – that is comparable to the total value of all equities nine years ago. And yet skeptics still abound, pointing to stretched valuations or policy uncertainty from Washington to Brussels. Those concerns are nothing new, but heeding to them is proving an especially costly mistake.

$20 trillion. That’s a lot of dough. It’s what all equities in the world combined were ‘worth’ 9 years ago. It’s also, oh irony, awfully close to the total increase in central bank balance sheets, through QE etc. Might the two be related in any way?

 

 

Clinging to such concerns means discounting a harmonized recovery in the global economy that’s virtually without precedent – and set to pick up steam, according to the IMF. At the same time, inflation remains tepid, enabling major central banks to maintain accommodative stances.

‘Harmonized recovery’ is a priceless find. But you have to feel for anyone who believes it. And it’s obviously over the top ironic that central banks are said to be ‘enabled’ to keep rates low precisely because they fail to both understand and raise inflation. Let’s call it the perks of failure.

“When policy is easy and growth is strong, this is an environment more conducive for people paying up for valuations,” said Andrew Sheets, chief cross-asset strategist at Morgan Stanley. “The markets are up in line with what the earnings have done, and stronger earnings helped drive a higher level of enthusiasm and a higher level of risk taking.”

Oh boy. He actually said that? What have earnings done? He hasn’t read any of the warnings on P/E (price/earnings) for the (US) market in general –“the Shiller P/E Cyclically Adjusted P/E, or CAPE, ratio, which is based on the S&P 500’s average inflation-adjusted earnings from the previous 10 years, is above 30 when its average is 16.8”– or for individual companies (tech) in particular?

The CAPE ratio has been higher than it is now only twice in history: right before the Great Depression and during the dotcom bubble, when tech companies didn’t even have to be able to fog a mirror to attract billions in ‘capital’. And the chief cross-asset strategist at Morgan Stanley says markets are in line with earnings? Again, oh boy.

No, it’s not earnings that “..helped drive a higher level of enthusiasm and a higher level of risk taking.” Cheap money did that. Central banks did that. As they were destroying fixed capital, savings, pensions.

 

 

The numbers are impressive: more than 85% of the 95 benchmark indexes tracked by Bloomberg worldwide are up this year, on course for the broadest gain since the bull market started. Emerging markets have surged 31%, developed nations are up 16%. Big companies are becoming huge, from Apple to Alibaba.

Look, emerging markets and developed economies have borrowed up the wazoo. Because they could. Often in US dollars. That may cause a -temporary- gain in stock markets, but it casts a dark spell over the reality of these markets. If it’s that obvious that a substantial part of your happy news comes from debt, there’s very little reason to celebrate.

Technology megacaps occupy all top six spots in the ranks of the world’s largest companies by market capitalization for the first time ever. Up 39% this year, the $1 trillion those firms added in value equals the combined worth of the world’s six-biggest companies at the bear market bottom in 2009. Apple, priced at $810 billion, is good for the total value of the 400 smallest companies in the S&P 500.

To cast those exact same words in a whole different light, no, Apple is not ‘good for the total value of the 400 smallest companies in the S&P 500’. Yes, you can argue that Apple’s ‘value’ has lifted other stocks too, but this has happened in a time of zero price discovery AND near zero interest rates. That means people have no way to figure out if a company is actually doing well, so it’s safer to park their cash in Apple.

Ergo: Apple, and the FANGs in general, take valuable money out of the stock market. At the same time that they, companies with P/E earnings ratios to the moon and back, buy back their stocks at blinding speeds. So yeah, Apple may be ‘good’ for the total value of the 400 smallest companies in the S&P 500, but at the same time it’s not good for that value at all. It’s killing companies by sucking up potential productive investment.

And Apple’s just an example. Silicon Valley as a whole is a scourge upon America’s economy, hoovering away even the cheapest and easiest money and redirecting it to questionable start-up projects with very questionable P/E ratios. But then, that’s what you get without price discovery.

 

 

Overall, U.S. corporate earnings are expected to rise 11% this year, on track to be the best profit growth since 2010. And after years of disappointments, European profits are set to climb 14% in 2017, Bloomberg data show. The expectations for both regions are roughly in line with forecasts made at the beginning of the year, defying the usual pattern of analysts downgrading their estimates as the months go by.

Come on, the European Central Bank has been buying bonds and securities at a rate of €60 billion a month for years now. How can it be any wonder that officially stock markets are up 14%? Maybe we should be surprised it’s not 114%. Maybe the one main point in all of this is that the ECB is still buying at that rate, and thereby signaling things are still as bad as when they started doing it.

Meanwhile, Asia is home to some of the world’s steepest rallies, led by Hong Kong stocks that are up 29% this year. Shares in Tokyo also hit fresh decade highs this week, bolstered by investor confidence before the local corporate earnings season and a snap election this month. “Asia will benefit from continued improving regional growth, stable macroeconomic conditions and undemanding valuations,” said BNP Paribas Asset Management’s head of Asia Pacific equities Arthur Kwong. Any pullback in Asian equities after the year-to-date rally presents a buying opportunity for long-term investors, he wrote in a note.

In Japan, so-called investor confidence is based solely on the Bank of Japan continuing to purchase anything that’s not bolted down. In China, the central bank buys the kitchen sink as well. How, knowing that, can you harp on about increased investor confidence? As if central banks taking over entire economies either isn’t happening, or makes no difference to economies? Buying opportunity?

Global economic growth has been robust in most places, with Europe finally joining the party and the euro-area economy on track for its best year since at least 2010. The region’s steady recovery has eclipsed worries about populism, which a few years ago would have been enough to derail any stock market rally.

No, global economic growth has not been ‘robust’. Stock market growth perhaps has been, but that’s only due to QE and buybacks. Still, stock markets are not the economy.

“I’ve never been so optimistic about the global economy,” said Vincent Juvyns, global market strategist at J.P. Morgan Asset Management. “Ten years after the financial crisis, Europe is recovering and we have synchronized economic growth around the world. Even if we get it wrong on a country or two, it doesn’t change the big picture, which is positive for the equity markets.”

Oh man. And at that exact moment the ECB announces it wants to cut its QE purchase in half by next year.

Nowhere is the shifting sentiment more pronounced than in Europe, where global investors began the year with a election calendar looming like a sword of Damocles. Ten months later, the Euro Stoxx 50 Index is up 10%, Italy’s FTSE MIB Index is up 17% and Germany’s DAX Index is up 13%. The rally is even stronger when priced in U.S. dollars, with the Euro Stoxx 50 up 23% since the start of the year.

Sure, whatever. I don’t want to kill your dream, and I don’t have to. The dream will kill itself. You’ll hear a monumental ‘POP’ go off, and then you’re back in reality.

 

 

Note: Rembrandt painted the portrait above when he was just 23-24 years old.

 

 

Oct 092017
 
 October 9, 2017  Posted by at 2:08 pm Finance Tagged with: , , , , , , , ,  


Fan Ho In Paris 1953

 

 

Update: I never did this before, but now I think I must: change the title of an article. “Minsky and Volatility” isn’t nearly as good as “The S&P Is A Bloated Corpse”. Simple, really. The URL will be the same as before

 

 

According to Hyman Minsky, economic stability is not only inevitably followed by instability, it inevitably creates it. Complacent humans being what they are. If he’s right, and would anyone dare doubt it, we’re in for that mushroom cloud on the financial horizon. We know that because market volatility, as measured for instance by the VIX, the Chicago Board Options Exchange (CBOE)’s volatility index, is scraping the depths of the Mariana trench.

Two separate articles at Zero Hedge this weekend, one by NorthmanTrader.com and one by LPLResearch.com, address the issue: it is time to be afraid and wake up. And that is not just true for investors or traders, it’s true for ‘everyone out there’ perhaps even more. Central bank policies, QE and ultra low rates, have distorted the financial system to such an extent -ostensibly in an attempt to save it- that the depressed, compressed volatility these policies have created can only come back to life with a vengeance.

Feel free to picture zombies and/or loss of heartbeat as much as you want; it’s all true. Financial markets haven’t been functioning for years, and there have been no investors either, only gamblers and profiteers, as savers and pensioners have been drawn and quartered. Central bankers have eradicated price discovery, nobody knows what anything is really worth anymore, be it stocks, bonds, housing, gold, bitcoin, you name it.

If you make interest rates ‘magically’ disappear anyone can spend any amount of money on anything they fancy buying. And it’s not just traders and investors either. Scores of people think: look, I can buy a house, others think they can buy a bigger house, many will get into stocks and/or bonds, because prices just keep going up. Even savers and pensioners are drawn into the central bank Ponzi, often in an effort to make up for what they lose when their accumulated wealth no longer pays them any returns. Shoeshine boys are dishing out market tips.

Crypto may or may not be a new tulip, but many Silicon Valley start-ups -increasingly funded by crypto ICO’s- certainly are. There’s so much money sloshing around nobody can tell, or even cares, whether they are actually worth a penny. It’s all based on gossip multiplied by the idea that they will be smart enough to get out in time in case things go awry.

 

People mistakenly think that a market’s heartbeat can be found in for instance rising stock prices, the Dow, the S&P. But that’s simply not true. The S&P is a bloated corpse increasingly filling up with gases that will eventually cause it to explode, with guts and blood and body parts and fluids flying all around.

The US stock market’s heartbeat manifests itself in volatility, and the overall economy’s heartbeat in interest rates. Rising and falling volatility and interest rates is how we know whether a market is in good health, or even alive at all. They are its vital signs.

That follows straight from Minsky. Ultra-low rates and ultra-low volatility, especially if they last for a longer period of time, are signs of trouble. The markets the central banks’ $20+ trillion QE and ZIRP have created are bloated corpses that no longer have a heartbeat. They are zombies. But markets, unlike natural bodies, won’t die, they can’t. They will instead rise from their graves and take over Wall Street, the City, and then everyone else’s street.

Bernanke, Yellen, Draghi and Kuroda are sorcerer’s apprentices and Dr. Frankensteins, who have created walking dead monsters they have no control over. But the monsters won’t turn on them personally; that’s the tragedy here as much as it is the reason why they have worked their sorcery. They themselves won’t go bankrupt, other will. No skin in the game.

Enough with the metaphors. First, here’s NorthmanTrader:

 

Flatliners

In the movie Flatliners aspiring medical doctors tried to unlock the mysteries of death by, well, killing themselves. It was meant to be a controlled death of course, to flat line on the heart rate monitor for a few minutes to find out what wonders where to be found “on the other side” only to then return safe & sound thanks to medical intervention. Well, they soon found out the other side wasn’t everything it was cracked up to be and the main character soon got regular beatings as the sins of his past came back to haunt him.

In my view markets find themselves in a very similar script. The promise of investor nirvana where the pains of real life no longer matter. If you only pay attention to the record highs headlines it all looks rather fantastical these days. [..] any trader staring at the tape knows that we find ourselves in the most compressed price environment in history. This is not normal, there’s no heartbeat:

As I’m writing this I’m fully aware I may be viewed as the bear who cried wolf. After all I’ve been outlining structural risk factors for a while and markets have moved past my technical risk zones of 2450-2500 and most recently 2530. That’s what bubbles do. They blow past anyone’s expectations, they make believers of the unbelievers, make bears look like idiots and the most reckless look like geniuses. But an extreme market that only becomes more extreme is not any less extreme, it is just more extreme. As no risk is apparent these extremes are then dismissed as the new normal. Yet momentum driven price appreciation has absolutely zero predictive value of future price appreciation, it only appears as such at the time.

We find ourselves in a very unique point in history and in a world dominated by false narratives. It is a challenge to keep an analytical grip on reality, but I’ll try to tie a few threads together here to put everything in a macro context. Firstly the underlying base reality: Free money, easy money, whatever you want to call it, permeates everything we see in financial markets. Indeed I would argue price appreciation has been paid for with unprecedented and, in my view, unsustainable volatility compression. A couple of charts really highlight this. Most clearly perhaps is the precise trend line tagging we can observe in the correlated picture of price appreciation and volatility compression since the February 2016 lows:

The $VIX’s corollary, the inverse $XIV, embarked on an explosive near one way journey since the US election coinciding with over $2 trillion central bank intervention in just the first 9 months of 2017:

And it has continued to this day and just made another all time high this past week on a massive negative divergence. It is the magnitude of this volatility compression that explains the current trading environment we find ourselves in.

 

[..] Debt expansion at low rates continues to sustain the illusion of real prosperity for the 90%:

 

And then LPLResearch with another indicator that goes to show we’re dealing with a zombie here: stock prices are not moving, either up or down. Or rather, they’re moving up all the time, but in too small increments. Yeah, like that bloated corpse.

 

Where Did All the Big Moves Go?

There have only been eight moves of at least 1% for the S&P 500 Index so far this year—the least since 13 in 1995. The all-time record was an incredible three in 1963. What about a big move? The last time the S&P 500 moved at least 4% was nearly six years ago. In fact, the S&P 500 had four consecutive days with 4% (or greater) changes in August 2011. Other than 2008 and the crash of ’87, that is the only other time since the Great Depression to see four consecutive 4% changes. That isn’t anything like today’s action.

As the chart below shows, so far in 2017, big moves have been nonexistent; and even 1% changes have been rare. Per Ryan Detrick, Senior Market Strategist, “If you had forecast that the 11 months after the 2016 U.S. presidential election would be one of the least volatile periods ever, you would be in the minority. Then again, the last time we saw a streak of calm like this was the year after John F. Kennedy was assassinated in November 1963. Once again proving that the market rarely does what the masses expect and usually surprises us.”

You want a heartbeat. That tells you if a body or a market is alive, healthy, functioning. We don’t have one. We haven’t for years. But we will again. Natural bodies can tend towards equilibrium, i.e. death. Markets cannot. They’re doomed to flatline, and then to always come back from near death experiences. They tend to do so in violent ways though. When volatility at last returns, so will price discovery. It won’t be pretty.

 

 

Oct 032017
 
 October 3, 2017  Posted by at 9:28 am Finance Tagged with: , , , , , , , ,  


Fan Ho Obsession 1964

 

Who Will Be There To Buy When Everyone Wants To Sell? – Howard Marks (FuW)
The Pricing of Risk is Kaput (WS)
Art Cashin: “I’ve Never Seen Anything Like Today’s Market Before” (ZH)
What You Are Not Being Told About The Economy – Steve Keen (RT)
An Accountant Smells a Rat in Our Global Credit Bubble (WS)
26 Recession-Free Years Hide a Darker Picture for Australia (BBG) >
Russia’s Rush For Gold Sees Record Reserves For Putin Era (II)
Fall of the Great Pumpkin (Jim Kunstler)
Spain’s Crisis Deepens as Catalonia Secession Clock Ticks Down (BBG)
Catalonia Set For General Strike Over Independence Poll Violence (AFP)
100,000s Of Puerto Ricans To Flee To Florida, New York (ZH)

 

 

 

 

A point I made again recentlly “It will continue to go up, but I will get out in time.» People overestimate their ability to get out in time. Who will be there to buy when everyone wants to sell? That’s wishful thinking.”

Who Will Be There To Buy When Everyone Wants To Sell? – Howard Marks (FuW)

It would be a dangerous bet to say interest rates are going to stay low forever, but I don’t see many people taking that bet. And you see, even if interest rates were to stay where they are, that would argue for P/E ratios to stay where they are. And if they do, then stocks will only appreciate at the same rate as earnings, which is not really fast; there would be no multiple expansion. This market is not built on some euphoric view of the future, but mainly on the unwillingness to accept zero or negative returns on cash and safe instruments. It’s based on the view that there is no alternative: people are afraid to be out of the market. But then again, a perceived lack of alternatives is not a good argument for chasing yield and taking big risks. That’s why I think this is the time to turn cautious.

It’s not smart, but people think that’s what they have to do now. You remember Chuck Prince, the CEO of Citigroup, who in July of 2007 said «when the liquidity dries up, this will end badly, but as long as the music is playing, you have to dance?» What does that even mean? People always say they’ll stay in the market, thinking it has further to go, but if it starts to turn down they will get out. Maybe that’s what people are thinking in today’s stock market: «It will continue to go up, but I will get out in time.» People overestimate their ability to get out in time. Who will be there to buy when everyone wants to sell? That’s wishful thinking.

[..] I see a lot of worries. One example: What’s going to happen when central banks start unwinding their balance sheets? We have no clue. There is no historical precedent for the measures they used to stimulate the economies in the past years, so we don’t know what will happen when they unwind them. If QE was stimulative, won’t the unwinding of it be the opposite of stimulative? I don’t know where the money came from for the QE programs, and I don’t know where the money will go to next. We don’t know what it will mean for interest rates and inflation.

Another worry is the low economic growth, combined with politics. All these right-wing populist movements – what are the implications of that? This is not imaginary. Where will the person with a low education level get a job in ten or twenty years, when all the cars are self-driving and all the stores have no clerks? I don’t know what the solution is. But I see a lack of political leadership around the world. Another worry concerns our pension systems. In the US and in other countries, defined benefit systems are hundreds of billions of dollars in the red. What’s going to happen to the people who expect to get their promised retirement payments? But today, nobody’s talking about the problems in our pension systems.

Read more …

“..when markets can no longer price risks, they cannot price anything at all because the price of risk underlies all prices in the financial markets.”

The Pricing of Risk is Kaput (WS)

US Treasury Securities with longer maturities fell this morning, with the 10-year Treasury yield rising above 2.37% early on and currently trading at 2.34%. This is still low by historical standards, and it’s still in denial of the Fed’s monetary tightening: Four rate hikes since it started this cycle, and the QE unwind has commenced as of today. But it cannot hold a candle to the Draghi-engineered negative-yield absurdity still unfolding in the Eurozone. The average yield of junk bonds denominated in euros hit a new all-time record low at the close on Friday of 2.30%. Let that sink in a moment. These euro corporate bonds are rated below investment grade. Companies, unlike the US, cannot print their own money to prevent default.

There is little liquidity in the junk bond market, and selling these bonds when push comes to shove can be hard or impossible. The reason they’re called “junk” is because of their high risk of default. And yet, prices of these junk bonds have been inflated by the ECB’s policies to such a degree that their yield, which falls as prices rise, is now lower than that of 10-year US Treasury securities that are considered the most liquid securities with the least credit risk out there. The average yield of the euro junk bonds is based on a basket of below-investment-grade corporate bonds denominated in euros. Issuers include junk-rated American companies with European subsidiaries – in which case these bonds are called “reverse Yankees.”

They include the riskiest bonds. Plenty of them will default. Losses will be painful. Investors know this. It’s not a secret. But they don’t mind. They’re institutional investors plowing other people’s money into these bonds, and they don’t need to mind, but they have to buy these bonds because that’s their job. This chart, based on BofA Merrill Lynch Euro High Yield Index Effective Yield via the St. Louis Fed, shows that the average euro junk bond yield is on the way to what? Zero?

During the peak of the Financial Crisis, the average junk bond yield hit 25%. During the dog days of the euro debt crisis in the summer of 2012, when Draghi pronounced the magic words that he’d do “whatever it takes,” these bonds yielded about 9%. The yield dropped below 5% in October 2013, for the first time ever. This juxtaposition of the already low 10-year US Treasury yield and the even lower euro junk bond yield creates one of the most fascinating WTF-charts for our amusement at central-bank absurdist policies – and we’d be laughing at these bond investors gone nuts, if it weren’t so serious:

.. this is Draghi’s ultimate accomplishment in his nutty bailiwick: The total destruction of the market’s risk-pricing mechanism at the expense of other people’s money – this includes pension funds and life insurance companies that play a large role in Europe’s private pension system. They have to buy corporate bonds. Their beneficiaries that paid into the systems will have to bear the costs in future years. And then there’s the comforting thought that when markets can no longer price risks, they cannot price anything at all because the price of risk underlies all prices in the financial markets.

Read more …

“..when we had the taper tantrum they hadn’t even done anything yet, they’d just threatened to taper..”

Art Cashin: “I’ve Never Seen Anything Like Today’s Market Before” (ZH)

Market veteran Art Cashin, the head of NYSE floor operations for UBS, made an interesting observation earlier today just minutes before the close, as US stocks headed for another record finish after shrugging off the worst mass shooting in US history. Asked by CNBC’s Kelly Evans to explain how US stocks have continued to outperform while the 10-year Treasury yield has remained anchored below 2.5%, Cashin acknowledged that, during a career that’s spanned more than six decades, he’s never seen anything like today’s market. “I’ve been doing this for over 50 years and I’ve never seen anything like it so it is rather odd.” And given global stocks’ strong performance this year, with markets weathering a series of political crises, natural disasters, terror attacks and other nominally destabilizing events (with a little help from central banks, of course) – Cashin says the outlook isn’t as dire as some would believe.

“Right now, Europe’s doing all right emerging markets are okay, and maybe they’re not going to take away the punchbowl that quickly – so we’ll see,” Cashin said. In September, the Fed suggested that while it would likely raise interest rates more quickly than previously believed during the coming quarters, median forecasts for the Fed funds rate in 2019, as well as the longer-run median target, declined compared with a set of forecasts released in July. Looking ahead to the fourth quarter, the most pressing questions that investors should be asking themselves is ‘is this the quarter where tapering – or the expectation of further tapering – finally triggers a market correction.

“What’s really going to be interesting to watch in this final quarter, is will there be an impact of quantitative tightening. As Peter Boockvar points out…it’s only going to be a token amount. But when we had the taper tantrum they hadn’t even done anything yet they’d just threatened to taper. When asked what it would take to spark a meaningful correction in stocks, Cashin said he expects investors will take notice once the 10-year yield climbs above 3%. “I think we’ve got to get a bit higher. Probably up around 3% you start to get everybody’s attention and you’ll start to hear that in the conversation more and more.”

Read more …

Are you rational? Economics is not.

What You Are Not Being Told About The Economy – Steve Keen (RT)

As Karl Marx’s ‘Das Kapital’ turns 150 and the global financial crisis enters its tenth year, we ask why it is that we are still no closer to creating an economy that actually works. Perhaps more importantly, why do mainstream economists continue to miss the fundamental drivers of financial instability? Host Ross Ashcroft talks about what’s next for the global economy with Professor Steve Keen, an economist who correctly predicted the financial crisis and the author of ‘Debunking Economics.’

Read more …

“Economists can’t see it. They can’t model money and credit. ”

An Accountant Smells a Rat in Our Global Credit Bubble (WS)

Twenty years ago Doug Noland was so worried about imbalances surrounding the dot.com boom that he began to title his weekly reports “The Credit Bubble Bulletin. Years later, he warned the world about the impending 2008 crisis. However a coming implosion, he says, could be the biggest yet. “We are in a global finance bubble, which I call the grand-daddy of all bubbles,” said Noland. “Economists can’t see it. They can’t model money and credit. However, to those outside the system, the facts are increasingly clear.” Noland points to inflating real estate, bond and equity prices as key causes for concern. According to the Federal Reserve’s September Z.1 Flow of Funds report, the value of US equities jumped $1.5 trillion during the second quarter to $42.2 trillion, a record 219% of GDP.

Noland may be right. A report by the International Institute of Finance released in June estimated that global government, business and personal debts totaled $217 trillion earlier this year. That’s more than three times (327%) higher than global economic output. Adding to the complexity is the fact that not all debts are fully recorded. For example, according to a World Economic Forum study, the world’s six largest pension saving systems – the US, UK, Japan, Netherlands, Canada and Australia – are expected to experience a $224 trillion funding shortfall by 2050. Noland’s warnings come during a time of exceptional public trust in governments, central banks, regulators and other institutions. Market volatility is trending at near record lows. In June, Federal Reserve Chair Janet Yellen spoke for many when she said that she did not see a financial crisis occurring “in our lifetimes.”

So why would Noland, who during his day job runs a tactical short book at McAlvany Wealth Management, see things that government, academic, and central bank economists don’t? One possibility is because Noland, who studied accounting and finance in college and began his career as a CPA at Price Waterhouse, is not an economist. He is thus not burdened with the “dismal science’s” limitations. Although Noland eventually completed an MBA and some doctoral studies, he was never forced to buy into the econometrics groupthink that plagues the profession. Noland is thus free to incorporate historical, financial, geographical and other data into his analyses. Another possible reason is that Noland (unlike almost all professional economists who missed both major market implosions/recessions of the last two decades) doesn’t hide it when he makes a bad call.

Read more …

 

 

But Australians won’t believe it until it hits them in the head.

26 Recession-Free Years Hide a Darker Picture for Australia (BBG)

The global crown for the longest stretch of uninterrupted economic growth is within sight for Australia. But it’s limping to the line as policy paralysis weighs on the nation’s prospects. Twenty-six years without recession have put Australia within two years of overtaking the Netherlands’ record growth streak and government, central bank and economist forecasts all suggest it’ll take the mantle. After all, the economy has a head start with 2.5% growth virtually baked in – 1.5% from population gains that are among the developed world’s quickest and 1% from resource exports feeding Asia’s giant economies. Yet the reliance on rapid immigration is straining infrastructure, while mining profits fuel riches for stakeholders but do little for the vast majority of Australians living in major cities.

Meantime, wages are barely growing, households carry some of the world’s heaviest debt loads, and productivity gains from the economic reforms of the 1980s and early 1990s have petered out. There’s been no major economic reform since the turn of the century, with just about every attempt reversed or cannibalized by toxic politics. And the impact is starting to show. Just when the economy needs growth drivers outside of mining, a slide in global rankings for innovation and education suggest living standards could decline. The miracle economy that shrugged off the global recession is turning mediocre. “Now that we don’t have the benefit of the mining boom, there’s nothing really that replaces it in terms of driving economic activity,” said Jeremy Lawson, chief economist at Aberdeen Standard Investments in Edinburgh and a former Reserve Bank of Australia economist.

“The really big task of governments over the next 5 to 10 years is to deal with these big structural issues that Australia is facing. Potential growth is relatively weak.” A decade of political infighting has seen the nation change prime ministers five times since 2007 and sidelined substantive policy debate. Meanwhile, attempts at reform have been held hostage by populists and single-issue parties who’ve harnessed voter frustration with mainstream politicians to take the balance of power in parliament’s upper house. That political dysfunction is threatening the nation’s prospects. A policy vacuum around energy has seen electricity prices surge to among the highest in the world, despite Australia holding some of the largest coal and gas reserves on the planet.

Read more …

“The gold rush is allowing the Bank of Russia to continue growing its reserves while abstaining from purchases of foreign currency for more than two years. ”

Russia’s Rush For Gold Sees Record Reserves For Putin Era (II)

Vladimir Putin is doing his part to keep the upswing in gold alive. Since the Russian president went on a geopolitical offensive in Ukraine in 2014, the haven asset had its first annual gain in four years in 2016 and is on track for another in 2017. A beneficiary of economic and political perils from North Korea to Brexit, it’s among the top-performing commodities this year. Meanwhile, the Bank of Russia has more than doubled the pace of gold purchases, bringing the share of bullion in its international reserves to the highest of Mr Putin’s 17 years in power, according to World Gold Council data. In the second quarter alone, it accounted for 38pc of all gold purchased by central banks. The gold rush is allowing the Bank of Russia to continue growing its reserves while abstaining from purchases of foreign currency for more than two years.

It’s one of a handful of central banks to keep the faith as global demand for the precious metal fell to a two-year low in the second quarter. But what may matter most is that gold is as geopolitics-proof an investment as any in the age of sanctions and a deepening rift with the US. “Gold is an asset that is independent of any government and, in effect, given what is usually held in reserves, any Western government,” said Matthew Turner, metals analyst at Macquarie Group in London. “This might appeal given Russia has faced financial sanctions.” Besides being the largest official buyer of gold, Russia is also among the world’s three biggest producers, with the central bank purchasing from domestic miners through commercial banks and not in the open market. Since starting to accelerate bullion purchases in 2007, Russia’s holdings have more than quadrupled to 1,556 tonnes at the end of June, just behind China and more than Turkey, India and Mexico combined, bringing its share in Russia’s $427bn (€361bn) reserves to near 17pc.

Read more …

 

 

“Trump travels there this week. That may be exactly the moment that the Deep State moves to take him down.”

Fall of the Great Pumpkin (Jim Kunstler)

Welcome to the witching month when America’s entropy-fueled death-wish expresses itself with as much Halloween jollity and merriment as the old Christmas spirit of yore. The outdoor displays alone take on a Babylonian scale, thanks to the plastic factories of China. I saw a half-life-size T-Rex skeleton for sale at a garden shop last week surrounded by an entire crew of moldering corpse Pirates of the Caribbean in full costume ho-ho-ho-ing among the jack-o-lanterns. What homeowner in this sore-beset floundering economy of three-job gig-workers can shell out four thousand bucks to decorate his lawn like the set of a zombie movie? The overnight news sure took on that Halloween tang as the nation woke up to what is probably a national record for a civilian mad-shooter incident.

So far, fifty dead and two hundred wounded at the Las Vegas at the Route 91 Harvest Festival (one up in fatalities from last year’s Florida Pulse nightclub massacre, and way more injured this time). The incident will live in infamy for maybe a day and a half in the US media. Stand by today as there will be calls far and wide, by personas masquerading as political leaders, for measures to make sure something like this never happens again. That’s rich, isn’t it? Meanwhile, the same six a.m. headlines declared that S &P futures were up in the overnight markets. Nothing can faze this mad bull, apparently. Except maybe the $90 trillion combined derivatives books of CitiBank, JP Morgan, and Goldman Sachs, who have gone back whole hog into manufacturing the same kind of hallucinatory collateralized debt obligations (giant sacks of non-performing loans) that gave Wall Street a heart attack in the fall of 2008.

Europe’s quaint doings must seem dull compared to the suicidal potlatch of life in the USA, but, believe me, it’s a big deal when the Spanish authorities start cracking the heads of Catalonian grandmothers for nothing more than casting a ballot. The video scenes of mayhem at the Barcelona polls looked like something out of the 1968 Prague uprising. And now that the Catalonia secession referendum passed with a 90% “yes” vote, it’s hard to imagine that a good deal more violent mischief will not follow. So far, the European Union stands dumbly on the sidelines. (For details, read the excellent Raul Ilargi Meijer column on today’s TheAutomaticEarth.)

[..] Finally — well, who know what else may pop up now — there is the matter of Puerto Rico. Halloween there is not like New England, with our nippy fall mornings, steaming mugs of hot cider, and quickening fall color. It will remain 90-degrees-plus down there in the fetid, stinking ruins, with lots of still-standing water, broken communications, shattered supply lines, and very little electricity. FEMA and the US Military may be doing all they can now, but they must be on watch for the ominous blossoming of tropical disease epidemics. The story there is far from over. Trump travels there this week. That may be exactly the moment that the Deep State moves to take him down.

Read more …

Catalonia wants to talk. But it will no longer accept many of the things it would have before Sunday.

Spain’s Crisis Deepens as Catalonia Secession Clock Ticks Down (BBG)

In Madrid, Barcelona, Bilbao and beyond, the question is the same: Now what? Sunday’s vote for independence in Catalonia, one of Spain’s most populous and prosperous regions, has thrust the country into its gravest political crisis since the days of the dictator Francisco Franco. Few see an easy way out. The results of the referendum give Prime Minister Mariano Rajoy stark choices – try to deal a blow to the independence movement by suspending Catalonia’s semi-autonomous status, or meet the secessionists halfway and start talks with Catalan President Carles Puigdemont. Puigdemont said the vote, rejected by the central government as illegal, justifies a unilateral declaration of independence. That could come by the end of the week, if the regional parliament agrees.

The European Union refused to recognize the rebel region’s bid, but Spanish bonds and stocks fell Monday as the risks of a breakaway rose. The clash puts Rajoy in a tight corner. Head of a minority government that relies on support from regional parties to rule, he has pledged to protect Spain’s territorial integrity. His main ally in parliament, Ciudadanos party leader Albert Rivera, called on the prime minister to invoke a never-before-used article of the 1978 constitution and pull Catalonia’s special regional standing, which gives it certain administrative powers. “It’s the moment to act with calm but with firmness,” said Rivera, who is Catalan, after meeting with Rajoy on Monday. Rivera said an independence declaration may be 72 hours away and suggested invoking Article 155 would cut off any attempt to make such a move.

But Pedro Sanchez, head of the main Socialist opposition party, said after his own meeting with Rajoy that the central government should hold talks with the secessionists. While Sanchez made no mention of Article 155 in the statement he issued, socialists in Catalonia said the party wouldn’t support the prime minister taking that step. That means Rajoy will have little political cover if he opts to suspend Catalan self-government – the most powerful card he has left. The crisis has already caused him problems: Last week, he had to withdraw plans to present his 2018 budget after allies in the Basque PNV party withheld their support as they criticized his position on Catalonia.

Read more …

The Guardia Civil will have to leave Catalonia at some point. And what then?

Catalonia Set For General Strike Over Independence Poll Violence (AFP)

Large numbers of Catalans are expected to observe a general strike on Tuesday to condemn police violence at a banned weekend referendum on independence, as Madrid comes under growing international pressure to resolve its worst political crisis in decades. Flights and train services could be disrupted as well as port operations, after unions called for the stoppage to “vigorously condemn” the police response to the poll, in which Catalonia’s leader said 90% of voters backed independence from Spain. Barcelona’s public universities are expected to join the strike, as is the contemporary art museum, football club FC Barcelona and the Sagrada Familia, the basilica designed by Antoni Gaudi and one of the city’s most popular tourist sites. “I am convinced that this strike will be widely followed,” Catalan leader Carles Puigdemont said ahead of the protest.

The central government has vowed to stop the wealthy northeastern region, which accounts for a fifth of Spain’s GDP, breaking away from Spain and has dismissed Sunday’s poll as unconstitutional and a “farce”. Violent scenes played out in towns and cities across the region on Sunday as riot police moved in on polling stations to stop people from casting their ballots, in some cases charging with batons and firing rubber bullets to disperse crowds. UN rights chief Zeid Ra’ad Al Hussein said he was “very disturbed” by the unrest while EU President Donald Tusk urged Madrid to avoid “further use of violence”. The European Parliament will hold a special debate on Wednesday on the issue. “We call on all relevant players to now move very swiftly from confrontation to dialogue. Violence can never be an instrument in politics,” European Commission spokesman Margaritis Schinas said, breaking weeks of virtual EU silence on the Catalan issue.

Read more …

“Florida Gov. Rick Scott has declared a state of emergency in Florida..”

100,000s Of Puerto Ricans To Flee To Florida, New York (ZH)

As mayors of cities with large Puerto Rican populations continue to advocate for federal assistance to help with the resettlement of hundreds of thousands of Puerto Ricans who are expected to temporarily seek shelter with friends and families in the US, Florida Gov. Rick Scott has declared a state of emergency in Florida, allowing state agencies to take extraordinary measures to assist families that will soon be arriving in droves to cities like Orlando and Miami, both of which feature large Puerto Rican populations. The Orlando Sentinel reports that Scott announced that disaster relief centers will be set up at Orlando International Airport and in Miami to help those seeking refuge in Florida. “Puerto Rico is absolutely devastated and so many families have lost everything,” Scott said in a released statement.

“Our goal is to make sure that while [Puerto Rican] Governor [Ricardo] Rosselló is working to rebuild Puerto Rico, any families displaced by Maria that come to Florida are welcomed and offered every available resource from the state.” The relief center at OIA, and two others at Miami International Airport and the Port of Miami, open Tuesday, according to a release from Scott’s office, just days after Puerto Rican airports reopened following the devastation caused by Hurricane Maria. [..] Scott’s emergency order will allow state agencies broad autonomy to waive regulations and do whatever is necessary to help Puerto Ricans. Importantly, it could also help bring more federal funding to help the state cope with aid efforts.

State lawmakers have said they expect at least 100,000 Puerto Ricans to flee to Florida because of Maria, forcing the state to step up its education, housing and job-placement offerings. It’s expected that some of those displaced by the storm could resettle permanently, as the reconstruction effort in Puerto Rico is expected to take months, if not years. State Rep. Carlos Guillermo Smith, D-Orlando, said the Legislature should hold a special session, as he estimates hundreds of thousands of Puerto Ricans are coming to Florida. The 2018 regular session starts in January. “FL needs 2 deal w/humanitarian crisis + over 100K Boricuas who’ll seek refuge here right now, not in Jan.,” he tweeted.

We now wait to hear from New York Gov. Andrew Cuomo and New York City Mayor Bill De Blasio. NYC officials have said more than 100,000 Puerto Ricans could arrive in NYC alone.

Read more …

 

 

 

Apr 212017
 
 April 21, 2017  Posted by at 6:35 pm Finance Tagged with: , , , , , , , , , ,  


Giotto Legend of St Francis, Exorcism of the Demons at Arezzo c.1297-1299

 

You are not an investor. One can only be an investor in functioning markets. There have been no functioning markets since at least 2008, and probably much longer. That’s when central banks started purchasing financial assets, for real, which means that is also the point when price discovery died. And without price discovery no market can function.

You are therefore not an investor. Perhaps you are a cheat, perhaps you are a chump, but you are not an investor. If we continue to use terms like ‘investor’ and ‘markets’ for what we see today, we would need to invent new terms for what these words once meant. Because they surely are not the same thing. Even as there are plenty people who would like you to believe they are, because it serves their purposes.

Central banks have become bubble machines, and that is the only function they have left. You could perhaps get away with saying that the dot-com bubble, maybe even the US housing bubble, were not created by central banks, but you can’t do that for the everything bubble of today.

The central banks blow their bubbles in order to allow banks and other financial institutions to first of all not crumble, and second of all even make sizeable profits. They have two instruments to blow their bubbles with, which are used in tandem.

The first one is asset purchases, which props up the prices for these assets, through artificial demand. The second is (ultra-) low interest rates, which allows for more parties -that is, you and mom and pop- to buy more assets, another form of artificial demand.

The most important central bank-created bubble is in housing, if only because it facilitates bubbles in stocks and bonds. Home prices in many places in the world have grown much higher than either economic growth or homebuyers’ wages justify.

In many instances they have even caused a feeding frenzy, where people are so desperate to either have a place to live or not miss out on profits that they’ll pay any price, provided rates are low enough for them to get a loan approved.

As I said a few weeks ago in Our Economies Run on Housing Bubbles, the housing bubbles created in this way are essential in keeping our economies going, because it is through mortgages -loans in general- that money is created in these economies.

If this money creation machine would stop, so would the economies. Home prices would come down to more realistic levels, but there still wouldn’t be anyone to buy them, so they would sink further. That, too, is called price discovery. For which there is a bitter and urgent need.

The Fed is an outlier in the central bank system, in that it no longer buys up too many assets. But other central banks have duly taken over. Indeed, Tyler Durden observes today via Bank of America that BoJ and ECB have bought more assets so far in 2017 than central banks ever have before. One may wonder at what point the term ‘asset’ will lose its rightful meaning to the same extent that ‘investor’ and ‘markets’ have:

A quick, if familiar, observation to start the day courtesy of Bank of America which in the latest overnight note from Michael Hartnett notes that central banks (ECB & BoJ) have bought $1 trillion of financial assets just in the first four months of 2017, which amounts to $3.6 trillion annualized, “the largest CB buying on record.” As Hartnett notes, the “Liquidity Supernova is the best explanation why global stocks & bonds both annualizing double-digit gains YTD despite Trump, Le Pen, China, macro…”

A recent graph from Citi and Haver illustrated it this way:

 

 

Note the rise in central bank balance sheets before 2008. There’s nothing innocent about it.

As an aside, I like this variation from the Twitter account of “Rudy Havenstein”, which came with the comment:

Here is a chart of the well being of the American middle-class and poor over the same period.

 

 

The Fed tries to become even more of an outlier among central banks, or at least it seems to discuss ways of doing this. Now, I don’t know what is more stunning, the fact that they go about it the way they do, or the lack of anger and bewilderment that emanates from the press and other voices -nobody has a clue what a central bank should be doing-, but the following certainly is ‘something’:

Fed Intensifies Balance-Sheet Discussions With Market Players

Federal Reserve staff, widening their outreach to investors in anticipation of a critical turning point in monetary policy, are seeking bond fund manager feedback on how the central bank should tailor and communicate its exit from record holdings of Treasuries and mortgage-backed securities. Fed officials are intent on shrinking their crisis-era $4.48 trillion balance sheet in a way that isn’t disruptive and doesn’t usurp the federal funds rate as the main policy tool. To do that, they need to find the right communication and assess market expectations on the size of shrinkage, which is why conversations with fund managers have picked up recently. “All indications suggest that conversations around the balance sheet have accelerated,” said Carl Tannenbaum at Northern Trust Company. “The consideration of everything from design of the program to communication seems to have intensified.”

Most U.S. central bankers agreed that they would begin phasing out their reinvestment of maturing Treasury and MBS securities in their portfolio “later this year,” according to minutes of the March meeting. They also agreed the strategy should be “gradual and predictable,” according to the minutes. Fed staff routinely seek feedback from investors and bond dealers to get a fix on sentiment and expectations. The New York Fed confirmed the discussions and said it is part of regular market monitoring. The Fed is getting closer to disclosing its plan, and conversations have become more intense. “They are gauging what’s the extent of weak hands in the market that will dump these assets,” said Ed Al-Hussainy, a senior analyst on the Columbia Threadneedle Investment’s global rates and currency team. “They are calling all the asset managers. It is not part of the regular survey.

The Fed-created bubbles in stocks, bonds, housing, what have you, have propped up these ‘market players’, which wouldn’t even be ‘market players’ anymore if they hadn’t. That would have made for a much saner world. These people are not ‘investors’ any more either, by the way, and they’re not the chumps either; they are the cheats, the profiteers. At your expense.

Now, with the new capital they have, courtesy of the Fed and other central banks only, certainly not their own intelligence or timing or knowledge, they get calls from Yellen and other Fed people about what the Fed can do for them this time. Yellen et al are afraid that if the Fed starts selling, the so-called ‘market players’ will too. Of course they will.

The bubble created by artificial demand cannot be allowed to burst all at once, it has to be done “gradual and predictable.” As if that is possible, as if the Fed controls the bursting of bubbles it has itself created. And Yellen is not going to call you or me, she could not care less; she’s going the call the pigs she fattened up most. The Fed is more than anything a bunch of academics, seduced exclusively by textbook theories that are shaky at best, to transfer wealth to the most sociopathic and hence seductive financial predators, at everyone else’s expense.

And that expense is humongous. At the same time that the Fed and the rest of the world’s central banks fattened their balance sheets as seen in the graph above, this is what happened to US debt vs GDP:

 

 

The Fed bubbles, intended to keep market players whole, are blown at the expense of the real economy. Imagine if all those $20 trillion and counting in central banks’ bubble blowing would have been used to prop up Main Street instead of Wall Street; everybody would have been better off except for the ‘investors’ who are not even real investors.

The problem is, the Fed has no control over its own bubbles. It may or may not devise ways to ‘deflate’ its balance sheet, but the bubbles that balance sheet gave birth to cannot be deflated in the same way. If the Fed did have ‘bubble control’, it would have chosen to keep both the stock markets (S&P) and housing prices at a much lower level, with only a gradual increase. That would have given the impression that things were still doing sort of fine, without adding the risk -make that certainty- that the while shebang would blow up. But once’s the genie’s out of the bubble…

The academics must have missed that part. In the end the Fed works for banks and affiliated ‘industries’, not for people. Even -or especially- those people that like to think of themselves as ‘investors’. Today, in the process, America’s central bank is actively destroying American people. And while the Fed’s operatives may know this or not, the people certainly don’t. They think they’re making fat profits in either stocks or housing. And they are the lucky ones; most Americans are simply drowning.

A great representation of all that’s wrong in this comes courtesy of this Lance Roberts graph. A chilling illustration of the price you pay for setting S&P records.

 

 

These days, every rising asset price, every single bubble, comes at the expense of enormous increases in debt. And there are still people who wish to claim that this is not a bubble. That it is OK to get into deep debt to purchase a home, or stocks, with leverage: can’t miss out on those rates! And sure, that is still true in theory; all you have to do is get out in time. If only the Fed can get out in time, if only you can get out in time.

‘Getting out in time’ is bubble territory by definition. It’s not investing. Investing is buying an interest in something that you expect to do well, something that you think may be successful in benefiting society in such a way that people will want to own part of it. As I write down these words, I can’t help thinking of ‘It’s A Wonderful Life’, simply because it is so obvious but already feels so outdated.

I’m thinking also of Uber and Airbnb and Tesla and so many other ‘innovative’ ideas. All seemingly thriving but only because there’s so much excess cash sloshing around courtesy of Bernanke and Yellen and Draghi, looking for a next bubble to ‘invest’ in. Ideas that apparently have no trouble raising another $1 billion or $10 billion ‘investment’, in the same way that the Tulip Bubble had no such trouble, or the South Sea or Dot.Com ones.

Good luck with all that, but you’ve been warned, you’re hereby on notice. The odds that you’ll be able to ‘get out in time’ are vanishingly small. And even if you do, most others just like you won’t. And neither will the Fed academics. They have the most so-called ‘money’ at their disposal, and the least sense of what to do with it. But they have their advisers in the private banking industry to tell them all about where to put it: in one bubble or another; anywhere but the real economy.

Have I mentioned yet that all these start-ups and other bubbles are being launched into a rapidly shinking economy? Or you don’t think it is shrinking? Look, there would be no need for the Fed to blow bubbles if the economy were doing fine. And if so, they wouldn’t. Even academics have an innate sense for risk overdose.

C’mon, you’re not an investor. And perhaps you won’t even end up a loser, though the odds on that are slim, but one thing’s for sure. You are a character in an epic poem about losers.

 

 

Jan 072016
 
 January 7, 2016  Posted by at 2:05 pm Finance Tagged with: , , , , , , , ,  


Berenice Abbott William Goldberg, 771 Broadway, Manhattan 1937

If there’s one thing to take away from this year’s developments in markets and economies so far, it’s that they are all linked, they’re all part of the same thing. If you can’t see that, you’re not going to understand what’s happening.

Looking at falling oil prices as a separate thread is not much use, and neither is doing the same with Chinese stocks, or the yuan, or the millions of Americans who are one paycheck away from poverty, for that matter. It’s all one story.

And the take-away from that, in turn, is that focusing too much on ‘narrow’ conditions in your particular part of the globe has only limited value. We’re very much all in this together. In the UK today, it matters very little what George Osborne says or does, or Mark Carney, because they don’t shape the future of the economy.

The same goes for all finance ministers and central bank governors across the planet, Yellen, Draghi, Koruda, the lot: the influence they exert on their own economies, which was always limited from the start, is running into the boundaries imposed by global developments.

Even if central bankers could ever have ‘lifted’ anything at all (a big question mark), their power to do so is rapidly diminishing. The constraints global developments place on their powers will now be exposed -even more. And of course they’ll try to deny and ignore that, as naked emperors are wont to do.

And with the exposure of the limits to their abilities to make markets and economies do what they want, come the limitations of the mainstream financial press to make their long-promoted recovery narratives appear valid. Before we know it, we might have functioning markets back.

Oil -both Brent and WTI- have breached the $32 handle, and are very openly flirting with the $20s. China’s stock market trading was halted for a second time this year, just 14 minutes after the opening. This came about after the PBoC announced another ‘official’ devaluation of the yuan by 0.5% (stealth devaluation has been a daily occurrence for a while).

$2.5 trillion was lost in global equities in three days this year even before the Thursday China trading stop and ongoing oil price decline. Must be easily over $3 trillion by now. And counting: European markets look awful, and so do futures.

For the first time in years, markets begin to seem to reflect actual economic activity. That is to say, industrial production, factory orders, exports, imports and services sectors are falling both in China and the US. Many of these have been falling for a prolonged period of time.

In fact, Reuters quotes a Sydney trader as saying: The Chinese economy actually contracted in December. Given what I’ve written in the past year and change about China, that can hardly be a surprise anymore.

What we are looking at is debt deflation, in which virtual ‘wealth’ is being wiped out at a fast pace, and it’s taken some real wealth with it for good measure. It’s not going to be one straight line down, for instance because there are a lot of parties out there who need to cover bets they carry from last year, but it’s getting very hard to see what can stop the plunge this time. Volatility will be a popular term again.

The Fed could lose its last remaining shred of credibility through QE4,5,6 and a 180º turn on the rate hike, but it would lose that last shred for sure. Draghi’s ECB could start buying ever more paper, but they would have a hard time finding sufficient amounts of anything to buy that’s worth anywhere near the written value.

The PBoC can’t really do QE after the $25 trillion post-2008 credit pump, and the yuan devaluation today achieved the opposite of what it was intended for. The BoJ is being severely hampered by the rising yen. We’ll see crazy stuff from the global Oracles, for sure, but in reality they never had anything but expensive band-aids to offer, and they have nothing better now.

Ultimately, if China is a Ponzi (and $25 trillion in credit spent on overcapacity strongly suggests so), then the entire world economy is one. I would very much argue so, and have for years. And we all know what inevitably happens with Ponzi’s.

Economists like to think in cycles, in which things will simply bounce back at some point, but a lot of this stuff will not come back, not for a very long time. I’ve said it before: Kondratieff is also a cycle.

We’re watching the initial stages (though a lot has already vanished behind all sorts of curtains) of a massive ‘wealth’ destruction, a very loud POOF!, ‘wealth’ which can so easily be destroyed because most of it was never real, just inflated soap. It’s time to move to cash if you haven’t already, and if you have enough, perhaps a bit of gold, silver or bitcoin, but do remember those are not risk-free.

It’s tempting to see this as a China problem, but first of all there is no China problem that will not of necessity also gravely affect the west , and second of all when you read, just to name an example, that America’s new jobs pay 23% less than the jobs they replaced, it’s just plain silly to believe that the economy is doing well, let alone recovering.

Which is why a majority of Americans are living paycheck to paycheck, and don’t have enough savings even for a $500 car repair bill. All Ponzi’s burst, they can’t be tapered, and this one we have now is going down in epic fashion because there are no major economies left that are not overburdened by debt.

It’s also tempting, certainly for economists, to see money that’s lost in one ‘investment’ to automatically shift to another, but that’s not what’s happening. Much of it simply evaporates. That’s why investment funds where already in a huge high-yield bind last year, and why you should really worry about your pension fund.

Do prepare for rising taxes and services cuts: governments suffer along with everyone, and because they’re slow and lagging, probably even more so. And governments think they deserve to have their hands in your pockets. Prepare for mass lay-offs too. The consumption model is being broken and dismantled as we speak.