Oct 132017
 
 October 13, 2017  Posted by at 7:45 pm Finance Tagged with: , , , , , , , ,  7 Responses »
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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: , , , , , , , ,  2 Responses »
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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: , , , , , , , ,  12 Responses »
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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.

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“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.

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“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.

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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: , , , , , , , , , ,  2 Responses »
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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: , , , , , , , ,  5 Responses »
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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.

Jan 072016
 
 January 7, 2016  Posted by at 9:37 am Finance Tagged with: , , , , , , , , ,  1 Response »
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Harris&Ewing Army Day Parade, Memories of the World War, Washington DC 1939

China Stock Markets Shuttered -Again- After Falling 7% (FT)
China Jolts Markets With Sharply Lower Yuan Fix (CNBC)
Offshore Yuan Rises From Five-Year Low as PBOC Puzzles Markets (BBG)
Global Oil Prices Hit 12-Year Low (Reuters)
Shanghai Fund Manager Dumps All Holdings in ‘Insane’ Market (BBG)
It’s All Bad News for Markets Buckling Under China, Fed, Economy (BBG)
George Soros Sees Crisis in Global Markets That Echoes 2008 (BBG)
Fears Mount Over Rise Of Sovereign-Backed Corporate Debt (FT)
A $500 Car Repair Bill Would Send Most Americans Scrambling (WSJ)
If A Basic Income Works For The Royal Family, It Can Work For Us All (Guardian)
Macy’s To Cut Jobs, Shut Stores Amid Weak Holiday Sales (Reuters)
Note To Joe Stiglitz: Banks Originate, Not Intermediate (Steve Keen)
BIS Says Central Banks’ Stimulus Strategy Is Based On A False Premise (AEP)
One Map That Explains the Dangerous Saudi-Iranian Conflict (Intercept)
Massive US Tax Grab Coming in 2016 at All Levels of Government (FRA)
Deal Paves Way For Thousands Of Cuban Immigrants Heading To US (CNN)
EU Fails to Defuse Passport-Free Clash in Northern Europe (BBG)
Drop In Refugees Due to Weather, Not Turkey’s Crackdown, Germany Says (Reuters)

This won’t stop until everyone who wants to sell, has. That’s the difference between markets and central control.

China Stock Markets Shuttered -Again- After Falling 7% (FT)

China’s entire equity market was shuttered within half an hour of opening after falling 7% on further currency weakness as government rescue efforts failed to deter the tide of sellers. China’s stock market meltdown and currency depreciation have spooked international investors in a replay of last summer’s rout that reverberated around the globe. So far this year — just four days — the bluechip CSI 300 index is down 12%. Newly minted circuit breakers, introduced and first tripped on Monday, kicked in again on Thursday after the CSI 300 fell 7%. Trading was halted for 15 minutes after the index lost 5%, but as stocks continued to fall the full-day closure was triggered. Investors were rattled by further weakening of the renminbi, said Wang Jun at China Securities in Beijing. “It was a panicked response to the forex market,” he said.

“Accelerating exchange-rate depreciation could lead to liquidity problems. Valuations can’t help but take a pounding.” The renminbi fell to its weakest level in nearly five years on Thursday, with capital outflow pressure still heavy even after more than a year of nearly uninterrupted outflows. The renminbi was 0.6% weaker on Thursday morning at 6.5928 per US dollar after falling by roughly the same amount on Wednesday. Policymakers appear uncertain about whether to wade back in to buy stocks with state funds or to stand back. On Tuesday, the “national team” of state-owned financial institutions appeared to re-enter the stock market after remaining on the sidelines since late August. Goldman Sachs estimated in September that the government had spent Rmb1.5tn ($234bn) to support the stock market in July and August, when the main index was down by as much as 45% from its late-June high.

The “national team” owned at least 6% of tradable market capitalisation in the Shanghai and Shenzhen exchanges at the end of the third quarter. On Wednesday, the stock market had clawed back some lost ground after state media said the securities regulator would extend a ban on share sales by large shareholders. After the trading halt on Thursday, the regulator published new permanent rules restricting share purchases by large shareholders, as well as by corporate management and directors. Starting January 9, large shareholders can sell a maximum of 1% of a company’s shares every three months. They also must disclose stake-cutting plans 15 days in advance. The China Securities Regulatory Commission said the new rules should help to stem panic-selling.

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Christine Lagarde will have to speak out.

China Jolts Markets With Sharply Lower Yuan Fix (CNBC)

China’s central bank guided the yuan lower on Thursday at the fastest pace since its shock devaluation in August, prompting a shuttering of mainland stocks and roiling markets elsewhere. The People’s Bank of China (PBOC) set the yuan reference rate at 6.5646 against the dollar, down 0.51% from Wednesday’s fix. That represents the largest daily change in the fix since August 13, according to Reuters data. The yuan had finished at 6.5554 on Wednesday. China’s central bank lets the yuan spot rate rise or fall a maximum of 2% against the dollar, relative to the official fixing rate. Thursday’s fix jolted markets, with the more freely-traded offshore yuan plunging to a record low of 6.7511 against the dollar before recovering to 6.6910 on suspected intervention. The onshore yuan rate fell to as much as 6.5932.

Equity markets in the region tumbled, with Chinese stocks closing for the day after the CSI 300 index fell more than 7%, triggering a circuit breaker. “The PBOC said the fix will be based on the previous day’s close and a softer fix is therefore not inconsistent with market forces,” said Vishnu Varathan, head of economics and markets strategy at Mizuho Bank’s Singapore office. “There is a sense in the market that the offshore market is getting carried away though and the PBOC would want to rein in excessively aggressive one-way bets,” he said. The currency moves have revived a litany of concerns in financial markets, from the health of the Chinese economy to the impact of a weaker yuan on capital outflows, which have accelerated in recent months. The more stocks fall on cues from a lower yuan, the more investors may be encouraged to yank funds out of China and park them overseas, in turn exerting further pressure on the yuan.

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Out of their hands.

Offshore Yuan Rises From Five-Year Low as PBOC Puzzles Markets (BBG)

The offshore yuan strengthened the most in two months amid speculation the central bank propped up the exchange rate after setting a weaker fixing that sent it into a tumble. The currency swung from a 0.3% gain to a 0.7% loss and back in the space of about 30 minutes, spurring intervention speculation and creating confusion about what the central bank is trying to achieve. The yuan turmoil sent mainland shares into a spiral, forcing an early trading halt for the second day this week. “China isn’t communicating its policy intentions in a clear manner,” said Sue Trinh at Royal Bank of Canada in Hong Kong. “It is sending confusing signals to the market. And it’s disappointing that their communication policy is less than transparent.”

The offshore yuan advanced 0.44% to 6.6837 a dollar as of 12:10 p.m. in Hong Kong, according to data compiled by Bloomberg, after reaching the weakest level since September 2010. The spot rate in Shanghai plunged 0.57% to a five-year low of 6.5923. The People’s Bank of China reduced its fixing, which restricts onshore moves to a maximum 2% on either side, by 0.51% to 6.5646, the lowest since March 2011. “We saw aggressive intervention in the offshore yuan market,” said Zhou Hao at Commerzbank in Singapore. “We don’t really understand the rationale behind the market movements in the past few days. Obviously, these movements have reminded us of the market rout last year.”

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Article says 11-year low, but reality caught up.

Global Oil Prices Hit 12-Year Low (Reuters)

Brent crude futures fell to a fresh 11-year low on Thursday as a sliding yuan and an emergency halt in China’s stock trading left Asian markets in a turmoil, while a huge supply overhang and near-record output levels also continued to drag on oil prices. China accelerated the devaluation of the yuan on Thursday, sending currencies across the region reeling and domestic stock markets tumbling, as investors feared the Asian giant was kicking off a virtual trade war against its competitors. Trading on its stock markets was suspended for the rest of the day, the second time this week, and China’s securities regulator intervened heavily by issuing rules to restrict share sales by listed companies’ major shareholders.

Tracking the weakness across financial markets, the global benchmark Brent fell to $33.09 per barrel, the weakest since 2004 and below the previous 11-year low from Wednesday. Prices, however, edged back to $33.42 by 0440 GMT. “With oil markets producing 1 million barrels a day in excess (of demand) and very little sign of any rational response from the supply side, it’s little wonder we’re seeing pressure again,” said Michael McCarthy at CMC Markets in Sydney. Global oil prices have crashed 70% since mid-2014 as near-record output from major producers such as OPEC, Russia and North America has left storage tanks brimming with supplies. Exacerbating the oil market woes is a weakening demand, especially in Asia, home to the world’s No.2 oil consumer, China, that is seeing the slowest economic growth in a generation.

“The Chinese economy actually contracted in December and that’s adding fire to fears of a more rapid slowdown in the world’s second biggest economy,” McCarthy said. Financial markets fear the yuan’s rapid depreciation may accelerate, which would mean China’s economy is even weaker than had been imagined. Offshore yuan fell to a fresh record low on Thursday since trading started in 2010. With the global economy looking shaky due to China’s slowdown, analysts said the outlook for oil remains for cheap prices for much of this year. “We think low $30’s (per barrel) is a floor, but once positioning gets so biased anything can happen,” said Virendra Chauhan at Energy Aspects in Singapore.

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China already did pre-empt the stock sale ban that was supposed to expire: “The CSRC capped the size of stakes that major investors are allowed to sell at 1% of a company’s shares for three months effective Jan. 9..”

Shanghai Fund Manager Dumps All Holdings in ‘Insane’ Market (BBG)

A Shanghai fund dumped all its holdings as Chinese shares tumbled and triggered a circuit-breaker that halted trading in the world’s second-biggest stock market. “This is insane,” Chen Gang, CIO at Shanghai Heqi Tongyi Asset Management, said in an interview on Thursday. “We were forced to liquidate all our holdings this morning,” said Chen, whose firm manages about 300 million yuan ($45.5 million). China’s CSI 300 Index plunged 7.2% before trading was halted by automatic circuit-breakers for the second time this week, after a weaker-than-estimated yuan fixing fueled concern that slowing economic growth is prompting authorities to guide the currency lower. Many private funds and hedge funds in China have agreements with investors spelling out mandatory liquidation levels if their holdings drop below a certain value.

Chinese regulators have imposed a limit on the amount of stock major corporate shareholders can sell as authorities move to curb the nation’s market rout. The CSRC capped the size of stakes that major investors are allowed to sell at 1% of a company’s shares for three months effective Jan. 9, the regulator said in a statement on Thursday. The restriction replaces an existing six-month ban on any secondary market stock sales that is due to expire Friday, it said. Chen, who commented before the CSRC announced its new caps, said he “won’t consider getting back into the market until that overhang is gone and CSRC improves its circuit-breaker system, for instance by extending the 15-minute break to half an hour.”

The Shanghai Heqi Tongyi manager, whose fund started mid-year in 2015, regretted the timing of its launch and said it “couldn’t be worse.” Chen isn’t alone in criticizing the circuit-breaker rule introduced Monday, which many say exacerbates a liquidity squeeze as investors rush for the exits before trading halts kick in. Under the new rule, a drop of 5% suspends trading for 15 minutes, while a decline of 7% halts the market for the rest of the day. “A trading break of 15 minutes or even longer wouldn’t ease their nerves or get them a clear picture of the fundamentals,” said Polar Zhang at BOC International. “On the contrary, it’s draining liquidity as everybody tries to get out of the door before the door is closed.”

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Deflation.

It’s All Bad News for Markets Buckling Under China, Fed, Economy (BBG)

New year, same fears. Except now they’re hitting all at once. For U.S. stocks it’s meant the worst start since the financial crisis, while volatility in Europe has exploded to levels not seen in a decade. From China’s weakening currency to the rout in oil to the withdrawal of Fed stimulus and gains in the cost of financing business, things that keep investors up at night are climbing out from under the bed again in 2016. While little of it is new, the persistence is troubling, especially when buffers such as valuations and central bank support are turning against bulls. The result has been one of the fastest retreats from risk ever by investors coming back from New Year’s holiday. Just days into 2016, Wall Street firms from Citigroup to Royal Bank of Canada have already scaled back bullish calls for American equities this year, while single-stock analysts forecast fourth-quarter profits will shrink by more than 6% after predicting an expansion in August.

“The market obviously rises on the wall of fear, but right now the fear is looking a little bit more realistic,” said Brad McMillan at Commonwealth Financial Network. Over three days, more than $2 trillion has been wiped from the value of global equities, volatility in the broadest stock gauges has jumped 13% or more, and more than 8% was shorn from the price of oil. China’s Shanghai Composite Index plunged almost 7% to start the year while everything from junk bonds to cocoa and coffee has tumbled. As has been true before, the proximate cause is China. Data showing weakness in manufacturing this week sparked a tumble in the CSI 300 Index. Markets were roiled Wednesday when the nation’s central bank unexpectedly set the yuan’s daily reference rate at the lowest level since April 2011, fueling concern over the strength of the world’s second-largest economy.

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“Almost $2.5 trillion was wiped from the value of global equities this year through Wednesday, and losses deepened in Asia on Thursday..”

George Soros Sees Crisis in Global Markets That Echoes 2008 (BBG)

Global markets are facing a crisis and investors need to be very cautious, billionaire George Soros told an economic forum in Sri Lanka on Thursday. China is struggling to find a new growth model and its currency devaluation is transferring problems to the rest of the world, Soros said in Colombo. A return to positive interest rates is a challenge for the developing world, he said, adding that the current environment has similarities to 2008. Global currency, stock and commodity markets are under fire in the first week of the new year, with a sinking yuan adding to concern about the strength of China’s economy as it shifts away from investment and manufacturing toward consumption and services.

Almost $2.5 trillion was wiped from the value of global equities this year through Wednesday, and losses deepened in Asia on Thursday as a plunge in Chinese equities halted trade for the rest of the day. “China has a major adjustment problem,” Soros said. “I would say it amounts to a crisis. When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008.”

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Emerging markets will keep plummeting.

Fears Mount Over Rise Of Sovereign-Backed Corporate Debt (FT)

More than $800bn of emerging market sovereign debt is being camouflaged by the growing use of bonds that offer implicit state backing without always appearing on government balance sheets, according to new research. The stock of so-called quasi-sovereign bonds issued in dollars and other hard currencies by emerging markets has risen sharply in the past 12 months to overtake that of all external emerging market sovereign debt by the end of 2015. The growing use of such bonds suggests that developing countries are increasingly transferring debt obligations to third parties that have taken advantage of historically low interest rates to load up with cheap debt. Emerging markets are already under strain as the US dollar strengthens against the renminbi and other emerging market currencies, making the cost of servicing debt denominated in dollars harder to bear.

Although official debt-to-GDP levels of countries such as India, Russia and China remain low by global standards, the growth of less visible debt which they might still have to guarantee in a crisis underlines the potential scale of their liabilities. “This has been a source of worry for some time, in part because it does not always appear on government balance sheets.” said Lee Buchheit, a partner at Cleary Gottlieb and expert on sovereign debt default. “Emerging markets have benefited from interest rates at historic low levels and commodity prices at historic highs,” he said: “In the last year both of these have begun to unwind. If the resulting strains on a country compel a sovereign debt rearrangement of some kind, these contingent liabilities of the sovereign will need to be addressed.”

New figures from JPMorgan and Bond Radar show that issuance of quasi-sovereign bonds outpaced that of sovereign bonds in emerging markets last year, raising the stock of such debt from $710bn in 2014 to a record $839bn by the end of 2015. By comparison, the stock of all external emerging market sovereign debt stood at $750bn at the end of last year, according to JPMorgan. The cost of selling bonds with either an explicit or implicit guarantee of the government is lower than other corporate bonds. Quasi-sovereign borrowers include 100% state-owned entities such as Mexico’s Pemex, local governments in countries such as China, and entities in which the government owns more than 50% of the equity or has more than 50% of the voting rights — a description that encompasses Brazil’s Petrobras.

However, the treatment of such debt is not uniform. Bonds issued by Pemex are included in debt-to-GDP calculations for Mexico, but this is unusual, and only 19 of the 181 quasi-sovereign bonds tracked by JPMorgan carry an explicit sovereign guarantee. [..] Emerging markets’ quasi-sovereign bonds are now suffering from the same diminishing capital flows and rising borrowing costs plaguing the developing world, thanks to the strengthening US dollar, weakening commodity prices and fears of slowing Chinese growth. Poor performance has already hurt the credit ratings of countries that back them. Last year, Standard & Poor’s and Fitch, two of the world’s three big credit rating agencies, cut Brazil’s rating to junk in part because of the growing risks associated with Petrobras. “What can really break the dam is the quasi-sovereign element in EM external debt,” says Gary Kleiman of Kleiman International, an emerging market investment consultant. “People have always assumed there is an implicit backing, but that capacity has not been called into question explicitly.”

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Paycheck to paycheck.

A $500 Car Repair Bill Would Send Most Americans Scrambling (WSJ)

An unexpected car repair or medical bill would cause the vast majority of Americans to scramble because they lack the needed funds in their savings accounts. Only 37% of adults have the necessary savings to cover a $500 car repair or a $1,000 emergency room bill, according to a survey Bankrate.com released Wednesday. The finding is little changed from last year, when 38% said they didn’t have the cash on hand, despite a year of steady job creation and the unemployment rate falling to 5%. “Most Americans are ill-prepared for life’s inevitable curveballs,” said Sheyna Steiner, Bankrate.com’s senior investing analyst. She said that’s a concern because more than 40% of families experienced a similar unexpected cost during the past 12 months.

Without the savings, 23% of those surveyed said they would have to cut back on spending elsewhere, and 15% said they would turn to credit cards. The same share said they would have to borrow from friends or family. The data suggests that many households are still on uncertain financial footing more than six years after the recession ended. However, other figures indicate Americans are earning, and saving, more. The personal saving rate was 5.5% in November, the second-highest level since the start of 2013, the Commerce Department said last month. Lower gasoline prices and solid income gains in recent months are supporting savings. Wages increased 2.3% from a year earlier in November, the Labor Department said, even as consumer inflation held near zero.

The Bankrate survey found that preparedness for unexpected expenses varied widely by income level. Just 23% of those earning less than $30,000 annually had the needed savings, while 54% of those earning more than $75,000 annually said they would have the cash on hand.

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“In Britain we’ve already experimented with a system in which one group of people receive a guaranteed income with no obligation to work for it. But what if this was extended beyond the royal family?”

If A Basic Income Works For The Royal Family, It Can Work For Us All (Guardian)

My first response to the notion of a universal basic income (UBI) was: “Well, really. That is never going to happen! I mean, it’s completely unaffordable. I mean, it would be political suicide for any progressive party suggesting it.” And then I may have started to froth at the mouth slightly and ask if it would be paid to refugees. Yet this year will see a UBI paid to residents of Utrecht and 19 other Dutch municipalities. Everyone will get about £150 a week, whether working or not. The unemployed won’t find themselves penalised for finding work, and the hope is that the state will spend less money snooping on benefit claimants, moving on the homeless or locking up those driven to crime. Advocates of this radical idea are keen to quash any notion that recipients of free money will just use it to lie around all day getting stoned.

This is why it is being piloted in Holland. The idea is so refreshingly contrary to the petty conditionality that is killing the welfare state that it began to fill me with optimism that there may be a few people lying in this political gutter still looking at the stars. Once upon a time, universality was the underpinning principle of welfare. Every mother got child benefit; every child got free school milk, until that was snatched away by … Oh, I can’t remember – I’m not one to bear grudges. In Britain we’ve already experimented with a system in which one group of people receive a guaranteed income with no obligation to work for it. But what if this was extended beyond the royal family? Imagine now if everyone in the UK started out with a guaranteed minimal amount of money each week.

All other benefits would be done away with, along with the stigma and entrapment that came with the old system of welfare (and the expense of policing and administering it). The idea of the UBI is so contrary to everything that has been drummed into us about preventing the “something for nothing society”, it’s worth advocating it just to see the Daily Mail and Iain Duncan Smith implode with outrage. The predictable argument that will be rolled out is that it will turn the masses from “strivers into skivers”; it will lead to welfare dependency, a lack of initiative and lots of programmes on Channel 5 called Fat Ugly People Spending Your Money on Crisps and Big Tellies.

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Vanguard for a much bigger trend.

Macy’s To Cut Jobs, Shut Stores Amid Weak Holiday Sales (Reuters)

Macy’s said it will eliminate more than 2,000 jobs and consolidate operations after reporting weak holiday sales, highlighting a downturn in apparel demand that has likely taken a similar toll on other department stores and clothing chains. Macy’s said comparable sales at stores open for more than a year tumbled by 4.7% in November and December, far worse than what it had estimated in November, and it cut its earnings outlook for the second time in two months. Macy’s, which operates the upscale Bloomingdale’s chain as well as its namesake Macy’s department stores, estimated that 80% of the fall was due to unusually warm weather, which discouraged purchases of sweaters, coats and gloves. It also blamed the strong dollar for keeping tourists from visiting the United States and spending money at its flagship stores.

The company’s shares rose 2.8% to $37.15 in after-hours trading on Wednesday as investors cheered its plan to reduce costs by $400 million by consolidating regions and call-centers. The jobs to be eliminated include 3,000 store workers, though about half of those employees will be put in other positions, as well as hundreds of back-office and senior executive posts, the company said in a press release. “Macy’s is cutting the fat, becoming a leaner organization,” said Lisa Haddock, marketing lecturer at San Diego State University, of why the shares rose. But Haddock said Macy’s, like many other traditional bricks-and mortar retailers, faced an uncertain future as more and more consumer demand shifted online. “Macy’s doesn’t seem to have a unique spot in consumers’ minds,” she said.

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Essential: “..the banks have very good reasons not to “fulfil their purpose” today, because that purpose is not what Joe thinks it is. Banks don’t “intermediate loans”, they “originate loans”..”

Note To Joe Stiglitz: Banks Originate, Not Intermediate (Steve Keen)

I like Joe Stiglitz, both professionally and personally. His Globalization and its Discontents was virtually the only work by a Nobel Laureate economist that I cited favourably in my Debunking Economics, because he had the courage to challenge the professional orthodoxy on the “Washington Consensus”. Far more than most in the economics mainstream—like Ken Rogoff for example—Joe is capable of thinking outside its box. But Joe’s latest public contribution—“The Great Malaise Continues” on Project Syndicate—simply echoes the mainstream on a crucial point that explains why the US economy is at stall speed, which the mainstream simply doesn’t get. Joe correctly notes that “the world faces a deficiency of aggregate demand”, and attributes this to both “growing inequality and a mindless wave of fiscal austerity”, neither of which I dispute. But then he adds that part of the problem is that “our banks … are not fit to fulfill their purpose” because “they have failed in their essential function of intermediation”:

Between long-term savers (for example, sovereign wealth funds and those saving for retirement) and long-term investment in infrastructure stands our short-sighted and dysfunctional financial sector… Former US Federal Reserve Board Chairman Ben Bernanke once said that the world is suffering from a “savings glut.” That might have been the case had the best use of the world’s savings been investing in shoddy homes in the Nevada desert. But in the real world, there is a shortage of funds; even projects with high social returns often can’t get financing.

I’m the last one to defend banks, but here Joe is quite wrong: the banks have very good reasons not to “fulfil their purpose” today, because that purpose is not what Joe thinks it is. Banks don’t “intermediate loans”, they “originate loans”, and they have every reason not to originate right now. In effect, Joe is complaining that banks aren’t doing what economics textbooks say they should do. But those textbooks are profoundly wrong about the actual functioning of banks, and until the economics profession gets its head around this and why it matters, then the economy will be stuck in the Great Malaise that Joe is hoping to lift us out of.

The argument that banks merely intermediate between savers and investors leads the mainstream to a manifestly false conclusion: that the level of private debt today is too low, because too little private debt is being created right now. In reality, the level of private debt is way too high, and that’s why so little lending is occurring. I can make the case empirically for non-economists pretty easily, thanks to an aside that Joe makes in his article. He observes that when WWII ended, many economists feared that there would be a period of stagnation:

Others, harking back to the profound pessimism after the end of World War II, fear that the global economy could slip into depression, or at least into prolonged stagnation.

In fact, the period from 1945 till 1965 is now regarded as the “Golden Age of Capitalism”. There was a severe slump initially as the economy changed from a war footing to a private one, but within 3 years, that transition was over and the US economy prospered—growing by as much as 10% in real terms in some years. The average from 1945 till 1965 was growth at 2.8% a year. In contrast, the average rate of economic growth since 2008 to today is precisely zero.

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“Schumpeterian creative destruction“: “The occurrence of a crisis greatly amplifies the impact of previous misallocations..”

BIS Says Central Banks’ Stimulus Strategy Is Based On A False Premise (AEP)

The world’s monetary watchdog has thrown down the gauntlet. It has challenged the twin assumptions of secular stagnation and the global savings glut that have possessed – some would say corrupted – the Western economic elites. It has implicity indicted the US Federal Reserve and fellow central banks for perverting the machinery of interest policy to conjure demand that may not, in fact, be needed, and ensnaring us in a self-perpetuating “debt-trap” with a diet of ever looser money. The Bank for International Settlements (BIS) – the temple of monetary orthodoxy in Switzerland – has been waiting for this moment, combing through the archives of economic history to mount an unanswerable assault. The BIS believes it has found the smoking gun in a study of recessions in 22 rich countries dating back to the late 1960s.

The evidence suggests that the long malaise of the post-Lehman era – and the strange episode that preceded it – can be explained almost entirely by the destructive effects of boom and bust on productivity growth. Credit bubbles are corrosive. They gobble up resources on the upswing, diverting workers into low-productivity sectors and building booms. In Spain the construction share of GDP reached 16pc at the height of the “burbuja” in 2007, when teenagers abandoned school en masse to earn instant money erecting ghost towns. Parasitical wastage creeps in. “Financial institutions’ high demand for skilled labour may crowd out more productive sectors,” said the paper, acidly. The bubbles leave a long toxic legacy after the bust hits. This takes eight years or so to clear.

“The occurrence of a crisis greatly amplifies the impact of previous misallocations,” said the paper, racily titled “Labour reallocation and productivity dynamics: financial causes, real consequences”. Crippled economies have to make the switch back to healthier sectors against the headwinds of a credit crunch and a broken financial system, and typically amid austerity cuts in public investment. The BIS has long argued that a key reason why the US recovered more quickly than others is because it tackled the bad debts of the banking system early, forcing lenders to raise capital. This averted a long credit squeeze. It cleared the way for Schumpeterian creative destruction. The Europeans dallied, prisoners of their bank lobbies. They let lenders meet tougher rules by slashing credit rather than raising capital.

Europe’s unemployed have paid a high price for this policy failure. Claudio Borio, the paper’s lead author and the BIS’s chief economist, said the “hysteresis” effect of lost productivity is 0.7pc of GDP each year. The cumulative damage from the boom-bust saga over the past decade is 6pc. This more or less accounts for the phenomenon of “secular stagnation”, the term invented by Alvin Hansen in 1938 and revived by former US Treasury Secretary Larry Summers. Loosely, it describes an inter-war Keynesian world of deficient investment and demand. The theory of the global savings glut propagated by former Fed chief Ben Bernanke falls away, and so does the Fed’s central alibi. It can longer be cited as the canonical justification for negative real rates. The alleged surfeit of capital in the world proves a mirage. So does the output gap. If the BIS hypothesis is correct, there is no lack of global demand. The world faces a supply-side problem, impervious to monetary stimulus. The entire strategy of global central banks is based on a false premise.

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“..the Saudi royals would just be some broke 80-year-olds with nothing left but a lot of beard dye and Viagra prescriptions.”

One Map That Explains the Dangerous Saudi-Iranian Conflict (Intercept)

The Kingdom of Saudi Arabia executed Shiite Muslim cleric Nimr al-Nimr on Saturday. Hours later, Iranian protestors set fire to the Saudi embassy in Tehran. On Sunday, the Saudi government, which considers itself the guardian of Sunni Islam, cut diplomatic ties with Iran, which is a Shiite Muslim theocracy. To explain what’s going on, the New York Times provided a primer on the difference between Sunni and Shiite Islam, informing us that “a schism emerged after the death of the Prophet Muhammad in 632” – i.e., 1383 years ago. But to the degree that the current crisis has anything to do with religion, it’s much less about whether Abu Bakr or Ali were Muhammad’s rightful successor and much more about who’s going to control something more concrete right now: oil.

In fact, much of the conflict can be explained by a fascinating map created by M.R. Izady, a cartographer and adjunct master professor at the U.S. Air Force Special Operations School/Joint Special Operations University in Florida. What the map shows is that, due to a peculiar correlation of religious history and anaerobic decomposition of plankton, almost all the Persian Gulf’s fossil fuels are located underneath Shiites. This is true even in Sunni Saudi Arabia, where the major oil fields are in the Eastern Province, which has a majority Shiite population. As a result, one of the Saudi royal family’s deepest fears is that one day Saudi Shiites will secede, with their oil, and ally with Shiite Iran.

This fear has only grown since the 2003 U.S. invasion of Iraq overturned Saddam Hussein’s minority Sunni regime, and empowered the pro-Iranian Shiite majority. Nimr himself said in 2009 that Saudi Shiites would call for secession if the Saudi government didn’t improve its treatment of them. As Izady’s map so strikingly demonstrates, essentially all of the Saudi oil wealth is located in a small sliver of its territory whose occupants are predominantly Shiite. (Nimr, for instance, lived in Awamiyya, in the heart of the Saudi oil region just northwest of Bahrain.) If this section of eastern Saudi Arabia were to break away, the Saudi royals would just be some broke 80-year-olds with nothing left but a lot of beard dye and Viagra prescriptions.


Map shows religious populations in the Middle East and proven developed oil and gas reserves. Click to view the full map of the wider region. The dark green areas are predominantly Shiite; light green predominantly Sunni; and purple predominantly Wahhabi/Salafi, a branch of Sunnis. The black and red areas represent oil and gas deposits, respectively. Source: Dr. Michael Izady at Columbia University, Gulf2000, New York

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Detailed and instructive article. Recommended reading.

Massive US Tax Grab Coming in 2016 at All Levels of Government (FRA)

The Financial Repression Authority sees the massive government tax grab already quietly underway accelerating in 2016 in most of the developed economies. This ‘grab’ will be a desperate political act driven by underfunded, and in a significant number of cases, unfunded public pension which will unfold at all three levels of government, Federal, State and City /Local government. It will be disguised by different focal emphasis and appear to evolve in an uncoordinated manner – but it will occur! To spot its telltale fingerprints we should expect the following words to become much more prevalent in the “public narrative” throughout 2016 and to see EACH of these which we explore in this article to increasingly and significantly extract money from taxpayer wallets:

• Capital Gains Tax,
• Property Tax,
• Global Wealth Tax (PFIC, FATCA, GATCA),
• Civil Forfeiture Fines,
• Means Testing,
• Licensing Fees,
• Usage, Tolls & Emergency Services Fees,
• Inspection Fees,
• Processing Fees,
• Fines (Police and Agency)
• Ticketing,
• School Activity, Equipment & Supply Fees,
• Inheritance Tax,
• Social Security Taxation Rate

The Wealth Effect is believed by the government to have pushed up taxpayer US Household Net Worth by $30 Trillion or 55% from the Financial Crisis low. The US government is coming after that money! They see it as a “Honey Pot” that can’t be resisted.

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Build a wall with Cuba?

Deal Paves Way For Thousands Of Cuban Immigrants Heading To US (CNN)

It’s a rare deal at a time when daily sparring over immigration is a worldwide reality. Five Central American countries and Mexico inked an agreement last week that will help thousands of stranded Cuban immigrants make their way to the United States. The group of Cubans, about 8,000 at the latest estimate, had been stuck in Costa Rica for weeks after Nicaragua closed its borders to them. Now a group of Central American countries say the Cubans will be flown to El Salvador, then transported on buses to Mexico. Then they’ll have a chance to cross into the United States. Officials have said they’ll start transporting the group of Cubans on flights this month. The first group of 180 will leave on a flight to El Salvador on Tuesday as part of a pilot program, Costa Rica’s foreign minister said Wednesday. It won’t be a free ride; the immigrants will have to pay about $550 to cover travel and visa costs, officials said.

The idea of 8,000 new immigrants showing up at America’s doorstep sounds like a large number. But experts say it’s in keeping with a trend they’ve observed. The number of Cubans coming to the United States has spiked dramatically, particularly after President Barack Obama’s announcement that relations between the United States and the island nation were on the mend. More than 43,000 Cubans entered the United States at ports of entry in the 2015 fiscal year, according to a recent Pew Research Center report, which cited U.S. Customs and Border Protection data. That represents a 78% increase over the previous year, according to Pew. Several factors are fueling the trend, said Marc Rosenblum, deputy director of the U.S. immigration policy program at the Migration Policy Institute.

These include the Obama administration’s 2009 decision to ease restrictions on Americans traveling to Cuba and sending money to families there, Cuba’s move in 2013 to relax exit controls on Cubans seeking to leave the island and – most importantly – the U.S. decision to normalize relations last year. Some fear the immigration policies that have welcomed Cubans into the United States could change now that relations between the countries are warming, Rosenblum said. “There is this concern that Cuba special privileges will be eliminated, so Cubans are trying to get out while the getting’s good,” he said. Not anymore. While the U.S. Coast Guard said last year it was seeing an increase in the number of Cubans trying to reach the United States in rafts, even more are taking a different route.

“Over the last several years, we’ve seen pretty sharp increases in the number of Cubans, especially traveling by land,” Rosenblum said. Until recently, many flew into Ecuador, which didn’t require a visa for Cubans until several months ago. From there, they trekked through Latin America until they reached the United States.

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Clueless.

EU Fails to Defuse Passport-Free Clash in Northern Europe (BBG)

German, Danish, Swedish and European officials blamed each other – and political leaders across the continent – for the refugee overruns that have led to the reintroduction of passport checks in northern Europe. A migration crisis session in Brussels on Wednesday ended with Germany identifying Greece’s lightly policed sea border as the cause of the problem, Denmark telling refugees to go elsewhere, Sweden confessing that it’s swamped and the EU’s head office appealing for “solidarity.” “Our problem at the moment in Europe is that we do not have a functioning border-control system, especially at the Greece-Turkey border,” German deputy interior minister, Ole Schroeder, told reporters afterward.

The latest threat to no-passport travel in much of the 28-nation EU started when Sweden began stopping traffic on its border with Denmark, leading to controls on the Danish-German frontier and prompting the bloc’s home affairs commissioner, Dimitris Avramopoulos, to plead for a “return to normal as soon as possible.” The scale of the challenge was dramatized by data showing that EU governments have rehoused only 272 of a pledged 160,000 refugees, leaving Germany, Sweden, Greece and Italy as the main interim hosts of people fleeing wars in the Middle East. Sweden renewed its call for the equitable distribution of refugees, as required by EU laws passed last year, and invoked the rule – widely seen as broken beyond repair – that refugees apply for asylum in the first EU country they reach.

“We cannot do everything, we have to share responsibility among all member states,” Swedish Justice Minister Morgan Johansson said. The largest movement of people since the dislocations after World War II has stirred tensions among commercially and culturally like-minded countries in Scandinavia. “We don’t wish to be the final destination for thousands and thousands of asylum seekers,” said Danish immigration minister, Inger Stoejberg. She said Denmark is ready “at very short notice” to sanction transport operators for bringing in illegal migrants.

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Still 4,000 a day arriving in Germany every day. Or 1.46 million per year. And that’s in winter.

Drop In Refugees Due to Weather, Not Turkey’s Crackdown, Germany Says (Reuters)


Migrant arrivals in Germany dropped significantly last month, but the reason was rough seas, not efforts by Turkey to crack down on illegal departures to Greece, German Interior Minister Thomas de Maiziere said on Wednesday. His remarks suggest that German efforts to stem the flow of arrivals with help from Turkey are not effective yet, which increases pressure on Chancellor Angela Merkel, whose popularity has fallen over her decision to welcome refugees. “Our impression is that the drop (in arrivals) is predominantly linked to the weather, namely a stormy sea in the Mediterranean,” de Maiziere, a member of Merkel’s Christian Democratic Union (CDU), told a news conference.

“We are also seeing efforts by Turkey to reduce the number of illegal migration departure from Turkey,” he said. “But we cannot confirm a sustainable, permanent, and visible reduction because of these activities and based on individual steps in December.” From 2,500 to 4,000 migrants entered Germany through Austria each day in December. That is far less than 10,000 daily arrivals recorded at the height of the crisis in autumn but still not low enough to silence Merkel’s critics. Most migrants reach Europe by making the short voyage from Turkey to Greece. Merkel wants Turkey to stem the flow and take back asylum seekers rejected by Europe.

In exchange, Turkey will get support for faster action on its bid to join the European Union and billions of euros in aid for Syrian refugees in border camps. The chancellor has rejected demands from members of her own conservatives to cap the number of refugees Germany is willing to take each year as well as calls to seal the border with Austria. Her multi-front approach to reducing the number of arrivals also includes providing aid to Syrian refugees in Lebanon and Jordan and distributing asylum seekers across the EU.

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Oct 042015
 
 October 4, 2015  Posted by at 9:52 am Finance Tagged with: , , , , , , , ,  1 Response »
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Russell Lee Photo booth at fiesta, Taos, New Mexico Jul 1940

Markets Are Back At Panic Levels, Says Credit Suisse (MarketWatch)
Post-QE “S&P Should Be Trading At Half Of Its Value”: Deutsche Bank (ZH)
Oil Slump Plays Havoc With The Junk-Bond Market (MarketWatch)
Oil Bulls Lose Faith in Recovery as Russia Adds to Global Glut (Bloomberg)
Economists Can’t Find the Silver Lining in US Jobs Report (Bloomberg)
US Hedge Funds Brace For Worst Year Since Financial Crisis (Reuters)
US System Designed To Prevent Financial Crisis ‘Likely To Fail’ (MarketWatch)
Fed’s Fischer Says Financial Stability Toolkit May Need To Grow (Reuters)
IMF’s Mass Debt Relief Call For Greece Set To Be Rejected By Europe (Telegraph)
New Greek Debt Framework Not So Flattering For Italy, Spain, Portugal (WSJ)
‘Bubbles Are All Over The Place’: Ron Paul (RT)
History Isn’t A Guide When Market Is Playing By A New Set Of Rules (Ind.)
The Failure Of Central Banking: The French Revolution Case Study (Lebowitz)
UK Car Emissions Test Body Receives 70% Of Cash From Motor Industry (Observer)
The Record US Military Budget. Spiralling Growth of America’s War Economy (Davies)
153,000 Refugees Arrived In Greece In September Alone (UNHCR)
280,000 Refugees Arrived In Germany In September (AFP)

They can’t let go: “..panic equals buying opportunities..”

Markets Are Back At Panic Levels, Says Credit Suisse (MarketWatch)

If it feels like you’re reliving the market jitters of the Great Recession and eurozone crisis, it’s probably because you are. During this week, global risk appetite dropped to “panic” levels for the first time since January 2012, according to Credit Suisse’s Global Risk Appetite Index. That was back when investors feared a breakup of the euro bloc, grappled with unsustainably high sovereign borrowing costs and freaking out about the spillover from Greece. Before that, the index reached panic state around the onset of the 2008 financial crisis, after the Sept. 11, 2001 attacks on the U.S., during the dotcom bubble and after Black Monday in 1987. Get the picture?

This time, Credit Suisse’s Global Risk Appetite Index slipped into panic territory just as global equity markets were wrapping up their worst quarter in four years. That came as investors feared a sharp slowdown in China’s economy and a collapse in commodity prices. “Global growth is not a strong supportive factor for risky assets right now,” said the analyst team led by the bank’s chief economist, James Sweeney. “Weak Chinese growth has had very negative effects on general emerging market performance and commodity prices. And a strong dollar has caused many exporters around the world to see declining trade revenues, even if actual activity has not fallen off a cliff,” they added. Indeed, the U.S. economy may not even have grown 1% in the third quarter, according to the Atlanta Fed’s GDPNow tracker.

But here’s for the good news: panic equals buying opportunities. The Credit Suisse analysts said panic usually is an overreaction to short-term events, providing a chance to buy risky assets at a cheaper price. There’s a caveat for the current panic state, however. Because of the murky global growth outlook, investors should only use this as a short-term opportunity, rather than going in for the long haul, the analysts said. “If panic persists, it could alter the global growth outlook for the worse. Ongoing panic and weak global growth would likely influence Fed behavior. But history suggests rebounds often occur when they are least expected,” they said. “That’s why we see the current panic as a tactical opportunity, even if it does not point to a lasting boom in risky assets.”

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Define ‘value’.

Post-QE “S&P Should Be Trading At Half Of Its Value”: Deutsche Bank (ZH)

[..] “Since 2013, stocks rallied while disinflationary pressures were reinforced by a strong USD, low commodity prices and a decline in global demand. If pre-2013 coordination between the two is taken as a reference, then based on current stock prices breakevens should trade about 1.5% wider. This means the Fed should be hiking because inflation is above target. Alternatively, given the current level of inflation, S&P should be trading at half of its value.”

Wait, the S&P should be trading at 900… or even less? Yes, according to the following Deutsche Bank chart:

Only one question remains: which breaks first – do inflation expectations surge higher, soaring by some 150 bps to justify equity valuations, or do equities crash?

“Is reconciliation likely – and, if so, in which direction? Are we returning to the pre-crisis world, or we are in a completely new regime?”

The answer will come from none other than the Fed and by now, even Janet Yellen knows that one word out of place, one signal to the market that the QE-inflation trade will converge with stocks crashing instead of inflation rising (which, unless the Fed launched QE4, NIRP of even helicopter money now appears inevitable), and some $10 trillion in market cap could evaporate overnight. Is it any wonder that Yellen is exhibiting “health issues” during her speeches: the realization that the fate of the biggest stock market bubble lies on your shoulders would make anyone “dehydrated.” In retrospect, Ben Bernanke knew exactly what he was doing when he got out of Dodge just as the endgame was set to begin.

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The last few sources of funding dry up.

Oil Slump Plays Havoc With The Junk-Bond Market (MarketWatch)

Low oil prices continued to wreak havoc in the U.S. high-yield bond market in September, and the outlook remains grim, reports from two major rating firms showed Friday. Moody’s said its Liquidity Stress Index, a measure of stress in the high-yield bond market, deteriorated in the month, weighed down once again by a wave of downgrades in the energy sector. The index rose to 5.8% in September from 5.1% in August, placing it at its highest level since October of 2010. The index measures the number of companies that carry Moody’s lowest liquidity rating of SGL-4. The index rises when more issuers are placed in that category, and it falls when liquidity improves.

The U.S. high-yield market is dominated by energy companies, many of them highly leveraged shale producers that had ramped up production while oil prices were soaring. Many are now struggling as the low oil price hammers profits just as debt service costs rise. Crude has lost roughly 59% of its value in the past year, falling from a high close to $107 a barrel in 2014 to about $44 on Friday. Reflecting the pressure on risky borrowers, the energy Liquidity Stress subindex shot up to 16.9% in September from 12.7% in August, its highest level since it reached 19.2% in July of 2009. “The LSI’s rise warns that more companies are becoming dependent on increasingly fickle capital markets to alleviate liquidity pressures, and this is putting upward pressure on defaults,” Moody’s said in a report.

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Pumping at full capacity is the only lifeline left.

Oil Bulls Lose Faith in Recovery as Russia Adds to Global Glut (Bloomberg)

Hedge funds trimmed bullish oil bets for the first time in six weeks, losing faith in a swift recovery as Russia boosted output to the highest since the Soviet Union collapsed. Speculators reduced their net-long position in West Texas Intermediate crude by 9.1% in the week ended Sept. 29, according to data from the Commodity Futures Trading Commission. Longs dropped from a 12-week high while shorts increased. U.S. crude output is down 514,000 barrels a day from a four-decade high reached in June, Energy Information Administration data show. The number of rigs targeting oil in the U.S. dropped to a five year low, Baker Hughes said Oct. 2. WTI traded in the tightest range since June last month as China’s slowing economy and the highest Russian output in two decades signaled the global glut will linger.

“The U.S. producers are the only ones doing their part to reduce the global glut,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund, said by phone. “Other countries, such as Russia, are pumping at full tilt. The cutbacks by shale producers here aren’t going to have much impact, especially given the slowing global economy.” WTI decreased 1.3% in the report week to $45.23 a barrel on the New York Mercantile Exchange. It settled at $45.54 Friday. U.S. crude stockpiles, already about 100 million barrels above the five-year average, may swell further. Stockpiles have climbed during October in eight of the last 10 years as refiners slow operations to perform seasonal maintenance.

Russian oil output rose to a post-Soviet record last month as producers took advantage of the weak ruble to push ahead with drilling. The nation’s production of crude and condensate climbed to 10.74 million barrels a day, 1% more than a year earlier and topping a record set in June, according to data from the Energy Ministry’s CDU-TEK unit.

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Give ’em a few days…

Economists Can’t Find the Silver Lining in US Jobs Report (Bloomberg)

When the U.S. jobs report is released each month, there’s typically enough nuance to offer something for everyone — the good and the bad. Today proved to be a feast for the bears. “When you look through all the details of the data, there just isn’t anything good to hang your hat on,” said Thomas Simons at Jefferies in New York. “It’s been years since we’ve seen such an unambiguously bad report. Silver linings were tough to come by in the September jobs data. Payrolls came in at a much-weaker-than-forecast 142,000, while August and July figures were revised down. Wage growth was nonexistent for the month, with average hourly earnings actually falling by a penny on average.

The softness in manufacturing endured, with factory payrolls falling by 9,000 when they were expected to show no change. With dollar appreciation and sluggish overseas growth providing headwinds, it was the biggest back-to-back decline since 2010. Even service industries, which make up the lion’s share of the economy and are more shielded from global weakness, seem to have shifted into a lower gear. Payroll growth there has slowed for four straight months, the longest such streak since 2001. “While it’s always important not to overreact to one single data release, we’ll make an exception in this case,” Paul Ashworth at Capital Economics in Toronto, wrote in a note to clients. “Aside from manufacturing, the slowdown in employment gains is most notable in business services and education and health, which are not the sectors most prone to cyclical swings.”

Even a small positive in today’s report — a sharp decline in the ranks of the underemployed — must be taken with a grain of salt, economists said. The ranks of people working part-time for economic reasons fell by the most since January 2014, which is generally a good sign. However, the number of full-time employees dropped as well. Meanwhile the labor force participation rate decreased to the lowest level since October 1977. At best, the data are murky. “It’s weak through and through,” Simons said. Because such thoroughly disappointing reports are so rare, “we probably won’t see it again next time around.”

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Numbered days?!

US Hedge Funds Brace For Worst Year Since Financial Crisis (Reuters)

U.S. hedge funds are bracing for their worst year since the 2008 financial crisis after a dramatic sell-off in healthcare and biotechnology stocks triggered double-digit losses for some prominent players last month. September’s sucker punch in the biotech sector, on top of a grim August when global markets tumbled due to fears about slowing growth in China, have pushed many hedge fund managers deep into the red. “These are some of the worst numbers we have seen since the crisis,” said Sam Abbas, whose Symmetric IO tracks hedge fund managers’ returns. The average hedge fund lost 19% in 2008 when the credit crunch hit. Since then, hedge funds have had only one down year, when they lost 5.25% in 2011, data from Hedge Fund Research show.

While the biotech sector held up relatively well during the initial market sell-off in August, it cratered in September. “It was the last remaining bastion of alpha and a sector where many hedge funds were hiding. Now it has succumbed,” said Peter Rup at Artemis Wealth Advisors, which invests in hedge funds. Rup said he was expecting some big negative surprises as more hedge funds send September returns to clients. Some of America’s most prominent hedge funds have seen their returns crumble. David Einhorn’s Greenlight Capital, now off 17%, is on track to post its first losses since 2008. And William Ackman’s Pershing Square Capital Management, which has a big bet on Valeant, told investors on Thursday that its Pershing Square Holdings portfolio is now off 12.6% for the year, a big reversal of fortune after 2014’s 40% gain. “Hedge funds are reeling from a relentless rout that has all but killed a year’s worth of alpha in a matter of two weeks,” Stanley Altshuller at research firm Novus wrote in a report.

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So.. more bailouts.

US System Designed To Prevent Financial Crisis ‘Likely To Fail’ (MarketWatch)

The current U.S.regulatory structure designed to prevent another financial crisis is “Balkanized,” a “mess” and likely to fail when needed, experts said. “The current U.S. institutional set-up is likely to fail in a crisis, and will be doing less to prevent a crisis than it should be,” said Adam Posen, president of the Peterson Institute for International Economics, at a two-day conference on financial stability sponsored by the Boston Federal Reserve. Posen said that U.S. regulators, including the Fed, don’t have the tools or the mandates from Congress that they need. Posen was especially critical of the umbrella group of regulators, the Financial Stability Oversight Council, that was set up by Dodd Frank to identify and deal with financial stability risks.

He said FSOC is chaired by the Secretary of Treasury, who is the most political member of the group. “To me, the FSOC is a mess,” Posen said. Mervyn King, the former head of the Bank of England, agreed that the U.S. institutional structure was a problem. He said U.S. regulators had a knack of working well together in a crisis, whatever the institutional structure. “It is before the crisis that the U.S. set-up is to be questioned,” King said. Well before the financial crisis, the U.S. and the Bank of England had a war game to discuss a possible cross-border bank failure, King said. The U.K. regulators had three key participants, while the U.S. had a “mass choir,” he said. Former Fed vice chairman Donald Kohn agreed: “broader and deeper structural deficiencies exist in the U.S. regulatory system for macroprudential regulation.”

Kohn said there is a widespread perception in Washington that the Fed is responsible for financial stability, but said in reality the Fed must work in a “Balkanized” regulatory system. He agreed that FSOC “cannot remedy the underlying flaws of financial regulation in the U.S.” During the conference, regulators and experts echoed concerns with the regulatory structure. Fed Vice Chairman Stanley Fischer said the Fed needed new tools targeted at the real estate sector to prevent another bubble. Boston Fed President Eric Rosengren suggested that Congress needed to give the U.S. central bank a third mandate to foster financial stability.

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Central banks’ toolkits should be abolished, not expanded. They create only mayhem.

Fed’s Fischer Says Financial Stability Toolkit May Need To Grow (Reuters)

The U.S.’s set of tools to limit asset bubbles is neither large nor “battle tested,” Federal Reserve vice chair Stanley Fischer said on Friday in a call for regulators to step up research on how to improve financial stability. Fischer said that compared to other countries the complexity of the U.S. financial system and the diverse number of regulators may make it difficult to develop or deploy so-called “macroprudential” tools – policies that could be used to selectively cool overheated financial markets. As head of the Bank of Israel, Fischer put such tools to work, for example, by hiking loan to value ratios on home mortgages to slow a run-up in real estate values. He has said the U.S. should examine that and other policies before new financial risks emerge, though he acknowledged they may be tough to implement.

“I remain concerned that the U.S. macroprudential toolkit is not large and not yet battle tested,” Fischer said, and it may be difficult to expand because so many agencies have control over different parts of the financial system. In addition, he said, targeting policies at one sector, such as home mortgages, could simply push that sort of lending to less regulated companies. There is concern that the Dodd-Frank regulations put in place after the crisis are already doing that, helping expand the influence of “shadow” banks not covered by the same rules as commercial lenders. Some of those regulations have a macroprudential character, such as the stress testing of banks and the possible imposition of “countercyclical” capital buffers that could require the largest banks to hold more in reserve if markets overheat.

Ultimately Fischer said it may be left to monetary policy to bear responsibility for financial stability. “The limited macroprudential toolkit…leads me to conclude that there may be times when adjustments to monetary policy should be discussed as a means to curb risks to financial stability,” Fischer said. Even though the interest rate is a blunt tool, requiring a potential tradeoff of higher unemployment if it was hiked to control an asset bubble, “we need to consider the potential role of monetary policy in fostering financial stability,” he said. That could include using narrower policy tools, like bank reserve requirements, and not just the interest rate alone, he said.

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And then Greece can jump back into crisis mode. No relief till 2017/18.

IMF’s Mass Debt Relief Call For Greece Set To Be Rejected By Europe (Telegraph)

The IMF is still poised to pull out of Greece’s third international rescue in five years over the sensitive issue of debt relief. The fund is pushing for a restructuring of at least €100bn of Greece’s €320bn debt pile, according to a report in Germany’s Rheinische Post. Such bold measures to extend maturities and reduce interest payments are set to be rejected by its European partners, who are unwilling to impose massive lossess on their taxpayers. The head of Greece’s largest creditor – Klaus Regling of the European Stability Mechanism – told the Financial Times that such radical restructuring was “unnecessary”. Debt relief is also not due to be discussed when eurozone finance ministers gather to meet for talks on Monday, said EU officials.

This intransigence could now see the IMF withdraw its involvement when its programme ends in March 2016. In debt sustainability analysis carried out by body, it has suggested Greece may need a full moratorium on payments for 30 years to finally end its reliance on international rescues. The reports came after a former IMF watchdog urged the world’s “lender of last resort” to be more critical of its involvement in many bail-out countries for the sake of the institution’s credibility. “Few reports probe more fundamental questions – either about alternative policy strategies or the broader rationale for IMF engagement,” said a report from David Goldsbrough, a former deputy director of IMF’s Independent Evaluation Office (IEO). The IMF has come under fire for failing in its duty of care towards Greece by pushing self-defeating austerity measures on the battered economy.

The Washington-based fund has previously admitted it should have eased up on the spending cuts and tax hikes, pushed for an earlier debt restructuring and paid more “attention” to the political costs of its punishing policies during its five-year involvement in Greece. Accounts from 2010 show the IMF was railroaded into a Greek rescue programme on the insistence of European authorities, vetoing the objections of its own board members from the developing world. The IMF is prevented from lending to bankrupt nations by its own rules. But it deployed an “exceptional circumstances” justification to provide part of a €110bn loan package to Athens five years ago. Greece has since become the first ever developed nation to default on the IMF in its 70-year history.

Despite privately urging haircuts for private sector creditors in 2010, the IMF was ignored for fear of triggering a “Lehman” moment in Europe, by then European Central Bank chief Jean-Claude Trichet. Greece later underwent the biggest debt restructuring in history in 2012. The findings of the fund’s research division have largely discredited the notion that harsh austerity will bring debtor nations back to health. However, this stance has been at odds with its negotiators during Greece’s new bail-out talks where officials have continued to demand deep pension reforms and spending cuts for Greece. Diplomatic cables between Greece’s ambassador to Washington have since revealed the White House pressed the fund to make vocal calls for mass debt relief to keep Greece in the eurozone during fraught negotiations in the summer.

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All it takes is a straw.

New Greek Debt Framework Not So Flattering For Italy, Spain, Portugal (WSJ)

When eurozone governments decided to throw Greece another financial lifeline this summer, they also embraced a new way of assessing whether the country will ever be able to repay its debts. But that framework isn’t so flattering for three other highly indebted euro countries. Italy, Portugal and Spain all have gross financing needs—the money a country has to raise to cover its deficit and roll over maturing debt—above 15% of gross domestic product in the coming years. That’s the maximum level the IMF said is manageable for Greece in its preliminary debt-sustainability analysis released this summer. By contrast, Cyprus and Ireland, two other euro countries that were bailed out in recent years, remain below the 15% threshold.

The question of when a country’s debt can be considered sustainable has been central to bailout discussions between the eurozone and the IMF for years. And the answer has been changing regularly—especially in the case of Greece. In the spring of 2012, the International Monetary Fund signed off on a second multibillion bailout, only after a steep writedown on its government bonds promised to bring Greek debt below 120% of gross domestic product by 2020. That, the IMF said at the time, was necessary to make the country’s debt “sustainable in the medium term.” It didn’t take long for that prediction to become outdated. By November 2012 it became clear that the 120% by 2020 was now out of reach. To keep the IMF on board, eurozone governments promised to ensure Greece’s debt would be “substantially lower than 110%” of gross domestic product by 2022.

Fast forward to 2015 and months of back and forth between Greece’s left-wing anti-austerity government and the rest of the eurozone. By the end of June, the IMF was once again ringing the alarm bells over Greek debt. The bigger deficits, lower growth and fewer privatizations expected under the Syriza-led government “render the debt dynamics unsustainable,” the fund warned. In its analysis released in on July 2, three days before Greeks overwhelmingly voted “no” in a referendum on a new bailout deal, the IMF said that Greece’s debt was going to remain at 149.9% in 2020. Even if debt sustainability was going to be judged by gross financing needs rather than the debt-to-GDP ratio, it was still unlikely that Athens would ever be able to regain its financial independence without substantial debt relief, the IMF warned. It was in this report that the IMF first official mentioned 15% as the adequate threshold for determining Greece’s debt sustainability.

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“..everything is a mistake and everything is going to be volatile…”

‘Bubbles Are All Over The Place’: Ron Paul (RT)

The US economy is set to grow 0.9% in the third quarter after a bigger-than-expected widening of the trade gap for goods in August, according to the Atlanta Federal Reserve’s GDPNow. This appeared to be a much slower rate from the regional Fed bank’s prior estimate of 1.8% last week, the Atlanta Fed noted. “It’s just the beginning of a downturn, nothing’s really happened yet,” Paul said. “Everything is misdirected because of the price of money. There are bubbles every place. You have a stock market bubble, you have still bubblemaking in housing when you see houses selling for $500 million, and you have a bubble in student loans.”

“The bubbles are all over the place. This is the problem. I don’t see an easy way out. I think the markets are going to go down a lot more when you realize how serious this is. Actually we are doing better than the rest of the world but we’re in for trouble too because the world has never had a situation like this where a whole world endorsed a paper currency and had pyramiding of debt around the world by the reserve currency which is the dollar. “It’s the biggest bubble ever, so it’s going to big the biggest crash ever, but it remains to be seen exactly when that’s going to hit. The source of the trouble is the Federal Reserve System, which simply cannot work in a real market economy, Dr Paul said.

“In a true free market economy you have to have people work, use what they need to live on and then save money, and that dictates interest rates and tells businessmen what they should do. Well, that isn’t the way it works any more. The so-called capital comes from the Fed and they create it out of thin air. So everything is a mistake and everything is going to be volatile. You can do this for a while when the country is very very wealthy, and a currency is very very strong.” “But eventually people mistrust the government. They don’t pay interest, they have a huge amount of principal to pay, and corporations are deeply in debt, they borrow a lot of money practically for free and they buy up their stocks. It’s a mess. It’s artificial. It has nothing to do with freedom, has nothing to do with free markets, and the sooner we realize this, the sooner we’ll get rid of central economic planning and especially look into the serious problems we get from the Federal Reserve System.”

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Only a few now the new rules.

History Isn’t A Guide When Market Is Playing By A New Set Of Rules (Ind.)

[..] an unstable global economy is nothing new. David Buik, a City of London veteran and a commentator for the stockbroker Panmure Gordon, has a theory – and it’s one echoed by many who have seen trading evolve over the years. “I think we forget that 40% of trades are programme trades,” Buik explains. “The number of what I call ‘numeric geeks’ that now work in the markets would never have considered being in the markets 50 years ago. “You’ve got a totally different person. He’s incredibly bright and he works out programmes that decide when it’s time to buy and sell. When you’ve got that kind of influence [on the market] you get that level of volatility.” Automated trading has changed the way the stock market works beyond all recognition.

Instead of holding a stock for years, months or days, as was the norm in years gone by, shares can now be owned for a matter of milliseconds. For example, a programme could be created to buy a stock when it reaches £10 and sell it at £10.0001. It might not sound like a big gain, but do it many thousands of times and it can make a tidy profit. High-frequency trading of this nature is also to blame for the “flash crashes” that have happened in recent years. So-called “stop-losses” can be put on trades, meaning that when a share price falls below a level determined by the investor, it is automatically sold, limiting their loss. For investors, it can mean the difference between a small loss and a catastrophic one – as plenty of those Glencore backers would attest to.

But inevitably, automatic stop-loss sales drag share prices down and trigger more selling, causing a dangerous domino effect as investors are automatically bailed out. The stock market is being played or manipulated by financial whiz kids – all completely legally, of course – but it is not what the market was intended for – investing in a company for the benefit of the backer and the recipient. The result is that the market has become increasingly detached from the real world and not a fair reflection of what most see as an improving outlook for the global economy. America, the world’s largest economy, is on the up and an interest rate rise is still expected this year. Yet the US stock market does not reflect that, with its benchmark Dow Jones average falling 8% in the third quarter.

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Great history.

The Failure Of Central Banking: The French Revolution Case Study (Lebowitz)

During the 1700’s France accumulated significant debts under the reigns of King Louis XV and King Louis XVI. The combination of wars, significant financial support of America in the Revolutionary War, and lavish government spending were key drivers of the deficit. Through the latter part of the century, numerous financial reforms were enacted to stem the problem, but none were successful. On a few occasions, politicians supporting fiscal austerity resigned or were fired because belt tightening was not popular and the King certainly didn’t want a revolution on his hands. For example, in 1776 newly anointed Finance Minister Jacques Necker believed France was much better off by taking large loans from other countries instead of increasing taxes as his recently fired predecessor argued.

Necker was ultimately replaced 7 years later when it was discovered France had heavy debt loads, unsustainable deficits, and no means to pay it back. By the late 1780’s, the gravity of France’s fiscal deficit was becoming severe. Widespread concerns helped the General Assembly introduce spending cuts and tax increases. They were somewhat effective but the deficit was very slow to decrease. The problem, however, was the citizens were tired of the economic stagnation that resulted from belt tightening. The medicine of austerity was working but the leaders didn’t have the patience to rule over a stagnant economy for much longer. The following quote from White sums up the situation well:

“Statesmanlike measures, careful watching and wise management would, doubtless, have ere long led to a return of confidence, a reappearance of money and a resumption of business; but these involved patience and self?denial, and, thus far in human history, these are the rarest products of political wisdom. Few nations have ever been able to exercise these virtues; and France was not then one of these few”.

By 1789, commoners, politicians and royalty alike continuously voiced their impatience with the weak economy. This led to the notion that printing money could revive the economy. The idea gained popularity and was widely discussed in public meetings, informal clubs and even the National Assembly. In early 1790, detailed discussions within the Assembly on money printing became more frequent. Within a few short months, chatter and rumor of printing money snowballed into a plan. The quickly evolving proposal was to confiscate church land, which represented more than a quarter of France’s acreage to “back” newly printed Assignats (the word assignat is derived from the Latin word assignatum – something appointed or assigned).

This was a stark departure from the silver and gold backed Livre, the currency of France at the time. Assembly debate was lively, with strong opinions on both sides of the issue. Those against it understood that printing fiat money failed miserably many times in the past. In fact, the John Law/Mississippi bubble crisis of 1720 was caused by an over issue of paper money. That crisis caused, in White’s words, “the most frightful catastrophe France had then experienced”. History was on the side of those opposed to the new plan.

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Cosy.

UK Car Emissions Test Body Receives 70% Of Cash From Motor Industry (Observer)

The body examining the practices of the car industry following the Volkswagen emissions scandal has been accused of a major conflict of interest after it emerged that nearly three quarters of its funding comes from the companies it is investigating. According to its latest annual report, the Vehicle Certification Agency receives 69.91% of its income from car manufacturers, who pay it to certify that their vehicles are meeting emissions and safety standards. The transport secretary, Patrick McLoughlin, said last month that the VCA, which also receives government funding, would be responsible for re-running tests on a variety of makes of diesel cars and investigating their real-world emissions.

The announcement followed the revelation from the US EPA last month that Volkswagen had installed illegal software to cheat emission tests, allowing its diesel cars to produce up to 40 times more pollution than is permitted. However, the apparent conflict of interest raised by VCA’s funding has prompted lawyers to demand a truly independent investigation into the industry, and will raise fresh concerns over the government’s handling of the issue of air pollution. Last week the Observer revealed how the government has been seeking to block EU legislation that would force member states to carry out surprise checks on car emissions. It has also been accused of ignoring a supreme court ruling that the government needed to urgently draw up significant plans to tackle the air pollution problem, which has been in breach of EU limits for years and is linked to thousands of premature deaths each year.

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Last days of the empire.

The Record US Military Budget. Spiralling Growth of America’s War Economy (Davies)

To listen to the Republican candidates’ debate last week, one would think that President Obama had slashed the U.S. military budget and left our country defenseless. Nothing could be farther off the mark. There are real weaknesses in Obama’s foreign policy, but a lack of funding for weapons and war is not one of them. President Obama has in fact been responsible for the largest U.S. military budget since the Second World War, as is well documented in the U.S. Department of Defense’s annual “Green Book.”

The table below compares average annual Pentagon budgets under every president since Truman, using “constant dollar” figures from the FY2016 Green Book. I’ll use these same inflation-adjusted figures throughout this article, to make sure I’m always comparing “apples to apples”. These figures do not include additional military-related spending by the VA, CIA, Homeland Security, Energy, Justice or State Departments, nor interest payments on past military spending, which combine to raise the true cost of U.S. militarism to about $1.3 trillion per year, or one thirteenth of the U.S. economy.

The U.S. military receives more generous funding than the rest of the 10 largest militaries in the world combined (China, Saudi Arabia, Russia, U.K., France, Japan, India, Germany & South Korea). And yet, despite the chaos and violence of the past 15 years, the Republican candidates seem oblivious to the dangers of one country wielding such massive and disproportionate military power. On the Democratic side, even Senator Bernie Sanders has not said how much he would cut military spending. But Sanders regularly votes against the authorization bills for these record military budgets, condemning this wholesale diversion of resources from real human needs and insisting that war should be a “last resort”.

Sanders’ votes to attack Yugoslavia in 1999 and Afghanistan in 2001, while the UN Charter prohibits such unilateral uses of force, do raise troubling questions about exactly what he means by a “last resort.” As his aide Jeremy Brecher asked Sanders in his resignation letter over his Yugoslavia vote, “Is there a moral limit to the military violence that you are willing to participate in or support? Where does that limit lie? And when that limit has been reached, what action will you take?” Many Americans are eager to hear Sanders flesh out a coherent commitment to peace and disarmament to match his commitment to economic justice. When President Obama took office, Congressman Barney Frank immediately called for a 25% cut in military spending.

Instead, the new president obtained an $80 billion supplemental to the FY2009 budget to fund his escalation of the war in Afghanistan, and his first full military budget (FY2010) was $761 billion, within $3.4 billion of the $764.3 billion post-WWII record set by President Bush in FY2008. The Sustainable Defense Task Force, commissioned by Congressman Frank and bipartisan Members of Congress in 2010, called for $960 billion in cuts from the projected military budget over the next 10 years. Jill Stein of the Green Party and Rocky Anderson of the Justice Partycalled for a 50% cut in U.S. military spending in their 2012 presidential campaigns. That seems radical at first glance, but a 50% cut in the FY2012 budget would only have been a 13% cut from what President Clinton spent in FY1998.

Read more …

They will not stop coming.

153,000 Refugees Arrived In Greece In September Alone (UNHCR)

The UN refugee agency said on Friday that refugee and migrant arrivals in Greece are expected to hit the 400,000 mark soon, despite adverse weather conditions. Greece remains by far the largest single entry point for new sea arrivals in the Mediterranean, followed by Italy with 131,000 arrivals so far in 2015. With the new figures from Greece, the total number of refugees and migrants crossing the Mediterranean this year is nearly 530,000. In September, 168,000 people crossed the Mediterranean, the highest monthly figure ever recorded and almost five times the number in September 2014.

UNHCR spokesman Adrian Edwards told journalists in Geneva that the continuing high rate of arrivals underlines the need for a fast implementation of Europe’s relocation programme, jointly with the establishment of robust facilities to receive, assist, register and screen all people arriving by sea. “These are steps needed for stabilizing the crisis,” he said. As of this morning, a total of 396,500 people have entered Greece by sea since the beginning of the year, more than 153,000 of them in September alone. The nine-month 2015 total compares to 43,500 such arrivals in Greece in all of 2014. Ninety-seven% are from the world’s top 10 refugee-producing countries, led by Syria (70%), Afghanistan (18%) and Iraq (4%).

“There was a noticeable drop in sea arrivals this week, along with the change in the weather,” Edwards said, adding that on Sept. 25, for example, there were some 6,600 arrivals. The next day, it dropped to around 2,200. “From an average of around 5,000 arrivals per day recently, it has fallen to some 3,300 over the past six days with just 1,500 yesterday. Nevertheless, any improvement in the weather is likely to bring another surge in sea arrivals.”

Read more …

Refugees in Berlin face 50-day waits just to register. The system is broken.

280,000 Refugees Arrived In Germany In September (AFP)

A record 270,000 to 280,000 refugees arrived in Germany in September, more than the total for 2014, said the interior minister of the southern state of Bavaria Wednesday. “According to current figures… we have to assume that in September 2015 between 270,000 and 280,000 refugees came to Germany,” said Joachim Herrmann. Europe’s biggest economy recorded around 200,000 migrant arrivals for the whole of 2014. The sudden surge this year has left local authorities scrambling to register as well as provide lodgings, food and basic care for the new arrivals. Herrmann highlighted the pressure on the state government of Bavaria – the key gateway for migrants arriving through the western Balkans and Hungary.

“My fellow interior ministers confirm, without exception, that pretty soon we’ll hit our limits in terms of accommodation,” he said. “It’s crucial to immediately reduce the migrant pressure on Germany’s borders,” he said. As Germany expects up to one million refugees this year, Chancellor Angela Merkel’s generosity towards migrants has sparked discord within her coalition. Merkel’s allies, the conservative CSU party governing Bavaria, have been particularly vocal in criticising the policy and warning that resources are overstretched. Berlin is now stepping up action to deter economic migrants from trying to obtain asylum in the country, in a bid to free up resources to deal with applicants from war-torn countries like Syria.

Read more …

Jun 292015
 
 June 29, 2015  Posted by at 7:31 am Finance Tagged with: , , , , ,  26 Responses »
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G. G. Bain At Casino, Belmar, Sunday, NJ 1910

It is with immense pleasure that I can introduce the return to The Automatic Earth of my friend and co-founder Nicole Foss. If only because I myself can now retire to a beach chair…. (not).

With the violent swings that have started and been amplified in Asia overnight, as well as in European and US futures, Nicole’s piece on volatility is quite pertinent.

Nicole Foss: A recent Business Insider chart of the day feature was particularly interesting. Called The stock market is asleep, it observed that the US market has been in a period of very low volatility:

Market technician Ryan Detrick noted that it’s been 8 weeks since we’ve seen a weekly move of at least 1% up or down in the S&P 500. That’s the longest such streak we’ve seen in 21 years.

The suggestion in the article is that the market will go on rising until the economy enters a recession, the implication being that a long period of low volatility is a sign of market health. In fact it is quite the opposite. A sleep-walking market is a reflection of complete disregard as to risk.

Markets enter such periods of complacency when there has been a long uptrend, with periods of very low volatility reflecting where the market has come from, not where it is going. Such periods are far more likely to be a sign of an impending trend reversal than of a continued uptrend.

Under normal circumstances, markets can be expected to show more variation, with regular inhalation and exhalation indicative of healthy risk perception. The loss of that pattern, indicating extreme complacency, is a leading indicator of a rude awakening. The VIX index, or volatility/fear index, is at extreme lows, indicating a historic level of complacency. It is no surprise that this coincides with a market extreme.

In short, market sentiment is a very effective contrarian indicator. When fear and volatility are low, there are typically few opportunities left and investors are openly flirting with danger they fail to perceive or acknowledge in their search for returns. Leverage balloons as riskier and riskier bets are made, along with bets on top of bets on top of bets.

Continuance of the prevailing uptrend becomes received wisdom as the combination of optimism and leverage drive the market higher in a self-fulfilling feedback loop. Bears capitulate over time, and as the last holdouts capitulate, the trend reversal become imminent. Risk typically returns with a vengeance, taking market participants by surprise.

The perception of risk shifts dramatically, from complacency to extreme risk aversion, and it can do so very quickly. In fact there already appears to be a shift underway, a mere two days after such an expression of complacency. Volatility and fear go hand in hand, and as increasing fear drives financial contraction and deleveraging, volatility goes through the roof.

The increasing and cumulative risks previously taken begin to manifest, piling on top of each other on the way down. A flood of margin calls overwhelms a mountain of IOUs, rendering them largely worthless. Excess claims to underlying real wealth are destroyed. Ironically, it is at this time that opportunity increases dramatically, for the relatively few who perceive it and are in a position to take advantage of it.

We are approaching just such a juncture at the moment. The long uptrend appears to be finally coming to an end. It is at extremes when it pays most to be a contrarian. Apart from the misinterpretation of low volatility as being good news for the stock market, another misconception is that market corrections are driven by recession.

Causation runs in the other direction. It’s not that a recession causes the markets to fall, but that a market trend change to the downside is a leading indicator of economic recession. Changes in finance, which is largely virtual, happen far more quickly than changes in the real economy.

When the trend change comes in finance, a similar direction change in the real economy can be expected to follow, with a time lag thanks to the longer time constant for change in the real economy. If the downward shift of the last couple of days does indeed mark the long-awaited trend reversal, then economic recession is sure to follow.

There is a substantial potential for the reversals in both finance and the real economy to be very large, as we have been predicting here at TAE for some time. This is yet another high risk juncture. Be careful.

May 032015
 
 May 3, 2015  Posted by at 1:21 pm Finance Tagged with: , , , , ,  5 Responses »
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Jack Delano Near Shawboro, North Carolina, Florida migrants on way to Cranberry, NJ 1940

With US GDP growth ‘officially’ back where it belongs, in the Arctic zone close to freezing on the surface but much worse in real life, for reasons both Albert Edwards and Ambrose Evans-Pritchard (not exactly a pair of Siamese twins) remarked this week; that is, excluding the “biggest inventory build in history, the economy contracted sharply”, it’s time for everyone to at long last change the angle from which they view the world, if not the color of their glasses.

But ‘everyone’ will resist, refuse and refute that change, leaving precious few people with an accurate picture of the – economic – world. Still, for you it’s beneficial to acknowledge that very little of what you read holds much, if any, truth or value. This is true when it comes to politics, geopolitics and economics. That is, the US is not a democracy, it is not the supreme leader of the world, and the American economy is not in recovery.

Declining business investment, a record inventory build and extreme borrowing to hold share prices above water through buybacks, it all together paints a picture of a very unhealthy if not outright dying economy, and certainly not one in which anything at all is recovering. But how are you supposed to know?

The entire financial media should change its angle of view, away from the recovery meme (or myth), but the media won’t because the absurd one-dimensional focus on that perpetuated myth is the only thing that makes the present mess somewhat bearable, palatable and, more importantly, marketable, to the general public.

This has the added simultaneous benefit of keeping that same general public from understanding how sinister the myth really is; it can only be upheld by greatly increasing the debt levels which burden their shoulders, in hidden ways. If the media can no longer keep the consequences of the debt increases hidden, the game is up.

And there are undoubtedly many people who find it more important right now to profit from the whole scale distortion by central banks of what were once the financial markets, than they find it to know the truth and understand the system they owe their gains to. But that may no be all that smart; they risk losing their gains again overnight. You can’t rely on what you don’t understand. So here are a notes:

1 – There are no markets anymore (and therefore no investors either).

There are ways to make money, but that’s not the same thing. Markets must of necessity reflect – the performance of – underlying economies, and to even pretend today’s markets do that is preposterous. Financial markets these days exclusively reflect central banks’ pumping money into their respective bankrupt banking systems, a practice poetically known as QE. Markets need to be functional in order to be called markets and if they don’t we should find another term to label them with.

Or, in other words, present day western economies – and their former markets – are being artificially propped up by either making already poor people poorer today, making them poorer tomorrow, or both. It’s the only way left to make things look passable. And those who still desire in these non-markets to call themselves ‘investors’ are merely little piglets sucking spoilt milk oozing from the teats of their mother sow’s long-dead bloated corpse.

2 – You have no idea what anything is truly worth.

Central bank stimulus across the globe has fully demolished price discovery. And whether you like it or not, financial markets can not and do not function without it. Lots of people try to make us believe that central bank announcements have momentarily taken the place of price discovery, but that is nonsense. And if you don’t know what any asset is really worth, how can you be sure you want to own it other than for myopic short-term reasons?

3- There is no recovery now, and there’s not one around the corner.

The weight of our debt, just to name one thing, has kept us from turning that corner for 7-8 years now, and the weight is getting more forbidding, not less. Publishing falling unemployment numbers while out-of-labor-force data rise (to a record 93 million working age Americans today) is an insult to everyone’s intelligence, not a sign of economic health. Whatever is seen as recovery or expansion is a testament to the power of illusion and propaganda, not the power of the economy. If you choose to look at the world from a point of view that focuses only on recovery, you’re not going to understand what is happening, because there is no recovery anywhere in sight.

4- You can’t trust anything your government and media say.

The entire apparatus is geared towards selling you a doctored image of the world you live in, instead of presenting you with reality. Not because as Jack Nicholson said “You can’t handle the truth”, but because you knowing the truth is not in the interest of those who run governments, nations and supranational organizations. You’re caught in a trap somewhere between Goebbels and Orwell, and it takes a lot of energy to escape it, energy you will be inclined and tempted to instead use to improve your position inside the trap. Just like everyone else does. We are social animals, we are disposed to do as those around us do.

As I said above, you can’t trust anything you hear or read about politics, geopolitics and economics:

• The US is not a democracy. You can’t have a democracy and SuperPacs at the same moment. For the hundredth time: if you allow money into your political system, it will end up buying the entire system. And if you allow endless amounts of money to enter it, that process is greatly accelerated.

• The US is not the supreme leader of the world. Today’s world doesn’t allow for a supreme leader. Neither does it need one. Countries like Russia and China will not tolerate American supremacy to dictate what they do. Not economically, and not militarily. This is very hard to stomach for parts of American society, but they’re going to have to get used to it. Going to war over these issues is pointless. Unfortunately, it increasingly looks like the entire globe will have to find that out the hard way. The very hard way.

• The American economy is not in recovery. I already mentioned the creative jobs numbers accounting. Also, without Fed intervention, asset prices (bonds, stocks, real estate..) would be much lower. This would have been a lot healthier for everyone, except for banks and their shareholders. But once QE is unleashed, there is no smooth exit possible. It will need to continue until it self-implodes.

At present, Japan is leading the way to economic self-immolation, but the US and Europe must inevitably follow. The only thing that helps is what the banks most resist: restructuring, cutting the leverage from the debt. But all we get is fantasy stories about how the crisis was left behind. Stories that of course all 42 million or so Americans on foodstamps and tens of millions of otherwise underpaid can confirm. Why am I even trying to show that, and why, there is no recovery?

We need to start thinking from the perspective of what we can and must do if and when that elusive and illusionary recovery is not going to happen. Decisions made from that point of view will substantially differ from those taken in order to ‘produce’ the recovery, which is the only perspective that exists in politics, media and indeed the minds of 99% of the population today.

We need to think about how we’re going to lay a foundation, as solid as we can, under our societies now, with the means we still possess to achieve that, knowing there will be times when those means will be increasingly less available. We’re not doing that, because we focus only on a world that does manage to attain a recovery. We truly think the world is one-dimensional.

Which is why, among other things, we strive to make individuals richer, and fail to see that this makes communities and societies poorer. Everything seems fine as long as we deny the bigger picture, and because we like things to look fine, we stick to that one dimension of our world that is ourself. And ignore each other.

Apr 082015
 
 April 8, 2015  Posted by at 10:21 am Finance Tagged with: , , , , , , , ,  11 Responses »
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Harris&Ewing Less taxes, more jobs, US Chamber of Commerce campaign 1939

It wouldn’t be a first, but it would certainly be a – bigger – shock. That is to say, the Bank of England hijacked the head of Canada’s central bank some time ago, but, while unexpected enough, that would pale in comparison to the US hiring the present Governor of the Russian central bank, Elvira Sakhipzadovna Nabiullina. It would still seem to be a mighty fine idea, though.

Not that I think it will happen, not to worry if you think Yellen is just what it takes at the Fed. But Nabiullina is both razor sharp and fiercely independent. Yellen is obviously neither; she’s a cog in a machine that huffs and puffs and pumps and dumps to make sure her overlords in the blissful world of US finance make ever more profit no matter how bad things get in American society.

There’s no need to be particularly sharp in order to play that role, and she was picked exactly because she’s NOT independent. Or let’s just say she’s a good listener.

Nabiullina is a whole different story. Not that I have much confidence in western readers understanding that this is so, let alone why. Not after the 24/7 highly public media campaigns and sanctions and oil price wars and Ukraine war talk and chest thumping directed at Putin and Russia, and after everything else that we don’t even know that plays out behind the veils.

Enjoy your conspiracies while you can, I’d say. Because despite more than a year of intense efforts to make Russia look like the empire of unspoken evil, financial markets, yes, the same ones Yellen manipulates at her lords’ bidding, have now made the Russian ruble and the Moscow stock exchange the biggest winners so far this year.

And that is due to a substantial extent to Elvira Nabiullina. You see, if she were just a blind or scared servant of Putin, or of his economic ideas, that would mean it was he who masterminded the resurrection of the currency and the stock market.

Think about it: that should make one really scared of Vladimir Vladimirovych. If besides all his other qualities, pursuits and activities (whether you see them in a positive light or not), he could also do that: save a $2 trillion economy from intense outside attacks.

Fear not: Putin is a mere mortal human being. One quality he does possess, however (he wouldn’t last in his position for 5 minutes if he didn’t), is a keen sense of who he can trust. And he trusts Elvira Nabiullina. She’s only been central bank governor since 2013, when she wasn’t even 50 years old, but she’s been a confidant for quite a while, most importantly as Putin’s private economic advisor in the years leading up to her present job.

You can all look up her career on Google or Wikipedia, interesting, but not overly so. What’s really important in Nabiullina’s career are two defining moments. Moments that make her stand out, and that define the relationship she has with Putin.

Sure, you can claim that she’s less independent than Yellen at the Fed, but who do you think you’re kidding? Yes, she has a hot line phone on her desk, and everyone is ushered out of the room when Putin calls her on that phone. But Yellen has hot lines to the US Treasury as well as to Jamie Dimon and Lloyd Blankfein and whoever lead those other banks and primary dealers. Independence?

So, to get to those two moments that define Elvira Nabiullina. The first was described by Bloomberg last month. In mid December 2014, the ruble was under vicious attack from financial markets. Nabiullina had already spent tens of billions of dollars in foreign reserves to prop it up. Then, on December 16, she, in a move nobody had foreseen, yanked up the interest rate in one fell swoop from 10.5% to 17%.

And here it comes: after that she did nothing. Not a thing. No more foreign reserves. Bloomberg quoted her as saying: ‘Speculators needed a cold shower’.

Mario Draghi said in 2012 he would do ‘whatever it takes to preserve the euro’. Nabiullina didn’t even have to say it.

The attack on the ruble was over. In January she lowered the interest rate to 15%, it’s at 13% now. Nabiullina says she expects it to be at 9% by the end of the year. The ruble is up 19% against the US dollar in 2015. No other currency has that record.

Did Putin order her to do this? No. They talked about it, and a lot, no doubt. But he knows she knows better. And he trusts her.

The second big moment came over the past few days, when Nabiullina announced that Russia will not get on the global central bank QE treadmill. Her reasoning, as Bloomberg reports, is that she sees problems with using debt to spur growth (eat your heart out, Krugman):

Nabiullina Sees ‘Limits’ in Using Debt Financing to Fund Growth

Russian central bank Governor Elvira Nabiullina raised questions about the use of debt financing to fund economic growth, underscoring the need to harness long-term capital as investment slumps. “We need to think about some other ways to finance growth, because financing economic growth with debt, in my opinion, has its limits,” Nabiullina said at a conference in Moscow on Thursday. “There won’t be long-term investment growth in Russia” without such sources of financing as pension savings and life insurance, she said.

“An excessive debt burden may be not only a catalyst for development and investment but also a hindrance,” Nabiullina said. Regardless of the high level of interest rates, the ratio of debt to Ebitda (Earnings Before Interest, Taxes, Depreciation and Amortization) “is already a considerable burden for companies, entire industries,” she said. Banking loans account for 57.6% of the Russian economy, according to Nabiullina. “Mandatory pension savings are of critical importance for sources of long-term financing and Russia’s capital markets,” the governor said.

Let me add some more from Reuters, so you get the full picture:

Russian Central Bank Chief Confident On Inflation, Banks, Ruble

“The acceleration of inflation… has in our view a temporary character. We expect quite a rapid fall in inflation if there are no new unforeseen circumstances..” Nabiullina said the central bank would continue cutting interest rates insofar as inflation risks receded. The bank has already cut rates twice this year. “On the whole we judge the situation in the banking sector as stable,” she said. “The banking sector maintains a substantial capital buffer and the banking sector is able to counter serious shocks even if crisis phenomena deepen.”

She said central bank stress tests showed that even if the oil price were to fall to $40 per barrel the sector would maintain capital levels above the regulatory minimum. Nabiullina also said the factors which had been weighing on the rouble had now passed, saying that repayments of foreign debts could be financed without this having a significant effect on the rouble’s value. “Thus the influence of those factors which were influencing the exchange rate and inflation last year are gradually receding to nothing..”

The entire financial markets attack ‘gradually receding to nothing’. The girl got style. Here’s thinking Nabiullina is right on this one too. Crippling sanctions? Crippling oil prices? Russia has survived it all so far.

There may well be negative growth in the country this year. But even if that were so, who would you choose to deal with that where you live? Yellen, Bernanke, Mario Draghi? Or would you go with a woman who’s shown she can not only think outside the box, but act outside of it too?! Who has both the guts and and the brains for it?!

She may well be one of Putin’s biggest weapons if the west elects to continue pestering Russia. It seems obvious: we need to hire her. But, caveat, to serve the American people, not Wall Street. Then again, I don’t think she’d want to do either.